Legislative Update

Arizona’s economic developers are ahead of the curve

In early October, thousands of economic developers and partners descended on Nashville, Tennessee, for the International Economic Development Council (IEDC) Annual Conference. The event was an excellent opportunity to meet and connect with other economic developers from around the world.

One of the reoccurring themes of the conference was recovery and the reimagining of economic development. Throughout the pandemic, economic developers worked overtime, fielding requests from companies seeking to locate or relocate in Arizona, helping businesses access funding, writing grants for new initiatives, creating workforce programs, collaborating with state and regional partners, and anything and everything in between. The Arizona Commerce Authority just reported a banner year despite the pandemic, far exceeding capital investment and job creation goals for fiscal year 2021. Regional economic development organizations also saw a similar goal-busting year.

Top-of-mind among many conference attendees was the idea of re-imagining economic development. Ideas included increasing public-private partnerships, bringing affordable housing and workforce partners together, and increasing the focus on education. As the conference progressed, it became apparent to me that Arizona is above and beyond most other states in the way we practice economic development.

Economic development is a simple concept with many definitions, including increasing the size or pace of the economy, creating wealth for the benefit of communities and improving the standard of living. So many of the definitions involve growth language, which can be off-putting for some communities (as I know, coming from a community of 17,000 in the Midwest). Our Arizona communities view economic development as programs and policies that seek to improve the quality of life for our communities. We are blessed with strong educational partners, a vast workforce ecosystem, strong partners like the Chambers of Commerce across the state, and an eye always toward quality-of-life issues.

Arizona has been on the right track for years, a fact that manifested in the many accolades awarded to our state’s economic development organizations. This year, IEDC named the Greater Phoenix Economic Council the best economic development organization globally, and the City of Mesa Office of Economic Development took silver in the same category. The City of Mesa also won gold in Economic Equity & Inclusion for its collaboration with HUUB, a digital platform that supports local governments in revitalizing small businesses. Mesa’s JD Beatty was named Young Economic Developer of the Year, and Rich Adams, a member of the City of Mesa Economic Development advisory board, received the Citizen Leadership Award.

Carrie Kelly

AAED

Additional honors went to:

City of Tucson

Gold — Thrive in the 05 collaboration with Pima Community College

City of Surprise

Silver — Drive to Surprise Virtual Tour Video Silver — Surprise Virtual Spring Training Tent Event

City of Goodyear

Silver — Holiday Shop Local Campaign Silver — PV303 Business Park/Loop 303 Industrial Corridor

The Arizona Association for Economic Development also took gold for our Economic Development Week initiative. We don’t do the work to gain awards, but I believe it is a good indication that Arizona is a leader in the nation in its economic development efforts.

Carrie Kelly is the executive director of the Arizona Association for Economic Development.

CRE industry faces challenges with 1031 like-kind exchange cap

Congress likely will be debating the proposed $3.5 trillion American Families Plan for some time, and one of the items could affect the commercial real estate (CRE) industry. Highlights of the plan include: • Funding for free preschool for 3- and 4-year-olds, two years of free community college and additional investments to provide four-year college education to low- and middle-income Americans. • Funding to support families to supplement child-care costs, create a national paid family and medical leave program and extend tax cuts provided to low- and middle-income workers that were put in place as part of the American Rescue Plan. • A requirement for banks to report to the IRS all transactions from personal and business accounts except those less than $600. • Significant changes to the tax code, including a cap of the $500,000 to individuals and $1 million to married individuals for the 1031 Exchange.

One of the most criticized components of the bill and possibly the most detrimental to the CRE estate industry is the cap to the 1031 like-kind exchange. This exchange is instrumental to the ongoing success of the CRE market.

The 1031 exchange is one of the largest drivers toward transactions in a transaction- driven industry. It has been around for 100 years and has been used by a broad range of Americans, including farmers and ranchers. There is significant data to support the economic benefits of leaving the 1031 exchange law unchanged.

Repealing or limiting it would cause serious harm to the CRE industry, which could have an impact on the entire economy. CCIM is lobbying against any changes to the 1031 exchange law and has a platform for industry professionals to contact their legislator or leave their stories related to the benefits of the 1031 exchange. It can be accessed at bit.ly/3CoAtr8.

Other critics point out the massive price tag of the $3.5 trillion legislation, what it will do to already concerning inflation and the impact it will have on our national debt.

August inflation numbers showed a trailing 12-month inflation rate of 5.3%, down from 5.4% in July. Target inflation rate is 2%. Current inflation figures are higher than they have been in more than a decade. U.S. Sen. Rick Scott leads a coalition of other senators introducing an amendment to the Senate rules that would require that all bills passed by Senate committees include inflationary impact statements so Americans can see the true impacts of government spending.

