The Arizona Supreme Court heard oral arguments on the CityNorth case Wednesday, with justices questioning whether Phoenix will get enough in return for its $97.4 million commitment to the project.
"We're struggling with where the line is," Chief Justice Rebecca Berch said, referring to benefits to the city and benefits to the developer.
The courtroom was packed with lawyers, developers and other interested parties who could be affected by the outcome.
Timothy Berg, who argued on behalf of the city and the developer, the Klutznick Co., said the justices need to take into consideration not just the quantifiable benefits of increased sales tax and parking garage revenue, but also the intangible benefits of reduced traffic, decreased air pollution and additional jobs.
Berg also argued that such decisions should rest with the City Council, not with the courts - unless the city's judgment clearly is flawed.
Under the agreement, approved in March 2007, Phoenix agreed to pay back to the developer half the sales taxes collected for 11 years, 3 months, or until the total reaches $97.4 million.
The developer agreed to erect 1.2 million square feet of tax-generating retail space and parking garages that would hold more than 3,000 vehicles, setting aside several hundred for city use as a park-and-ride lot. No money has been exchanged yet.
CityNorth, on the north side of Loop 101 at 56th Street, has opened one phase, but additional work has been delayed because of the economy.
"The court was trying to determine whether there was a genuine quid pro quo," said Clint Bolick of the Goldwater Institute, which sued to block the agreement on behalf of six small businesses.
Berg said that besides the parking garages, which are scheduled to be built in Phase 2 of the project, and the sales taxes, Klutznick agreed to build CityNorth in a way that would maximize return to the city.
Bolick said the developer is committed to the project, even without the agreement. The parking-garage argument, he said, "is a sham" because the city and the anchor tenants already required parking.
He said the money for CityNorth clearly is for private purpose, benefiting a profit-making developer, despite the tax benefits for the city.
Grady Gammage, whose law firm is retained by CityNorth, said that if the agreement is upheld, the project will move forward as soon as financially feasible.
He added: "This case will determine if the project proceeds as originally envisioned."
If the agreement is deemed unconstitutional, he said, the project would have to be revised and likely delayed.
"It will be more like a standard mall," he said.
John Klutznick of the Klutznick Co. did not take questions. But in a statement e-mailed to reporters later, he said a loss in the case would "threaten economic development throughout Arizona."
A decision could come before the end of year, court spokeswoman Cari Gerchick said.