A state judge on Tuesday threw out much of the challenge by Attorney General Mark Brnovich to the power of state universities to lease out the land they own for private, for-profit operations.
In an extensive ruling, Tax Court Judge Christopher Whitten said Arizona law gives the Board or Regents the authority to buy, hold and sell real estate. That power, the judge wrote, specifically includes the power to enter into leases of the land it owns.
And in this case, Whitten said, the deal to create a 330-room Omni hotel and a 30,000-square-foot conference center on land that is owned by Arizona State University clearly is a lease.
The judge also would not let Brnovich claim that, by seeking to void the deal, he is enforcing laws to ensure that all property is being properly taxed.
“As a matter of law, the property on which the Attorney General seeks to collect tax is constitutionally exempt from taxation,” Whitten wrote, because it belongs to the universities and the regents. “There is no tax owing, and nothing for the Attorney General to enforce.”
Anyway, the judge said, Brnovich’s power under the tax enforcement statutes allow him only to “prosecute” tax laws.
“The power to ‘prosecute’ is different from the power to ‘initiate’ or ‘commence’ an action,” Whitten said.
But the judge left intact one part of the lawsuit, at least for the time being. Whitten said he will give Brnovich the chance to argue that the deal violates the Gift Clause of the Arizona Constitution.
That, however, could depend on the judge deciding the question of what did Brnovich know about the plan for the hotel, when did he know it, and did he wait too long to sue.
But Larry Penley, who chairs the Board of Regents, said he believes that the judge ultimately will rule against Brnovich on that issue, too.
“There is no Gift Clause violation because of the significant benefits of this project to students, Arizona State University and the city of Tempe,” Penley said in prepared comments.
The ultimate outcome of the lawsuit has statewide implications. If Brnovich wins, it would undermine similar deals where universities lease out their tax-exempt property for commercial development.
In the lawsuit filed earlier this year Brnovich argued that the practice of the board in removing property from the tax rolls and leasing it for private development is not only unfair to other taxpayers but also unconstitutional. He said the net result is that everyone else in the taxing district, whether city, county, school or community college, has to pay more to make up for what is avoided by the businesses that benefit.
Most immediately he sought to block any move to exempt the parcel that ASU owns on the southeast corner of Mill Avenue and University Drive in Tempe from taxes.
In the lawsuit, Brnovich acknowledged that state lawmakers have allowed some situations where property can be taken off the tax rolls in exchange for excise tax payments by the commercial entity. And he said universities are specifically authorized to operate research parks where private companies engaged in educational or research activities on university campuses pay a reduced property tax.
“ABOR is not, and never has been, authorized to rent out its tax-exempt status so that private real estate developers can build large buildings for private tenants while evading property taxes,” Brnovich argued.
He also said that ASU is paying $19.5 million to build the conference center but will be allowed to use it only seven days a year. And Brnovich said ASU is spending about $30 million to build a 1,200-space parking garage, with Omni getting exclusive use to 275 of the spots, a move he contends is a gift worth about $8 million.
Whitten said that at least part of Brnovich’s argument is based on his claim that the regents can lease out property only when it’s done “for the benefit of this state and for the use of the institutions under its jurisdiction.”
“This logic is dubious,” the judge wrote. He said the authority of the board to sell and lease its property necessarily implies the authority to surrender the use of the property to someone else in exchange for cash or some other value.
“As long as the proceeds are put to the use of the universities, that provision is satisfied,” Whitten said.
The judge also pointed out that the Legislature has never defined whether a deal is “for the benefit of the state.” And that, he said, means it’s left to the discretion of the regents.
While Whitten’s ruling leaves intact the Gift Clause challenge, that does not mean Brnovich ultimately will be able to actually make that argument.
The judge said that such claims have to be brought within one year of any illegal payment. And Whitten said Brnovich claims he only knew the details within a year before filing suit.
Penley, in his statement, sniffed at that contention.
“This seems unlikely given that the Omni project has been publicly discussed for years before he filed his lawsuit, has gone through multiple public approval processes and has been covered in the press dozens of times,” he said.