Angels Trumpet Ale House seeks to block a tax deal that would bring a 19-story neighbor.
A controversial tax incentive used to launch some of downtown Phoenix’s biggest construction projects could sustain a major blow if a lawsuit pitting Roosevelt Row neighbors against an incoming development succeeds.
The Goldwater Institute is asking a judge to rule that Phoenix violated Arizona’s Constitution by awarding the tax break, known as a government property lease excise tax, to the developer of a 19-story “micro-unit” apartment tower on Second and McKinley streets.
The conservative watchdog group filed a complaint in Maricopa County Superior Court on March 1 on behalf of nearby property owners and businesses, including Angels Trumpet Ale House, The vacant lot adjacent to the restaurant is slated for a 211-unit project called Derby Roosevelt Row.
Other plaintiffs include Flying E LLC, which owns the Angels Trumpet land, and Roosevelt Row property owner Bramley Paulin.
The lawsuit challenges the incentive that allows developers to transfer their land to local governments, which don’t pay property taxes. The agreement approved last year by the City Council is expected to save Derby developer Amstar/McKinley LLC roughly $8 million over 25 years.
The developer proposed apartments averaging 400 square feet and renting for $1,300 per month.
Violation of state Constitution alleged
The lawsuit argues the tax break violates several parts of the Arizona Constitution, including a clause preventing “gifts” to private interests and rules requiring properties of the same class to be taxed equally. It asks the court to declare the agreement illegal, prevent its execution and award attorney fees.
Phoenix was served with the lawsuit on Wednesday afternoon and does not comment on active litigation, according to a city spokeswoman. Development companies behind the apartment project declined to comment.
Though the lawsuit focuses on Derby Roosevelt Row, the decision would affect similar deals, said Jim Manley, senior attorney for the Goldwater Institute. Goldwater also is seeking “modest reforms” in the Arizona Legislature for the program across the state.
Cities throughout Arizona use the tool, which supporters say is one of the few ways to encourage big projects in redevelopment areas. Phoenix has awarded the incentives to downtown buildings such as CityScape, the Collier Center and the Roosevelt Point apartments.
It’s not just conservative groups questioning the benefits, however, as downtown Phoenix sees development projects arise without incentives. Neighborhood advocates are increasingly pushing the city to add extra requirements, including providing workforce housing, to the agreements.
“It’s a program no one has really taken a hard look at,” Manley said.
Suit: Break will ‘burden’ other property owners
Phoenix approved the agreement for Derby Roosevelt Row last year. A fence is up on the construction site and the project is moving forward, Community and Economic Development Director Christine Mackay said.
The developer has three years to complete the project after construction begins, under the agreement.
The less than one-third of an acre will transfer to the city for 25 years once the tower is completed. The developer will pay an excise tax after the first eight years but nothing before. Annual lease payments that escalate in amount start immediately, ranging from $10,000 to $250,000.
The Goldwater Institute intervened at the request of the nearby property owners, Manley said. The complaint says that a plaintiff told the city in June that the deal was unconstitutional but that the city “responded dismissively.”
The lawsuit argues that when one landowner stops contributing to property taxes, others “bear a share of the burden for replenishing the public coffers.” Taxes either have to go up or services are cut, Manley said.
“That money has to come from somewhere,” he said.
The complaint also states that the tax incentive is an “impermissible special law” that grants special privileges, violates parts of the state Constitution preventing properties from evading taxation and didn’t follow the competitive bidding process.
Finally, the lawsuit contends that the property is not within a slum or blighted area, which is required for the eight-year abatement of the excise tax. Phoenix is using an outdated declaration of that status, especially considering the immense development in recent years, Manley said.
Plaintiff Mat Englehorn, owner of Angels Trumpet Ale House, deferred questions on the lawsuit to Manley. Englehorn and other plaintiffs also organized against a Roosevelt Row business improvement district that would have taxed property owners in the area to pay for improvements like beautification.
Gov. Doug Ducey signed a law to retroactively block that district. Phoenix sued the state over the law; the case is in Maricopa County Superior Court.
With the new development, Englehorn said he’s worried construction of the 19-story building next door will disrupt his restaurant to the point it won’t survive.
“I’m very concerned about our business,” he said.
Phoenix: Market can’t support high-rises
Phoenix approves tax-break development agreements under the process established by state law, Mackay said. And for residential projects, the city analyzes whether an economic incentive is necessary.
The market has proven in recent years that more typical “stick built” apartments can support themselves financially, Mackay said. But for high-rises like Derby Roosevelt Row, “the numbers just don’t pencil,” she said.
The agreements can come with additional provisions. Derby Roosevelt Row will designate 10 of its units as reduced-rent workforce housing to be capped at $840 per month for five years. The developer also must contribute $30,000 to a downtown parking study.
Phoenix also analyzes the financial impact to the project’s local school district for the loss of property taxes. The developer negotiates a contribution with the district individually, though the city isn’t privy to the amount, Mackay said.
But overall, the tax-break incentive often is abused, according to the Goldwater Institute. The group helped draft House Bill 2213 to close loopholes, which passed the Senate Finance Committee on Wednesday, Manley said.
Changes include requiring the government to calculate and collect lease payments from a tax-break recipient, instead of relying on the developer to do it. One of its prime provisions lowers the lease rates for certain projects, by 100 percent, which returns them to lease rates that were in effect prior to 2010.
The bill now moves to the full Senate for consideration.
Phoenix has an open call to accept proposals for government property lease excise tax projects in the downtown area. Recently, the developer of the former Circles Discs and Tapes building affirmed that it is seeking a tax break after tearing down part of the building last year.
City staff has not restarted negotiations on that project, Mackay said. The city halted initial talks after the demolition.
Republic reporter Mary Jo Pitzl contributed to this article.