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Arizona Basic Economic Development Course
Real Estate Development
and Reuse
Jeremy LeggCity of Phoenix
January 2019
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Background
• 15 years local government management, focused
on economic and real estate development
• Master of Public Administration, NAU
• AZED Pro (thanks, AAED!)
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Why is Real Estate Development important?
We all live, work, shop and recreate in developed
real estate!
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Why is Real Estate Development important?
It creates a sense of place (or not) that defines our
communities.
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Real Estate Development impacts public
policy and can drive economic development
• “Downtown Phoenix has seen 318 percent
increase in tech companies since 2012”
– Phoenix Business Journal headline 1/16/2018
• An acre per hour…
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Course Outline
1. Introduction
2. Approaches to Development
3. The Real Estate Development Process
4. Environmental Issues
5. Public Sector Involvement
Arizona Basic Economic Development Course
Introduction
1
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Real Estate Development for public benefit /
economic development is unique
• Not just about private markets / supply & demand
• Public purpose and goals
• Brings new resources, also imposes limitations
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Purpose and Goals
• Goals often difficult to measure
– Attract jobs / talent
– Broaden or expand tax base
– Revitalize an area
• Balance public and private interests
• Politics
– Parties and Geography
HOW IS PUBLIC REAL ESTATE DEVELOPMENT UNIQUE?
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Types of Resources Available
• Direct Financial
– Loans, grants, reimbursements
– Infrastructure development
• Other
– Land
– Tax Relief
– Expediting / Streamlining
HOW IS PUBLIC REAL ESTATE DEVELOPMENT UNIQUE?
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Limitations
• Statutory
• Financial
• Political
• Practical
HOW IS PUBLIC REAL ESTATE DEVELOPMENT UNIQUE?
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Lessons LearnedNote: Instructor’s views may or may not reflect IEDC / AAED
1. Align objectives, fill the gap, tell the story, keep going
2. Public and private sectors need each other
3. A trend toward talent
4. A unicorn named, “Consensus”
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Your Role is Unique! City Administration
Arizona Basic Economic Development Course
Approaches to Development
2
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
A Little History…
Migration to City Living
Zoning to Separate
Incompatible Uses
Mixed-Use / Lifestyle Centers /
Smart Growth
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Green Building
• Increased Up-Front Costs
• Reduced Operating Costs
• Positive Marketing
“Initial Investment of 2% Results in
20% Lifecycle Savings”
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Green Building
• What is Your Goal?
– Operational savings
– Net zero, carbon neutral, minimize footprint
– Competitive market position
– Generate sales / media exposure
– Political points / plaque on the wall
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
LEED Sales Pitch: No Additional Cost!
Actual Cost: $3,000,000
LEED Points for
15,000 SF Solar Array:
None
Phoenix
Convention Center
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
ASU Downtown
Phoenix Campus• Workforce development
• Urban revitalization
• Historic preservation
• Adaptive reuse
• Sustainable development
• LEED Silver or better
• Attracted jobs
• Attracted capital
• Expanded tax base
• Growth without sprawl
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Types of Development: Analyze Risk
Build-to-suit ✓ Customized for 1 business
✓ Single tenant
Speculative development ✓ Built before securing tenants
✓ Multiple leases
Greenfield development ✓ Undeveloped land
✓ Rural & suburban areas
Redevelopment/reuse ✓ Infill
✓ Sprawl mitigation
Arizona Basic Economic Development Course
The Real Estate
Development Process
3
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
The Real Estate Development Process
1. Predevelopment2. Feasibility
Studies3. Site Analysis
4. Financing5. Negotiations &
Approvals6. Construction
7. Marketing 8. Occupancy &
Management
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Predevelopment & Feasibility Analysis
2. FEASIBILITY ANALYSIS
Market ✓ Sufficient market demand?
Financial ✓ ROI? Capital available?
Political ✓ Approved by the public sector?
1. PREDEVELOPMENT ✓ Business plan
✓ Site control / building size
✓ Pro forma
✓ Partners
Does the project pencil out?
THE REAL ESTATE DEVELOPMENT PROCESS
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Site & Engineering Analysis
Is the site shovel ready?
