A great deal on valuable state land
Nationwide Insurance only bidder on acreage
Among the 9.2 million acres that the Arizona State Land Department owns, no parcel was more valuable than the 134-acre site in northeast Scottsdale that is now being developed by the real estate arm of Nationwide Mutual Insurance Company.
That was the conclusion of the Land Department’s commissioner in 2017 as the state prepared to sell the parcel.
Land in the north Scottsdale area had been selling for more than $900,000 an acre, on average. The Land Department had sold one nearby 12-acre site for more than $1.3 million an acre.
Even so, the Land Department sold the property to Nationwide for just $619,403 per acre. The $83 million sales price was based on an appraisal that concluded, among other things, the developer would incur substantial costs for drainage and roadwork.
Yet when the Land Department lowered the price to account for those costs, it did so knowing that the city of Scottsdale had decided to give Nationwide $21.9 million in incentives, much
of that also for drainage and roadwork.
Four months before the September 2018 sale, another state agency, the Arizona Commerce Authority, awarded the company a $2.5 million grant as an incentive to stay in Arizona even though the company had made clear in 2017 that it wanted to increase its presence in Phoenix. ACA has also determined that Nationwide is eligible for another $4.6 million in state tax credits for creating jobs once the site is developed.
In the midst of the process, first-time donors from Nationwide and its development partners contributed at least $20,000 to Gov. Doug Ducey’s 2018 reelection campaign. The contributions began just after Nationwide applied to buy the site in mid-2017 and ended just after the company bought the land.
And though Nationwide and the Land Department both said they did not negotiate in advance over setting the opening bid price, Nationwide was the sole bidder on the property.
Land Commissioner Lisa A. Atkins declared the price to be fair, insisted there was no interference in her agency’s decision-making and said she knew nothing about the political contributions until reporters told her about them.
“I’m not in a position to have any idea why anybody makes contributions to the governor,” Atkins said in an interview in April that included her top aides.
Ross Smith, a former senior Land Department official, concluded after reviewing the Land Department’s appraisal and auction notice that — conservatively — the property near Loop 101 and Hayden Road was worth more than $800,000 an acre. At that price, Nationwide would have paid about $107 million, not the $83 million set by the state.
“Nationwide got the trust land for much less than it was worth,’’ said Smith, a longtime real estate broker who is an expert in land sales. The losers, Smith noted, are the designated beneficiaries of state land sales — Arizona’s schoolchildren. Land sale revenues are primarily earmarked for public education.
The company’s development partner is Grayhawk, whose principal, Gregg Tryhus, is a Ducey supporter. And Nationwide’s lobbyist, the law firm Kutak Rock, is politically connected — the firm has done outside legal work for the Governor’s Office and the state’s public safety pension fund, according to state records.
Patrick Ptak, Ducey’s spokesman, said the governor had no involvement in the Land Department’s process, and documents made available by the Land Department do not show any communication with Ducey’s office.
Ptak referred questions about Nationwide’s donations to the Ducey campaign. A campaign spokeswoman, Katie Mueller, declined to answer specific questions about the Nationwide-related contributions.
As for Nationwide, the Ohio-based insurance industry behemoth also declined to discuss either the land purchase or the political contributions. Instead, the company provided a short statement from Brian J. Ellis, president and chief operating officer of Nationwide Realty Investors, saying Nationwide purchased the land fairly and negotiated in good faith.
State land bequeathed in 1912
The Nationwide sale is among the largest and most valuable the Land Department has made since the federal government gifted the state 10 million acres when Arizona became a state in 1912. Like other Western states that were bequeathed sizable land holdings at statehood, Arizona must use sale and lease revenue principally for public education.
The state Trust Lands, which the Land Department controls, amount to about 13% of Arizona’s total acreage. About 8 million acres is rural desert that is mostly leased for cattle grazing or mining. But an estimated 1 million acres lie within the burgeoning Phoenix and Tucson metropolitan areas, and that land can be enormously valuable.
When the Land Department sells off parcels, the sales must be at public auction, and the opening bid must be the appraised value of the land. But in the Nationwide case, the company was the only bidder and paid just the opening bid price, $83 million.
When Nationwide Realty Investors filed an application with the Land Department in July 2017, it wanted to build a mixed-use development. Its centerpiece, now under construction, will be Nationwide’s new regional headquarters, and also includes restaurants, retail space, rental housing and two hotels.
Last year, Nationwide had sales of $49.3 billion and a net operating income of $1.9 billion.
