The Fourth amendment to the Infrastructure Development Agreement for Project 10-11 amends terms of the existing agreement to amend requirements for the issuance of building permits for future buildings and for the issuance of any certificate of occupancy for the third structure on Microsoft’s PHX 10-11 Site and provides terms for Microsoft’s acquisition of the City Booster Station Site that is surrounded by Microsoft’s property.

ADOPT RESOLUTION NO. 2023-2323 APPROVING THE FOURTH AMENDMENT TO THE INFRASTRUCTURE DEVELOPMENT AGREEMENT FOR PROJECT 10-11; AUTHORIZING AND DIRECTING THE CITY MANAGER TO EXECUTE THE FOURTH AMENDMENT; PROVIDING AUTHORIZATION FOR FUTURE ACTIONS; AND PROVIDING FOR AN EFFECTIVE DATE. (Sarah Chilton, Deputy City Attorney and Andy Granger, Deputy City Manager)

The continued development of the PHX 10-11 Site will have an ongoing fiscal impact on the city. The Fourth Amendment to the Infrastructure Development Agreement for Project 10-11 will result in a $9,000,000 contribution toward the costs of the city’s water treatment facility for the capacity that Microsoft’s operations will require, which amount will be reduced by the amount of the water development impact fees that Microsoft paid that included the city’s water treatment facility.  The continued development of the PHX 10-11 site will generate one-time revenues for the city through construction sales tax and development impact fees for the additional data centers and public infrastructure Microsoft will be constructing. Longer-term fiscal impacts include increased demands for municipal services, the costs of which may or may not be offset by increased property values/tax levies, city sales tax, and state-shared revenues.

In 2018, Microsoft acquired approximately 279 acres, generally located between the north side of Broadway Road and the south side of MC-85 and extending from east of Bullard Avenue to west of Litchfield Road (the “PHX 10-11 Site”). Since this acquisition, Council has considered and taken numerous actions to facilitate the development of the PHX 10-11 Site, including the adoption of the Infrastructure Development Agreement for Project 10-11 (the PHX 10-11 IDA”) and three amendments thereto.  Among other things, the PHX 10-11 IDA and the amendments thereto identified Microsoft’s obligations regarding the design and construction of on-site and off-site water and wastewater infrastructure and payments Microsoft was required to make towards the costs of water and wastewater treatment facilities.

Under the terms of the Infrastructure Development Agreement for Project 10-11 (the “PHX 10-11 IDA”), Microsoft is responsible for the design and construction of all infrastructure, within the boundaries of the PHX 10-11 Site and outside the boundaries of the PHX 10-11 Site as reasonably determined by the City to be both in accordance with the duly-adopted Development Regulations and needed to support the development of the PHX 10-11 Site and to allow the City to provide City services to the PHX 10-11 Site.  The identification of the public infrastructure needed was to be guided by engineering studies paid for by Microsoft. 

The third amendment to the PHX 10-11 IDA approved by the City Council on March 6, 2023, was the most recent amendment that addressed infrastructure requirements and financial contributions Microsoft was required to make for the City to provide services to the PHX 10-11 Site. However, the third amendment required the submittal of an updated engineering study because of a change in direction regarding Microsoft’s operations, and the city’s desire to have confirmation by a professional engineer of the specific infrastructure required based on the change in Microsoft’s operations.  

In the third amendment, Microsoft, agreed that only the first three structures on the PHX 10-11 Site would be water cooled; all additional buildings constructed on site are to be air cooled.  The third amendment included terms that had to be satisfied before a building permit would be issued for the third structure on the Property (PHX 12); before a certificate of occupancy could be issued for the PHX 12; and before building permits for any additional structures on the Property.  It also amended the requirements that had to be satisfied before a certificate of occupancy could be issued for the second structure on the Property (PHX 11).  The following is a summary of those terms.

Microsoft had to satisfy the following before a building permit would be issued for PHX 12:

· Microsoft had to make a $36 million in-lieu payment towards the cost of an expansion of the wastewater treatment plant for the treatment capacity that will be needed to treat all discharges (industrial discharges and domestic sewage) generated by the operations on the PHX 10-11 Site at full build-out.
· Microsoft had to deposit $5 million with the city as financial assurance toward the cost of the dedicated discharge line and any additional water lines Microsoft has to construct.
· Microsoft had to deposit $800,000 with the city, which the city is to use to pay for the services of a person the city will retain to serve as the city’s designated representative to coordinate and facilitate the development of the PHX 10-11 Site and the PHX 70 Site

All of the foregoing payments have been remitted to the city.

