Even though downtown Phoenix property owners will face higher property tax rates due to the use of a tax incentive, the city of Phoenix approved the incentive’s use earlier this month on a residential tower that will be built on the current Central Station site and is looking to use it for future development projects.
The tax incentive, which is given through Government Property Lease Excise Tax agreements negotiated between the city and a developer, has been used extensively in the downtown core to help finance redevelopment projects.
The prevalence of GPLET agreements in downtown has affected surrounding property owners’ tax rates because of a change in school district finance calculations that recently went into effect.
Last year’s primary property tax rate for the Phoenix Elementary School District was estimated to be 72 cents higher than it would have been prior to the change, according to Randie Stein, vice president of Stifel, Nicolaus & Company, Inc. This meant that a business’s property valued at $500,000 paid about $700 more in property taxes than it would have before the change.
The city is aware of the change and is evaluating its impact with the help of a consultant, said Eric Johnson, city of Phoenix economic development program manager. However, that analysis did not directly impact the authorization of GPLET on the Central Station project, located on Central and Van Buren avenues.
Future changes could include limiting the incentive’s use or duration for development projects, Johnson said.
“It’s something that depends on every project because each project is unique as to how they are financed, how big it is and what it is constructed of,” Johnson said.
GPLET agreements help developers secure funding for large projects like the one at Central Station, Johnson said.
“It’s a more challenging project to get financing for because of the high-rise proposal,” Johnson said.
The Central Station site is currently underutilized and would benefit from a project like this, Johnson said.
GPLET agreements are based on a provision in Arizona’s tax code that exempts land owned by governments from property taxes. GPLET 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.
Unlike normal property taxes, which are based on a property’s value, GPLET rates are based on the size of a property and the buildings on it.
In downtown, GPLET agreements last between 8 and 99 years and have been used on mixed-use projects like CityScape, hotels like the Renaissance Hotel and residential complexes like Roosevelt Point.
The effect of GPLET on property taxes was amplified when the state changed school district financing calculations.
Before the change, the state covered the property tax revenue lost due to the use of GPLET through equalization assistance. Now, GPLET properties are included among the taxable properties in a school district’s taxing area even thought they do not pay traditional property taxes.
The net effect is that non-GPLET property owners pay for the taxes that GPLET properties are not paying.
By ensuring that future GPLET agreements are shorter and used for smaller projects, the city can help mitigate the impact on downtown property owners, Johnson said. Furthermore, projects using GPLET will theoretically reduce future property taxes once they come back on the tax rolls.
The GPLET agreement approved by city council for the Central Station project will last 25 years, which is the maximum allowed after the law was changed in 2010, Johnson said. The city is still working with the developer to finalize the terms of the agreement.
Community members are split on the use of GPLET.
Critics say GPLET has harmed surrounding property owners because it shifts the tax burden to them.
“If someone’s not paying their fair share of property taxes, that means everyone else is paying the shortfall,” said Michael Levine, a prominent property owner and developer in the Warehouse District.
Levine said GPLET is unfair competitively for small business owners.
“The rest of us are subsidizing their free ride,” Levine said.
The city should not be using GPLET to pick winners and losers, especially when the developer often does not need to make sure the project is successful after it is completed, Levine said.
“As government officials, they should be looking out for everybody, not just the top cream of the crop,” Levine said. “That’s what their job is as a government official.”
However, others say that GPLET allows developers to build projects that the downtown area needs.
“Everyone I’ve spoken to, from residents to city people to businesspeople, indicate that GPLET is going to be needed, or some kind of tool like it is going to be needed,” said Tim Eigo, chair of the Downtown Voices Coalition.
Eigo said that incentives like GPLET are going to be needed in downtown until the area becomes attractive enough for developers to pursue ambitious projects without them.
However, the city must make sure that it is not over-offering these incentives to developers, Eigo said.
Editor’s note: Government Property Lease Excise Tax agreements are a complex topic that the Downtown Devil broke down extensively in a previous report. If you’d like to learn more about GPLET you can read the report here.
Contact the reporter at agnel.philip@asu.edu
