Many in the real estate
community have been awaiting the final decision regarding the CityNorth project.
On January 25, 2010, the Arizona Supreme Court issued its decision, a thorough
analysis of which is a necessity for any developer or municipality that intends
to utilize development agreements in the future. See Turken et al. v. Phil
Gordon et al., 223 Ariz. 342, 224 P.3d 158 (2010).
CityNorth is a large
mixed-use development in the Desert Ridge master-planned community that, when
completed, will consist of retail, residential and commercial uses. To entice
CityNorth to develop its project in Phoenix, the City of Phoenix entered into a
Parking Space Development and Use Agreement with CityNorth. The Development
Agreement consisted of the dedication by CityNorth of 3,180 public parking
spaces, including at least 200 park-and-ride spaces, that would be free to the
public for 45 years. In return, the City would pay CityNorth for the use of such
parking spaces in an annual amount equal to 50% of the annual sales tax
collected by the City from the retail portion of the project for a period not to
exceed 11 years 3 months, or until the City had paid $97.4 million. The payments
were intended to approximate the market rates for the 45 years of use of public
parking.
A collection of taxpayers
and businesses filed suit against the City of Phoenix, and CityNorth intervened.
The plaintiffs argued that the Development Agreement violated the Equal
Privileges and Immunities, Special Laws, and Gift Clauses of the Arizona
Constitution. The trial court granted summary judgment in favor of CityNorth and
the City, finding in part that the Gift Clause was not violated since there was
adequate consideration and various public purposes were being served.
On appeal, the Arizona
Court of Appeals found, among other things, that the Development Agreement
violated the Gift Clause to the extent that the City made payments for
non-park-and-ride spaces (the Court of Appeals declined to consider the other
possible violations of the Arizona Constitution). In its ruling, the Court of
Appeals adopted a three-factor standard for determining whether there is a Gift
Clause violation: whether a public purpose is being served; whether the
consideration is adequate; and whether any private or personal interest is being
served. The Court of Appeals found that the 200 parking spaces set aside for
park-and-ride purposes satisfied these tests, but that the remaining almost
3,000 parking spaces did not, since they would be used by the public only in the
context of being private customers of CityNorth. Thus, the Court of Appeals
reversed the trial court.
The Arizona Supreme Court
reversed the appellate court’s decision and affirmed the trial court’s dismissal
of the Gift Clause claim. The Court found that the appellate court had misread
the precedent, as the test for a Gift Clause was only a two-prong test,
consisting of whether (i) the expenditure served a public purpose and (ii)
whether the payment to the private party was “grossly disproportionate” to the
consideration received by the public. The Court found that the public purpose
requirement was satisfied in this case, due to the direct and indirect public
benefits involved. Also, courts will generally defer to the government’s
determination of whether there is a public purpose, unless it has
“unquestionably abused” its discretion.
However, the Supreme
Court held that indirect benefits (such as sales tax revenues to the City or
increased jobs) could not be considered for purposes of determining the adequacy
of consideration. Only benefits that are bargained for by the parties, and that
the private party promises to provide, constitute consideration. The Court found
that the only consideration under the Agreement was the right to use the parking
spaces once they were built. CityNorth and the City had argued that the
construction of improvements also constituted consideration, but the Court
dismissed this argument, since, under the Development Agreement, CityNorth had
not promised to build anything. Only if CityNorth built the improvements,
including the parking garage, did the reimbursement arrangement between the
parties arise. The Court stated that it doubted the objective fair market value
of these parking spaces – particularly since the use of 2,980 spaces was
non-exclusive – would equal the maximum amount of $97.4 million promised by the
City, although that would be a determination for the trial court.
In spite of these
findings, the Court held that this application of the law (i.e., that indirect
benefits could not be considered in measuring adequacy of consideration) could
only be applied prospectively, since the law had been previously unclear. Thus,
the Supreme Court reversed the opinion of the appellate court, affirmed the
dismissal of the Gift Clause claim, and remanded the case to the appellate court
to consider the other two Constitutional claims alleged.
The Arizona Supreme
Court’s decision apparently will not apply to development agreements already in
existence, rather, only those entered into after January 25, 2010. While the
facts of this case are rather unusual, in terms of how the Development Agreement
was structured, some practice points can be derived from the decision.
Specifically, development
agreements need to clearly express the benefits that the municipality or public
entity will receive under the agreement. In addition, the obligations of the
developer need to be promised, not open-ended or discretionary. Obviously, this
raises some concerns given the respective timing of when a development agreement
is entered into versus when financing is obtained. However, this goal could
possibly be achieved by promising to commence construction subject to
satisfaction of certain conditions precedent; of course, this approach is not
addressed by the Court and thus is not “guaranteed” to comply with its decision.
■
These materials
are designed to provide general information prepared by professionals in regard
to the subject matter covered. It is provided with the understanding that the
author is not engaged in rendering legal, accounting, or other professional
service. Although prepared by professionals, these materials should not be
utilized as a substitute for professional service in specific situations. If
legal advice or other expert assistance is required, the service of a
professional should be sought.
