Lease-onomics-Part II-True Conc[f]essions
This is the second in a series of three blogs that present the economics related to the Tortolita Preserve (TP) Lease. Part I-Tourism Pays For Preservation covered the origins of the TP Lease and how the lease rent is funded. Part II delves into the Dove Mountain Master Developer Agreements (Developer Agreements) and how they play into the TP Lease and certain Developer Reimbursements. Part III is a wrap-up with conclusions and recommendations.
The Town of Marana (Marana) held a Study Session on 10/8/19 and one of the agenda items was the proposed reconfiguration and rezoning of the Tortolita Preserve by the Arizona State Land Department (ASLD). During this discussion, Marana stated; (1) Cottonwood Properties, Inc. (Developer) paid the TP Lease rent in the early years of the TP Lease and (2) the Ritz Carlton Hotel generated enough money to cover the TP Lease rent and reimbursements to Cottonwood Properties, Inc for infrastructure construction. This perked our interest.
Accordingly, 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 made Public Records Requests (PRRs) with Marana and met with Marana Finance Director, Town Attorneys and Deputy Town Manager.
The complexity of the Development Agreements and Developer Reimbursements unavoidably make this a somewhat lengthy and detailed read. We think you will find this information surprising and fascinating.
Dove Mountain Specific Plan
The development of the Dove Mountain Specific Plan (DMSP) dates back to 1989. Over the years, there have been 19 Dove Mountain Specific Plan Developer Agreements and Amendments (Developer Agreements). TA has reviewed the Developer Agreements and created a Chronology to show how this development played out over time along with key TP Lease events.
As previously mentioned, the Developer Agreements and the provisions therein are very complex. Here we will boil it down to a discussion related to the TP Lease and Developer Reimbursements.
The original master developer (Developer) was Marana & Tortolita Mountain Properties Limited Partnership aka Westinghouse Communities of AZ, Inc. Ultimately, Cottonwood Properties, Inc. would become the Developer.
The Key Agreement for this discussion is the Amendment to Bajada-Phase 1-Canyon Pass Agreements dated 6/19/2001 (recorded 7/19/2001). TA has developed a Summary of the Key Agreement and inter-related agreements/amendments and can be referenced for more detailed information, especially definitions.
A word of caution. The Key Agreement was written and executed in 2001 and some of the terms used are different from today. This is especially true for references to Sales Tax and Bed Tax. For example, the Key Agreement uses the term Resort Sales Tax which is a combination of various sales taxes related specifically to the Resort Hotel (aka Ritz-Carlton). We will try to distinguish the terms and eliminate any confusion. In addition, for the purposes of this discussion, the term Developer also includes any associated Community Facilities District (CFD) formed by the Developer.
The Concessions
Developer agreements in general define the project and spell out the requirements and responsibilities of both the developer and the municipality/public agency. Sometimes the municipality/public agency will extend concessions to the developer to stimulate the project for a variety of reasons.
The Key Agreement provides for four primary concessions; (1) Qualified Expense Reimbursement, (2) Transportation Facilities Costs Reimbursement, (3) Resort Bed Tax Reimbursement and (4) Construction Premium Reimbursement. These are further described below.
Qualified Expense Reimbursement (QER)
QER is the most complicated concession. QER provides for Marana to reimburse the Developer for the construction of Dove Mountain Infrastructure and TP Costs Incurred By The Developer (collectively Qualified Expenses).
QER began in 2011 and continues for 20 years until 2031. QER to the Developer occurs when the Resort Net Revenue exceeds $1 million/year. The formula for Net Revenue is:
Net Revenue = [Resort Sales Tax + Resort Construction Tax] – [Town’s Preserve Costs + Convention Visitors Bureau Costs].
See Summary for definitions of all the terms
The concept behind this equation is that Marana receives two sources of income from the Resort Hotel (Resort Sales Tax and Resort Construction Tax), but incurs two expenses (TP Preserve Costs + Convention Visitors Bureau Costs). Therefore, the “Net Revenue” that Marana receives is the difference between the two taxes received and the two costs incurred.
Marana indicates that Net Revenue is presented in multiple funds as collected and allocated in accordance with Arizona Revised Statutes and Council Resolutions and Ordinances, including the General Fund, Bed Tax Fund and Transportation Fund.
It should be noted that QER in any year cannot exceed 20% of Resort Sales Tax for that year and the Net Revenue obtained by Town cannot go below $1 million.
