The city of Phoenix will be in court on Wednesday over a lawsuit against its arrangement waiving $8 million in property taxes for a private real estate developer downtown.
The Arizona Court of Appeals will hear the case, Paulin v. City of Phoenix. The Goldwater Institute filed the lawsuit in May 2022.
Goldwater Institute Vice President for Litigation Jon Riches claimed the property tax exemption violated both the Arizona Constitution and court precedent prohibiting the use of taxpayer dollars to benefit private interests.
“Arizona courts have been clear time and again: taxpayer dollars are to be put to public use, not to benefit private, special interests,” said Riches.
Phoenix waived the property taxes on a downtown high-rise development project by assuming the legal title from real estate developer Hubbard Street Group and leasing the property back to them. The city did so in order to capitalize on Arizona’s Government Property Lease Excise Tax (GPLET) abatement provisions. In so doing, the city of Phoenix ensured the Hubbard Street Group protection would be saved from having to pay millions in property taxes for the term of the lease — eight years. After that better part of the decade is up, the city will return the title back to the developer.
The Goldwater Institute maintains that this workaround adopted by the city amounts to, essentially, tax evasion: an abuse of GPLET and a loss of a revenue stream at a burden to other taxpayers.
As reported previously, the city of Phoenix assumed ownership after it declared the developer’s project, “Skye on 6th,” to be part of a slum or blighted area. As part of their arrangement with the city’s assumption of their legal title to the development, Hubbard Street Group agreed to pay over $500,000 in rent to the city, $30,000 to two school districts, and dedicate 10 percent of its residential units to workforce housing.
Skye on 6th is marketed as “the height of luxury.” The most affordable rooms (studios listed at 400 square feet) start at $1,500 a month. The most expensive rooms are on their penthouse floor, where rent starts at $4,500 a month and goes up to over $6,700 a month.
The project cost nearly $88 million to develop.
One of the represented taxpayers in the case, Bramley Paulin, successfully sued the city last year, Paulin v. Gallego, when he challenged the city’s restriction on temporary signage for the Super Bowl LVII. The Maricopa County Superior Court ruled the city’s resolution on signage was an unconstitutional restraint on free speech and delegation of government power.
Paulin and the other taxpayer in the case, Mat Englehorn, reside and own businesses in the Phoenix area.
The oral arguments are scheduled to occur on Wednesday at 9:30 am.
In 2020, the Maricopa County Superior Court ruled against a similar GPLET arrangement between the city of Phoenix and another high-rise developer.
In his ruling, Superior Court Judge Christopher Coury questioned whether GPLET could be relevant any longer given the tendency for abuse.
“This judicial officer questions whether the death knell for the GPLET’s usefulness has rung,” wrote Coury.
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A swim coach is challenging the city of Scottsdale over its apparent favoritism in granting a private swim club exclusive access to city pools. The Goldwater Institute and American Freedom Network have joined the fight; they say the city’s actions have created a monopoly on public resources, and therefore are a violation of the Arizona Gift Clause. The coach backed by Goldwater, Joe Zemaitis, founded and oversees a K-12 swim club in the Metro Phoenix area called Swim Neptune. According to Zemaitis, their club has been attempting to gain access to Scottsdale public pools since 2007 – well over a decade.
Swim Neptune was never granted entry to the pools. However, Scottsdale always allowed entry for one private, city-sponsored team: the Scottsdale Aquatic Club. What’s more, that swim club reportedly received entry at a greater discounted rate. Despite Swim Neptune offering far greater compensation for pool access, the city would only admit the Scottsdale Aquatic Club. The Goldwater Institute claims that this violates Arizona’s Gift Clause prohibiting the government from giving gifts to private entities.
In a press release issued by the Goldwater Institute, Zemaitis summarized the city’s various methods of rejection in response to their club’s many requests for access.
“Since 2007, we’ve been aggressively pursuing space in the Scottsdale pools,” said Zemaitis. “They seem to reinterpret the rules and rewrite the rules every time we are eligible under their criteria, they change them again to try to freeze us and our residents out, and it’s simply not fair.”
In a press release, the Goldwater Institute said that families have suffered due to the city’s actions.
“Scottsdale’s unconstitutional actions against Swim Neptune are preventing the swim club’s Scottsdale families from using facilities that they’re already paying for with their taxes. That means that these families have to drive to surrounding cities to get swim lessons, eating up more time and money for something they should be able to get in the town they live in. One of those kids, 14-year-old Ethan Mindlin, was cut from the Scottsdale Aquatic Club when he was younger—and today, he’s won an Arizona state championship for swimming with Swim Neptune. But his family has to drive 45 minutes each way to take him to practice because Scottsdale has turned their back on him.”
In an interview with AZ Free News, National Litigation Director for the Goldwater Institute Jon Riches shared further insight about the relationship between the city and Scottsdale Aquatic Club.
“The team’s been there for several decades. I think part of it is sort of bureaucratic inertia. The city and this particular team always had this strange, cozy relationship,” said Riches.” The city wants to continue to pursue it at the exclusion of other groups. I don’t know exactly the ‘why.’ The most dangerous phrase in the English language is, ‘We’ve always done it this way.’”
Riches explained that Zemaitis reached out to the Goldwater Institute years ago when his issues with the city were happening initially. At the time, their team referred Zemaitis’ case to the American Freedom Network – Goldwater’s network of pro-bono attorneys. Their attorneys sent the city of Scottsdale a letter, which prompted the city to put the pools out to bid.
Zemaitis and Swim Neptune didn’t receive relief at that point, because the city quickly canceled the bid and awarded Scottsdale Aquatic Club access. That’s when their case first went to trial.
After the case was appealed, Goldwater stepped in. Their team recognized similar patterns of potential Gift Clause violations. Riches stated that this case tackled a new issue presented under the clause: public resources versus expenditures.
“The government can’t spend public expenditures on private purposes,” asserted Riches. “[This case explores] what the test [is] for public resources for the exclusive benefit for private parties.”
Riches shared that they may receive a decision by the court by the end of this year, or early next year at the latest.
“This isn’t fair for [Zemaitis] or his kids. If the city can give special interests and treatment in this case, they can give anybody special treatment,” said Riches.
Corinne Murdock is a contributing reporter for AZ Free News. In her free time, she works on her books and podcasts. Follow her on Twitter, @CorinneMurdock or email tips to corinnejournalist@gmail.com.
