The Arizona attorney general has launched another battle against the state's public universities, this time over large Arizona State University real estate projects that he says are illegal.

Attorney General Mark Brnovich sued the Arizona Board of Regents, which oversees the state's universities, in Arizona Tax Court Thursday.

He claims real estate deals approved by the board allow universities to boost favored companies and help them avoid paying taxes. ASU is essentially renting out its tax-exempt status to private businesses, Brnovich said.

Specifically, Brnovich calls out Arizona State University's practice of allowing for-profit companies to build on university-owned land, which is tax-exempt. He seeks to force an unbuilt Omni Hotel to pay property taxes.

"ASU is a public university, not a commercial enterprise or an urban development authority. It is inappropriate for this educational institution to pick winners and losers in the highly competitive property development industry by negotiating for the use of ABOR's tax shielding status," the lawsuit says.

It's the second lawsuit Brnovich will have against the regents. Another lawsuit, over tuition costs the attorney general claims are too high, is on appeal.

"The constitution requires education to be nearly free as possible," Brnovich told The Arizona Republic. "Maybe if our public universities weren’t in the real estate development business, they could make sure some of that money was going to lower tuition for all Arizonans."

In response to the lawsuit, ASU criticized Brnovich personally.

"... Arizona’s confused and confusing attorney general has once again sued his own client," ASU said in a statement.

The university pointed to remarks Brnovich made during his inauguration earlier this week, where he said that being attorney general meant "enforcing the law as it is and not as you may want it to be."

"Apparently the law is not as he wants it to be," ASU said in its statement.

"It’s another example of the glaring inconsistency between his actions and his words, " ASU said.

The university also called the lawsuit "frivolous" and said it's a "huge waste of taxpayer money, time and energy, and it saps the public’s faith in our elected officials."

How the real estate deals are set up

ASU has faced scrutiny by some state lawmakers and taxpayer-advocacy groups over its real estate deals. Marina Heights along Tempe Town Lake, which is the site of a massive State Farm Insurance campus, is one such deal.

Here's how the arrangement works: ASU rents out the land to a private company, which pays ASU but enjoys a property tax-exempt status because the university remains the landowner.

ASU has said in the past that these projects have allowed the university to make up revenue after state budget cuts.

MORE: New ASU developments will fund Sun Devil Stadium, other athletic facilities

In the lawsuit, Brnovich seeks to force one unbuilt project, an Omni Hotel slated for University Drive and Mill Avenue, to pay property taxes. Plans call for a 330-room hotel and a 30,000-square-foot conference center to be built on land owned by the regents.

But Brnovich also questions the Marina Heights project and Mirabella, an unfinished senior living facility, that use similar leasing structures.

Brnovich said the regents don't have the authority under the Arizona Constitution or any other state laws to use university-owned land to allow private developers to avoid paying property taxes.

"These construction projects are therefore not included in the property tax base available to local schools and governments, even as ASU receives substantial income for its straw-man role," the lawsuit says.

Brnovich: Stop the 'shenanigans'

Brnovich said ASU’s real estate deals mean there’s less money for government services like public schools and amount to sweetheart deals for companies. Other hotels have to pay property taxes, which makes it unfair for Omni to avoid them, he said.

He filed the lawsuit to stop these “shenanigans,” he told The Republic.

“What ASU is doing here is legally dubious,” he said.

He hopes the lawsuit will make clear that everyone needs to play by the rules, even large institutions like ASU.

“It just seems like no one wants to talk about or has been willing to talk about this issue,” he said. "And at some point, we need to hold everyone accountable, including the regents and including the universities."

Criticism of real estate deals

State Rep. Vince Leach, R-Tucson, ran legislation in 2018 that would have outlawed the practice of leasing university land to private developers unless the purpose was still related to education, like student housing.

The bill didn't pass.

The Arizona Tax Research Association has criticized ASU's real estate arrangements, saying they hurt local governments and other taxpayers. Marina Heights, for instance, avoided about $12 million in property taxes, ATRA said in 2017.

ASU President Michael Crow defended the practice in a 2017 op-ed, attacking the notion that the property diverts tax money from other public purposes. Because the land is owned by the universities, it was never on the tax rolls, so no tax money is being taken away because it never existed, he argued,

Plus, because of budget cuts, ASU had to use its assets to generate revenue, he wrote.

"Arizona has been on the fast track to driving its universities to act more entrepreneurial in lieu of state funding," Crow wrote. "We don’t throw up our hands; we embrace the challenge and look for new ways to generate revenue without imposing new taxes on residents. Using university-owned land to generate new revenue is one way to achieve that."

Other lawsuits against regents

Brnovich sued over tuition costs in 2017, saying they were not meeting Arizona constitutional mandate for education to be "as nearly free as possible."

A Maricopa County Superior Court judge dismissed the lawsuit in April 2018, saying Brnovich lacked the standing to sue universities over their tuition rates.

Brnovich appealed the ruling. The case is ongoing.

After the dismissal, Brnovich unleashed a fiery attack on the regents, saying they were neglecting their duties, and said he knew he was fighting against powerful interests when he went after tuition rates. His spokesman also said the filing of the lawsuit generated threats against Brnovich's political future.

“The regents have been attacking me for months, they attacked me for months even on the DACA issue. And guess what? They got their asses kicked at the Supreme Court, seven to nothing unanimously. They lost at the Court of Appeals unanimously,” Brnovich said at the time.

“They can say whatever they want to say, but I’m not going to listen to a bunch of gimmicky yobs and have them try and influence what I’m doing.”

The tuition lawsuit coincided with a separate court case over the legality of granting in-state tuition rates to young immigrants brought to the United States as children and protected from deportation under the Deferred Action for Childhood Arrivals program.

Brnovich won that lawsuit when the Arizona Supreme Court unanimously ruled against the community colleges and universities, saying DACA recipients are not entitled to in-state tuition benefits.

Reach reporter Rachel Leingang by email or by phone at 602-444-8157, or find her on Twitter and Facebook.

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