When it comes to Museum Square, Scottsdale officials apparently embraced the old adage “You have to spend money to make money.”
As it continues to negotiate the sale of city-owned land to developer MacDonald Development Corporation, the city has agreed in principle to pay over $2 million for a condo unit — and may spend another $700,000 to renovate it — in order to lift a decades-old deed restriction that threatened to torpedo plans for the site.
But on Tuesday, July 2, just hours before Council was to vote on the purchase of a 4,526-square-foot retail space at the Gateway at Main Street Plaza condominiums for $2.25 million, city staff removed the purchase from the agenda, citing "new information discovered that requires additional investigation and negotiation."
The tentative agreement would also have required the city to pay an estimated $700,000 to renovate the unit to house the administrative offices for Scottsdale’s Museum of the West after they are displaced by the Museum Square development. Gateway at Main Street Plaza is located just west of Scottsdale’s Museum of the West and adjacent to the parcels slated for Museum Square.
In February 2018, the Scottsdale City Council approved an agreement to sell city-owned land next to Scottsdale’s Museum of the West to MacDonald Development Corporation for $27.75 million.
The approximately $3 million it will cost to the city to buy and refurbish the condominium will be paid for by what amounts to just over 10 percent of the proceeds the city expects from the land sale.
But it’s not just the condo the city will receive for that money.
As a condition of the $2.25-million sale, the condo complex is lifting a deed restriction that limits building heights to 60 feet on much of the city-owned parcels that Scottsdale is trying to sell to MacDonald Development Corporation.
The sale was contingent on City Council approval of zoning amendments for the property and the approval of a development agreement between the parties.
Both of those issues are expected to come before the City Council in September, Assistant City Manager Brent Stockwell said.
The height restriction would likely be a deal breaker for the developer as initial plans for Museum Square included a 150-foot hotel and four residential buildings between 75 and 149 feet tall.
Council approved a new Old Town Scottsdale Character Area Plan in July 2018 that allows for building heights of up to 150-feet in certain areas throughout downtown, including the Museum Square site.
However, even with that plan in place, the city and developer had to contend with the existing deed restriction at the Gateway condominiums, which covered approximately 405,000 square feet of city-owned land.
It is unclear how much of the 180,000 square feet the city agreed to sell to MacDonald in 2018 is included within that area.
Stockwell acknowledged that the city has had to work with the developer to resolve a number of issues before it can finalize the land sale.
“The prior development had zoning associated with it and other things and so that has to be untangled before this can be done,” Stockwell said.
The development Stockwell referred to was an old plan by a Houston-based developer to build a mixed-use development.
That development never came to fruition, though the developer, Arruth Associates, built the Main Street Plaza — and is the same entity selling the condo to the city on July 2.
The $2.25 million price is based on an October 2018 appraisal of the unit’s value and a 2017 appraisal of the Museum Square land value.
According to a council memo, the purchase price also includes consideration of the increased property value that would result from increasing the height limit from 60 to 150 feet.
“This appraisal values the city’s land under existing zoning at $100 (per square foot) and at $121 (per square foot) under rezoning consistent with the Downtown Character Plan. Since the City’s land burdened by the deed restriction is approximately 405,000 (square feet), the value of the deed restriction termination is well in excess of the difference between the acquisition price and the appraised value for the G-101 condo.”
Though the Gateway at Main Street Plaza Scottsdale Condominium Association agreed to waive the deed restriction, it is unclear what the condo owners represented by that association are getting from the deal.
The appraised value of the unit alone was $1.45 million, making the value of the termination of the height restriction approximately $800,000.
“It’s also important to understand that the seller’s asking price from the outset was a firm $2.25 million,” Stockwell said.
Even though city documents state the $2.25 million includes the appraised value of the condo unit as well as the value of lifting the deed restriction, it looks like the condo seller — Arts District Development I LLC — is receiving 100 percent of the proceeds.
Arts District Development I LLC is an Arizona corporation owned by Houston developer Madeleine Ferris, whose Arruth Associates built Main Street Plaza.
Though some of the units have been sold to private owners since then, Ferris still retains ownership of many of the units, through a number of different LLCs. In fact, Ferris is just one vote short of holding a controlling interest in the association.
According to an email shared with the Progress, the association is not getting a dime and the board did not want to incur the legal costs of challenging Ferris.
The association board held two meetings in fall 2018 to discuss the potential removal of the deed restriction with the city and developer.
“The City of Scottsdale and the developer of the proposed Museum Square project met twice with the Gateway at Main Street Homeowners,” association President Richard Lamden said. “After hearing a comprehensive overview of the proposed project noting that the Museum of the West would be the beneficiary of the space, the board authorized my signing so that the commercial unit could be sold.”
According to the email, the 150-foot heights proposed by Museum Square was the only complaint expressed by residents.
The condo owner who spoke with the Progress said they did not know the association board had officially signed off on lifting the restriction until about a week ago, when the proposal showed up online on the City Council’s agenda for July 2.