What We'll Be Looking for in Englehorn v. Stanton

Englehorn, et al. v. Stanton, et al., Maricopa County Superior Court, CV2017-001742

To understand what’s going on in Englehorn, one has to know something about Arizona’s Government Property Lease Excise Tax (“GPLET”) program, see A.R.S. § 42-6201 through 42-6209, the Arizona Gift Clause, see art. 9, sec. 7 of the Arizona Constitution, and other state constitutional provisions. Enacted in 1996, the GPLET statute allows a city to acquire ownership of land and improvements in a blighted area and thus exempt the land from property taxes while simultaneously leasing the land back to the original owner at a reduced rate. The property typically qualifies for an eight-year tax abatement followed by a reduced or abated tax obligation that can extend up to 25 years in total under current law. By some estimates, one-third of the largest buildings in Phoenix have used GPLET leases. Many cities and professional groups view the GPLET program to be the most valuable economic development tool still available to the cities, particularly in the wake of the Arizona Supreme Court’s interpretation of the Gift Clause in the case of Turken v. Gordon, 224 P.3d 158, 223 Ariz. 342 (2010), better known as the CityNorth case.

In 2010, the Arizona Supreme Court issued its decision in Turken, addressing the limits imposed by the Gift Clause on public payments to private parties. The Gift Clause provides in relevant part that “[n]either the state nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation . . . .” In the context of a development agreement providing for a “tax reimbursement” payment to a private developer, the Supreme Court in Turken affirmed and clarified the parameters of the so-called Wistuber test, under which a governmental payment to a private party complies with the Gift Clause only if the payment both (1) has a public purpose and (2) is not grossly disproportionate to what is received in return.

With respect to the first prong of the test, the Turken Court reaffirmed an expansive view of what constitutes a public purpose. The Court further reaffirmed the rule that courts may not disturb the decision of elected officials that a specific purpose constitutes a “public purpose,” absent proof that the elected body’s discretion has been “unquestionably abused.” With regard to the second prong of the test, however, the Turken Court changed the terrain significantly by rejecting the argument that indirect benefits (e.g., projected increases in tax revenue) can automatically be “counted” as the consideration for a public payment. Only “the objective fair market value of what the private party has promised to provide in return for the public entity's payment” can be taken into account, the Court instructed.

Which brings us to Englehorn. In 2016, according to the Complaint discussed below, the City of Phoenix and Denver-based Amstar/McKinley, LLC entered into a GPLET transaction, pursuant to which Amstar/McKinley sold two parcels of land located on the northwest corner of East McKinley Street and North 2nd Street and the City leased the land back to Amstar/McKinley. Prior to the deal, the Complaint alleges, the developer’s annual property taxes for the two parcels combined was $13,821.06. As a result of the deal, at a cost exceeding $36 million, the developer plans to construct a 19-story high-rise to be known as the Derby Roosevelt Row, which will include 4,500 square feet of commercial space, 120 structured parking spaces, and 211 furnished micro-apartment rental units, and to make annual lease payments to the City on a graduated basis over the 25-year term of the lease. But for the GPLET, according to the Complaint, the approximate yearly property tax on the two parcels after construction is completed would be in the neighborhood of $500,000. By the same token, but for the GPLET, the developer presumably would not build the Derby Roosevelt Row and the City would continue receiving only the de minimus amount of annual tax revenue from those parcels for years to come.

On March 1, 2017, the Goldwater Institute sued the City of Phoenix, Mayor Stanton, and other public officials on behalf of Mr. Matt Englehorn, the proprietor of Angel’s Trumpet Ale House sitting to the north of the new tower, and other taxpayers to invalidate the GPLET transaction. Relying on several provisions of the Arizona Constitution as well as the GPLET statutes and the alleged failure of the City to follow competitive bidding requirements, the plaintiffs challenge the transaction as an illegal $8.4 million subsidy by the taxpayers to a private developer.[1]

The case is only at the initial pleading stage, so we have yet to learn what facts the City will propound in response to the constitutional challenges. For us, what will be especially interesting is how the City responds to the Gift Clause allegations. Potentially, the City will argue the Gift Clause does not even apply because the City is not actually paying money to the developer but instead relieving it of a tax burden that it would not incur but for the GPLET transaction and its consequent investment of $36 million to develop the parcels. If the City concedes that the Gift Clause is implicated (or if the trial court makes a finding that it is), it will be interesting to see how the City demonstrates that it will receive “the objective fair market value of what the private party has promised to provide in return for” the tax abatement. Perhaps the City will rely on the lease payments, which appear to exceed what the City would have earned in property taxes if the parcels were not developed. Much will depend on the terms of the development agreement itself, of course, particularly those dealing with the consideration that the developer has promised.

Without question, this case will end up on appeal, and we expect to have a lot more to tell our readers about when it does.

[1]           The Uniformity Clause requires the government to uniformly tax all properties within the same class of property in the territorial limits of the taxing authority. The Special Law Clause prohibits a city from enacting any local special laws in cases involving the assessment and collection of taxes, or granting any special or exclusive privileges, immunities, or franchises, if a general law can be made applicable. The Conveyance Clause provides that no property that has been conveyed to evade taxation shall be exempt.


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