TOPICS TO CONSIDER
• Natural Conditions and Contamination
• Road Issues
• Site Access Infrastructure
• Utilities
• Planning and Development
THE REAL ESTATE DEVELOPMENT PROCESS
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Financing
PUBLIC ASSISTANCE TOOLS TRADITIONAL FINANCING TOOLS
• Public Property
• Tax Abatement (GPLET, TIF …)
• New Markets Tax Credits
• Low-Income Housing Tax Credit
• Industrial Development Authority
• Historic Preservation Incentives
• Infrastructure Reimbursement
• Federal Grants & Loans
• Debt – Bank Loans
• Equity – Cash
THE REAL ESTATE DEVELOPMENT PROCESS
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – What is It?
• Government Property Lease Excise Tax
• Authorized by State as economic development tool in 1996
– ARS Title 42, Chapter 6, Article 5
• Government-owned property is not subject to property tax
• Provides a way to collect tax from private entities who lease
government property
– Restricted Use
– Eight-year Abatement
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Factors Impacting Property Taxes
Property Tax Bill
Changing Property
Values/Uses
Many Taxing Jurisdictions
Public Budgets / Priorities
Use of GPLETChange in
Gov’t Ownership
Declining Commercial Assessment
Ratios
Prop 117, Limits on
Annual AV Growth
Prop 117, Transition
from LPV/FCV to LV
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – in Phoenix
• Used within the Downtown
Redevelopment Area and Central
Business District
• Significant redevelopment
• Billions in capital investment
• Net new public revenue: retail
sales, commercial leases, hotel
bed taxes
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – Why Use It?• Valuable Economic Development Tool
– Encourages redevelopment and type of development public desires
– Creates jobs, spending and tax revenues
– Enhances property values & capitalizes on existing public infrastructure
– Generates excise taxes during GPLET
• Example: Arizona Center
– $805 million capital investment in 1989
– GPLET lease ended in 2011
– Generating ~$4 million annually in property taxes
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – ExampleScenario 1: Status Quo
$10,000
Base Year
Property Tax
Year Status Quo
0 $10,000
1 $10,300
2 $10,600
3 $10,900
4 $11,200
5 $11,500
6 $11,800
7 $12,200
8 $12,600
9 $13,000
10 $13,400
11 $13,800
12 $14,200
13 $14,600
14 $15,000
15 $15,500
16 $16,000
17 $16,500
18 $17,000
19 $17,500
20 $18,000
21 $18,500
22 $19,100
23 $19,700
24 $20,300
25 $20,900
26 $21,500
27 $22,100
28 $22,800
29 $23,500
30 $24,200
Total $500,000
Property Taxes
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – ExampleScenario 2: Approve GPLET Project
8-Year Abatement
Project
Complete
Ad Valorem
(Traditional)
Tax
25-Year GPLET Agreement
Year Approve GPLET Project
0 $10,000
1 $0
2 $0
3 $0
4 $0
5 $0
6 $0
7 $0
8 $50,000
9 $51,500
10 $53,000
11 $54,600
12 $56,200
13 $57,900
14 $59,600
15 $61,400
16 $63,200
17 $65,100
18 $67,100
19 $69,100
20 $71,200
21 $73,300
22 $75,500
23 $77,800
24 $80,100
25 $82,500
26 $220,000
27 $226,600
28 $233,400
29 $240,400
30 $247,600
Total $2,300,000
17-Year Excise Tax Payments
Property / Excise Taxes
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Year Status QuoApprove GPLET
Project
0 $10,000 $10,000
1 $10,300 $0
2 $10,600 $0
3 $10,900 $0
4 $11,200 $0
5 $11,500 $0
6 $11,800 $0
7 $12,200 $0
8 $12,600 $50,000
9 $13,000 $51,500
10 $13,400 $53,000
11 $13,800 $54,600
12 $14,200 $56,200
13 $14,600 $57,900
14 $15,000 $59,600
15 $15,500 $61,400
16 $16,000 $63,200
17 $16,500 $65,100
18 $17,000 $67,100
19 $17,500 $69,100
20 $18,000 $71,200
21 $18,500 $73,300
22 $19,100 $75,500
23 $19,700 $77,800
24 $20,300 $80,100
25 $20,900 $82,500
26 $21,500 $220,000
27 $22,100 $226,600
28 $22,800 $233,400
29 $23,500 $240,400
30 $24,200 $247,600
Total $500,000 $2,300,000
GPLET – ExampleStatus Quo vs. GPLET Comparison
Property / Excise Taxes
Abatement →
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – ExampleArgument – Hurts schools / raises neighbors’ taxes
Abatement →
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – ExampleFacts:
1) Property tax revenue decline for up to 8 Years
2) Lost revenue typically recaptured 2 Years after abatement
Abatement →
8 Years of
Lost
Revenue
Revenue
Gained in
First 2 Years=
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
GPLET – Summary• Allows communities to build a sense of place
• Generates net new tax revenues immediately
• Can have temporary, negative impact on elementary school
districts (side agreements can be negotiated)
• Demonstrated long-term benefits
• Philosophical opposition to government “picking winners and
losers”
• CityScape and other downtown Phoenix landmarks would not
have been possible
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Negotiations & Public Approvals
PUBLIC APPROVALS PRIVATE APPROVALS
• Zoning
• Subdivision
• Site plan review
• Building permits
• Elected officials
• Joint venture agreements
• Land acquisition contracts
• Lender commitments
• Architect agreements
• Engineering agreements
• Construction agreements
• Lease/Sale contracts
• Insurance agreements
THE REAL ESTATE DEVELOPMENT PROCESS
Why didn’t
I go to law
school?
