Rio Nuevo Contract Dispute Pits Low Income Housing Developers Against Each Other

Rio Nuevo Contract Dispute Pits Low Income Housing Developers Against Each Other

By Terri Jo Neff |

A contract dispute between two companies involved in co-developing a low-income housing project to support Tucson’s Rio Nuevo redevelopment effort will be argued before the Arizona Court of Appeals next month.

The appeal stems from a 2021 ruling by a Pima County judge who dismissed two breach of contract related claims against Gorman & Company Inc. after the company announced it was not paying any of a nearly $1.9 million development fee to The Gadsden Company LLC, even though Gadsden performed the services required in the companies’ contract.   

Gadsden argued that the contract called for Gadsden to receive “up to 40 percent” of a guaranteed $1,879,252 development fee paid by the Investor Fund which financed the project. However, a Pima County judge dismissed the lawsuit in 2021, ruling Gadsden did not have a proper claim to any of the fee money.  

Oral arguments will be heard by a three judge appellate panel on July 13.

Court records show the Investor Fund managed by the non-profit Enterprise Community Investment pledged more than $16 million for a 99.99 percent stake in the Tucson project built on land owned by Mission District Partners LLC, a Gadsden affiliate. The developers kept a 0.01 percent interest.

Gorman & Company regularly develops affordable housing properties through the

federal Low Income Housing Tax Credit program. It was contracted by West End Station LLC for architectural and construction services for the planned project.  

The legal dispute centers on a provision of a June 2017 contract between Gorman and Gadsden which states Gorman is entitled to the “first” 60 percent of the development fee. Of that, $1,281,218 was to be earned at four milestones related to the progress of the project.

The contract also includes language furthering defining the split between the two companies. It also allows Gorman to defer some of the development fees and have it applied instead to cost overruns which Gorman was responsible for in its contract with the Investor Fund.  

Various milestones were achieved in June 2017, March 2019, and February 2020. Some of the fees was deferred by Gorman, which reported about 43 percent was deferred and only 57 percent taken in cash. None of it went to Gadsden.

“Gorman was free to receive those dollars in cash, defer them, or both,” Gadsden’s attorneys argue. “But once Gorman receives or defers sixty percent its entitlement is satisfied.”

Gorman’s attorneys disagree, arguing in a brief filed with the Arizona Court of Appeals that financial issues with the housing project prevented Gorman from hitting the 60 percent threshold and keeping Gadsden from receiving any share.

“The agreement clearly and unambiguously places two conditions on Gadsden’s receipt of any share of the development fee,” Gorman argued. “When cost overruns prevented those conditions’ fulfillment by requiring cash payments of the fee to be deferred to keep the project solvent, there was simply no cash paid, non-deferred portion of the fee left for Gadsden to receive.”

The Pima County judge dismissed the breach of contract claim as well as Gadsden’s claim of breach of the covenant of good faith and fair dealing. To prove such a claim, Gadsden argued all it must show is the existence of a contract and that Gorman manipulated the cash and deferred fee split to “impair the right of the other to receive the benefits which flow from their agreement or contractual relationship.”

Mission District was paid $1.75 million for the property. Gadsden was also paid $470,000 at closing for development costs expended before the deal.