U.S. Sen. Jim Banks introduced the companion bill, H.R. 468, in the House last month.

“We know that reckless government spending causes inflation, but President Joe Biden and the Democrats have absolutely no plans to slow down spending or get our debt under control,” Sen. Scotts says. “Congress must get real about the true cost on every American family that this recklessness brings and start spending responsibly.”

U.S. Sens. Kyrsten Sinema and Joe Manchin are two Democratic senators standing in the way of the massive spending plan.

“My experience over two decades of legislation is that bipartisan efforts have lasting effects. When legislation is passed that is supported by both parties, that is how legislation sticks,” Sinema says. “One of the dangers of legislating along a party line is that you will see a ricochet effect on policies with drastic swings in both directions as opposed to passing bipartisan legislation that will last.”

“I can’t support $3.5 trillion more in spending when we have already spent $5.4 trillion since last March. At some point, all of us, regardless of party, must ask the simple question — how much is enough?” Manchin adds.

We encourage CCIM members and industry professionals to get involved by contacting their legislators and sharing their positive 1031 exchange stories and concerns over government spending and inflation.

Todd Hamilton

CCIM

Brian Teske

CCIM

Todd Hamilton is president and Brian Teske is president-elect and legislative chair of the board of the Central Arizona chapter of CCIM.

LEGISLATIVE UPDATE Arizona’s Water Supply: Don’t Let Misinformation Affect Investment

Back in August, the U.S. Secretary of the Interior declared a longexpected Tier 1 shortage for the Colorado River. This means that the Basin States, including Arizona, will begin to experience cutbacks in 2022.

Out-of-state investors have begun to question the long-term viability of Arizona’s water supply and our ability to continuing growing. It’s important that anyone in the commercial real estate industry, especially those who speak to prospective investors or tenants from other parts of the country, be able to quickly articulate the facts.

First and foremost, agriculture, primarily in Pinal County, will be the only sector of the economy impacted by Tier 1 cuts under the Drought Contingency Plan (DCP). Farms will receive less Colorado River water from the Central Arizona Project (CAP) as stipulated in this agreement. Cities, homeowners, industrial users and other types of businesses will not be forced to curtail their water use.

The Tier 1 reductions amount to about 30% of CAP’s normal supply, 18% of Arizona’s total Colorado River supply and, importantly, less than 8% of Arizona’s total water use.

Over many decades as Arizona has grown, land use has shifted from agriculture to municipal. Houses and businesses use far less water per acre than farming. As a result, Arizona is now using the same amount of water as it was in 1957 despite a more than sevenfold increase in population.

Nevertheless, agriculture remains the largest user of water statewide at 70% of all water but makes up less than 7% of the gross state product (sum of economic value added by all industries in the state). In Metro Phoenix, agriculture uses 30% of the water, while cities use 50%, industrial 9% and tribal 11%, according to Arizona Department of Water Resources 2018 data.

Metro Phoenix is not overly dependent on Colorado River water. The supply comes from four major sources: groundwater (34%), effluent (12%), Salt and Verde rivers (25%) and the CAP/Colorado River (29%), according to Arizona Department of Water Resources’ 2020 data.

If levels of water in Lake Mead, which stores Colorado River water, continue to dip, the DCP provides a legal framework for which types of users will experience cutbacks, when this will occur and what mitigation measures will be available for these users.

The state would have to enter a Tier 3 shortage for municipal and industrial users to be subjected to cutbacks. Based on hydrological research, this is highly unlikely for many years and may never occur. Of particular importance is the fact that Arizona has banked about 13-million-acre feet of water, enough for the urban areas of Phoenix and Tucson to survive exclusively on this source for 10 years.

Additionally, long-term planning dating back to the 1980 Groundwater Management Act has protected communities from unsustainable growth. This act requires all new housing developments to secure a 100year supply of water. Many residential developers have relied on participation in the Central Arizona Groundwater Replenishment District, which provides water replenishment services to holders of assured water supply status. Although this tool may not be available for much longer, master planners are actively coming up with new approaches to fulfill this requirement.

Long-term augmentation strategies are already being developed. These will take years to come to fruition and, ultimately, it can be reasonably expected that all users will pay more for water. The strategies include desalination, bringing in water from farther distances, the creation of water markets, renegotiation of historic water rights with payments to the holders of these rights, cloud seeding, gray water usage and many more creative approaches.

Due to wise policy decisions in the past and hard work among current government officials and water stakeholders, our supply is secure for many years to come. This fortunate fact combined with future augmentation strategies and voluntary conservation measures means that Arizona will remain a safe place to invest even as the climate becomes hotter and dryer.

Suzanne Kinney

NAIOP

Suzanne Kinney is the president and CEO of the Arizona Chapter of NAIOP, the Commercial Real Estate Development Association.