Microsoft had to satisfy the following before any type of certificate of occupancy for PHX-12 would be issued:

· The submittal of an updated engineering study that identified water infrastructure and wastewater infrastructure, including infrastructure for industrial discharges that would be required to serve the Property at full build-out in light of Microsoft’s agreement that all but the first three structures on the Property would be air cooled rather than water cooled. 
· The completion of the infrastructure identified within the updated engineering study.
· The completion of certain berming and landscaping mitigation measures that are to be installed pursuant to the requirements of the PAD zoning for the Property.

Microsoft had to satisfy the following before building permits for future buildings on the PHX 10-11 Site:

· The PHX 10-11 IDA being amended to identify all water and wastewater infrastructure, including infrastructure for industrial discharges, that would be required to serve the buildings for which permits were sought.
· The completion of all of the requirements that had to be satisfied before any type of certificate of occupancy would be issued for PHX 12 (the requirements set forth above). 

Microsoft has submitted an updated engineering study that identifies the water demands for the Property at full build-out on an annualized basis, the peak water demands, and the wastewater demands.  The updated engineering study identifies the water infrastructure, wastewater infrastructure, including infrastructure needed for the delivery and storage of industrial discharges at full build-out and that is consistent with the parameters in the third amendment.

Recently, representatives of Microsoft approached city staff about the possibility of relocating existing water facilities (potable storage reservoir capable of storing 750,000 gallons, booster pump(s), hydropneumatics tank and water lines) that are located on a small tract that is less than a quarter of an acre (30,851 square feet) (the “Booster Station Site”).  This site is surrounded by property owned by Microsoft.  Under the proposed transaction, Microsoft would pay the city the costs of developing replacement facilities that would be located on an existing city site.  The amount paid would be based on an Engineer’s Estimate provided by Microsoft and agreed to by the City and Microsoft.  Following the city’s receipt of the payment, the city would quit claim the city’s interest in the parcel and all improvements owned by the City within the parcel to Microsoft.  Microsoft would then be responsible for removing all of the equipment on the property.  The transaction is at the discretion of Microsoft, which will need to conduct its due diligence on the site before determining whether to proceed with the acquisition.

Microsoft desires to amend the Agreement, to (i) confirm that no additional water supplies are necessary to provide water services to the Property over and above Owner’s Type 1 Industrial Water Right of 362.60 acre feet annually; (ii) the amount of the Water Resources Fee Owner is required to pay if additional water supplies are required; (iii) identify the Additional Necessary Utility Infrastructure Improvements Owner is required to purchase and/or design and construct for the City to provide water and wastewater services to the Property and the timing for the payments and/or construction of the same, (iv) modify the terms in the Agreement regarding the issuance of  building permits for future phases of development after the Phase One Development, the Phase Two Development and the Phase Three Development; (v) modify the terms in the Agreement regarding the issuance of temporary certificates of occupancy, certificates of completions and certificates of occupancy for future phases of development; and (vi) provide terms for the City to convey its interest in the Booster Station Site and the improvements it owns to Microsoft. 

The fourth amendment to the PHX 10-11 IDA modifies the terms of the PHX 10-11 IDA as amended as follows:

· The fourth amendment identifies the water infrastructure and wastewater infrastructure, including the infrastructure needed for the storage and disposal of industrial discharges from Microsoft’s operations needed for the City to serve the PHX 10-11 at build-out. 
· A contribution of $9,000,000 towards the cost of the city’s water treatment plant (“Water Production In-Lieu Payment”), which will be reduced by the amount of water development impact fees previously collected, is required to be made prior to the issuance of any future building permits and prior to any type of certificate of occupancy is issued for PHX 12.
· Subject to the payment of the Water Production In-Lieu Payment, building permits for future buildings to be issued without having to satisfy the requirements for obtaining a certificate of occupancy for PHX 12, including the requirement that all of the infrastructure identified in the updated engineering study be completed.  Because the future buildings will be air-cooled, the completion of these infrastructure improvements is not necessary to support the future buildings.
· Because the determination of the required infrastructure and financial contributions are based on certain assumptions, there are provisions that if the assumptions were inconsistent with Microsoft’s actual operations, Microsoft will be responsible for constructing any additional  infrastructure improvements required to support the actual operations, to make additional financial contributions for the cost of the city’s wastewater treatment facilities and the cost of the city’s water treatment facilities should Microsoft’s actual demands exceed the demands reflected in the most recent engineering study and to make a Water Resource Fee payment should the actual water demands exceed 362.20 acre feet a year on an annualized basis.
· Provides terms for Microsoft’s acquisition of the city’s existing Booster Station Site


The terms of the proposed amendment are consistent with the general intent of the infrastructure development for Project 10-11 which requires Microsoft to construct infrastructure improvements needed for the city to provide utility services to the property. Accordingly, staff supports its adoption.