https://www.bizjournals.com/phoenix/news...VWLcURbQ0fac03ca&t=1548429178&j=86266761
Arizona State University-owned land may be the target of a lawsuit over diversion of property taxes, but its massive real estate development designed to fund ASU’s athletics facilities is progressing forward unscathed.
Overall, the Novus corridor just east of Phoenix has nearly $1 billion worth of projects in the works, making it the largest single concentration of construction in the state, possibly in the Southwest, said Charley Freericks, senior vice president of Catellus, the project’s master developer.
The corridor, which runs along the north and east side of ASU’s Tempe campus, will add office space, hotel rooms, retail, restaurants and residential developments into the Valley’s hottest submarket. Already it has developed Marina Heights, the regional home to State Farm with more than 2 million square feet of office space.
Even as the Arizona Board of Regents works to defend a separate project on university-owned land, ASU officials see their way forward in protecting their Novus investment with a state law that gives universities the ability to develop athletic facilities districts. Instead of paying property taxes, those developments pay fees to ASU that ultimately will fund upgraded athletics facilities.
So far, Arizona Attorney General Mark Brnovich’s lawsuit isn’t targeting Novus. ASU’s facilities district allows money that would be collected as property taxes to be received as in-lieu fees that support the university. That distinction could allow the project to fulfill the university’s plan.
For ASU, the money gleaned from Novus is seen as a way to keep the university competitive in the increasingly expensive world of college athletics, where schools around the country are finding new ways to raise revenue.
Plans to allow private development on the 330 acres designated as ASU’s athletic facilities district started “as a self-help tool” in the wake of diminishing state funding for universities following the Great Recession. The lack of money meant athletics often was among the first departments to see budget cuts.
“We realized quickly that was the tail wagging the dog,” said Morgan Olsen, chief financial officer of ASU. “We’ve got 300 acres [to use] for large-scale development.
In 2010, the Arizona Legislature gave universities the ability to create an athletic facilities district where private development could be built and, instead of property taxes, the developers would pay in-lieu fees to the university that would directly fund athletics.
“The university realized the resources it would need to be competitive at the college level in the Pac-12, and it would be expensive to provide that type of environment,” Olsen said. “You can argue right or wrong, but it is.”
According to the law, the land had to be contiguous, and ASU chose property it determined was not needed for its “core mission” of educating students, Olsen said.
Funding athletic operations through the district can help to relieve the burden from other university funding sources, which have been pinched by state funding cuts, Olsen said. The university anticipates the district will raise about $500 million over two decades, funds the law requires to go to the creation or maintenance of athletics facilities.
In the most recent year, ASU ranked No. 30 nationwide in terms of athletic revenue, pulling in $101 million, according to USA Today’s most recent analysis. Tops in the U.S. is the University of Texas in Austin, which had revenue of $214 million during the 2016-17 school year. Adding an additional $50 million annually would greatly benefit ASU’s athletics efforts and put it at the top of the Pac-12.
Grand plans
At buildout, Novus will have 4 million square feet of office space, 670 hotel rooms and 300,000 square feet of retail, according to data from ASU. About half the development that takes place in the corridor will be office, according Freericks.
Novus is more than just a funding mechanism for athletics. It could put Arizona on the map for significant company relocations and large corporate headquarters, Olsen said.
While Arizona did not make the short list for Amazon’s HQ2, “that opportunity is still there for another organization,” Olsen said. “State Farm could have gone anywhere, and now those jobs are here. That is the model we are trying to put in place here. There are benefits to working with a world-class university.”
Horizontal improvements have begun on a 262-unit luxury apartment complex and a six-story, 162,000-square-foot office building on the east side of Rural Road at Sixth Street along the future road that will be named Novus Place. Groundbreaking for the developments is planned for the first quarter.
“The focus will be heavier on office and residential,” Freericks said of the Novus corridor at full build-out. “We want to complement Mill Avenue, not compete with it. We anticipate this being more of a business district.”
Most of the corridor’s retail space is planned for ground floors of office, hotel and residential developments, according to plans shared by ASU.
In the next phase of development, the third phase, about 30,000 square feet of retail and restaurant space is planned, Freericks said. The development will include a multi-tenant food hall space, which Freericks said “will be a terrific way to anchor Novus Place.”
The development is planned over seven phases, two of which — the Marina Heights development that became the State Farm office complex and the Sun Devil Stadium remodel — are completed. Marina Heights, the biggest office development in the state, is not within the facilities district’s physical boundaries, but is being treated the same as the district, a spokeswoman for ASU said.
The development’s land will come from razing ASU’s dated athletics facilities, including the ASU Karsten Golf Course, baseball’s Packard Stadium and Sun Angel Stadium, the track and field complex. The ASU Golf teams’ new home course will be the Papago Golf Course, and ASU Baseball began playing its home games at Phoenix Municipal Stadium in 2015.
“The city of Phoenix had a course that needed some love for a fraction of the cost of upgrading Karsten,” Freericks said. “We can create revenue on the site to help pay for the university growing.”
Public golf courses generally do not create much profit, Freericks said, so constructing office space on the former course will generate millions of dollars worth of in-lieu fees over time.
To replace some of the athletic facilities that will be razed, ASU will build a state-of-the-art athletics village within the Novus corridor. The facility will include tennis, track and field, soccer and other sports facilities.
“We want the tennis facilities to be a destination for college tennis,” Freericks said.
‘Philosophical opposition’
The bill to allow the creation of the facilities district failed its first time in the state legislature, but passed in 2010.
Sean McCarthy, senior research analyst at the Arizona Tax Research Association, which opposed the bill at the time, said even though Novus follows what the law allows for an athletic facilities district, the group remains “philosophically opposed” to the idea because it diverts property taxes away from local governments and school districts.
“As a general rule, we oppose the idea of redirecting taxes that are supposed to fund local governments,” McCarthy said.
Unlike other developments that have drawn scrutiny from the Arizona Attorney General for using university land to avoid property taxes, facilities district developments do not receive the same financial incentive because they require in-lieu fees, which go to the university instead of cities, school districts and other entities.
Brnovich is suing the Arizona Board of Regents in Arizona Tax Court regarding 2.25 acres near Mill Avenue and University Drive destined to be an Omni Hotels Management Corp.-branded hotel and conference center. The lawsuit was filed because that project would mean the hotel avoids property taxes by having ASU take over the deed of the building.
McCarthy said Novus is “better than the Omni [hotel development],” because it does not have the incentive of avoiding property taxes.
ATRA originally worked with legislators in 2010 during the law’s passage to advocate for oversight and regulation on the districts, such as requiring approval by the county’s board of supervisors for the creation of the district boundaries, McCarthy said.
“We will be monitoring it to make sure everything is done within the bounds of the law,” he said.
Demand in Tempe
The additional office space has been a boon for Tempe, which has some of the highest rents in the Valley, both for multifamily residential and for office space.
According to Cushman & Wakefield research, Tempe’s average multifamily rent was $1,195 for a two-bedroom unit, above the Valley’s average of $1,136. Tempe’s vacancy rate was slightly higher than the Valley’s average, with a 5.4 percent multifamily vacancy in the submarket.
Tempe had the lowest office vacancy of any submarket in the Valley at the end of the third quarter, with a 4.7 percent vacancy rate, according to CBRE research. Rent for office space in Tempe was $29.10 per square foot, the third-highest price for office space in the Valley.
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