To expand in Phoenix, the real estate investment arm of the Ohio-based insurance giant had its eye on 134 acres that sits at the intersection of Loop 101 and Hayden Road.
To determine the site’s value, the Land Department hired an appraisal firm, CBRE Group Inc. When CBRE appraiser Thomas Raynak went looking for comparable recent sales, he found seven nearby that had sold in the prior eight years for an average of $931,768 an acre, though he noted that the seven locations were not as desirable as the Nationwide site.
In his report, Raynak was effusive about the property, writing that the “subject property is located within a highly desirable northeast valley neighborhood and benefits from frontage/ visibility to Hayden Road, Legacy Boulevard and Loop 101. The subject property also benefits from excellent freeway accessibility and close proximity to desirable surrounding land uses. It is also important to note the subject location is far more desirable than other suburban locations within metropolitan Phoenix.”
An eighth nearby property, which CBRE did not include in its calculations, had sold at a Land Department auction with multiple bidders for $1,350,000 an acre. Before that 2015 sale, another outside appraiser valued the property at $813,000 an acre. That sort of discrepancy, not uncommon in Land Department sales, has generated long-standing complaints. Those include findings in two state auditor general reports dating to the 1980s that appraisers used by the state often undervalued land.
Appraisals are as much art as science. And the Land Department’s chief appraiser, Mark Fast, acknowledged as much during the interview with Atkins.
“You know, nobody’s perfect. I think that there may be times that the appraisal could have been a little low or something like that,” Fast said, though he said the outside appraiser had correctly valued the Nationwide site.
When Raynak reviewed the comparable sales, he discounted them, partly because they were smaller than the 134acre parcel that was eventually sold to Nationwide.
“When you have smaller sales, they
tend to sell for a higher amount per acre, just due to lack of economies of scale. Also, there are more buyers that can purchase smaller acreage than large parcels,” Fast said.
Instead, CBRE relied heavily on a complicated formula to arrive at a prospective buyer’s costs to develop the land, including infrastructure installation, against the buyer’s anticipated income generated from the development.
That formula led the appraiser to arrive at a value he determined to be between $79 million and $90 million, or between $590,000 and $672,000 an acre. That left it to Atkins, the Land Department’s commissioner, to pick the actual sales price.
Raynak declined to discuss his appraisal with a reporter and referred questions to the Land Department.
Typically, the Land Department’s outside appraisers determine a set value. In the Nationwide case, however, the department asked for a range. And Atkins and her aides settled on the $83 million price — $619,403 an acre.
Atkins could have selected any number in the $79 million to $90 million range. In fact, the commissioner had the discretion to set the price at an amount even higher than the $90 million. Her choice of $83 million was unusual, according to Smith, the land broker.
“When the commissioner is given a range, she tends to pick a number at the higher end of the range. This is the only time, picking $83 million, that I’ve seen her go low,” said Smith, who specializes in state land transactions.
Mark Edelman, the Land Department’s director of planning and engineering, said the lower amount was selected because the property was undeveloped and much of the site (about one-third) sat in a flood zone — the same justification the appraiser used to lower the value to begin with.
“The site had some very significant costs for drainage and for infrastructure. They (the infrastructure improvements) don’t just benefit that property. They benefit all of the properties in that area. And so that’s why the values were set where they were at the time,” Edelman said.
Edelman’s explanation for why the appraiser provided a range, and why Atkins picked a sales price at the lower end, appears to conflict with what Fast said in the same interview, that “sometimes providing a range of values better facilitates negotiations.’’
The Land Department has insisted there was no negotiation with Nationwide over the price, that the company never told state officials what it considered a fair price.
But to land sales expert Smith, the notion that a sophisticated buyer like the insurance company’s real estate arm would not aggressively seek a lower price is “simply not credible.’’
Setting plans in motion
Even while the Land Department was setting a price favorable to Nationwide, the city of Scottsdale was taking steps that would benefit the buyer:
● On June 12, 2018, Atkins gave a presentation to the Scottsdale City Council about the development agreement with Nationwide. Ellis, the CEO, and Tryhus, the developer, also spoke.
● On June 12, 2018, the Scottsdale City Council rezoned the land from residential to mixed-use to accommodate the development Nationwide intended, a step that made it highly unlikely there would be a competitive auction.
● That same evening, the council passed a development agreement committing to reimburse Nationwide up to $21.9 million for infrastructure costs, in return for which Nationwide committed to economic benefits that included job creation and tax revenue.
To be sure, developers regularly seek zoning changes before buying land to guarantee they will be permitted to develop their projects as envisioned.
