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Phoenix CityNorth Deal Ruled
Unlawful
PHOENIX (By Michael Clancy, Arizona
Republic) December 24, 2008 — 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.
Developer was to get $97 mil in
sales taxes.
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.
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