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
ConstructionTHE REAL ESTATE DEVELOPMENT PROCESS
Suddenly a heated
exchange took place
between the king and the
moat contractor.
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
ConstructionTHE REAL ESTATE DEVELOPMENT PROCESS
• Environmental remediation
• Demolition
• Infrastructure development
• Construction / Renovation
• Tenant Improvements
• Pre-leasing
Always carry a contingency
Architects and contractors can have
conflicts of interest
Time
CostQuality
“Pick Two”
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
MarketingTHE REAL ESTATE DEVELOPMENT PROCESS
• Public sector participation typically limited
• Targets = Tenants / Buyers
• Strategies• Competitive pricing
• Advertising
• Promotions
• Earned media
• Broker relations
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Building Occupancy & ManagementTHE REAL ESTATE DEVELOPMENT PROCESS
• Public sector participation typically limited
• Asset Management• Set rates and charges
• Allocate Common Area Maintenance (CAM) expenses
• Contract for Property Management
• Save / contract for Capital Improvements
• Contract for Maintenance
• Refinancing
• Reporting
• Maintain Relationship w/ Owner
Arizona Basic Economic Development Course
Environmental Issues
4
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Environmental Issues
• Brownfield Site (US EPA):“real property, the expansion, redevelopment or reuse of
which may be complicated by the presence or potential
presence of a hazardous substance, pollutant, or
contaminant.”
• Common Contaminants
– Asbestos
– Lead Paint
– PCBs / PCEs / Petroleum
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Environmental Issues – Analysis
• “Phase I” Environmental Assessment
• “Phase II” Environmental Assessment
If federal involvement:
• CATEX or
• EA / FONSI or
• EIS
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Environmental Issues – Cleanup
If remediation required, determine cost, who pays,
and if another site is a better alternative.
Hire the right team in
“bunny suits”
Arizona Basic Economic Development Course
Public Sector Involvement
5
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Incentives
• Basic Premise:
Project would not happen in a way desirable for the
community, but for the incentive
• Justification
• Jobs
• Revenue
• Catalyst for Future Development
• Other Policy Goals (e.g. revitalize downtown,
attract sustainable, high-wage jobs / talent)
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Sector Roles – REGULATOR
PLANNING DEVELOPMENT
• General Plan
• Overlay Districts
• Zoning
• Adjustment / Relief• Variance
• Use Permit
• Design Review Board
• Plan Review
• Building Permits
• Inspections
• Certificate of Occupancy• Temporary
• Phased Occupancy
• Final
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Sector Roles – FACILIATOR
FACILITATOR ROLE
• Regulatory approvals
• Partial financing
• Infrastructure
• Streetscape
• Facade improvement
• Public entity as tenant
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Participation
STAKEHOLDER OUTREACH
✓ Public forums
✓ Neighborhood associations
✓ Community organizations
✓ Business community
✓ Property owners
✓ Public notices
✓ Media outreach
✓ Surveys
Arizona Basic Economic Development CourseArizona Basic Economic Development Course
Public Sector Roles – INITIATOR
INITIATOR ROLE
• Define redevelopment area
• Conceptual design
• Feasibility study
• Public participation
• Issue RFP / RFQ
• Select developer
• Sell / lease land
Arizona Basic Economic Development Course
You did it!
You learned the Real Estate Development process…
any questions?
Jeremy LeggCity of Phoenix
(602) 534-6451