Lawsuit says Arizona cities cannot require affordable housing

The development at the heart of the suit is a proposal by Pennrose, an affordable housing developer that responded to a city-issued request for proposals seeking a development that included affordable housing along with a mix of uses.

Pennrose was deemed the successful respondent to the request, and the city entered into an agreement to sell the site to the developer for $1.5 million, which was later amended to $1.6 million. In exchange, Pennrose proposed a five-story, 64-unit affordable housing development. The project is supposed to be income-restricted, renting to people earning 60% of the area median income or below.

The latest amendment to the development agreement was approved in March 2026. The site is located near Roosevelt and Second streets in downtown Phoenix.

A lawsuit filed by the Goldwater Institute, a libertarian think tank, on behalf of Bramley Paulin, a downtown Phoenix property owner, accuses Phoenix of giving away land for less than its value, what it calls a violation of the state’s constitution. It also accuses the city of violating state law when it issued the request for proposals that required affordable housing.

Representatives from Phoenix declined to comment on the issue, citing ongoing litigation.

The first claim, that the sale violates the so-called “gift clause,” which prevents Arizona governments from transactions that do not provide equivalent public benefit, is a common issue taken up by the Goldwater Institute. In this case, the suit alleges that the land was appraised for about $4.8 million, meaning it was sold for about $3.2 million less than its appraised value.

Claim could be first of its kind in Arizona

The second claim, however, could be the first of its kind in Arizona, Tony Napolitano, senior attorney for the Goldwater Institute said. The suit claims that the city’s requirement of affordable housing in the request is an unlawful imposition of an inclusionary housing requirement.

Arizona is one of a few states that prohibits mandatory inclusionary zoning, meaning that generally, a city cannot require affordable housing to be included in a project as a condition of its approval. However, cities can offer incentives for developers that voluntarily adopt inclusionary zoning.

However, it is common for cities to include an affordable housing requirement in their requests for proposals. Phoenix has issued several requests that require developers to include affordable housing in their proposals, and other surrounding cities, like Tempe, have also included similar requirements.

“A lot of RFPs have affordable housing provisions in them, but the Legislature draws the line between requiring it and incentivizing it,” Napolitano said. “It will be an excellent case in terms of how the courts want to go with it.”

Preschool mentioned as public benefit

In its submission to the city, Pennrose proposed using some of the mixed-use space in the development for a location of Bezos Academy, a tuition-free preschool created by Amazon founder Jeff Bezos, according to the lawsuit. According to the suit, the public benefit gained from the tuition-free preschool program would count toward matching the benefit given to Pennrose through the discounted property sale.

However, a spokesperson for Bezos Academy said the school had no plans for a location in the development.

Regardless, Napolitano said, a preschool, while it would be a good addition to downtown, does not bring public benefit to Phoenix taxpayers because Phoenix does not provide preschool as a service. Other services, like road construction or other infrastructure, could potentially count, he said, because that would represent savings to the taxpayer.

“It’s not relieving the taxpayers of any burden,” he said.

Napolitano said the correct outcome, in his opinion, would be the city entering into a contract to sell the site for its fair market value.