Scottsdale-based Five Star Development

Scottsdale-based Five Star Development filed a lawsuit against Town of Paradise Valley in June, alleging the town is violating a development agreement for Palmeraie, the Ritz Carlton-anchored project on the Paradise Valley-Scottsdale border.

Scottsdale-based Five Star Development is suing Paradise Valley, accusing the town of a “shakedown” for millions of dollars in infrastructure improvements from the developer as part of the Ritz-Carlton project along Scottsdale Road.

The town has denied those allegations, arguing the Five Star is using the litigation in an attempt to create leverage with the ultimate goal of requesting additional rezoning concessions in the future. 

The conflict surrounds the long-gestating Palmeraie development that will be anchored by a Ritz-Carlton resort and also include homes, restaurants and retail shops.

The project, located on prominent plot of land at the Scottsdale-Paradise Valley border west of Scottsdale Road and Lincoln Drive, is mostly located on 105 acres within Paradise Valley, though some parts also fall within Scottsdale.

Five Star Development and the Town have a contentious history over the project, which survived a citizen referendum in November 2008 after the Paradise Valley Town Council approved it that year.

The project went unfinished over the next several years due to the Great Recession, according to Five Star’s lawsuit.

Paradise Valley Council again approved the rezoning in 2015 and the parties agreed to a development agreement in 2016 that, among other stipulations, included specific infrastructure requirements assigned to the developer and town.

In a complaint filed in Superior Court on June 25, Five Star alleged the town is attempting to rewrite those obligations.

The lawsuit accused it of demanding payment for around $2 million in underwater stormwater drainage infrastructure that the company said is not included in its agreement.

“The development agreement, mutually-approved in January 2016, makes no mention of Five Star Development’s responsibility for regional storm drainage issues,” Five Star spokesman Matthew Benson said “It wasn’t until early 2019 that Town officials first delineated those costs as part of the project design phase.”

In a press release, Five Star said the lawsuit followed months of “attempted coercion” by the town, accusing Paradise Valley of threatening to hold up necessary permits and certificates of occupation for the development’s buildings.

“This is a shakedown, pure and simple,” Five Star President Jerry Ayoub said in the release.

Paradise Valley Town Manager Jill Keimach denied the allegations in a statement.

“We have endeavored to work proactively with Five Star Development throughout the construction process to overcome any hurdles that may arise,” Keimach said. “It’s unfortunate that during this uncertain time, rather than work proactively to find solutions, Five Star has chosen to file a lawsuit against the very community its project would call home.” 

The town also denied that it withheld certificates of occupation, stating that they were “clearly defined” in the agreement and are “based on Five Star’s own internal construction milestones.”

Five Star admitted no permits have been held up thus far, but spokesman Matthew Benson said, “numerous re-submissions have occurred under the guise of plan deficiencies and/or code compliance requirements.”

Certificates of occupancy have significant financial ramifications.

Five Star paid the town $3 million for building permits for one area of the property but could recoup $2 million of that if it receives certificates for specific buildings within five years.

Five Star maintains it is only responsible for drainage improvements on-site and that the town’s demands are for “regional drainage and flood control improvements that benefit the public, not the project,” according to the lawsuit.

The source of the conflicts appears to be a section in the development agreement addressing street improvements.

The exhibit assigns nine improvements – including new turn lanes, medians, signage and other features – on Indian Bend, Lincoln Drive and other nearby streets that are to be paid for by Five Star Development.

In several cases, the town agreed to split design costs for those improvements. 

According to the development agreement, Five Star must “construct median islands and roadway and setback improvements along the north side of Lincoln…construct another channel along Lincoln from Mockingbird to the east Town limits.”

Although the development agreement does not specify what type of “channel” the company must build, staff notes included with the requirement state that the improvement must match the “Final Drainage & Grading Master Plan.”

The company wants a judge to rule it is not liable for the drainage projects.

Beyond that, Five Star Development is challenging fees charged by the town and wants the court to uphold credits the company argued it is due under the agreement.

According to the lawsuit, the town agreed to waive up to $200,000 in building permit fees after the company paid the first $200,000 in fees.

But Five Star alleged the town is only crediting the cost of the permits themselves and not plan review fees tied to that process.

The development agreement appears to state that the $200,000 credit could be used to offset building permits and fees “in connection with its application for and obtaining of building permits for improvements.”

Five Star is also challenging a 10 percent management fee it would owe the town for managing infrastructure improvements.

The company also alleged it is being illegally charged a fee for review of an underground parking garage.

According to the lawsuit, the town is relying on City of Scottsdale staff to review those plans. The town maintains the fees are covered in the development agreement.

Since Five Star filed the lawsuit in June, the two sides have also traded barbs and theories about the other side’s motives.

The town alleged Five Star is using the lawsuit as leverage for future rezoning requests and to request certificates of occupancy for its Villa condominiums before timelines laid out in the development agreement are achieved.

“These commitments were essential to the Town’s decision to approve the Development Agreement and to ensure the promised Ritz-Carlton hotel was constructed in a timely manner,” the town’s statement said.

Ayoub said it as in the best interest of all involved for the development to be a success.

“That includes taking stock of how the world has changed in recent months and, rather than tacking millions of dollars in added fees onto a project, working with the developer and cooperating with Villa buyers to ensure they can move into their properties upon completion,” he said.

Five Star Development said the town is attempting to extract extra infrastructure from the company due to it financial state.

Paradise Valley, like other municipalities, has projected significant budget shortfalls due to the COVID-19 economic downturn.

“It’s terribly disappointing that Town officials, rather than working with us, would hold our project hostage at this late date in an attempt to secure additional financial concessions,” Ayoub said in a statement.

But the town denied that allegation, stating the two sides entered mediation over the issues in 2019 before the pandemic.

The town also said it obtained a low-interest $8 million loan to cover construction costs “in the event Five Star is financially unable or unwilling to pay its share of the construction.” 

Five Star also pointed out that several Town Council members have long opposed the project, including Mayor Jerry Bien-Willner, who voted against it twice.

Benson said Palmeraie has become “just another political football.”

But in her statement, Keimach challenged that argument.

“Our goal as a Town will continue to be a simple one – to protect the best interests of our residents and to abide by the agreements we have in place to bring this project to fruition,” she said.

Outside of the lawsuit, construction is moving according to schedule despite challenges posed by the ongoing pandemic, Benson said.

Five Star expects to complete the first phase by late 2020 or early 2021.