Transportation Facilities Cost Reimbursement (TFCR)
This provision states that when Town first receives Resort Construction Tax and 20 years thereafter, the Town reimburses Developer an amount equal to Transportation Facilities Costs but shall not exceed 2/3rds of the cumulative Resort Construction Tax. TFCR apparently began in 2006 and ends in 2026.
QER & TFCR-Costs Incurred & Reimbursements To Date
Recall from the discussion above that QER is payable through 2031 and TFCR is
payable through 2026. Marana provided the following Exhibit (Public Infrastructure Cost Summary) showing the amount of Qualified Expenses and/or Transportation Facilities Costs that have been incurred up through February 2020. The total of these eligible reimbursements is currently a whopping $26.2 million (column 3, bottom). This means that as of now we expect that by 2031, Marana will have paid $26.2 million to the Developer for these Reimbursements.
Note the Qualified Expenses include TP Costs Incurred By The Developer and soft costs related to CFD financing.
Yep, Marana is reimbursing the Developer $5.7 million for TP Lease rent payments paid by the Developer during the early years of the TP Lease. This was not mentioned at the 10/8/19 Study Session.
Plus Marana is reimbursing the Developer $8.1 million for CFD Bond and Interest costs. Typically CFD costs are borne by the members of the CFD, not the municipality. This was not mentioned at the 10/8/19 Study Session.
A relevant question arise; how much of this $26.2 million dollars has been paid so far? The answer is just over $10 million, as shown by the schedule of payments below, provided by Marana.
Therefore, Marana has a remaining reimbursement obligation of $16.2 million ($26.2 million - $10.0 million = $16.2 million) through 2026 (TFCR) and 2031(QER).
TA asked Marana if the $26.2 million obligation is shown as a liability in Marana's CAFR and the response was, "There is no reimbursement liability recorded as such payments are annual and processed by the end of the fiscal year." It seems that Marana should be transparent and place this reimbursement obligation/payments in Marana's Financial statements.
It is interesting to note that the total Qualified Expenditures of $26.2 million far exceed the 2014 Present Value ($16.53 million) of the TP Lease rent payments and the 2014 TP appraised value of $17.5 million!
Resort Bed Tax Reimbursement
If Marana invokes a Bed Tax (in today’s lingo that would be Hotel Sales Tax) higher than the average (Tucson-Phoenix-Scottsdale-Marana) Bed Tax, then Marana remits the excess to the Developer. This provision ends in 2029.
TA requested the total amount that has been remitted under this provision and received the following response, “Amount remitted – Per ARS §42-2001 - This would be privileged information and as such are not able to disclose it as knowing this amount would allow viewers to draw conclusions about the individual taxpayer.”
Therefore, we do not know how lucrative this concession is.
Construction Premium Reimbursement
Back in 2001, Marana imposed an extra 1% Sales Tax (2% to 3%) on Construction (Marana Ordinance 98.02). The Key Agreement has a clause that states if Marana increases the extra Sales Tax on Construction, Marana shall reimburse the Developer any Construction Sales Tax receipts in excess of the original 1%. As outlined in Part I, the Construction Sales Tax sales tax is now 4% so the extra amount is 1%. According to Marana, this concession is included in the Qualified Expenses Exhibit above. This provision ends in 2031.
Summary
There are 19 Dove Mountain Developer Agreements and one Key Agreement.
The Key Agreement includes four concessions, (1) Qualified Expense Reimbursement (QER), (2) Transportation Facilities Costs Reimbursement (TFCR), (3) Resort Bed Tax Reimbursement and (4) Construction Premium Reimbursement.
Qualified Expenses and/or Transportation Facilities Costs total $26.2 million.
Qualified Expenses include TP Lease rent ($5.2 million) previously paid by the Developer.
Qualified Expenses and/or Transportation Facilities Costs include CFD bonding and interest costs ($8.1 million).
QER/TFCR payments to-date total $10.0 million.
Remaining QER/TFCR obligations total $16.2 million.
Resort Bed Tax Reimbursements amounts are unknown as they cannot be released.
Construction Premium Reimbursements are apparently included in the Qualified Expenses.
Bottom Line:
Dove Mountain Developer Agreement Concessions are substantial and burden Marana finances, residents and taxpayers.
Although TP Lease rent payments from 2000-2010 were appropriately borne by the Developer, they are being reimbursed as a Qualified Expense and borne by taxpayers.
In Lease-onomics Part III, we will summarize and provide some dynamic conclusions.