Condo owner Paul Ng was surprised when he found out the City of Scottsdale had planned to buy a commercial unit at the Gateway at Main Street Plaza complex as part of a deal to remove a height restriction standing in the way of the Museum Square development.
That deal, nixed by city staff just hours before the Council was set to vote on July 2, would have required taxpayers to shell out $2.25 million for a commercial condo unit and spend another $700,000 on renovations in return for lifting a 15-year-old height limit on city-owned land.
Deed restrictions that date back nearly 100 years – one of which is racist with the other banning the sale of alcohol – also have complicated Scottsdale’s agreement to sell the city-owned land for $28 million.
The removal of the height limit would allow ARC Scottsdale Holdings to build Museum Square, which includes a 150-foot-high hotel and residential buildings over 100 feet tall on land neighboring the condos.
Ng, a past president of the HOA’s board, was surprised by the potential deal because he and other condo owners had not been consulted.
Rather, city staff made a presentation to the homeowners association board, which signed off on the deal.
Ng is concerned that all the condo owners would not share the profits from the height restriction removal, and he does not believe the HOA board had the authority to unilaterally remove the restriction.
According to city documents, the withdrawn plan included a city payment of $2.25 million for the ground-floor condo unit to an entity owned by Madeleine Ferris, a Houston resident who owned developer Arruth Associates with her late husband, Alan.
Arruth Associates originally built Gateway at Main Street Plaza as the first phase in a larger development that fell apart.
Arts District Development LLC – an entity owned by the Ferris family – signed off on a declaration of covenants and restrictions with the city in November 2004.
Ferris is now leveraging that agreement to sell a piece of her property at a premium.
The commercial unit’s appraised value is $1.45 million – meaning taxpayers would be forking over $800,000 above that so the height restriction can be lifted.
“It’s also important to understand that the seller’s asking price from the outset was a firm $2.25 million,” Assistant City Manager Brent Stockwell said.
If the deal had gone through, the unit would have housed Museum of the West offices displaced by eventual Museum Square construction and would cost the city another $700,000 in renovations.
As part of the deal, the Gateway at Main Street Plaza board of directors agreed to remove the height restriction even though Ferris is receiving all the proceeds.
“The City of Scottsdale and the developer of the proposed Museum Square project met twice with the Gateway at Main Street Homeowners,” board President Dick 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,” he said.
Ng said he is not opposed to the Museum Square project and thinks it would ultimately benefit nearby businesses.
However, Ng takes issue with the fact that he and other owners were not consulted about removing the restriction and that the HOA gave the restriction away for nothing.
“My issue here is that nobody over there has the right to sell my interest,” said Ng, who said he has spoken with other owners who feel the same way.
Ng believes the HOA is required under Arizona state law to bring the proposal before owners.
“If the majority of owners agree (to lift the restriction), then I have to go along with it,” Ng said. “But my personal rights and financial rights are being given away to one individual property owner for her own gain.”
Arizona law does not give condo HOA boards the power to amend condominium declarations on behalf of all owners.
However, it is unclear if that prohibition also applies to this height restriction, which was agreed to separately from the condo’s overarching declaration.
Ng also argues that the HOA board has a fiduciary obligation to its members to bring the proposal before them because the height restriction now has a monetary value.
When asked whether or not the city believes the condo board had the power to approve lifting the restriction, Stockwell replied:
“It is the HOA’s responsibility to follow their processes to approve the release, just as it is the city’s responsibility to follow its processes to approve the release.”
Lamden did not respond to a request for comment about what bylaw gives the HOA board the power to lift the restriction unilaterally.
Gateway at Main Street Plaza, originally built by Ferris’ Arruth Partners, is governed by a complicated collection of contracts, covenants and amendments that have gone into effect over the past 15 years.
In some cases, the board is empowered to make decisions on behalf of the homeowners while others require a vote of all owners.
The November 2004 agreement that imposed the height restriction does include a mechanism for amending the agreement – though it is unclear whether it can be used to nullify the restriction altogether.
An amendment requires the approval of “either (a) the owners of not less than two-thirds by area of the developer property if the developer property is not subject to a condominium declaration or homeowner’s association or (b) the governing association of the owners if the developer property is subject to a condominium declaration or a homeowner’s association.”
