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Legislative Update
Bipartisan Agreement Invests in our Country and Its People
In July, a group of Senate Democrats and Republicans, including Arizona Sen. Kyrsten Sinema, released details of the Bipartisan Infrastructure Deal. This agreement passed the Senate in early August and was sent back to the House of Representatives for consideration and markup. The legislation includes $550 billion in infrastructure investments paid largely by unused COVID relief funds already appropriated by Congress.
A White House synopsis of the bipartisan agreement includes the following breakdown of how the funds will be allocated:
ROADS, BRIDGES AND MAJOR PROJECTS: $110 BILLION
This investment funds the aging infrastructure needs of roads and bridges throughout the U.S. The bill allocates $16 billion for major projects that are too large or complex for traditional funding programs but will deliver significant economic benefits to communities. It also reauthorizes the Surface Transportation Reauthorization Act for an additional five years.
Carrie Kelly
AAED
POWER AND GRID: $65 BILLION
Part of the deal supports grid reliability and resiliency infrastructure. It includes funds for critical minerals and supply chains for clean energy technology, carbon capture, hydrogen, direct air capture and energy efficiency technologies.
WATER INFRASTRUCTURE: $55 BILLION
The deal provides funding for water projects, lead service line replacement and water infrastructure in tribal communities.
PASSENGER AND FREIGHT RAIL: $66 BILLION
The infrastructure deal funds the U.S. rail network that carries more than 1.8 billion tons of freight valued at more than $830 billion annually, as well as 32.5 millionplus passengers on rail passenger transportation services. Operating assistance and new construction grants are also included.
RESILIENCY: $50 BILLION
In an effort to make our communities safer and our infrastructure more resilient to the impacts of climate change and cyberattacks, the bill funds cybersecurity protection of critical infrastructure needs, flood mitigation, wildfire, drought, coastal resiliency, waste management, ecosystem restoration and weatherization.
BROADBAND INFRASTRUCTURE: $65 BILLION
An estimated 19 million Americans lack access to high-speed internet. From urban broadband deserts to much needed rural connectivity, this investment will no doubt help bridge the digital divide throughout Arizona.
PUBLIC TRANSIT: $39.15 BILLION
The largest Federal investment in public transit in history provides significant funding for bus, streetcar and rail transit systems in both rural and urban areas of the country. It also extends the Fixing America’s Surface Transportation (FAST) Act for an additional five years.
AIRPORTS: $25 BILLION
The legislation allocates $20 billion in funding for air and terminal projects and $5 billion for air traffic control facilities in airports throughout the U.S.
ENVIRONMENTAL REMEDIATION: $21 BILLION
The deal addresses legacy pollution and allocates funds to clean up superfund and brownfield sites. It also backs reclaiming abandoned mine land and capping orphaned gas wells, actions that will benefit Arizona.
PORTS AND WATERWAYS: $17.4 BILLION
This bill invests in port and water infrastructure. Funding for the Army Corps of Engineers and Coast Guard also is included.
SAFETY AND RESEARCH: $10.5 BILLION
The deal invests additional money on grant programs, such as Safe Streets for All, Vision Zero and the Strengthening Mobility and Revolutionizing Transportation (SMART) Grant Program, as well as utility upgrades.
As our nation’s first national investment in EV infrastructure, the deal supports alternative-fuel corridors and a national network of EV charging stations to facilitate long-distance travel. The funding will be focus on rural disadvantaged communities.
The Arizona Association for Economic Development (AAED) continues to advocate for infrastructure investments. From broadband and rural highways to water and urban transportation, infrastructure is necessary for the efficient movement of goods and services as a function of economic advancement in Arizona.
Carrie Kelly is the executive director of the Arizona Association for Economic Development.
AMA Legislative Priorities Become Law
Arizona lawmakers wrapped up the third-longest legislative session in state history on June 30. The 171-day session was just shy of the 173-day record set in 1988 — making it one for the books. While 1,774 bills and 125 memorial resolutions were introduced in the 2021 legislative session, the following issues remained at the forefront of the AMA’s advocacy efforts.
AFFORDABLE HOUSING
After falling short last year due to the outbreak of COVID-19, the Legislature finally passed a state Low-Income Housing Tax Credit (LIHTC) program. Arizona’s new LIHTC program models itself after the federal public-private program signed into law by President Ronald Reagan as part of his Tax Reform Act of 1986. Federal LIHTC has helped finance approximately 47,000 affordable housing units — nearly 99% of the units in Arizona — since 1987.
