Arizona State Pushes Back in Real Estate Fight

By Mike Sunnucks for Phoenix Business Journal

For Morgan Olsen it circles back to the well-worn adage of ‘teach a man to fish.’

But the problem for Olsen – CFO at Arizona State University – is that some fiscal conservatives at the Arizona Legislature don’t want the school to fish for real estate deals and its own revenue streams even after the same state assembly cut higher education budgets during and after the last recession.

Olsen said ASU lost $200M in state funding over four years between 2008 and 2012. From 2009 to 2012, the state cut $400M in funding to the three state universities, including.

To backfill those cuts, the ASU CFO said the school started looking more at creating its own revenue streams.

Consequently, ASU has turned to real estate and its land holdings to bring in revenue, finance improvements at Sun Devil Stadium and Wells Fargo Arena as well as foster more research and development activity.

The school owns the 320-acre ASU Research Park in south Tempe.

It also owns land in downtown Tempe within as well as next to its main campus. ASU also has real estate holdings in north and downtown Phoenix, Scottsdale at the SkySong development (which is owned by the ASU Foundation) and at its West and Polytechnic campuses on either ends of the region.

ASU is partnering with Catellus Development Corp. for development of a 330-acre high-tech office development called the Novus Innovation Corridor.

But ASU’s other real estate deals and ventures involving public university lands are rubbing some fiscal conservatives the wrong way.

They point to the $928M sale of the 2MSF Marina Heights development in Tempe.

The development was built for $600M by Sunbelt Holdings and Ryan Cos. It sits on land owned by the Arizona Board of Regents.

Olsen and Nick Wood, a prominent land-use attorney for Snell & Wilmer LLP, said where State Farm now has 6,500 employees and a regional operations (center) was long empty and used for parking for ASU football games.

Raised Eyebrows

But the $928M sale of the development has raised the eyebrows of fiscal conservatives.

It’s also brought to the forefront the ASU Research Park and a similar development owned by the University of Arizona in Tucson.

State Rep. Vince Leach has introduced House Bill 2280.

The legislation would put new rules on university research parks.

Those include expansions of the research parks beyond their current boundaries and requiring private tenants there to be R&D related or linked to the university’s mission.

(It) would also restrict future sale leaseback deals on university-owned land. The land was donated to ABOR years ago.

Cutting Deals

While Olsen and ASU officials see economic development and needed revenue, fiscal conservatives such as Leach, the Arizona Tax Research Association and Commercial Real-estate Executives for Economic Development and Arizona Free Enterprise Club worry about real estate deals struck on university land.

That land isn’t taxed like private property and brings up some of the same concerns voiced about Government Property Lease Excise Taxes.

Leach is also running a bill on GPLETs this year and says the university real estate bill is about fairness.

Wood contends the State Farm deal is not a sale leaseback and that HB 2280 steps on universities’ and ABOR’s constitutional powers.

Olsen said ASU is worried about potential state restrictions that could impact development and real estate deals in downtown Tempe, downtown Phoenix and north Phoenix where the school owns land near the Mayo Clinic.

Cut Out

ATRA Senior Research Analyst Sean McCarthy contends the Marina Heights development avoids $12.1M in property taxes per year by being on university land.

Wood counters that the land otherwise would have been empty and the Marina Heights development produces jobs, construction sales tax revenue during its construction and the project is paying some payments via a deal struck with ASU and ABOR.

Constitutional Arguments

Tim Lawless, president of the CREED group, said there are other constitutional considerations in the mix including the uniformity and gift clauses. The former deals with uniform treatment of tax classes and the latter restricts government gifts to businesses.

For Lawless, it comes down to one office building or development paying traditional property taxes compared “to a competing facility a few miles away which is tax free but engages in the same activities”.

Wood points out that a number of state-owned buildings in the State Capitol area are actually owned by U.S. Bank in a sale leaseback deal struck during the recession when the state was in financial distress.

Read more at Phoenix Business Journal.