The Sedona City Council has agreed to grant Gateway West LLC a waiver of recent changes to the city’s Land Development Code requirements for its property located at 15 Cultural Park Place in order to allow its conversion to a six-unit hotel.

The Miller Brothers Building at 15 Cultural Park Place was originally designed as an office building. Prior to purchasing the property in early 2021, Gateway requested a director’s interpretation of the LDC to confirm that the building could be converted for use as lodging, and in her role as then-Community Development Director, Karen Osburn provided that confirmation in a letter dated Jan. 19, 2021.

“The director has determined that the property at 15 Cultural Park Place may be converted to a lodging use with fewer than seven [no more than six] lodging units,” Osburn wrote. “The property is zoned CO [Commercial]. Lodging, fewer than seven units, is a permitted use in the CO zone.”

Based on this determination, Gateway closed on the property on Feb. 5, 2021. Following receipt of a July 2023 offer to purchase the property for a prospective conversion to a mixed-use development with a bike shop and lodging, Gateway representatives contacted the city to confirm that the lodging conversion would still be allowed.

“As of the last update to the city’s Land Development Code this past spring, we no longer allow any new lodging by right just because a property is zoned commercial,” Osburn — now Sedona city manager — wrote on July 11 in response to the Gateway inquiry. “Any new lodging units will require new zoning. The ability to do multi-family under existing commercial zoning is still applicable. If you or a future owner wanted to do multi-family on this property you or they could build up to 12 units per acre. You could go above 12 units per acre if you put long-term rental restrictions on the units.”

The city council removed the provision in the LDC allowing lodging by right in commercial zones on April 25 “to better reflect the intent of the code and the Sedona Community Plan.”

The staff recommendation for the change stated that the provision allowing lodging by right “has caused properties to try to get around the requirements of the lodging zone by splitting properties into smaller properties and constructing up to six lodging units per property. Removal of this as a permitted use ensures that all lodging projects are treated equally and reviewed using the same process.”

As a result of this change, Gateway filed a notice of claim against the city on Aug. 4, seeking either a waiver of the LDC requirements for the property or compensation for its lost value in the amount of $1,165,000.

“We were given prior assurance, via a letter that we paid $350 for from the city, while doing our due diligence before purchasing the property at 15 Cultural Park Place,” the Stevenson family, owners of Gateway, wrote in a statement. “We had the full intention of converting this building into six luxury lodging units, which is why we asked for the letter of zoning determination. After receiving the approval letter, we proceeded in closing escrow to purchase the property. We hired and paid an architect to start the drawings for the conversion and also paid for an appraisal based on the new improvements we were planning to develop. After hearing rumors that the city had quietly revised commercial zoning for Sedona, we reached back out to the city asking for clarification. We were told that all zoning had been changed and would no longer be approved. What the city essentially has done is substantially devalue all commercial properties in Sedona.”

Pursuant to Arizona Revised Statutes §12- 1134(A) — passed by voters in 2006 as Proposition 207 — “If the existing rights to use, divide, sell or possess private real property are reduced by the enactment or applicability of any land use law enacted after the date the property is transferred to the owner and such action reduces the fair market value of the property, the owner is entitled to just compensation from this state or the political subdivision of this state that enacted the land use law.”

The city council discussed the claim in executive session on Sept. 12 and Oct. 24. Osburn stated on Oct. 25 that the council decided to grant Gateway the requested waiver in a vote following the executive session on Oct. 24.