Mark L. Johnson
Lease-onomics-Part I-Tourism Pays For Preservation
Updated: Jul 11, 2021
This is the first blog in a three-part series that presents the economics related to the Tortolita Preserve Lease (TP Lease). Part I covers the origins of the TP Lease and how the lease rent is funded. Part II delves into the Dove Mountain Master Developer Agreements and how they play into the TP Lease and certain Developer Reimbursements and Part III is a wrap-up with conclusions.
Over the last few months, the Tortolita Alliance (TA) Core Team has been researching and analyzing TP Lease and Developer Agreement documents and finances. To ensure accuracy, we have obtained documents and financial data via the Town of Marana website, Public Records Requests (PRRs) and meetings/correspondence with Marana Finance Director, Town Attorneys and Deputy Town Manager.
Enjoy the read! We think you will find this fascinating! Stay with us to the end and you'll see that it is not local taxpayers, but tourists who pay to protect the Tortolita Preserve for everyone.
Tortolita Preserve Lease & Funding
Tortolita Preserve Lease Origins
The Tortolita Preserve (TP) was established as a result of required mitigation land for the construction of a Resort Hotel (ultimately Ritz-Carlton) within the Dove Mountain Specific Plan. The US Fish & Wildlife Service required that 2,400 acres of land would need to be acquired by the developer to mitigate impacts to the Ferruginous pygmy owl on the proposed Resort Hotel land.
The closest mitigation land was located just to the west of the proposed Resort Hotel on land owned by the State of Arizona and managed by the Arizona State Land Department (ASLD). In 2000, ASLD agreed to establish a 99-year lease for the 2,400 acres (now known as the Tortolita Preserve) to serve as the mitigation land.
TP Lease Assignment
Marana had been working closely with Cottonwood Properties (Mehl) in the late 1990’s to develop the Dove Mountain Specific Plan including the Resort Hotel. As mentioned above, the Resort Hotel could not be developed without the mitigation land, i.e. TP Lease. ASLD rules required the TP Lease be auctioned. Another local competing developer, Vistoso Partners (Wolfswinkel), also wanted a local Resort Hotel. Vistoso Partners participated in the auction and was awarded the TP Lease!
Marana and Cottonwood Properties were not happy with this situation and, apparently under the threat of condemnation by Marana, the TP Lease was ultimately assigned from Vistoso Partners to Marana on 10/16/2001. The cost for this deal was $850,000, which was to be paid by Cottonwood Properties [Resolution 2001-138].
TP Lease Key Articles
The TP Lease is a comprehensive document. The intent here is to review only some of the key provisions:
Article 3, Commencement & Expiration-10/25/00 through 10/24/99
Article 4, Annual Rent
Years 1-5: $432,000/year
Years 6-99: Every 5 years, annual rent increase by the greater of 10% or the cumulative change in the CPI for the prior 5 years
Article 6, Use and Occupancy of Premises-states in-part that TP shall be used “solely and exclusively” for “open space and park purposes” and “construction, operation and maintenance of hiking, bicycling and equestrian trails.”
Early TP Lease Funding
The proposed development of the Dove Mountain area dates back to 1989. Over the years, there have been different Master Developers and 18 Dove Mountain Specific Plan Developer Agreements and Amendments (Developer Agreements) were approved by Marana. TA has reviewed the Developer Agreements and created a Chronology to show how the Dove Mountain development played out over time. In addition, the Chronology includes key TP Lease events.
Part II will go into the Developer Agreements in more detail but for the purposes of this section we can simply indicate that Cottonwood Properties was responsible for the TP Lease rent from 2000-2010 and Marana took over paying the TP Lease rent in 2011.
Current TP Lease Funding
Marana has provided TA with the Projected Annual Lease Payments assuming the 10% inflation factor. In 2019, Marana paid TP Lease rent of $574,992 and the annual rent goes up to $2,642,072 in the last year of the TP Lease. In 2014, Marana calculated the Present Value of the TP Lease rent payments at $16,530,000 and the TP property was appraised at $17,800,000.
Marana funds the TP Lease rent from Hotel Sales Tax Revenues as further described below.
TP Lease rent is not being funded by Marana residents!
Marana Sales Tax
Marana obtains about 50% of its revenue from local Sales Taxes and 14% from State Shared Revenues. Marana receives very little revenue from Property Taxes! See Figure to the left showing Revenue By Type taken from 2019 Comprehensive Annual Financial Report (CAFR).
All Sales Tax (Transaction Privilege Tax) receipts are collected by the State of AZ from the vendor and that portion belonging to Marana is subsequently returned to Marana.
Marana Sales Tax rates vary by 20 classifications. The following Exhibit shows three Marana Sales Tax rate examples--Retail Sales Tax, Construction Sales Tax and Hotel Sales Tax.
If you buy a television in Marana, you will be charged 8.1% total Sales Tax of which Marana only gets 2%.
If you construct something in Marana, you will be charged 10.1% total Sales Tax and Marana gets 4%.
If you stay at any hotel (not just Ritz Carlton) in Marana, you will be charged 14.1% total Sales Tax. Here's where the magic begins! There are two Marana Hotel Sales Tax components that total 8%. As shown above, half (4%) goes to the General Fund and half (4%) goes to the Bed Tax Fund. As you'll see next, Bed Tax Fund revenues come from tourists, not local taxpayers, and it pays the freight on the TP Lease!
Bed Tax Fund
The Bed Tax Fund is a stand-alone fund utilized to fund tourism which includes the TP Lease rent.
Per ARS §9-500.06((C)(E)), two-thirds (4%) of the Hotel Additional Sales Tax (6%) shall be used exclusively by the Town for the promotion of tourism. The remaining one-third (2%) goes to the General Fund.
The Figure below is taken from CAFR (pg. 112) and shows the revenues, expenditures and fund balance for the Bed Tax Fund. The TP Lease rent of $574,992 is included in the total expenditures of $983,534. The other expenditures were for tourism-related expenses including a Marketing Manger!
Note the year-end fund balance is $1,869,207 and grew by $449,079 in 2019.
The Bed Tax Fund revenues budgeted for 2020 are $1,227,600 which seems light as a new large hotel (Hampton Inn) will be adding more Hotel Sales Tax in 2020.
TP Lease was assigned to Marana in 2001
TP Lease rent payments increase from $432,000 (2000) to $2,642,072 (2098)
Cottonwood Properties paid TP Lease rent from 2000-2010
Marana has been paying TP Lease rent since 2011 and paid $574,992 in 2019
Marana collects two Hotel Sales Taxes totaling 8%
Half of the Hotel Sales Tax (4%) goes to the Bed Tax Fund
Bed Tax Fund funds tourism including the TP Lease rent
TP Lease rent is funded by Hotel Sales Tax Revenues via the Bed Tax Fund
TP Lease rent is not being funded by Marana residents!
In Lease-onomics Part II, we will provide some very interesting information regarding the Dove Mountain Developer Agreements and Reimbursements. Stayed tuned!