City of Phoenix development plan facing lawsuit over illegal tax breaks

PHOENIX (AZFamily) — As cities work to attract more affordable housing, a lawsuit before the Arizona Court of Appeals this week could influence how municipalities incentivize downtown developments.

The lawsuit, filed by the Goldwater Institute, challenges the legality of a set of tax breaks meant to spur development in blighted areas.

The appeals court will hear arguments on Wednesday in a case involving a tax incentive deal between the City of Phoenix and the developer of Skye on 6th.

The 26-story high-rise, located just south of Roosevelt Row, opened last year. It features 309 luxury units, 10% of which are set aside for affordable housing.

Although privately operated, the City agreed to take ownership of the high-rise on paper for tax purposes, allowing it to be designated as a “government building.”

The arrangement, known as a Government Property Lease Excise Tax (GPLET) abatement, will save the developer about $7.9 million in property taxes while allowing it to maintain control of the facility, said Jon Riches, vice president for litigation for the Goldwater Institute.

“Public dollars should be used for public purposes. It shouldn’t be used to enrich private special interests,” Riches said. “Here you have the City of Phoenix picking winners and losers, enriching one private special interest at the cost to the rest of us and to all taxpayers.”

Under the arrangement, the city will take ownership of the building for eight years, leasing the facility back to the developer because government buildings are exempt from property taxes. After eight years, ownership reverts to the developer.

GPLETs are only available in designated “blighted areas.”

In response to the lawsuit, the City’s attorneys argued, “GPLET abatement is a key tool of economic development for Arizona’s municipalities. It allows municipalities to encourage development of high-value projects in areas in need of redevelopment, projects that would otherwise not be built.”

Riches said the economic data suggests otherwise. He said multiple projects that were promised GPLET subsidies later fell through, but the developments still went up.

“It’s not like these things are necessary for private development to happen. They’re certainly not necessary in one of the hottest real estate markets in all of Arizona,” he said.

According to court documents, the developer of Skye on 6th estimated that without the tax breaks, it would make at least a 5.56% profit. The company estimated the tax break would raise its profit margin by 1%, to 6.51%.

“It’s really just gravy for private developers,” Riches said.

The Goldwater Institute successfully blocked another GPLET arrangement in 2020, arguing it violated the Gift Clause of the Arizona Constitution and another provision that prevents the transfer of property to evade taxes.

In response, the City of Phoenix structured its Skye on 6th agreement differently, incorporating guarantees of a “direct minimum benefit” to the city.

The developer agreed to pay a minimum of $9 million in taxes, including $3.6 million in pre-lease construction taxes, $2.5 million in transaction privilege taxes during the lease, and at least $362,500 per year in property taxes after the initial 8-year term.

The developer, the Hubbard Street Group, also agreed to pay $65,000 per year in rent and reserve 10% of its units for “workforce housing” during the eight-year term. There is no requirement to continue providing affordable housing after the lease expires.

A ruling in Goldwater’s favor would set a precedent that “binds the whole state,” Riches said, and would apply to other cities that use GPLET deals like Tempe and Tucson.

“We think it could have broad statewide impact,” he said.

See a spelling or grammatical error in our story? Please click here to report it.

Do you have a photo or video of a breaking news story? Send it to us here with a brief description.

Copyright 2024 KTVK/KPHO. All rights reserved.