Revolting Development

The CityNorth project hosed Phoenix taxpayers, but don't look to city leaders for an apology

Plenty of people also intimate that we needed to subsidize Klutznick so that the developer could land Nordstrom, a company that might well have put another store in Scottsdale instead. Better to get half of the usual sales tax revenue from a high-end retailer than lose out on landing that retailer and end up with no sales tax at all.

Thanks to the litigation, the city's very cagey about the details of the deal. But the mayor's spokesman, Scott Phelps, told me that they're looking for CityNorth to "generate hundreds of millions of dollars for the residents of Phoenix, without fronting a single penny." The city isn't giving any money to the developers before the shops open, Phelps stresses. It's merely giving Klutznick half of the sales tax collected for 11 years, or until they reach the $97 million mark.

But there are two problems.

One is that the Desert Ridge area, where CityNorth is under construction, is lovely. Unlike Maryvale or even my half-gentrified 'hood in central Phoenix, this area could compete with Scottsdale on its own merits. In fact, Phoenix had barely begun to study the feasibility of giving the developer a massive tax break when the Klutznicks signed a letter of intent with Nordstrom. Gordon and his cohorts simply can't argue that undeveloped land near both the Loop 101 and the 51 won't attract high-end retail and plenty of sales tax, even without a subsidy.

Look at Scottsdale. CityNorth's chief retail competition is just across that city's border: a similar-size mixed-use development called One Scottsdale.

City officials in Scottsdale rejected a $50 million subsidy for that project. I'm guessing they're still going to get plenty of good shopping.

The second problem is the specifics of what Phoenix agreed to give.

The city based its offer, in part, on an analysis by a local economist. The economist, who was paid by the developer, concluded that CityNorth needed a $117 million subsidy to be feasible.

By that measure, the city's promise of $97 million doesn't look quite so bad.

But anyone who's paid any attention to development will tell you this: You can't just look at a developer's totals without breaking things down and poring over every deal. To really understand this deal, you've got to read the economist's report.

Unfortunately, that's impossible in this case. Wouldn't you know, the city didn't manage to retain a single copy of the economist's report? If it did that, of course, the report would be a public record. God knows we can't have that!

I was still able to get a summary. Under the law, the city must hire a third party to review the developer's analysis. That review, done by the national consultants Keyser Marston Associates, is a public record, and it references numerous details from the developer's report.

Most interestingly, Keyser Marston concluded that the developer's $117 million "feasibility gap" was based on a flawed number. Mainly, Klutznick had included the cost of purchasing land from an affiliate. But the $120 million land price averages more than $39 per square foot — way outside what land was selling for at the time, the consultants wrote. (Since then, of course, prices have only gone down.)

Even factoring in the developer's cost of buying out his former partners, Keyser Marston concluded, the analysis set the land price at $26 per square foot, "which seems quite high for unimproved property."

So, Klutznick was crying poor because the company was overcharging itself for the acreage. When Keyser Marston reduced the land price to something it felt was more appropriate, CityNorth's projected shortfall dropped to just $25 million.

So why is Phoenix giving Klutznick $97 million?

It gets worse.

The developer's economist built in a "required return on investment" of 9.2 percent. But the Korpacz Investor Expectation Survey, a report released by Price Waterhouse Coopers, suggests that the industry average may be a whole lot less. Like, say, just below 7 percent.

I called David Wells, a senior lecturer at Arizona State University's school of letters and sciences, to ask what that meant.

Wells did his doctorate in political economy, an experience that came in handy in analyzing the developer's projections. Change the "required return" rate to the industry average, Wells says, and the developer's projected shortfall dries right up. In fact, at that point, CityNorth could well run a surplus.

So the city based its tax giveaway on numbers that build in a large profit for the developer. And even the city's consultant, who didn't object to that part of the report, believed the developer had "significantly overstated" the cost of land.

Either something here stinks, or the canals at the Scottsdale Waterfront are acting up again.

