The state Court of Appeals has thrown some new roadblocks in the path of cities that want to help subsidize new retail and office construction.
In a decision Tuesday, the court declared illegal a deal between Phoenix and the developers of the CityNorth project that could have diverted up to $97.4 million in revenue to the project.
Judge Patrick Irvine, writing the unanimous ruling, acknowledged that the payments would be used to provide some parking spaces in a garage that could be used by the public. But Irvine said the real beneficiary would be CityNorth, which would have parking for its retail customers.
And that, the court concluded, violates a constitutional provision that makes it illegal to give public dollars to private individuals or groups.
Tuesday's ruling, unless overturned, is likely to have broad impact.
Deputy Phoenix City Manager David Krietor said the agreement was designed to lure retail stores - and the sales taxes they generate - into Phoenix. He said that the pact is not unique and was modeled after similar pacts between cities and developers.
Those kinds of deals would now be considered illegal if a court rules that they are designed more to benefit the developer than the public interest.
CityNorth agreed to construct 1.2 million square feet of retail, restaurant and hotel space on the site at 56th Street and the Pima Freeway leg of Loop 101, along with parking garages.
In exchange, the city agreed to pay a "use fee" for those parking spaces, equal to one-half of what the project generates in sales taxes, for up to 11 years and three months or until the payments total $97.4 million.
The lawsuit, filed by the Goldwater Institute on behalf of some business owners located elsewhere, charged that the parking space rental agreement was little more than a method of subsidizing construction of a luxury mall that would benefit only one developer. A trial judge disagreed, concluding that the free use of the parking spaces, coupled with the sales tax revenue, outweighed any costs.
Irvine acknowledged that the payments would come from additional taxes generated from the development. But he pointed out that the agreement has other terms that make the deal more of a benefit to CityNorth than Phoenix.
For example, the city's use of those parking spaces would not be exclusive and there could be times where the garage would be filled with customers of CityNorth tenants.