On October 14, 2016 Pima County Superior Court Judge Catherine Woods denied Pima County’s motion to dismiss the Goldwater Institute‘s Gift Clause claim. Despite the likelihood of future success in court, the County moved forward with construction and the court battle.
In Judge Woods’ October 14 ruling she found that the Goldwater Institute successfully explained its position that Pima County “’unquestionably abused’ its discretion in spending taxpayer money and lending its credit when Pima County officials took on $15 million in new debt, commenced the construction of the headquarters and balloon pad to be used by a private for-profit corporation that had an unproven ability to conduct its intended operations, failed to obtain competitive bids, committed to lease the premises to the private for-profit corporation at below market rates, and granted to that corporation the right to operate, maintain, and control access to the pad (which would include keeping any profits it makes from allowing other third parties to use the pad).”
Emails sent to and from Regina L. Nassen, Deputy Pima County Attorney with the Pima County Attorney’s Office and John Moffat, Strategic Planning Director, Pima County and “Principal Consultant” at Moffatt Consulting, LLC., Pima County Administrator Chuck Huckelberry and others were obtained by the Arizona Daily Independent though a records request. Among the emails were a handful marked “Attorney Client Privilege.” Initially, Nassen claimed that the Arizona Daily Independent could not publish the emails due to the fact that the County had not waived that privilege. However, the County did waive the privilege when it turned the emails over to the ADI.
The County’s court strategy is laid out in an email exchange between Moffat and Nassen about the proper parameters of a public private partnership. “Note that even if the trial court ultimately grants our motion to dismiss the gift-clause claim,” writes Nassen referring to the Goldwater lawsuit, “we still have the issue of compliance with § 11-256, which requires the County to appraise the property’s rental value and auction it off to the highest bidder for no less than 90% of the appraised value. The trial court denied our motion to dismiss that claim. It’s not a final ruling, of course, but presumably it will turn into one at some point, because there aren’t really any disputed facts relevant to that claim. The County could still basically ignore the ruling until the appellate process is exhausted, but that could be politically uncomfortable, and scare away companies you’re trying to attract.”
When Moffat asks Nassen if “we should continue to pursue self-development until we have clarity from the Court, Nassen responds: “It’s not really a legal question. All I can tell you is that we won’t have legal certainty on the issues for several years. And, given the changing make-up of the Arizona Supreme Court, I’m not as sanguine as I once was that our legal arguments—which I think are very good—will ultimately succeed. How to proceed in the face of that legal uncertainty is a policy choice.”
The majority on the Pima County Board of Supervisors has supported proceeding “in the face of that legal uncertainty.” They have chosen to ignore the advice of Shirley V. Svorny, Ph.D., an economics professor at California State University Northridge. In her study “Economic Development in Pima County,” Svorny notes, “Instead of negotiating subsidies to individual private firms, such as World View, Pima County should focus on efforts that make the community attractive to firms in general and to the workers they might hire.”
Rather than attracting firms, the majority of the members of the Board of Supervisors approved a resolution earlier this month condemning companies that might play a role in the building of the border wall.
From: John Moffatt [mailto:John.Moffatt@pima.gov]
Sent: Tuesday, October 04, 2016 6:35 PM
To: Regina L. Nassen <Regina.Nassen@pcao.pima.gov>; Chuck Huckelberry <Chuck.Huckelberry@pima.gov>; Tom Burke <Tom.Burke@pima.gov>; Patrick Cavanaugh <patrick.cavanaugh1@pima.gov>; Teresa Bravo <Teresa.Bravo@pima.gov>; Nanette Slusser <Nanette.Slusser@pima.gov>
Cc: Maura Kwiatkowski <Maura.Kwiatkowski@pima.gov>; Deseret Romero <deseret.romero@pima.gov>; Diana Durazo <diana.durazo@pima.gov>
Subject: RE: Bids for Public – Private Partnership concept – Attorney Client Privilege
Certainly your last paragraph is the simplest approach. My goal like some of the University projects and the Ina Road plant is for the facility to revert back to the County after a reasonable time for the builder to get their appropriate return meanwhile we have some cash flow from the ground lease (potentially at an incentive rate). If we had definitive answers on the World View project, my preference is to use our borrowing power backed by the lease payments. [Regina L. Nassen] Note that even if the trial court ultimately grants our motion to dismiss the gift-clause claim, we still have the issue of compliance with § 11-256, which requires the County to appraise the property’s rental value and auction it off to the highest bidder for no less than 90% of the appraised value. The trial court denied our motion to dismiss that claim. It’s not a final ruling, of course, but presumably it will turn into one at some point, because there aren’t really any disputed facts relevant to that claim. The County could still basically ignore the ruling until the appellate process is exhausted, but that could be politically uncomfortable, and scare away companies you’re trying to attract. Lacking clarity, I was searching for another option that would allow us to maintain development control to accommodate our commitments to Raytheon, retain the asset in the long run, yet come up with a way to competitively provide a facility to a tenant that meets our investment and employment goals while providing a fair return to the developer.[Regina L. Nassen] In terms of control, keep in mind that the developer’s lender will require a security interest in the lease, so that if the developer defaults the lender can take over the developer’s interest in the property. A lender would probably agree to abide by certain restrictions—perhaps those that protect Raytheon, assuming they don’t unduly limit the use of the property—but will otherwise want flexibility with respect to who their tenants are and what the building is used for. The developer has the opportunity to make money on the construction, have a competitive underlying ground lease that should allow for competitive occupant lease rates and operate the facility at a fair profit for X years before it reverts to the County. This takes us out of the building and financing business for which we seem to be under attack. [Regina L. Nassen] And that’s all fine. If you can do a straight-forward deal like this, following the § 11-256 process, for a 30 to 50-year term, that’s great. We can get the property appraised, draft the term sheet, and hold the auction.