While that number sounds significant, the reality is that we need many more units to simply meet demand. In fact, to meet immediate needs, Arizona should be building nearly 3,000 new affordable units annually; we are currently building at half that pace.
The final state LIHTC proposal, introduced by Rep. Regina Cobb and Sen. David Gowan resulted in the creation of a $4 million annual tax credit. This relatively small investment by the state will, almost immediately, make a major dent in our lagging supply of affordable housing.
Arizona now joins nearly 20 states in offering a state LIHTC program. The AMA worked closely with the Arizona Housing Coalition in passing this historic piece of legislation.
Courtney Gilstrap LeVinus
AMA
VIRTUAL COURT
In a move to make a temporary COVID policy permanent, the AMA worked with Sen. Warren Petersen in passing SB 1322, which will allow any party, including an attorney or witness, to appear telephonically or virtually for an eviction action proceeding before the court.
While many courts were indicating that they were likely moving in this direction without the law change, placing the requirements in statute ensures that the policy will be uniformly applied to all courts across the state and that individual courts will not create their own specific rule or requirement.
ANIMALS IN RENTAL UNITS
The AMA worked closely with Rep. Shawnna Bolick in passing legislation to expediate the release of a deceased or incapacitated tenant’s animal. House Bill 2507 provides new remedies for property owners to quickly remove an animal from the rental unit — in the event the renter passes away — and release the animal to a family member or shelter.
Prior to the law change, animals were treated no differently than any other personal item held by the renter, putting property owners in a precarious position of having to choose between providing care to the animal or simply locking the door and waiting for the hold period, prescribed by statute, to expire. This was a similar issue rectified by the AMA in a 2018 state law change that dealt with animals left behind when a renter abandoned the unit.
RENT REGULATION
The 2021 legislative session also saw an unprecedented number of bills introduced that directly attack the rental housing industry. Eighteen bills attempted to impose some form of new regulation on rental owners. Of the those, five proposed pieces of legislation, if passed, would impose some form of rent control on the industry.
Rent control policies, which are found in some communities across the country, would have a catastrophic impact on housing development. Our country has very few examples, if any, of comparable price controls since these types of policies are universally rejected by economists and business leaders.
Fortunately, none of these harmful bills made it across the finish line in 2021.
Courtney Gilstrap LeVinus is the executive director of the Arizona Multihousing Association.
Arizona Legislature wraps with historic tax reform and other CRE protections
After 171 days in session, the Arizona Legislature adjourned on June 30. While many hotbutton issues — such as election reform proposals, education funding ideas and pandemic-related policies — received the bulk of media attention, a historic tax reform package will likely go down as the single most important policy shift for the state in the past decade.
For BOMA Greater Phoenix, which represents some of the largest commercial office building owners and property managers in the state, this reform package took front and center for our advocacy efforts.
For years, the potential growth of commercial real estate (CRE) has been hindered due to relatively high commercial property taxes. Prior to this year’s reform, Arizona had some of the highest commercial property tax rates in the country.
Regionally, Arizona compared negatively with New Mexico, Nevada and Utah — and even worse with Texas, which simply rolls out the red carpet with generous incentives to draw job creators from California.
Property tax in Arizona is assessed and administered in each county by the county assessor. The state assigns legal classes to categorize property based on its use, and an assessment ratio is applied to the value. Prior to this year’s reform, Class 1 property, which includes commercial, industrial, utilities and mines, was assigned the highest rate of all nine classifications at 18%.
To achieve parity for commercial real estate, Sen. J.D. Mesnard and House Majority Leader Ben Toma secured majority consensus around lowering the assessment ratio from 18% to 16% over four years, with a 0.5% reduction each year.
Farrell Quinlan
BOMA
MOVING ARIZONA TO A FLAT TAX
Property tax wasn’t the only area the legislature addressed this year, as lawmakers also took aim at Arizona’s income tax system. While lawmakers have long promoted the idea of moving Arizona to a “flat tax” model, the recent passage of Proposition 208 — the measure that created a surcharge to increase income taxes for the purposes of providing more education funding — only heightened the urgency for change. Much like the state’s commercial property taxes, Arizona’s income taxes catapulted to among the top in the country, due to the Proposition 208 surcharge — second only to California in the region.
Under the Mesnard/Toma plan, the state’s individual income tax rates were reduced, and the individual brackets were consolidated. Effective January 1, 2022, the state’s four individual income tax rates will be consolidated into two by eliminating the 4.5% and 4.17% general rates.
