Real Estate Development and Reuse€¦ · Arizona Basic Economic Development Course Real Estate...

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!)


Why is Real Estate Development important?

We all live, work, shop and recreate in developed

real estate!


Why is Real Estate Development important?

It creates a sense of place (or not) that defines our

communities.


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…


Course Outline

1. Introduction

2. Approaches to Development

3. The Real Estate Development Process

4. Environmental Issues

5. Public Sector Involvement


Introduction

1


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


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?


Types of Resources Available

• Direct Financial

– Loans, grants, reimbursements

– Infrastructure development

• Other

– Land

– Tax Relief

– Expediting / Streamlining



Limitations

• Statutory

• Financial

• Political

• Practical



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”


Your Role is Unique! City Administration


Approaches to Development

2


A Little History…

Migration to City Living

Zoning to Separate

Incompatible Uses

Mixed-Use / Lifestyle Centers /

Smart Growth


Green Building

• Increased Up-Front Costs

• Reduced Operating Costs

• Positive Marketing

“Initial Investment of 2% Results in

20% Lifecycle Savings”


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


LEED Sales Pitch: No Additional Cost!

Actual Cost: $3,000,000

LEED Points for

15,000 SF Solar Array:

None

Phoenix

Convention Center


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


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


The Real Estate

Development Process

3


The Real Estate Development Process

1. Predevelopment2. Feasibility

Studies3. Site Analysis

4. Financing5. Negotiations &

Approvals6. Construction

7. Marketing 8. Occupancy &

Management


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


Site & Engineering Analysis

Is the site shovel ready?

TOPICS TO CONSIDER

• Natural Conditions and Contamination

• Road Issues

• Site Access Infrastructure

• Utilities

• Planning and Development


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.mygovcost.org/2010/11/16/shovel-ready-stimulus-sightings/&ei=drWUVKvDDMzxoATkjIDIDw&bvm=bv.82001339,d.cGU&psig=AFQjCNF8zlP7jU4r15k8ojx2ZFvJ60rQ3Q&ust=1419118282184362


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


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.theinquirer.net/inquirer/news/2347243/want-a-job-at-google-youd-better-be-a-white-man&ei=N4CLVPrkM47ooATNx4CwCw&bvm=bv.81828268,d.cGU&psig=AFQjCNGfitl3gHN0XxS8MjiZdKDe8WJGsQ&ust=1418514837145370


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


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


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


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


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


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


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 →


GPLET – ExampleArgument – Hurts schools / raises neighbors’ taxes

Abatement →


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=


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


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


Why didn’t

I go to law

school?


ConstructionTHE REAL ESTATE DEVELOPMENT PROCESS

Suddenly a heated

exchange took place

between the king and the

moat contractor.


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”


MarketingTHE REAL ESTATE DEVELOPMENT PROCESS

• Public sector participation typically limited

• Targets = Tenants / Buyers

• Strategies• Competitive pricing

• Advertising

• Promotions

• Earned media

• Broker relations


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


Environmental Issues

4


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


Environmental Issues – Analysis

• “Phase I” Environmental Assessment

• “Phase II” Environmental Assessment

If federal involvement:

• CATEX or

• EA / FONSI or

• EIS


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”


Public Sector Involvement

5


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)


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


Public Sector Roles – FACILIATOR

FACILITATOR ROLE

• Regulatory approvals

• Partial financing

• Infrastructure

• Streetscape

• Facade improvement

• Public entity as tenant


Public Participation

STAKEHOLDER OUTREACH

✓ Public forums

✓ Neighborhood associations

✓ Community organizations

✓ Business community

✓ Property owners

✓ Public notices

✓ Media outreach

✓ Surveys


Public Sector Roles – INITIATOR

INITIATOR ROLE

• Define redevelopment area

• Conceptual design

• Feasibility study

• Public participation

• Issue RFP / RFQ

• Select developer

• Sell / lease land


You did it!

You learned the Real Estate Development process…

any questions?

Jeremy LeggCity of Phoenix

(602) 534-6451

[email protected]

Real Estate Development and Reuse€¦ · Arizona Basic Economic Development Course Real Estate...

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