Oops, They Did It Again! Phoenix Sued Over Property Tax ‘Shell Game’

An emergent lawsuit could hinder Hubbard Street Group’s plans to finish building this mixed-use tower near Roosevelt Row, which is already about halfway constructed.
An emergent lawsuit could hinder Hubbard Street Group’s plans to finish building this mixed-use tower near Roosevelt Row, which is already about halfway constructed. Elias Weiss

The Goldwater Institute, a libertarian public policy think tank based in Phoenix, sued the city of Phoenix last week on behalf of two Arizona taxpayers for the second time in Maricopa County Superior Court.

Plaintiffs think the city is playing favorites, and they’re not happy about it. Especially because they went through the same ordeal just two years ago.

Goldwater Institute attorneys allege the city sidestepped state law when it got in bed with the Chicago-based Hubbard Street Group, a real estate developer, gifting it a hefty handout of taxpayer dollars in the form of a $7.9 million tax break to spur local development.

“I am baffled by this,” Jon Riches, Goldwater Institute’s director of national litigation, told Phoenix New Times on Monday. “This is an extraordinary demonstration of hubris and lawlessness.”

A Deluxe Apartment in the Sky

click to enlarge Skye on 6th will be 26 stories tall and feature more than 300 apartment units and 7,000 square feet of commercial space. - HUBBARD STREET GROUP
Skye on 6th will be 26 stories tall and feature more than 300 apartment units and 7,000 square feet of commercial space.
Hubbard Street Group

The Chicago developer is eyeing its Phoenix debut with Skye on 6th, a 26-story high-rise at Sixth and Garfield streets downtown. It’s an $87 million project that is expected to feature more than 300 apartment units and 7,000 square feet of commercial space.

Skye on 6th is Hubbard Street Group’s second Arizona project. The firm developed the Sunscape Villas in Scottsdale in 2010.

But the new lawsuit could hinder Hubbard Street Group’s plans to finish the mixed-use tower near Roosevelt Row, which is already about half-built. The project broke ground in July last year and is slated to begin admitting tenants next summer.

Plaintiffs want the city’s decision to offer Hubbard Street Group a special tax break to be ruled unconstitutional. They also want to bar the city from ever providing special tax advantages to the developer again, and to award costs, attorney fees, and additional relief, according to court records.

Hubbard Street Group executives did not respond to interview requests from New Times.

The new lawsuit is an echo of another case the Goldwater Institute filed and won against the city.

In that case, a Maricopa County Superior Court judge ruled in 2020 that Phoenix officials violated the Arizona Constitution when they gave millions of dollars in tax breaks to Denver-based Amstar, another private developer, to construct a 22-story residential high-rise downtown.

click to enlarge The Derby Roosevelt Row, Amstar's luxury high-rise project, continued development after an Arizona judge ruled the special tax break it received from the city of Phoenix was unconstitutional. - MARK-TAYLOR, INC.
The Derby Roosevelt Row, Amstar's luxury high-rise project, continued development after an Arizona judge ruled the special tax break it received from the city of Phoenix was unconstitutional.
Mark-Taylor, Inc.

The same legal team is representing the same two plaintiffs, challenging the same defendant over the same issue less than two years later.

Now, Goldwater attorneys are looking for consecutive victories in court.

Taxpayer advocates call the special subsidy a “property tax shell game” and the “latest crony tax scheme,” again decrying the action as unconstitutional.

The city's defense against these assertions will later be filed in court.

“We are unable to comment on pending litigation,” city spokesperson Dan Wilson said.

What is known is that the city believes it will eventually see returns on the project exceed $8 million, justifying the preemptive tax break.

That special tax break could stick existing business and property owners with a higher tax bill. Just ask the plaintiffs: Mat Englehorn, the co-owner of  Angels Trumpet Ale House on nearby Second Street, and Bramley Paulin, a property owner in downtown Phoenix.

“Paying taxes on my own business is enough of a burden,” Englehorn said. “I shouldn’t be required to pay additional taxes so the city can pick its preferred winners and losers.”

In 2018, Englehorn opened a second beer garden in the Arcadia neighborhood. It closed less than two years later, and sources close to the owners say business at the flagship restaurant has lagged.

“The pandemic was not easy on the downtown area,” said Riches, Englehorn’s attorney. “If you’re a downtown redevelopment-area business like Angels Trumpet Ale House, your property taxes will necessarily go up. The price of doing business is now even higher.”

Gimme a (Tax) Break

Englehorn worries that the Hubbard Project, as it has been dubbed, will make matters worse.

It’s rooted in a 1996 decision by the Arizona Legislature to roll out a commercial development program called Government Property Lease Excise Tax (GPLET).

The city uses GPLETs to temporarily ease developer tax burdens, incentivizing developments that meet its long-term vision for downtown.