The “developer property” is the Gateway at Main Street Condo building, which is subject to a condominium declaration.
The declaration empowers the board to make all decisions without owner approval “unless the condominium documents or the Condominium Act specifically require a vote of the members.”
Ng said he plans to contact the board and request that any new proposals to purchase the height restriction, by the city or the developer, be brought before all owners in the community.
“The developer will have to deal with the HOA, and the HOA will have to deal with the owners, and that’s the way that it should be,” Ng said.
That height restriction is not the only roadblock standing in the way of Museum Square, though.
“The grantor grants, sells and conveys the property subject to the following express conditions and stipulations…no saloon, bar or house of ill fame shall ever be allowed thereon; that no part of said premises shall ever be conveyed, transferred, let or demised to any person or persons other than the Caucasian race.”
Those are just a few of the restrictions included in a warranty deed for three parcels of land on the south side of Main Street between Marshall Avenue and Goldwater Boulevard that were sold to Henry and Mary Walthall in 1920, according to documents on file with the Maricopa County Recorder’s Office.
That area generally now houses Scottsdale’s Museum of the West, the Gateway at Main Street Plaza condos and city-owned land that is in the process of being sold to the Museum Square developer.
The 1920 deed, and other potential restrictions on the land, is one factor that led the city staff to pull the proposed city purchase of the Gateway condo earlier this month.
Jason Rose, a spokesman for the developer, confirmed that the deal is contingent on the city removing all deed restrictions. However, Rose does not view the 1920 deed as a major impediment, saying many titles dating back to Scottsdale’s beginnings included similarly antiquated restrictions.
“Those are not specific to Museum Square,” Rose said. “Those are part of almost every title report in Old Town Scottsdale, and cleaning those up is a matter of routine business.”
To Rose, removing the height restriction is the major issue.
However, the 1920 deed was enough of a concern to city staff, which pulled the condo sale just hours before the July 2 City Council meeting.
At the time, staff would only say the item was pulled “due to new information discovered that requires additional investigation and negotiation.”
Documents provided to the Progress under Arizona’s public records law revealed that the new information included the century-old deed.
Stockwell said “that restriction was recently uncovered by the city. Staff is reviewing the implications on the Loloma Land parcels,” referring to the land under agreement to be sold by the city to ARC Scottsdale Holdings.
Stockwell said the racist language in the deed is not a concern because it has long been invalidated by federal anti-discrimination laws.
However, other restrictions in the deed could pose a problem for Museum Square.
The deed, in addition to banning bars on the property, also includes a prohibition against the sale of wine, beer and liquor on site.
It is likely the Museum Square hotel, which would include a restaurant, would serve alcohol.
This would pose a problem if the deed still carries legal weight and any part of the proposed hotel would sit on the parcels subject to the 1920 deed.
“I think the core issue is the removal of any restrictions, which would preclude the Museum Square project from being built as proposed, should the City Council choose to approve the rezoning case,” Stockwell said.
In addition to the alcohol ban, Stockwell said the city is also concerned about property setback restrictions in the 1920 deed.
The deed, which allows for hotels and residential uses, restricts dwelling units from being within 30 feet of the frontline of the property and 10 feet from side street lines.
It also prohibits garages and barns from being within 75 feet of the front streetline of the property.
Development standards proposed by the developer for Museum Square include setbacks at ground level between 20 and 30 feet. Removing deed restrictions on the land is the city’s responsibility, according to the sale agreement between Scottsdale and the developer.
Some Scottsdale residents had criticized the condo purchase proposal for using public dollars to benefit a developer.
Rose also argued that the city will benefit from removing the height restriction.
Rose said the $28 million land sale price agreed to by the city and the developer is based on the height restriction being removed and that the land would not fetch as much money if the 60-foot restriction remains in place.
“When we talk about $25 million to $30 million, that’s based on (the proposal) in front of you and the community now,” Rose said. “If you talk about going down to 60 feet, then that number drops dramatically.”
According to the city, an appraisal found that the value of the city’s land will increase from $100 per square foot to $121 per square foot if the restriction is lifted.
“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,” according to a City Council memo.