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By Anonymous Mike, pseudonymously.

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Sunday, July 20, 2008
Holy GPLETS Batman!

Following up on my post from last week concerning downtown development...

Espresso Pundit and Laurie Roberts have both written on GPLETS, the Government Property Lease Excise Tax. As the name suggests, GPLET involves a private party leasing government property and then paying a tax on the lease with the amount dependent on the type and size of the property.

Sound pretty innocuous you say? Well sure but it is how it's primarially used, that is as a incentive offered by local governments in the act of urban redevelopment, that is of primary interest.

The City of Phoenix has used GPLETS to attract new construction to downtown and is used in projects such as the Phelps Dodge Tower, Collier Center, and Renassiance Square. The law passed in 1996 replaced a similar law the previous year and allow the City to take possession of land and building and then lease it to a private entity. Sounds sort of like condemntation for urban blight? Well no because the act of taking poession is done in agreement with the private entity in question in order to benefit the entity.

Let's take a look at one such deal, though with the caveat that not all deals are exactly alike. Earlier this year, a developer cut a deal with the City under a GPLET/development lease to build a 107 room boutique hotel at the southeast corner of Adams and Central. Here's what the agreement states:

1) The developer would give, yes give as in "free", the City a parcel of land at 3rd St. & Fillmore.

2) The developer would then build a hotel on City land at Central and Adams

3) After the hotel was built and the Certificate of Occupancy issued, the whole brand-new hotel would then become City property.

So the developer not only agrees to give the City free land but also a brand-new hotel. The developer seems to be out of land and a building with no compensation. Is the developer crazy or crazy like a fox?

4) The developer will then sign a 20-year lease for the hotel. The developer would pay the City $10,000 a year with the amount increasing by $5,000 ecvery 5th year. Yep, $10,000 for a brand-new hotel.

5) The lease would be subject to GPLET but that amount would be abated for the first 8 years since it is in a redevelopment zone.

6) At the end of the 30-year lease the developer would take title of both the land and hotel at no cost. In fact at any time during the lease period, the developer could title to the land and hotel for no cost.

So what you have here is a shell game where the developer builds a hotel as a private entity, operates it as a private entity, but is allowed to essentially wave a "government property" flag of convenience for the purposes of property taxes.

I don't have the inside numbers on what that hotel developer will pay in GPLET or how much the shell game will save it but let's look at 2 properties for comparison.

The Radisson Hotel uptown at 2nd Ave and Osborn was assessed in 2007 at a Full Cash Value (FCV) of $5,497,500. Based on that amount it had a propety tax bill of $126,714

Some 3 miles to the south lies the Collier Center which had a 2007 FCV of $48,019,946 or roughly 8x the assessed value of the Radisson. In 2007 it had a tax bill of... $81,440 or 2/3 of what the Radisson paid. The difference between the Radisson and Collier? The latter is owned by the City of Phoenix and leased back and the former is private property and fully taxed. The $81,440 is the GPLET.

Now the value to the developer is clear, it's tax bill is much lower than what it would if the property was still in its private hands. Even with the unknown lease amount it would still be cheaper; if the lease was any on anything similar to the fore-mentioned hotel developer, it is song. Also the GPLET is assessed on the square footage and type of facility, not on its assessed value. That means even as the Collier's tax abatement expires, it will continue to enjoy all of the benefits of increasing property values without having to pay for it.

So what does the City get out of GPLET deals? First it gets nice shiny buildings downtown. Second, the City gets revenue from more than just property taxes; it also gets tax revenue from the construction and later business activity.

So who gets the smelly end of the stick?

First is the other government sub-divisions who heavily depend on the property tax: the county, community college district, schools. Even though a percentage of the Collier's GPLET goes to those various government sub-divisions, the Radisson paid more in property taxes to local K-12 even though its property is worth 1/8 as much. The City by taking land out of property tax generation to build those shiny new buildings is nailing the schools in the very communities it proposes to help.

Second is you, I, and the average businessman in the street. The GPLET is about creating a charade of public ownership in order to allow selected private companies in selected areas to escape paying taxes. The argument for that type of action is that it promotes the development of an area, downtown, that will beneit all Phoenix residents. I don't buy that argument but I think it's a legitmate one. The real danger, beyond the missing property taxes, is the legitmization of public action taken to benefit private parties. Those benefits most directly accrue, not to the average taxpayer or small business but rather to those who have the financial muscle and the ability to seek political redress in ordet to borrow public pwoer to get private benefit.

I cannot think of a better breeding ground for corruption