December 24, 2008 - CityNorth Project, Phoenix AZ

Phoenix's CityNorth deal ruled unlawful

Developer was to get $97 mil in sales taxes

A major economic-development agreement between Phoenix and the CityNorth development has been ruled unconstitutional, meaning the project may not grow into the once-envisioned second downtown on the city's north side.

The Arizona Court of Appeals said Tuesday that the $97.4 million agreement violates the gift clause of the Arizona Constitution, which prohibits governments from granting money or credit to private entities in most cases.

In 2007, the city agreed to give the developer half the sales-tax revenue from the site. The developer, among other provisions, agreed to denser construction and to provide free parking and special spaces for park-and-ride use. The ruling could force the developers to completely remake the $1.5 billion project on 144 acres at 56th Street and Loop 101. The development's first phase, with several dozen shops and restaurants, opened last month. The city agreement was scheduled to begin after the second phase was completed. No money has been exchanged yet.

Representatives of the Thomas J. Klutznick Co. declined interviews but issued a prepared statement saying that, without the agreement, they will be forced to cut the density of the project.

Less density would mean fewer shops, restaurants, hotels and offices and fewer jobs, the statement said.

The company said a "less capital-intensive design" would include surface parking lots covering more than half the development. It also warned that the project will face delays.

The project's timetable already has been jeopardized by the poor economy.

Kenneth Himmel, president of Related Urban Development, Klutznick's partner, previously said that the second phase, which includes three major department stores, could not open by November 2010, as scheduled, if construction did not begin in the first quarter of 2009. He also has had said that obtaining construction financing could be difficult if the agreement with the city was not in place.

A spokeswoman for Nordstrom, one of the department stores, said that the company remains committed to CityNorth and that financing of the project is the developer's responsibility.

The developer's agreement with Phoenix, which the City Council approved in March 2007, was for $97.4 million or half the sales taxes collected at CityNorth for 11 years and three months, whichever came first. In exchange, the developer agreed to build 3,100 spaces of free garage parking, 200 spaces for park-and-ride use, and a denser development that was expected to generate taxes above what normally could be anticipated.

The court said the benefits the city would get from a denser project, although attractive, would provide "an indirect benefit to the public." To be acceptable under the gift clause, the court said, the benefit would have to be direct, such as city ownership of the parking structures.

"Under these circumstances, we think these payments are exactly what the gift clause was intended to prohibit," Judge Patrick Irvine said, writing for the three-member court.

The Goldwater Institute filed suit in July 2007 on behalf of six small-business owners who said they objected to the CityNorth deal because they didn't have the opportunity for a similar agreement.

Clint Bolick of the institute said the ruling is an early Christmas present.

"This ruling vindicates this important provision of the Arizona Constitution," he said. "No longer will cities and towns be able to give away our tax dollars to pay private businesses to pursue a profit."

David Krietor, assistant city manager, said the city structured the agreement "like it has been done for years by municipalities all around the state."

"We believe it was done in a legal way," he added.

Either the city or the developer can appeal the case to the Arizona Supreme Court. A decision about whether to appeal will be made after the holidays.

"The lawyers will have to advise us on whether we should appeal," Krietor said. "Ultimately, it is the decision of the mayor and City Council."

Makeup of the eight-member council has changed since the agreement was approved, with three new members opposed to the agreement replacing three who supported it.

In addition, the city's budget crunch could have an effect on the decision.

"Our plea to the city is not to throw good money after bad," said Bolick, urging the city to drop the case.

Original Story - Arizona Republic

Update January 27, 2009

Oro Valley suspends tax-sharing agreements with developers

he Oro Valley Town Council has suspended existing economic development agreements with five commercial developers while it awaits a final outcome to a Court of Appeals ruling that such agreements are illegal.

A tax revenue-sharing agreement between the City of Phoenix and developers of a shopping center violated a section of the Arizona Constitution, commonly known as the "gift clause" the court ruled last month.

Oro Valley has five similar agreements.

Tobin Rosen, Oro Valley's attorney, told council members last week the legality of any further payments under the EDAs is open to a legal challenge.

"Simply put, to continue payments at this juncture could place the town in violation of the Arizona constitution," he wrote to the council.

The five developments are Steam Pump Village, Oracle Crossings, Oro Valley Marketplace, Hilton El Conquistador Resort & Country Club and an undeveloped project of Cañada del Oro partners.

When some of the agreements were under consideration in the early 2000s, a group of Oro Valley residents protested them, criticizing them as tax giveaways to developers.

A letter was sent to all five developers, informing them of the suspension of payments, said Mary K. Davis, an Oro Valley spokeswoman.

Update Story - Arizona Daily Star

Update February 5, 2009

CityNorth developers intend to take case to state's high court

The developers of CityNorth plan to take their case to the Arizona Supreme Court, attorney Lisa Hauser said Wednesday.

Related Urban Development and the Thomas J. Klutznick Co., who are building the development at 56th Street and Deer Valley Drive in phases, want the state's highest court to overturn an Arizona Court of Appeals decision that nixed CityNorth's $97.4 million agreement with Phoenix.

The City Council has not yet decided whether to join the appeal. An appeal must be filed by Feb. 23.

The agreement between the parties, designed as an economic development incentive, would provide Klutznick with half of the sales-tax revenue generated by stores at CityNorth in exchange for 3,180 free parking spaces - in effect, two parking garages to be built in the center of the project. The rebate would begin once the development's second phase is open, and last for 11 years and three months or until the $97.4 million mark is reached.

Deputy City Manager David Krietor has said the deal was "consistent with other retail details we have done around the city."

But the Goldwater Institute took the agreement to court in 2007, a month after it was approved. The organization, which recruited owners of small businesses as plaintiffs, argued that the agreement violated several provisions of the Arizona Constitution, including the gift clause, which prohibits payments to private entities under certain circumstances.

A Superior Court judge did not agree, but the Appeals Court did, saying the proposed payments "are exactly what the gift clause was intended to prohibit."

Wednesday, Krietor said the City Council has been briefed on the issues of the case but has not made a decision whether to appeal.

Clint Bolick, the attorney for the Goldwater Institute, said that considering the city's budget problems, walking away from the agreement would be a "sensible decision."

CityNorth is planned as a mixed-use development with nearly 5.5 million square feet of luxury retail shops and upscale department stores, including Nordstrom, office space, hotels and residences. It will occupy 144 acres at Loop 101 and 56th Street.

After the Appeals Court ruling, the Klutznick Co. said in a statement that without the income from the agreement, it would be forced to reconsider its plans.

Update Story - Arizona Republic