The two lower rates will be reduced from 3.34% to 2.98% and from 2.59% to 2.55%. Top earners (single filers earning $250,000 and married filing jointly earning $500,000) will still pay the Proposition 208 surcharge. However, their rate will be capped at 4.5%, much lower than the current 8% rate.
If revenues continue to meet projections, then further consolidations of the tax brackets will be triggered, ultimately leading to a flat 2.5% rate for all filers except those in the top (4.5%) bracket.
To appease concerns from local jurisdictions about a potential loss in revenue from the cuts, the legislature wisely employed the use of revenue triggers and increased the percentage of state-shared revenue to be distributed to the localities.
LIABILITY PROTECTIONS KEY FOR POST-PANDEMIC RECOVERY
BOMA Greater Phoenix also applauds Sen. Vince Leach’s efforts to pass SB 1377, which creates business liability protections during the COVID-19 pandemic.
The bill, retroactive to March 11, 2020, holds a person or “provider” harmless for damages in a civil action for any injury, death or loss to person or property based on a claim that the defendant failed to protect the person or public from the effects of the pandemic unless “it is proven by clear and convincing evidence that the person or provider failed to act or acted with willful misconduct or gross negligence.”
These liability protections are critical for CRE operators as concern was growing over a potential rash of lawsuits from “mass action” filers, akin to the frivolous Americans with Disabilities Act complaints that swept through the Valley several years ago and ultimately required intervention from our state attorney general and the legislature to put an end to the abuse.
The 2021 Legislative session will certainly go down in the history books as one of the most important sessions for CRE and business owners. We look forward to the 2022 session to further advance policy that encourages investment in Arizona’s CRE.
Farrell Quinlin is the executive director of the Greater Phoenix chapter of the Building Owners and Managers Association (BOMA).
Raising taxes will slow development of projects needed for recovery
Commercial real estate development is a high-risk venture, led by entrepreneurs driving economic growth in our communities. Office buildings, shopping centers, apartments, hotels, manufacturing facilities and fulfillment/distribution centers are examples of real estate developments that require significant, high-risk investment. These projects provide jobs, create affordable housing and meet other needs for Arizonans.
While the COVID-19 pandemic challenged nearly every commercial real estate sector in 2020 and 2021, a new report by Newmark Research, titled “The Newmark Opportunity Index,” ranks Phoenix among the hottest cities for new opportunities in the multifamily housing and hospitality sectors. Over the next few years, buildings in Arizona will need to be repurposed and reimagined to adapt to the post-COVID era. As the Valley continues its pandemic recovery and attracts new residents from across the country, it’s important to promote policies that will mobilize and encourage real estate investment, not create unnecessary barriers.
On the heels of a successful state legislative session that lowered commercial property taxes and income taxes, NAIOP is turning its attention to federal policy proposals that would reduce investment in innovative businesses and real estate projects throughout the state.
President Joe Biden has committed to helping small businesses “Build Back Better” through grants, investments and an infrastructure package. Sen. Kyrsten Sinema has been a leader in finding bipartisan compromise on a major infrastructure package that would fund critical highway, water and port of entry projects.
However, other members of Congress have introduced legislation that would substantially raise taxes on entrepreneurs and investors. Several of these proposals would directly hit commercial real estate by raising the capital gains tax rates, eliminating 1031 like-kind exchanges and taxing carried interest at the higher, ordinary income rate.
Many real estate projects are developed by small partnerships that rely on a combination of loans, private investment and business expertise, or “sweat equity.”
For context, these projects frequently cost tens of millions of dollars to complete — an insurmountable amount of cash for most developers and entrepreneurs to have on hand.
These projects typically are funded by investment partnerships between a general partner, who does most of the work, and limited partners, who provide most of the funding. Carried interest, often referred to in real estate as “the promoted return,” is the portion of the profits that the general partner realizes for his or her investment of time and money when a project is successful. This is not compensation for routine work, such as leasing or property management, but rather investment income for the person who provided sweat equity along with expertise, business acumen and hard work.
Raising taxes on individuals and small businesses who contribute funds or sweat equity to a project will diminish the incentive to take on risk. This will make it more difficult to attract companies that will create new jobs or investors who are interested in developing affordable housing. It will also make it harder to increase warehousing capacity for businesses that want to to avoid product shortages, similar to those experienced during the initial months of the COVID-19 pandemic.
Another concerning proposal would eliminate Section 1031 of the Internal Revenue Code for like-kind exchanges greater than $500,000. Since 1921, Section 1031 has allowed investors to defer paying capital gains taxes on investment property sales by reinvesting the proceeds into a similar investment property within a specified time frame.