When the city authorizes a GPLET, it assumes the title of the property and leases it back to the developer for several years. The private project becomes government property, which takes it off the tax rolls.

In the long run, the city profits by levying higher property taxes after a project is complete. The program has worked well for projects of public interest, such as community colleges, schools, and multi-family housing units.

GPLETs target dense urban development where building and design costs are higher due to aging infrastructure and other factors that make investment risky and costly.

But there is little public support behind high-rises like Skye on 6th and The Derby Roosevelt Row, the Amstar project.

In 2020, the city admitted it would save Amstar more than $21 million in taxes, but claimed it would receive “no less than $36 million among other benefits,” court documents show.

That didn’t sway Maricopa County Superior Court Judge Christopher Coury, who ruled against Phoenix that June, two months later. In fact, Coury questioned in his ruling whether GPLETs would be viable in any capacity in Arizona again.

“This judicial officer questions whether the death knell for the GPLET’s usefulness has rung," Coury wrote.

The city of Phoenix had 30 days to appeal Coury’s decision. No appeal was ever filed.

“By not appealing, the city avoided the possibility of an adverse statewide precedent," Joe Setyon, a spokesperson for the Goldwater Institute, told New Times.

Because the 2020 lawsuit challenged the specific GPLET to Amstar and not the constitutionality of GPLETs generally, there is nothing stopping the same plaintiffs from challenging a different GPLET for Hubbard Street Group, said Olen Lenets, a land use litigator with Rose Law Group in Scottsdale.

He's sure the city of Phoenix has every reason to believe it can be successful in defending against the claims brought against it.

The two cases are not as identical as they appear, he asserted.

"While the parties in the 2020 and 2022 lawsuits may be the same, the underlying facts appear to be different," Lenets told New Times. "If I successfully sue you for negligence because you hit me with your car in 2020, and make the same allegation in 2022 based on a new, separate instance of alleged negligence, you have every right and opportunity to defend against my new negligence claim."

However, he added, had the 2020 verdict concluded that all GPLETs are unconstitutional, there would probably be some concerns for the parties in the new lawsuit over a subsequent GPLET.

The March of Progress

Amstar anticipated a 7 percent profit margin for the Derby with the help of a subsidy from the city. But the company predicted it could make a profit of 6 percent without it, and the project forged ahead after the tax break was ruled illegal.

Hubbard Street Group estimates that it would make at least a 5.56 percent profit from the Hubbard Project without the GPLET lease and tax abatement, according to legal documents. The developer estimates that the profit on the Hubbard Project will increase by less than 1 percent as a consequence of the GPLET lease and tax abatement.

The city did not dispute those numbers.

In 2016, city officials said no high-rise developer would touch the aging and damaged Circles Records building, near Central Avenue and McKinley Street, without a GPLET.

Empire Group, a local developer that had plans to build a mixed-use residential development on the site, had conversations with the city about obtaining a GPLET. It never did, yet that project forged ahead successfully, too.

“High-rises want to come to Phoenix,” Riches said. “These things are going to go up anyway. The market decides, not the city.”

Phoenix-based historic preservationist Stacey Champion started an online petition during that controversy, urging the city of Phoenix not to grant Empire the tax break, and several hundred people signed it.

Six years later, she remembers it all vividly.

Phoenix passes out GPLETs “like candy favors,” Champion told New Times.

Downtown Phoenix wouldn't be littered with vacant lots and derelict buildings without the commercial development program, agreed Champion and Riches, who have a history of being at odds with each other on local issues.

The GPLET is more of a want than a need for high-rise developers, they claim, as evident by the marginal profit differential between projects that received a subsidy and those that did not. Large, wealthy out-of-state developers dominate the pool of successful applicants, "supported by big-name attorneys who called in favors to get them," Champion said.

"If people believe that the free market works, then they should let the free market work."

This storyline unfolds amid an unprecedented housing crisis in Phoenix.

“Had the city only been incentivizing real affordable housing developments instead of luxury high-rises and settling for peanuts from out-of-state developers, perhaps we wouldn’t currently have thousands of people living on our city streets,” Champion said. "We have literally been screaming about that for the past 10 years."

But according to a Phoenix City Council agenda from September 2020, at least 10 percent of the units in Skye on 6th will be designated for workforce housing.

The development is expected to “create approximately 264 construction jobs and 77 permanent jobs,” according to the agenda.

Hubbard Street Group made a $100,000 contribution to affordable housing efforts in the city, and pledged to make annual donations of $2,000 each to Phoenix Elementary School District and the Phoenix Union High School District for each year of the eight-year lease.

"My clients thought the city would appreciate it," said Nick Wood, Hubbard Street Group's attorney.

However, according to court documents, “The payments to the Phoenix Elementary School District and Phoenix Union High School District are intended to ‘compensate’ the school districts for tax revenue they would otherwise receive had the city not provided to the developer the GPLET tax benefits.”

