A 15-year-old height restriction blocking the proposed Museum Square development has shed light on how the City of Scottsdale’s development priorities have shifted over the past two decades.
The restriction was connected to a now-defunct 2002 redevelopment agreement between the city and a Houston-based developer and limits heights of structures to 60 feet on some city-owned land in the area northeast of Goldwater Boulevard and Second Street.
Much of that land is currently slated to become Museum Square, a mixed-use development by ARC Scottsdale Holdings.
The city agreed to sell the land to the developer for $28 million in 2018. The sale is contingent on the city’s removal of deed restrictions and Council’s zoning approval for the project, which includes multiple buildings over 100 feet tall.
Museum Square is not the first attempt by the city to partner with a developer to redevelop city-owned land.
In 2002, the city agreed to a redevelopment agreement with Arts District Group LLC, an entity owned by Alan and Madeleine Ferris of Houston-based Arruth Associates.
The Ferrises' company came to an agreement to purchase much of the land now set aside for Museum of the West, including the land that currently houses the Gateway at Main Street Plaza condominiums just west of Scottsdale’s Museum of the West.
The condo complex, which includes residential and commercial space at Main Street and Goldwater Boulevard, was intended to be the first of several phases that would have expanded over additional land parcels in the area and included three-story residential buildings, ground level retail and a restaurant.
The developer had also committed to improve the Scottsdale Artists’ School parking lot and the then-functioning Loloma transit station.
The deal included staggered options and deadlines giving Arts District Group the right to purchase additional parcels as it built out its project.
However, the Gateway condos – once envisioned as the first of many phases – ended up being the only piece that got off the ground.
A confluence of factors – referred to as a “financial tsunami” by the Ferris’ attorney in court filings – tanked the project.
Ultimately, the city deemed the redevelopment agreement null and void in 2008 when an entity of the Ferris family failed to exercise options to purchase more parcels by deadlines that had been extended multiple times by a succession of city managers.
The exact circumstances surrounding the agreement’s demise are the subject of some debate and Ferris took the city to court in an attempt to enforce some aspects of the agreement after the city nixed the deal.
Following the success of the first phase of development, an entity of the Ferris family attempted to secure funding for Phase 2 – a requirement before it could exercise its options on new parcels.
The developer secured a terms sheet with JP Morgan for a $45 million loan in October 2007, according to court filings.
However, that deal fell apart within months as the savings and loan crisis decimated confidence in the market. Large institutions, including JP Morgan, stopped offering condo construction loans.
That effectively killed the deal.
At the time, then-Councilmen Bob Littlefield and Ron McCullagh argued the end of the deal could work out in the city’s favor because it would be able to fetch market rates for the land instead of the prices negotiated back in 2002, according to the Scottsdale Republic.
That prediction turned out to be prescient.
Under the old deal, the city would have netted around $5 million for all of its available parcels – much less than the $28 million ARC Scottsdale Holdings is committed to spending on the land.
The Ferrises pinned some of the blame for the failure of the deal on the city, arguing officials dragged their feet on design and entitlement approvals and other commitments needed to move forward with Phase 2.
The Ferrises' attorneys argued that the city had failed to live up to its commitment to build a cultural center or museum just east of the first condo complex.
That land is now home to Scottsdale’s Museum of the West.
Under the original agreement, Scottsdale was required to begin work on a museum or gallery shortly after the developer purchased its first parcel of land.
That didn’t happen.
The developer closed on the Annex Parcel – now the Gateway condos – in 2002.
The Museum of the West did not open on the adjacent site until 2015, long after the dispute was settled.
The Ferrises attempted to purchase the planned museum site, which was allowed under the contract if the city failed to meet its obligations to build a museum.
However, the court ultimately sided with the city in the dispute because the developer did not attempt to purchase the museum parcel until after the entire agreement had already terminated.
A judge decided the agreement terminated no later than May 7, 2008.
Beyond the Gateway at Main Street Plaza, one other vestige of the doomed development agreement remains: the height restriction.
The language of the restriction agreement suggests the city agreed to the developer’s request for the height restriction.
The contract reads “city and developer desire to impose certain use restrictions on the city property for the benefit of the developer property.”
In addition to the 60-foot height restriction, the contract banned certain uses from the land – such as gas stations, trailer parks, warehouses and department stores.
The city agreed to those restrictions even though the developer had not yet – and eventually didn’t – but the land.
Now, that very same developer – Madeleine Ferris of Houston – is attempting to leverage that restriction to maximize the value of a commercial unit at Gateway she is attempting to sell to the city for $2.25 million, well above the $1.4 million appraisal.
The city was able to secure a commitment from the Gateway condos to waive the height restriction if the city purchases a condo unit to house Museum of the West offices.
Former Scottsdale Mayor Mary Manross, who was in office at the time the Arts District Development agreement was signed, said that 20 years ago, the city was not looking for the type of tall and dense development slated for the site today.
“No one wanted half of downtown to be high-profile development,” Manross said.
Manross said the height restriction protected what she viewed as the unique character of the Arts district that included many historic, low-profile buildings.
“We were concerned about maintaining the unique character of our downtown with a use that was complimentary to arts community,” Manross said.
That vision has changed since Manross left office.
Over the years, the city’s development priorities have shifted toward higher, denser development in some areas of downtown.
In July 2018, the City Council unanimously approved a new Old Town Character Area Plan that allows for heights up to 150 feet in certain areas of downtown Scottsdale.
Developers, including Museum Square’s ARC Scottsdale Holdings, have already begun applying for zoning changes to allow them to take advantage of the Type 3 designation allowing for those heights.
Other developments seeking Type 3 zoning including the Marquee office building project next to the Scottsdale Galleria Corporate Centre and Carter Unger’s proposed Southbridge development near 5th Avenue and Scottsdale Road.