Lawsuit against city’s use of controversial incentive moves forward

The GPLET tax incentive makes it easier for developers to build, with controversial results. (Nicole Neri/DD)

A lawsuit threatening the city’s use of a popular tax incentive which has increased downtown density is moving forward following the ruling of a Maricopa County Superior Court Judge Wednesday.

The complaints, filed by Angel’s Trumpet Ale House owner Mat Englehorn, allege the city violated several clauses of the Arizona Constitution and other Arizona Statutes when it granted a Government Property Lease Excise Tax (GPLET) agreement to a 19-story development which will be built in a vacant lot behind Angel’s Trumpet Ale house.

The city granted the tax incentive agreement to the developer in March of last year in exchange for 5 percent of its units being sold at workforce housing rates as opposed to market rates.

The city of Phoenix filed motions to dismiss the complaints in the suit individually. Judge David Gass granted the city’s request on the Special Laws clause, the Uniformity clause and the competitive bidding statutes. He denied three, allowing complaints against the Gift clause, the Conveyance clause and the blighted and slum area definition to move forward in court. Both sides will appeal the hearing’s results where the legality of the various GPLET components will be further argued.

If the city eventually loses to Englehorn, it would no longer be able to use the advantages of GPLETs to attract development.

RELATED: Lawsuit could threaten future of GPLET tax incentives

The foundation for a GPLET tax incentive is a provision in Arizona’s tax code that exempts land owned by governments from property taxes. GPLET allows the city to take over the rights to a piece of land and lease it back to the developer at a significantly reduced rate that replaces the normal property tax.

In agreements like the one given to Amstar/McKinley LLC, the developer pays no tax for the first eight years of the agreement. Goldwater Institute lawyer Jim Manley represented Angel’s Trumpet and said the provision violated the Gift clause of the Arizona State Constitution. The clause states no government state or local can give financial gifts to private entities.

The city’s attorney Mary O’Grady argued it wasn’t directly “making payments to private entities,” but Gass did not dismiss the complaint.

Unlike normal property taxes, which are based on the land’s value, GPLET rates are based on the size of a property and the buildings on it. For agreements signed before 2010, the GPLET rate will actually decrease over the duration of the lease.

Manley said the lowering and suspending of taxes violated the Uniformity clause. The clause states “taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax.” However, this only applies to normal, or ad valorem, property taxes, so Gass ruled in the city’s favor and dismissed the complaint.

Manley also questioned the agreement’s compliance with the Special Law and Conveyance clauses. The Special Law clause prevents “local or special law” from being made to benefit a private entity, but a ruling involving the city of Tucson found it did not apply to municipalities so the complaint was thrown out.

Judge Gass did not grant the city’s motion to dismiss the complaint on the Conveyance clause. While city-owned properties are exempt from property taxes, Manley said they cannot be transferred to the city’s ownership for the purpose of not paying property taxes. If this is found to violate the Conveyance clause later in court it could prevent the city from using the lure of lower property taxes to attract developers.

Englehorn’s complaint that the agreement violated state laws regarding competitive bidding was thrown out under the same grounds as the complaint against the Special Law clause.

One of the complaints central to downtown tax breaks in particular challenges the city’s definition of what constitutes a blighted area, where complete abatements of property taxes for a period of time are allowed. In 1979, downtown was designated as a blighted area and the city used that definition to build more tax incentive properties in the area, despite the growth it has seen in recent years.

“How is a designation from 39 years ago rational in this case?” Gass asked O’Grady.

Gass did not dismiss that complaint, allowing it to move forward in court.

If the blighted definition of downtown Phoenix changes, developers could lose eight year abatement periods entirely.

Contact the reporter at dmperle@asu.edu.