Public entities often strike deals with developers and other private interests to bring commercial projects to life. So, when the City of Phoenix partnered with some Chicago-based developers to build a large, mixed-use development in north Phoenix, neither party anticipated that it would spark a lawsuit that would change the face of development in Arizona. But that’s exactly what happened with CityNorth, a 144-acre project featuring shopping, dining, luxury rentals, and upscale residences.

CityNorth’s developers entered into a development agreement with the City of Phoenix specifying that each would receive certain benefits associated with the project. As a financial incentive, the City of Phoenix agreed that the developers would receive half of the sales taxes generated by the project-not to exceed $97.4 million over11 years. For its benefit, the City of Phoenix would get 2,000 public parking spaces, 200 “exclusive use” parking spaces for commuters, and the other half of the sales tax proceeds. All parking spaces would be set aside for the city for 45 years.

Invoking the Arizona Gift Clause
All seemed well-until a group of private taxpayers filed a challenge against the City of Phoenix that made it all the way to the Arizona Supreme Court. In Turken v. Gordon, the plaintiffs argued that the CityNorth agreement violated the state constitutional provision commonly referred to as the Gift Clause. In essence, this provision prohibits using public money to benefit private enterprise when the benefit to the private interest far exceeds the public benefit.

Before now, Arizona courts applied the Gift Clause by analyzing whether the public money spent was for a “public purpose.” The court’s interpretation of “public purpose” has focused in large measure on balancing the general public benefit received v. the public funds spent.

CityNorth Agreement Stands, But Major Changes to Law Imposed
The Arizona Supreme Court’s decision allowed the CityNorth development agreement to stand; however; the court imposed a dramatically new analysis for all future deals. Now, Arizona law requires that a municipality involved in a development deal receive close to-if not equal-value for what it gives as an incentive to a private enterprise. In the CityNorth project, the court decided that the City of Phoenix’s receipt of a few thousand parking spaces did not equal the $97.4 million to be received by the private developers.

In addition, the court rejected the benefit of the City of Phoenix’s new tax revenue, saying that under a Gift Clause analysis, it didn’t qualify as a specific enough benefit to the public. Before this, it was largely left to the city or town to identify what served a “public purpose” or “public benefit” to satisfy the requirements of the Gift Clause. Now, such development deals must offer a more tangible, measurable benefit to the governmental entity equal to the incentive offered to any private entity.

In many ways, this ruling makes life easier for all parties in such deals. It’s likely that all agreements will now explicitly identify the equality of the fair market value of the tangible benefits flowing to each party. The full impact of this case remains to be seen, but there is no doubt that it has altered how future development deals will be done in Arizona.