Wells says the subsidy game has more to do with the city's desire to beat out its neighbors than any actual financial justification.

"These kind of deals only happen because we have these city boundaries," he says. "Something was going to get built at CityNorth eventually. Once people come, the retail market starts developing. It would happen naturally. You don't need subsidies for it to occur."


Unfortunately, these shenanigans happen every day. Rich developers plead poor and pit municipalities against each other for tax dollars. Cities ignore their own consultants. Our money gets channeled to private companies in the name of growing the tax base.

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2 comments
Priscilla Wolfe
Priscilla Wolfe

I am writing you with concern and frustration. I speak on behalf of many individuals with interests in the Desert Ridge development.

As a native of Arizona, property owner, and with regret, silent investor in a vacation rental unit at Toscana of Desert Ridge, I am asking that Klutznick concede defeat and exit the State of Arizona and not return under any circumstance. Clearly, Maricopa County Superior Court Judge Robert Miles’ 2008 ruling an err, as the so called "contemplated benefits” to the state, particularly the substantial tax revenues," were not advantageous to the public and would likely be realized on that site in another way.

Phoenix Democratic Mayor, Phil Gordon should be ashamed of his involvement and contribution to tyranny, corruption and unethical, unconstitutional behaviors and allowing this type of mismanagement to occur with taxpayer dollars. It has been said, that the Mayor’s actions are that of a fool, allowing an entity with such obvious conflicts of interest to pocket hundreds of millions, at Arizona's taxpayer’s expense.

In July, a jury in Maricopa County Superior Court awarded Gray Development and its principal, Bruce Gray, $110.65 million in damages from Northeast Phoenix Partners, the master developer of Desert Ridge, composed of Klutznick Co. officials. I agree with the recent court judgment against The Kluztnick Company in favor of Gray Development. Furthermore, I agree with the comment regarding the Klutznick Companies, “The actions are that of "Despicable Tyrants", with interest only in personal enrichment.”

I believe Klutznick has turned a beautiful project into a miserable, failed attempt at development. The project has been thwarted under Klutznick management since inception. Currently, owners are losing their properties at an alarming rate thus increasing bank losses therefore furthering damages to American economy. Major retail contenders have backed out due to a poorly planned and funded operations, and property values have been declining as a result. The Thomas J. Klutznick Companies skills as master developer are less than desirable and the business acumen exhibited, highly indicative of incompetence, dishonesty, power mongering and certainly unethical in every aspect.

Gray Development hopes to take control of the lease to satisfy at least part of the court judgment, and the recent transfer of that asset to a Delaware Corporation by Klutznick is clearly an attempt to shield it from Gray’s claims; just another indication of, and a lack of concern for, taxpayers in the State of Arizona, residential, as well as, business owners and/or investors at Desert Ridge and surrounding areas. I urge you to forgo your holdings to Gray Development allowing a proven, competent developer to proceed. The area is in urgent need of progress, and that can and will be realized in another way, the sooner the better, under the control of Gray Development.

Again, I ask that you settle your claims and relinquish to Gray Development, any assets you attempt to shield. I ask that you concede defeat, both as master developer and as a board member of the Desert Ridge Master Association immediately. Behaviors such as those exhibited by The Thomas J. Klutznick Co., breach of fiduciary duty as master developer, gross violations to personal property rights and anti-competitive behaviors may occur in your hometown of Illinois but, not in my hometown, nor in the State of Arizona. Klutznick, “you’re fired” go home.

Pissed at Phx
Pissed at Phx

First we were given park benches to deal with our spiraling, out-of-control crime problems.Then there was the latest downtown Phoenix "revitalization" scheme.Then there was the light rail debacle.Then there was the "no-bid" public transportation scandal.Finally we have the details of this latest taxpayer rip-off.Gordon doesn't just have feet of clay, he's made of the stuff. Oh no!! Mr. Phil!!Phoenix ain't nothin' but the bird.I'm not worried. I'm packin' a park bench.

 
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