Reinvestment of capital gains can help businesses continue to grow. Current legislative proposals would require the taxpayer to recognize gains from the sale of real property in the same tax year they transfer the property. These restrictions would stifle transactions, provide a disincentive to upgrade assets and hamper the marketplace.
After a year like 2020, this is certainly not the time to discourage long-term investment in Arizona or anywhere throughout the nation.
While we look to lawmakers in Washington, D.C., to pass a reasonable bipartisan infrastructure package, we strongly encourage Arizona’s congressional delegation to reject any proposal that could harm local entrepreneurial innovation, risk taking and sweat equity. This is the time to put our communities and job creators first.
Suzanne Kinney
NAIOP
Suzanne Kinney is the president and CEO of Arizona Chapter of NAIOP, the Commercial Real Estate Development Association.
Deb Sydenham
ULI
Housing For All
Housing affordability and the creation of thriving mixedincome communities should not be an aspirational goal for Arizona and the Phoenix Metropolitan area. It should be a mandate. Metro Phoenix used to be one of the most affordable regions in the country, but rising land costs, supply shortages and stagnate wages have all contributed to a “perfect storm” that is decreasing housing affordability. Most metropolitan centers in Arizona, including Flagstaff, Tucson and Prescott, are all experiencing this affordability crisis.
Making effective and successful change is easier said than done. Communities across the region are drilling down on specific policies and regulations, working collaboratively with the private sector and nonprofits to craft frameworks that encourage the development of affordable and workforce housing and address homelessness. It’s not necessary to reinvent the wheel. Strong examples of success can be found across the country, and each year, the Urban Land Institute’s Terwilliger Center for Housing highlights the efforts of leaders throughout the U.S. who are working to expand housing opportunities. In fact, this year there are 16 finalists in the Jack Kemp Excellence in Affordable and Workforce Housing Awards, which recognizes exemplary developments that meet workforce and affordable housing needs and help create mixedincome communities of opportunity.
In January 2021, the Urban Land Institute Arizona District Council (ULI), in partnership with Vitalyst Health Foundation and with support from the Robert Wood Johnson Foundation, released “Advancing Health & Equity Through Workforce Housing.” This report was the culmination of an 18-month effort by the Housing, Health & Equity Task Force and created a compilation of strategies, tools and examples covering a range of potential solutions for increasing healthy and equitable affordable workforce housing in the Phoenix Metro region.
Without intentional efforts, renters and low- and moderate- income working families will continue to be priced out of markets and forced to move outward from jobs and community culture. Homelessness will continue to climb as individuals and families struggle under the burden of housing costs. We at ULI firmly believe that sustaining a full spectrum of housing opportunities is a fundamental underpinning of healthy and thriving communities. Through the work of its task force, ULI sought to answer a driving question that is in many local discussions around housing affordability: Are market solutions available for workforce housing that are feasible and scalable, especially in transit-accessible neighborhoods with equitable and health-promoting opportunities?
The simple answer is, “Yes, solutions do exist.” However, none are a silver bullet approach. Implementation will require a suite of innovative tools and strategies, policy modifications and cross-sector partnerships, along with passion and commitment.
Solutions to addressing housing affordability can be organized around six key themes: • Inclusive community investment without displacement • Planning and regulations • Land and location • Finance and capital • Sustainable, healthy design • Partnerships
A number of efforts that zero in on housing affordability and homelessness across the region continue. These include the City of Tempe’s Housing Plan, City of Phoenix Affordable Housing Initiative, the recent creation of the Low-Income Housing Tax Credit program, Housing Trust Fund Restoration, Arizona Housing Fund, Greater Phoenix Leadership, Arizona Community Foundation PreDevelopment Loan Fund, Maricopa Association of Governments Regional Homelessness Forum on Housing and many others.
Additionally, the Federal Reserve Bank of San Francisco recently released cutting-edge essays in the fifth volume of its “What Works” series. The Urban Land Institute America’s Terwilliger Center for Housing contributed a piece focusing on the developer’s perspective to building mixedincome communities and how these projects create and sustain a sense of fellowship. For developers, building mixed-income communities is a worthy goal but one that raises obstacles as they seek to satisfy the different and sometimes competing needs of various stakeholders, including investors, local government leaders and residents.
The bottom line? Every person needs housing that is affordable to them. Working together, we can ignite possibilities — the answers are within reach.
Deb Sydenham, FAICP, is the executive director of Urban Land Institute Arizona District Council. This Legislative Update includes excerpts from the “Advancing Health & Equity Through Workforce Housing” report, ULI Arizona, 2021.
