Pennrose LLC
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A new affordable housing development is slated to go up right off of Roosevelt Row in Phoenix. But the Goldwater Institute, Arizona’s libertarian-minded policy organization, is suing to prevent it from happening.
Last week, the Goldwater Institute filed a complaint against the city of Phoenix in Maricopa County Superior Court. The suit alleges that Phoenix violated the gift clause in the Arizona Constitution by selling the property — currently an empty lot just north of Tropic Thunder at 1016 N. 2nd Street — to Pennrose LLC at a severe discount.
Phoenix agreed to sell the lot for approximately $1.5 million, about one-third of the 2023 appraised fair market value of $4.8 million. Goldwater argues that the sale violates the state constitution’s gift clause, which prohibits governments from giving away anything of value — land, credit, money and assets — to a private entity. It also argues that the sale violates a state law prohibiting housing from being built for a specific class of people, including income.
In approving the project, the city relied on calculations that suggested that by selling the property and turning it into affordable housing, Phoenix would benefit in other ways to make up for the difference in price.
The city acquired the 0.4-acre lot, which is now in a prime location on Roosevelt Row, in 2004. Pennrose, whose website says it has successfully completed more than 350 projects, responded to the city’s request for proposals in 2023. It submitted a plan for a multi-use development that includes about 60 housing units, all of which would be affordable housing.
As a way to increase the benefit to the city, the developer proposed having an early childhood education program run by the Bezos Academy — of Jeff Bezos fame — on the property. If the academy runs for 15 years and has 80 students each year, the city would receive the equivalent of $10.8 million in saved tuition and a free lease valued at $100,000 a year, the complaint says.
Goldwater — which is bringing the suit on behalf of a Phoenix landowner named Bramley Paulin, who seeks “to prevent the unlawful depletion and transfer of City-owned public assets” — argues all of this is an illegal giveaway.
“The hope of the lawsuit is that the city will spend or will make this land available to a developer — be it the current one or someone else — who will pay the actual market price,” Goldwater Institute senior attorney Anthony Napolitano told Phoenix New Times. “That the city will be blocked from giving something away so that it does not squander public resources, and that it will actually receive in compensation the amount it is due for such valuable land in the middle of downtown on Roosevelt Row.”
To bolster its point, the Goldwater complaint notes that nothing in the contract for the sale holds Pennrose to following through on the academy. And even if it did, it doesn’t think having the academy clears Phoenix of a gift clause violation because the city government doesn’t benefit from it directly. Pennrose comes out on top, especially since it will also receive $2 million in federal HOME funding for the project.
New Times reached out to the Bezos Academy to ask whether it plans to open a school at that location if the project is completed. Spokesperson Aarti Chandorkar said no. The city declined to comment due to the ongoing litigation. Pennrose LLC did not respond to questions and requests for comment.
“It just, to us, underscores the overpromise and underperform that is common in these gift clause cases,” Napolitano said.
Pennrose LLC
Different interpretation
But one expert — Arizona State University professor Mark Stapp, who is the director of the school’s Masters in Real Estate Development program — doesn’t agree with Goldwater’s interpretation. Stapp has testified as an expert against Goldwater in similar cases.
Arizona has one of the strongest gift clauses in the country because it was so late in becoming a state, Stapp said: “By the time they got to us, all of the corruption that had been perpetrated by others before was known and figured out, and they are not going to let that happen here.” But he doesn’t think simply selling a property at a discount so it can be turned into affordable housing is a violation.
It isn’t viable for a property to be sold at market value and used for affordable housing, Stapp said. Putting affordable housing restrictions on a property decreases its earning potential over time and ultimately decreases its value.
“You simply can’t lease it or sell it for as much money,” he said. “Period.”
Some of the arguments in the case boil down to a difference in opinion over what constitutes a benefit to the city. Stapp’s understanding is less literal. Affordable housing brings many benefits to the community, which in turn benefits the city, he said. Affordable housing has a ripple effect on residents and often comes with changes that last for many years, like deed restrictions on the property so it remains affordable for future owners. It doesn’t need to be a literal exchange, he said.
A development that is entirely affordable housing will have a massive impact.
“It’s a legitimate use of public funds and public assets to pursue affordable housing,” he said.
And the early childhood education program would be a legitimate benefit if it happens, even if it’s through a nonprofit with no association with city government. However, Stapp said if he were an expert on the case, he would most likely not factor in the free tuition as a benefit when doing his calculations.
The tuition is not tied to the property and could benefit the city wherever it is located. A free lease to the academy is tied to the property, so he would include it when calculating how much benefit the school gives the city. And on the whole, early childhood education is a good thing.
“Think about making an argument to a jury that says childhood education, early childhood education isn’t really necessary, and we shouldn’t really support it,” Stapp said. “That’s a hard one to make with a straight face.”