On June 21, the Land Department issued the official auction notice setting the minimum bid price at $83 million.
When Atkins set that price, the Land Department knew about the Scottsdale subsidy. Indeed, at the City Council meeting, she had touted the close working relationship between her department and Scottsdale on the Nationwide sale.
But Land Department officials said their decisions could not take into account any subsidies Nationwide received from any other state or local government agency.
Fast, the department’s chief appraiser, said the department couldn’t assume Nationwide would be the winning bidder and that the department had to appraise the property for a typical buyer.
“If Nationwide did some due diligence and got a great deal on this, that’s to their benefit,” Fast said.
In concept, any other developer could also have arrived at the auction and driven the price up by bidding. In practice, no other developer had already secured the city agreements and subsidies.
Smith scoffed at the notion that the
Land Department did not anticipate that Nationwide would be the sole bidder.
The Nationwide sale, Smith said, “was the most complex offering I’ve ever seen. That tends to discourage other bidders. This was overly complex. Whether that was purposeful or not, I don’t know. But it ended up that way.”
Indeed, Atkins, in the interview, made it clear that all along her department was working with the insurer to make the sale happen. Atkins cited the substantial amount of time “we spent on a Nationwide sale in working with the city of Scottsdale to work on all the planning and zoning ahead of time.’’
Money from the state
Less public than the sale and Scottsdale’s subsidy was the involvement of the Arizona Commerce Authority, which played the role of matchmaker in the land deal.
“This particular conversation with Nationwide actually began with the introduction of Nationwide to the Land Department by the Arizona Commerce Authority,” Commissioner Atkins said in an interview.
ACA, a state entity whose CEO was appointed by Ducey, also put some skin in the game. On July 1, 2018 — just after Scottsdale approved its subsidy and Atkins set the sales price, but two months before the auction — ACA reached an agreement to provide Nationwide with a grant of $2.5 million as an incentive to create jobs in Arizona — something Nationwide had already pledged to do.
Asked why Nationwide would need such an incentive, Connie Weber, the ACA spokeswoman, emailed a response that said: “These grants are based on a business case, in order to equalize Arizona’s competitiveness with another market in cases where there is a gap.’’
As for the $4.6 million state tax credit, Weber said the company has been deemed eligible but hasn’t yet applied. The credit would amount to $9,000 over three years for each new high-quality job Nationwide creates. That benefit appears to overlap with the subsidy from the city of Scottsdale, which is also tied to job creation.
Objections to the plan
In Scottsdale, more than a few people found the city’s subsidy unjustifiable. All along, opponents of the subsidy have insisted that the $21.9 million was based on overly rosy assumptions.
Scottsdale’s deal with Nationwide was based on projections that the city would recoup its $21.9 million from an increase in taxes from the project. David Smith, who was a City Council member when the project was approved, said the city’s outside consultant overestimated the sales tax revenue the city would receive from the development.
Whether the effects of the COVID-19 pandemic will further decrease projected tax revenues is unclear.
There were also concerns about the project’s height and density, the closeddoor process, and the city’s lack of due diligence — such as conducting traffic studies.
“This whole thing went on in the background with no public meetings,” said Scottsdale resident Howard Meyers. “When it was divulged that Nationwide would buy this plot, it was too late for anyone to do anything.”
Scottsdale Mayor Jim Lane, who was an enthusiastic supporter of the project and his city’s subsidies, said that he claims no expertise in real estate. But of the sale, he said he thinks the $83 million was a “very good price” for Nationwide.
Lane defended the city’s process, saying city officials are obligated by law to hold closed-door negotiation sessions and that the economic benefit to the city is still substantial, even with a 30% reduction.
Atkins, too, brushed aside criticism of the sale, calling it a “great outcome.’’ The development, she said, “sets the stage for increased land and development values in the area.’’
Also, Atkins added, the sale is “a huge win’’ for funding public education.
Others remain skeptical. One, former City Councilman David Smith, was optimistic about the development proposal in 2018 but was so uneasy about the process that he voted against the subsidy package. Back then, he recalled in an interview, there were legitimate questions about whether the city would recoup the projected tax benefits, and fears that the agreement with Nationwide might violate the city charter.
“It was a rush for approval,’’ Smith said, one that foreclosed the chance for a robust study using more reliable economic data. “I think it’s an unfortunate example of the city proceeding with the development unduly influenced by the parties proposing the development and in the process forgetting to be sensitive to our client — the council’s client — the citizens of Scottsdale.’’