After a contentious discussion, the Sedona City Council approved a ground lease for the proposed Villas on Shelby 30-unit, three-story apartment complex project by a 5-2 vote during its April 28 meeting, with Vice Mayor Holli Ploog and Councilman Derek Pfaff opposed.

The approval had been scheduled for April 22 but was tabled until the following week due to council concern over available time to review lease changes that will significantly increase the city’s eventual cost to purchase the project.

City Attorney Kurt Christianson said the city had previously approved two similar leases for the city-owned parcel at 2250 Shelby Drive, the first in support of a 9% Low Income Housing Tax Credit application by the developer, and the second in support of a 4% LIHTC application, which would have required the units to remain affordable for 75 years, committed the city to a $2.25 million loan to the project and given the city the option to purchase the project for $100 after 30 years.

“It was on April 3, just two weeks ago, that the city found out that the option to purchase for $100 at year 30 was not going to be able to be in the lease and that the option to purchase would have to be fair market rent,” Christianson said. “It was on April 15 that the city found out that the affordability period could not be for 75 years, that it would have to be only for 30 years, and then it was just on Friday, on April 23, that the city found out that the lease term had to be 99 years instead of 75 years.”

The revised lease to meet LIHTC requirements will allow the city to purchase the complex at market value after 15 years, while retaining the $2.25 million city loan to the project, which will carry an interest rate of 5.83%.

Housing Manager Jeanne Blum said that “close to $20 million in outside funding sources are being contributed” to the project in partnership with investment funds.

The agenda bill for the resolution approving the lease stated the project’s additional financing would include a $5 million loan from the Arizona Department of Housing, $8 million in tax-exempt bond funding and a $7.525 million “construction loan” and $1.365 million “permanent loan” from unspecified investors for a total of $24,140,000.

The agenda bill also stated that staff had asked council to waive $18,924.26 in review and permitting fees and pay $312,245.41 in development impact fees for the project, a total of $331,169.71, in addition to the city loan. The fee waivers and payments would increase the city’s total contribution to $2,581,169.71 and the estimated total project cost to $24,471,169.71.

Developer Matt Shoemacher stated in January 2024 that the cost of the project was then “right at $14 million,” or $466,666 per unit; on the basis of the new project cost, that has now risen to $815,706 per unit.

“We plan on closing and breaking ground in two weeks,” Shoemacher said on April 28, adding that the closing date had been scheduled for May 9 and that bond funding would remain available for roughly 60 days.

Although he was presenting a proposal to build an apartment complex, Shoemacher also said that locals to whom he has spoken “want to be the next homeowners.”

“I don’t think I can support this,” Pfaff said. “We started with the benefit to the city was going to be this … and then in the last few months it’s sort of been whittled down to, now we’re getting this. That doesn’t sit right with me.”

“I have concerns that this project has just gotten a worse and worse deal for the city. I’m probably going to vote ‘no,’” Pfaff added.

“I think I’m begging for two more weeks to see if we can get some outside independent advice of looking at this deal,” Councilman Pete Furman said.

“The affordability was taken out of our control,” Shoemacher said. “It’s a 30-unit deal that has 4% credits with two pieces of subordinate debt. That’s the only way to make a project here work.”

“With this not giving the same terms to the city, there might be a future responsibility to the city … to be having an additional financial contribution, and I think we need to consider that,” Councilwoman Kathy Kinsella said. “I hate kicking the can down the road on this, but I think there is some research that could be done in those areas over the next two weeks.”

“There’s dozens of attorneys that are experts in this that we’ve had conversations with. They’re not going to say anything different,” Shoemacher said. “I don’t know if there is the time to go through another two weeks and then pick it up again,” adding that it would be complicated to reschedule the 75 people involved in negotiating the deal for a different date. “At a certain point the tax credit investor is going to say ‘we can’t change this and this, these are federal opinions, we have to be compliant with federal banking laws.’”

“I was under the impression there was a drop-dead date,” Kinsella said. “Would a date of like the [May] 12th be too late?”

“To be blunt, we haven’t had any of this information until the 11th hour and 59 minutes. We felt the rug pulled out from underneath us in the past month on this where things have changed due to the negotiation points,” Mayor Scott Jablow said. “To me it felt like somebody up there is negotiating in bad faith, because they weren’t giving us a lot of information 18 months ago. When we started, we had a totally different picture of what it was to dealt with LIHTC 18 months ago, and it’s certainly not what we’re getting now.”

“The terms are what the terms are. I don’t think there’s a lot of room left,” Christianson said.

“From a straight business perspective, having terms change this dynamically, and unfortunately negatively, right up to the last minute is really unpalatable,” Councilman Brian Fultz said. “That said, I think that we are wasting time and putting the project at risk to go and seek additional consultation.”

“If we kill this, we’re still going to wind up spending as much money one way or another to get something done,” Fultz added.

“I’m not in favor of the terms, but they are what they are,” Councilwoman Melissa Dunn said.

“Nobody has given me the assurances I need,” Ploog said. “This is not a good deal for the city … We’re talking about a substantial amount of money that we’re going to put on hold every year for the next 15 years that we won’t have access to.”

“Dealing with LIHTC has left a bad taste in my mouth, and I tell you what, I’m going to be letting every city and town that I talk to in this state know that this is the way they negotiate,” Jablow said. “This is wrong.”

“I don’t think we’re urgent for a project,” Jablow added. “I’m going to support this and I’m probably going to kick myself one way or the other.”

The council then voted 5-2 to approve the lease and loan with Pfaff and Ploog opposed.