AZ Central – Win case or lose, CityNorth may be out millions

by Michael Clancy – May. 30, 2009 12:00 AM
The Arizona Republic

While the state Supreme Court is set to decide Monday whether to consider a legal challenge to Phoenix‘s economic-development agreement with the developer of CityNorth, much remains uncertain.

Did Phoenix violate the state Constitution because its sales-tax rebates in exchange for a public-parking structure essentially amount to a public gift to a private company, as an appellate court ruled?

Or is the agreement simply a legal and effective way to generate new tax revenue and jobs, as project supporters contend.

Although the courts have yet to define precisely what, or how much, constitutes an illegal gift in this case, one thing is increasingly clear: The dollar value of the agreement, gift or not, is decreasing with every passing day.

CityNorth, a retail and office project at the northwestern corner of 56th Street and Loop 101, was envisioned as a spectacular new center for Phoenix, with department stores anchoring a large retail core surrounded by hotels, offices and residential options.

In 2007, Phoenix agreed to pay CityNorth’s developer half the sales taxes collected from the project for 11 years and three months, up to $97.4 million, as a development incentive. In return, the developer would build 1.2 million square feet of tax-generating retail space with more than 3,000 free parking spaces in a garage that also would have a few hundred spaces for a park-and-ride lot.

The Goldwater Institute, a conservative think tank, filed suit in 2007, saying the agreement was illegal.

Now, as the case winds through the courts, the city estimates that the project is two years behind schedule. About 180,000 square feet of retail space opened in November, but a second phase of development that originally was scheduled to open this fall has not yet begun.

The result is that the value of the agreement is now closer to $62.2 million when two years of inflation are taken into account, attorneys for the city and developer say.

Furthermore, CityNorth would have to become the most successful retail operation in the state in order to generate the nearly $100 million in tax sharing originally set as the cap, an Arizona Republic analysis indicates.

Retailers would have to sell $9.74 billion in goods and services over the length of the agreement.

In terms of a monthly sales figure, the standard measuring gauge for shopping-center sales, CityNorth would have to sell $727 worth of goods per square foot.

Only one shopping area in the state, the relatively small Biltmore Fashion Park, achieves those kinds of sales. Biltmore pulled in $837 per square foot in 2008, according to the annual report of the Macerich Co., part-owner of the center. Scottsdale Fashion Square, with a mix of stores similar to what CityNorth expects, brings in $618 a square foot.

But the clock has not yet started to run under the terms of the agreement, and Phoenix hasn’t paid the developer a dime. The developer has to complete 1.2 million square feet of sales-tax-generating space before the sales-tax sharing begins. With Phase 2 containing the biggest portion of retail in the development on hold and the recent withdrawal of a Nordstrom department store, meeting that benchmark could be years away.

If the appellate ruling is allowed to stand, the financial implications would be even more dramatic. Full development of CityNorth may never proceed, which proponents of the economic agreement say could ultimately cost the city millions in lost sales-tax revenue.

“Phase 2 is not financeable (without the sales-tax rebates),” Deputy City Manager David Krietor said.

Developer John Klutznick of the Klutznick Co., following the Appeals Court decision, suggested that the entire scope of the project could change. The tax-sharing agreement was expected to defray the cost of the parking structure that would increase the retail density of the project and theoretically attract more shoppers.

Najla Kayyem, vice president of marketing for Related Urban Development, Klutznick’s partner in the retail section of CityNorth, said the developers are eager to get Phase 2 under way. She said the companies remain committed to the project, despite the slowdown.

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