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Regents ask judge to toss lawsuit alleging ‘gift clause’ violation


Attorney General Mark Brnovich is making a last-ditch effort to quash a proposal to create a 330-room Omni hotel and a 30,000-square-foot conference center on land that is owned by Arizona State University.

Brnovich contends that the deal violates the Gift Clause of the Arizona Constitution. That’s based on the idea that the Arizona Board of Regents is effectively providing a subsidy to the private developer by paying for a conference center that the university would be able to use just seven days a year.

There’s also a separate legal question of having what amounts to a tax exemption for the hotel because it is being built on tax-exempt university property.

The outcome of the litigation could have statewide implications, governing future deals between state universities and commercial enterprises.

In this March 22, 2018, photo, Attorney General Mark Brnovich speaks at the Arizona Technology Innovation Summit in Phoenix. Brnovich wants the Arizona Supreme Court to overturn a 1960 ruling that limits the power of the attorney general. (Photo by Gage Skidmore/Flickr)

 Attorney General Mark Brnovich (Photo by Gage Skidmore/Flickr)

But Brnovich first has to get into court to make those claims.

At a hearing on Friday, attorney Paul Eckstein who is representing the regents, urged Tax Court Judge Christopher Whitten to throw out the case, saying that the state waited too long to file suit.

He presented evidence that it was public knowledge as far back as 2016 that the deal was in the works when elements of it were discussed at a legislative hearing. But the state did not file its first complaint until January 2019; an amended complaint with more claims came three months later.

What makes that important is that Arizona law requires such lawsuits to be filed within a year of the action being challenged.

Assistant Attorney General Beau Roysden told the judge that clock starts running when the person filing suit realizes the damage and knew – or should have known – the cause of the damage.

“We did not realize we were damaged until November of 2018 when we actually had attorneys go in and do research,” he told the judge. That makes the lawsuit timely, Roysden said.

He did not dispute that Rep. Athena Salman, D-Tempe, wrote an op-ed piece in January 2018 decrying what she said were improper tax breaks “in a deal practically no one has heard about.” But Roysden said that “did not make it unquestionable” that the plan was illegal.

The outcome of the legal battle, which could go all the way to the Arizona Supreme Court, is about more than the hotel and conference center. If Brnovich ultimately prevails it could call into question other similar deals entered into between the state’s three universities and private developers.

There are two basic legal issues.

One is the payment of tax dollars to private companies, the Gift Clause issue. In this case, Arizona State University is paying $19.5 million to build the conference center even though the contract allows the school to use it just seven days a year. There is also the claim by Brnovich that ASU agreed to pay about $30 million to construct a 1,200 spot parking garage but will “gift” Omni 275 of the spots that the hotel gets to use exclusively and keep the revenue from the spaces.

And then there is the fact that by having the hotel built on property owned by the university it escapes having to pay property taxes.

There will be some “payments in lieu of taxes.” But Brnovich contends that will still leave schools and local governments short of what they would otherwise have received if the property were on the tax rolls the same as any other commercial development.

Whitten already has rejected the contention that property taxes were being avoided as the land in question, being owned by the regents, already is exempt from taxes. An appeal is likely.

That still leaves Whitten to decide the Gift Clause claim. But that goes to the question of what did Brnovich know about the deal, and when did he know it.

Roysden told the judge that the deal wasn’t completed until February 2018. That, he said, made the January 2019 complaint within the one-year legal window to file suit. And he dismissed arguments made by the regents that somehow the publicity surrounding the plan in the months and years before should have triggered the knowledge that something potentially improper was taking place.

“They kind of right now are saying any time the AG’s office knows about any deal whatsoever they should immediately investigate,” Roysden said.

“We can’t presume that every public entity, city, county, town is acting in bad faith,” he explained, saying the presumption is that, absent evidence to the contrary, that governments are obeying the law. And Roysden said it would be “impractical” for his office to constantly monitor every land deal entered into by every government agency.

But Eckstein said this isn’t about requiring the AG’s office to monitor everything.

“This transaction was talked about at the Board of Regents level for a year and a half or so before the transaction was signed on Feb. 28, 2018,” he told Whitten. That included a November 2016 meeting of the regents where he said key details – including the $19.5 million payment – were on the agenda.

“And it should not be lost on Your Honor that the attorney general represents the Arizona Board of Regents,” Eckstein continued. More to the point, he said that the assistant AG who represents the regents in risk management cases was at a legislative committee meeting in December 2017 “where this deal was discussed fairly well.”

Even if Whitten says the case was timely filed that does not secure a win for Brnovich. Larry Penley who chairs the Board of Regents said he believes there is no Gift Clause violation “because of the significant benefits of this project to students, Arizona State University and the city of Tempe.”

Whitten did not say when he will rule.

The hearing comes less than a month after an often-stinging review of the practices of the Board of Regents in leasing out property for commercial use in which the Auditor General’s Office concluded there was a lack of proper oversight and limited transparency, creating a “risk of inappropriate use of public resources.”

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