Lawsuit could threaten future of GPLET tax incentives

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Local restaurant and bar Angel's Trumpet sued the city of Phoenix over a micro-unit apartment it plans to subsidize. (Nathan Thrash/DD)

Cityscape was subsidized using a GPLET tax incentive. (Amanda LaCasse/DD)

The Roosevelt Point apartments were subsidized using a GPLET tax incentive. (Amanda LaCasse/DD)

The Freeport-McMoran building was subsidized using a GPLET tax incentive. (Nicole Neri/DD)

The Collier Center was subsidized using a GPLET tax incentive.(Nicole Neri/DD)

Skyline Lofts was subsidized using a GPLET tax incentive.(Nicole Neri/DD)

The future of a tax incentive commonly used downtown to increase density is being challenged in court.

Government Property Lease Excise Tax (GPLET) agreements could be in question after the Goldwater Institute filed a lawsuit against the city of Phoenix on behalf of Angels Trumpet Ale House.

Phoenix City Council awarded a GPLET agreement to Amstar/McKinley LLC last March for their 19-story micro-apartment development known as Derby Roosevelt Row under the condition they make five percent of the units affordable. The development is to be built in a vacant lot that sits behind Angels Trumpet Ale House.

RELATED: City Council reduces rents on certain micro-apartment units in return for tax incentive

The Goldwater Institute is suing the city on the grounds that the agreement given to Amstar/McKinley violates several clauses of the Arizona Constitution. These include the Gift, Special Law, Conveyance and Uniformity clauses. Goldwater also claims the city did not follow competitive bidding requirements and challenges its definition of what constitutes a blighted area. In 1979, downtown was designated as a blighted area and the city has used that definition to build more GPLET properties in the area, despite the growth it has seen in recent years.

GPLET agreements are based on a provision in Arizona’s tax code that exempts land owned by governments from property taxes. This allows the city to take over the rights to a piece of land and lease it back to the developer at a significantly reduced rate that replaces the normal property tax.

Jim Manley, the attorney for Angel’s Trumpet in the lawsuit, disputes this. Manley claims that the Conveyance to Evade Taxation clause overrules this provision, as it states property that changes hands to avoid taxation is not exempt from taxation.

“At some point the city needs to step back and say, ‘do we need to keep throwing the taxpayers money away to subsidize private development?’” Manley said.

The city has used GPLET to encourage numerous projects in the downtown area, including the Arizona Center and Roosevelt Point. Local activist Sean Sweat, who lobbied for Derby’s affordable housing requirement, said he is worried that without the incentive downtown Phoenix will not be able to attract high-rise development.

“Whatever happens, I hope this doesn’t stymie downtown development because we need to fill these empty lots,” Sweat said.

City of Phoenix Community and Economic Development Director Christine Mackay said that without GPLET, downtown would not look the way it does today. Mackay said the city of Phoenix does not have another tool to attract high-rise developers to the downtown area.

Manley disagreed and said there were better ways for the city to attract development.

“If you look in the Roosevelt Row area there are a number of apartment complexes that have been built without subsidies,” Manley said. “So this idea that you have to have government money to make these projects work is demonstrably false.”

Manley also disputed the fairness of GPLETs in attracting development.

“If you want to attract development, the constitutional way to do that is to lower taxes for everybody. Don’t choose winners and losers,” Manley said. “The constitutional way to go about economic development is to create broad-based reforms that help everybody.”

A 2014 Downtown Devil report found that non-GPLET property owners in downtown had been helping subsidize the discounted tax rates GPLET developments paid because of a change in the formula used to calculate state funding for school districts. According to the revised state law, which passed in 2009, GPLET properties are included in a district’s taxable value, potentially reducing the total state assistance provided for districts with many GPLET properties by a significant amount.

Mackay said the effect on property owners in the area was minimal. She said the city had not explored any ways in which it could compensate property owners for the increased property taxes they may pay as a result of GPLET properties in their school districts.

HB 2213, passed by the Arizona House of Representatives in February and awaiting a vote on the senate floor, would amend several features of GPLET. The bill ends the reduced property tax, requiring that properties pay normal value-based property taxes after the eight year abatement period, during which no property taxes of any kind are paid, ends. That provision does not apply to existing properties that are already in GPLET agreements. For those properties, the bill mandates the government lessor calculates the excise tax the lessee owes. Under current law, the lessee calculates how much it owes.

RELATED: GPLET reform bill moves forward in house

The bill originally changed the definition of what constitutes a blighted area. While in the House, that provision was amended and kept the original definition.

Manley praised the bill, saying it solved some of the problems he has with GPLET, particularly the provision making the government lessor calculate the excise tax. However, he still maintains the core of GPLET is flawed.

“The bill doesn’t fix the root of the problem, which is the city is giving these special gifts to politically connected developers, that’s unconstitutional and the bill doesn’t fix that core problem,” Manley said.

Mackay said she is supportive of some aspects of the bill and hopes if it is passed GPLET can still be used as a tool to attract high-rise development.

District 6 Councilman Sal DiCiccio, who voted against awarding the GPLET to Derby Roosevelt Row, took to Facebook on Saturday to criticize the incentive. DiCiccio said the city had robbed Phoenix schools of $45 million, in reference to the total amount of money the city had collected in lease payments from GPLET properties.

“What the city of Phoenix has been doing is they charge a lease, and by charging that lease they more than make up for what they would have to give away in property taxes,” DiCiccio said.

Mackay said the lease payments the city collects are used to “enhance the downtown district.” Examples of what the lease money has been spent on include parking structures as well as properties the city then sends out Request for Proposals (RFPs) for.

Seventy-three percent of the excise tax a GPLET property pays goes to the school district it is located in while the rest is divided up between the city, state and county.

Contact the reporter at dmperle@asu.edu.

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