We also don’t need to be borrowing money against our permanent assets to build the facility. Developers get construction loans then permanent financing which is then based on the new asset and cash flow. It is my understanding that our non-World View assets are committed until the World View loan is paid off. These deals should stand by themselves in the long run.
My legal question is whether we should continue to pursue self-development until we have clarity from the Court? [Regina L. Nassen] It’s not really a legal question. All I can tell you is that we won’t have legal certainty on the issues for several years. And, given the changing make-up of the Arizona Supreme Court, I’m not as sanguine as I once was that our legal arguments—which I think are very good—will ultimately succeed. How to proceed in the face of that legal uncertainty is a policy choice. If so, then we need to answer the financial questions. If not, then I believe we need to involve third parties.
My financial question is how to accomplish developing these facilities without burdening our debt load further. Can we perform like a developer with construction loans and then acquire permanent financing against the finished asset?[Regina L. Nassen] I assume you’re talking about some sort of non-recourse financing, like the COPs sale/leaseback structure, in which only the asset is at risk in the event of non-payment, and the County has not pledged its full faith and credit. That type of debt is not debt for constitutional-debt-limit and voter-approval purposes, but it will still be debt, and the County will still be levying taxes to pay that debt. So it’s an option if you’re trying to avoid the necessity of voter-approval, but otherwise … debt is debt, and the County may get a better interest rate pledging what are perceived as critical government assets rather than a facility being leased to a
private party. These are issues that can be explored with Keith and Tom, and the County’s financial advisors and bond counsel. Is there a benefit or not? Should we leave the risk and operational issues
to a developer and simply gain some long term payback on our land investment through market rate or slightly below market rate leases over some period of time?[Regina L. Nassen] That’s a very
straight-forward way to go, as noted above. Or another option to sell the land requires putting covenants on the land to fulfill our commitment to Raytheon to not interfere with their guidance
system development and testing operations which are one of their primary reasons for being here. [Regina L. Nassen] That’s easiest enough to do as well.
To answer your question on incentive, there is some incentive in that we now have some synergy where some of these companies want to be near Raytheon and are asking to be in the Business and
Research Park. [Regina L. Nassen] That’s awesome, and if the desirability of the location makes a classic “incentive” unnecessary, so much the better. Again, a straight-forward ground lease is easy
enough to do. Those are not hard dollars and we need to be competitive. My hope is to be able to offer the land to a developer at a competitive rate where the incentive is passed through to the
tenant. [Regina L. Nassen] Because of the 11-256 issue—if the County wants to be conservative and abide by that statute’s requirements in light of Judge Woods’s ruling—that competitive rate will be 90% of the appraised ground-lease value. My limited knowledge here says that needs to be part of a development agreement[Regina L. Nassen] No, not a development agreement, per se; that term is used in connection with development on private property. The type of improvements, and any restrictions on subleases, would all be part of a ground lease agreement.
This current client is ready to move forward on likely 10-15 acres with a 60-70K sq. ft. building with growth to 110,000 Sq. Ft. in 5 years. They are not looking for huge incentives and are willing to
commit to a 20 year lease. We have several options and I am sure you all have more informed ideas than I do, but I need some guidance as to how we want to proceed. [Regina L. Nassen] We can do the appraisal, draft ground-lease conditions, and auction it off to a build-to-suit developer.
John
Related articles:
Pima County Denied, Goldwater Calls For World View Lease Cancellation
Goldwater Alleges Pima County Supervisors Gifting Practices Violates Law
Pima County Leaders Went To Great Lengths To Send KFC Into Stratosphere With World View