In a 2020 letter to Phoenix residents, Mayor Kate Gallego said that ensuring access to affordable housing for all was a priority for the Phoenix City Council, with a goal to create 50,000 homes by 2030.

The city suggested the Hubbard Project would further this goal.

“We have a lot of apartments, a lot of condos, a lot of housing going up but it’s not workforce housing, it’s not affordable housing,” said Councilmember Michael Nowakowski, whose district is part of downtown.

"I believe that if we start with this new trend where we get at least 10 percent plus a donation into a fund where we as the city of Phoenix can actually turn around and either have a nonprofit or ourselves build workforce housing or affordable housing, I think it’s a good trend to have," he added.

click to enlarge Skye on 6th is Chicago-based Hubbard Street Group's second luxury housing project in Arizona after finishing the Sunscape Villas in Scottsdale in 2010. - HUBBARD STREET GROUP
Skye on 6th is Chicago-based Hubbard Street Group's second luxury housing project in Arizona after finishing the Sunscape Villas in Scottsdale in 2010.
Hubbard Street Group

The Gift Clause That Keeps on Giving

No one denies that the Hubbard Project is receiving a tax break amounting to nearly $8 million. What’s up for debate is whether the tax break is unconstitutional.

"GPLETs are expressly designed to allow local government to attract development without violating Arizona’s strong gift clause provision," said Lenets, the land use attorney in Scottsdale. "The very fact that there is an active lawsuit regarding GPLETs, meaning it has not been summarily dismissed on its face, means that GPLETs are not unconstitutional. This is not to say, however, that this could change based on the issues before the court in the current case, and the court’s ultimate ruling."

The Arizona Constitution’s gift clause keeps on giving the city of Phoenix problems in court.

The gift clause, a single provision buried inside the Arizona Constitution, ratified that no city can ever “give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise” to any person or company.

For offering a tax break that's nearly $8 million, the city will collect just $500,000 in rent combined over the next eight years.

“That’s grossly disproportionate and that violates the gift clause,” Riches said.

The city’s attorneys argued in the Amstar case that the market wouldn’t support the project, and that financing wouldn’t be available to the developer elsewhere. They further promised the return would outweigh the cost for taxpayers — a claim that has never been substantiated, according to Riches.

And in Schires v. Carlat, a 2020 lawsuit also known as the "gift clause" case, the Arizona Supreme Court held that the city of Peoria violated the gift clause by spending public funds to induce a private university to open a branch campus in Peoria.

This isn't like what happened in Peoria, Phoenix officials claim.

“The city did not violate the gift clause,” defense attorneys wrote in court documents filed in April 2020. “This is because the city’s determination that the agreement served a public purpose was reasonable, and the value of what the city will receive under the agreement is not ‘grossly disproportionate' to the value of what the city agreed to give.”

In late 2020, months after the Amstar ruling, Assistant City Attorney Thomas Stack maintained that the Hubbard development agreement would contain “express requirements on the amount of tax revenue the developer would generate … and mandate additional payments by the developers if they do not generate that revenue.” Therefore, the revenues “qualify as a benefit” to the city, thereby rendering the development agreement constitutional, court records show.

“I’m not buying that,” Riches said. “Whether or not it makes money in the long run, this is already a violation of the constitution.”

click to enlarge Skye on 6th stands about a dozen stories tall today with a little more than a year to go before the anticipated completion. - ELIAS WEISS
Skye on 6th stands about a dozen stories tall today with a little more than a year to go before the anticipated completion.
Elias Weiss

He is also concerned about the disparate control over the project offered to the developer even with the city government acting as the de facto owner.

According to court documents, the developer may terminate the lease and acquire the property at any time and for any reason for a $100,000 payment.

The city cannot transfer the title to the Hubbard Project to any third party without approval from the developer, nor can it place any liens or encumbrances on the project without approval from the developer.

In the end, the plaintiffs and others in their position are liable for replenishing the public coffers for unlawful government expenditures, gifts, and loans, as was the case with the Amstar project.

“The government shouldn’t force hardworking Arizonans to foot the bill so a private company can avoid paying property taxes,” said Paulin, one of the plaintiffs who owns properties downtown. “If a private developer wants to build a new high-rise, why should I be forced to pay higher taxes to subsidize it, at the same time that I am having to compete with their development?”

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Elias Weiss is a staff writer at the Phoenix New Times. A native of Charlotte, North Carolina, he reported first for the Northwest Arkansas Democrat-Gazette and was editor of the Chatham Star-Tribune in Southern Virginia, where he covered politics and law. In 2020, the Virginia Press Association awarded him first place in the categories of Government Writing and Breaking News Writing for non-daily newspapers statewide.
Contact: Elias Weiss