Brnovich: ASU unlawfully giving tax money to developer for hotel

By: - April 4, 2019 12:27 pm

The light rail bridge crossing Tempe Town Lake. Photo by Alan Stark | Flickr/CC BY-SA 2.0

A new filing in an on-going lawsuit against Arizona State University by the state’s Attorney General claims the school is in violation of the Arizona Constitution’s gift clause.

“This case is about ending the Arizona Board of Regents and Arizona State University’s practice of picking winners and losers in the highly competitive properly [sic] development business,” Brnovich wrote in the filing. “Some of the largest existing and planned construction projects in Tempe will be built by private developers, leased back to the private tenants for the tenants’ uses, and yet produce no property tax revenue.”

The lawsuit primarily focuses on one deal by ASU and Regents, a hotel and conference center project in Tempe by the $2 billion Omni company.

ASU sharply criticized Brnovich and pledged to fight the lawsuit.

“As in the past, neither the law nor the facts are on the side of the Office of the Attorney General,” ASU said in a statement emailed to the Arizona Mirror. “ASU will not be distracted from its focus on providing a world-class education to the people of Arizona, creating economic opportunities around the state and country, and advancing knowledge for the good of humanity.”

“An approximately $28 million investment in the construction of a conference center and parking garage is not a gift,” ASU’s statement to the Mirror said. “That investment will yield revenue of approximately $140 million for the university.”

ASU ended its statement by saying that “selective cherry-picking of facts does not change any of that.”

The project was controversial when it went before the Tempe City Council last year with critics like State Rep. Athena Salman, D-Tempe, and Sen. Juan Mendez, D-Tempe, calling for a delay on a vote for a $21 million tax break for the project.

The 30-year break on bed- and sales taxes was approved by the council on a 6-1 vote. Because ASU owns the land, the property also will be exempt from property taxes.

ASU has always contended that it is working within its rights, and often claim that the deals help bolster university funding in the face of cuts by the legislature.

The Attorney General’s new filing refutes those claims by ASU and says that the project is an “immediate, substantial drain on ASU funds that would otherwise be available for reducing tuition and providing instruction.”

Arizona’s Gift Clause

The new filing claims that the way ASU and ABOR entered into the agreement with Omni is in violation of a section of the Arizona Constitution that prohibits the state, counties, cities, towns and more from giving or loaning credit to a company as a donation or gift.

That constitutional provision is commonly known as the “gift clause,” and the Arizona Supreme Court ruled in 2010 that governmental entities must receive a “direct benefit” from subsidies given to corporations.

The heart of Brnovich’s case against ASU and ABOR violating the state constitution comes down to four major points.

  1. ABOR waived its policy that requires a public auction for property it sells and instead authorized ASU to lease the land to a private business at a “fair market value.” Brnovich’s office claims that the discount on the lease price was close to $8.9 million.
  2. ASU agreed to pay $19.5 million for all the construction of the project.
  3. ASU agreed to pay $8 million for parking spaces for the project.
  4. ASU is giving Omni the option to buy the land for $10.

“These deals purport to shield the private companies from paying property taxes that would otherwise be assessed,” the filing states.

In the filing, the Attorney General’s office gave examples of similar hotel and conference center properties that do pay property taxes.

The Camby Hotel in Phoenix paid nearly $900,000 in 2018, and The Renaissance Glendale paid $968,000. As it stands, the Omni would not pay any property taxes, because it will be built on land that ABOR owns.

Additionally, the AG’s Office found that the $85 per square foot price that ASU used to assess the value of the Omni property doesn’t line up with other nearby properties. Parcels for two hotels nearby were sold for $216 per square foot and $212 per square foot within three months of when the Omni deal was executed, Brnovich alleged.

Brnovich’s office also found it odd that ASU will only be allowed to use the conference center that is a part of the deal for only seven days out of the year.

The filing also mentions a development agreement between ABOR, ASU and Tempe that the Mirror has previously written about.

Brnovich is asking the court to subject the Omni project to taxation because ABOR has used its powers improperly.

ASU and ABOR did not respond to a request for comment.

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Jerod MacDonald-Evoy
Jerod MacDonald-Evoy

Reporter Jerod MacDonald-Evoy joined the Arizona Mirror from the Arizona Republic, where he spent 4 years covering everything from dark money in politics to Catholic priest sexual abuse scandals. He brings strong watchdog sensibilities and creative storytelling skills to the Arizona Mirror.