Has East Valley lost the power of the perk?

Feb 8, 2010 — East Valley Tribune

Garin Groff

Feb. 6, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- East Valley cities have lost one of their most powerful tools to use taxpayer money to lure shopping centers, auto malls and other developments to their communities, city leaders and real estate experts agree.

Whether that's good for taxpayers is being hotly debated and will likely take years to know for certain.

For now, elected officials and economic development experts are studying a recent Arizona Supreme Court ruling that cities can only hand over taxpayer dollars to developments when the projects directly produce at least that much economic benefit. Indirect perks cannot be considered -- which likely would make it impossible to repeat many of the big incentives cities offered to projects that include Mesa Riverview, the Chandler and Gilbert auto malls, the planned Mesa Waveyard and more.

Critics of subsidies are certain to put any new incentives under a microscope to see if they comply with the ruling.

The first one of those incentives likely will involve Mesa's plans for a new Chicago Cubs spring training complex. Mesa will use $25 million to partially fund some facilities open to the team and the public, while car rental taxes and Cactus League ticket surcharges would kick in $59 million more.

Mesa says it will comply with the court ruling, which was triggered by a lawsuit from the Phoenix-based Goldwater Institute over incentives for a Phoenix development called CityNorth.

The institute is skeptical of the economic benefits that will come from the proposed $119 million Cubs complex, said Clint Bolick, director of Goldwater's Scharf-Norton Center for Constitutional Litigation.

"It looks like to us, to borrow an unfortunate baseball metaphor, to be a subsidy on steroids, and precisely the type of deal the Supreme Court was talking about when the Supreme Court described impermissible subsidies," Bolick said.

The court ruled unanimously that cities can no longer offer deals like the one Phoenix has for CityNorth. The city agreed to return $97.4 million in sales tax to the developer as long as it promised to build 1.2 million square feet of retail, restaurant and hotel space at 56th Street and the Loop 101.

To justify the subsidy, the developer promised to build 200 parking spaces for drivers who use commuting programs, plus another 2,980 spaces.

The city argued it was returning sales taxes that would not have been generated without the project, but Goldwater argued the deal was a subsidy that only benefited the developer.

The ruling could have had a devastating affect on Chandler had it been in place when the city was luring an auto mall in 2003-04, said Chandler City Manager Mark Pentz. The city secured Toyota, Nissan, Honda and Subaru dealerships with an estimated $40 million incentive that has provided the city with millions in sales tax revenue over the years.

"We would not have received that, had those dealers not come in," Pentz said. "It would have been a substantial loss of sales tax revenue."

Chandler offered the dealerships an agreement similar to the one between Phoenix and CityNorth: a 50 percent rebate on sales tax revenue, Pentz said. The city had been competing with Gilbert for the dealerships at the time, he said.

"The additional revenue far outweighed the temporary cost of providing the incentives," he said.

Gilbert Town Manager George Pettit said he's not sure if the town's past incentives, the largest being the $60 million Santan Motorplex deal, would meet the court's new standard. The ruling does not affect any past deals.

"We're certainly not going to spend a lot of time trying to figure that out," Pettit said.

The court's ruling will hurt Arizona's efforts to convince developers to build projects here instead of other states that can still offer that same incentive, said Mesa City Manager Chris Brady. Incentives are key to keeping the Cubs, which were considering a move to Florida, Brady said. Also, the perks played a role in the planned 1,200-room Gaylord resort, which was also eyeing a California location.

"At the end of the day, it does have an effect on Arizona's ability to attract large investments," he said. "Having done some of the largest deals in the state of Texas, I can tell it takes every tool in the toolbox to get them done."

Bolick agrees it will be harder to entice specific businesses. He likes that, however, saying the state and cities have helped only certain industries or developers at the expense of a broader economic development plan.

"I've been hearing some in the development community that say if we can't do incentives, then we'll just have to reduce taxes across the board," he said. "That's a light bulb going off."

Incentive restrictions are putting more of a burden on small exurban communities as opposed to centrally located larger cities, since many of the larger cities have already used incentives to attract projects, said Gary Birnbaum, a managing partner with law firm Mariscal Weeks who frequently works with Queen Creek.

With an increasing number of restrictions on incentives, "you put Arizona and its municipalities at a severe disadvantage when it comes to competing with other states. We have a severely low number of arrows in the quiver," Birnbaum said. "It's becoming increasingly difficult to find incentive devices that can be used. It's a little naive to think, if another city in another state can say I can provide $10 million to help you get here ... to think a company will say, 'Well, I'll come to Arizona because it has nice weather.'"

Some real estate experts say Arizona will have to retool economic development plans in light of the ruling. Too many incentives went to developments with low-wage jobs, said Mark Stapp, executive director of the Master of Real Estate Development Program at Arizona State University.

With fewer economic incentives available, Arizona should focus on educational and cultural amenities to set itself apart, he said.

"When we take away all of our tactical tools, what else do we have left?" Stapp said. "And that's why focusing on these other things makes it even more important."

Goldwater doesn't oppose all incentives. It supports reimbursing developers for public infrastructure and even is generally supportive of Mesa's incentives for a conference center at the Gaylord resort. The conference center is a legitimate need, Bolick said, that would likely be built by Mesa had a private company not offered to do so.

However, Goldwater's victory with incentives could trigger a lawsuit on what Bolick considers a similar perk that forgives property tax payments. Under one type of incentive, cities can buy land for new developments and lease it back to the owner for a nominal charge. Property taxes cannot be collected on government-owned land even when private developments are on the lots.

"At a time when cities are laying off police and firefighters and suffering from overspending and a lack of tax revenues, the notion of taking businesses off the tax rolls is just horrendous," he said. "I think that will probably be the next area of litigation for the Goldwater Institute."

Tribune reporters Amanda Keim, Blake Herzog and Ari Cohn and Capitol Media Services contributed to this story.

Past perks

Recent single-development incentive packages by East Valley municipalities:

Chandler: $40 million for Chandler Fashion Center approved in March 2000; estimated $40 million for Chandler Auto Mall approved May 2004.

Gilbert: $60 million for San Tan Motorplex approved in December 2003.

Mesa: $1.5 million for Superstition Springs Auto Mall approved in May 2001. Riverview: Rebate a portion of sales tax, up to $84 million.

Phoenix: $15.7 million for Chauncey Ranch Auto Boutique approved in April 2000.

Scottsdale: $28.75 million plus interest (estimated total with interest $62 million) for the Fashion Square-Nordstrom expansion approved in October 1996.

Tempe: $36.6 million for Tempe Marketplace approved in May 2004.

Newstex ID: KRTB-0132-41864896