DAN MORALES 

ATTORNEY GENERAI. 

QBffice of tty Rlttornep @enera 

&ate of Qexas 

January 34 1992 

Honorable Temple Dickson 

Senate Economic Development 

committee 

P.O. Box 12068 

Austin, Tex& 78711 

Opinion No. DM-80 

Re: Whether a municipal industrial 

development corporation may use funds 

generated by a sales tax for the purpose 

of aquirin~~ constructing, and 

operating a *for profit” hospital or clinic 

@Q-101) 

Deer Mr. Dickson: 

You ask whether a for-profit hospital or cIin$c may be considered an 

“industrial faciliv pursuant to the Development Corporation Act of 1979, as 

amended, article 5190.6, V.T.CS.1 The Development Corporation Act permits the 

creation of nonprofit industrial development corporations to act on behalf of cities, 

counties, or water districts as issuers of bonds to Penance certaia projects, as defied 

in the act. As the interest on the boa under proper &cumstance~ is exempt from 

federal income taxation, the projects financed by these bonds may receive !hancing 

p. 400 
Honorable Temple Dickson - Page 2 (DM-80) 

at interest rates substantially lower than the rates available with conventional 

financing.* 

The projects that may be financed by the proceeds of bonds issued by an 

industrial development corporation are defined by section 2(10) of the Development Corporation Act. As a hospital is clearly not a transportation, waste disposal, 

pollution control, water supply, distribution, or warehouse facility, a hospital would 

only be within the act’s definition of project if the legislature intended the term 

“manufacturing and industrial facilities” to be broad enough to encompass a 

hospital, or if the legislature intended that a hospital could be found by the board of 

directors of a development corporation to be a facility 

required or suitable for the promotion of commercial 

development and expansion and in furtherance of the public 

purposes of this Act, or for use by commercial enterprises, all as 

defined in the rules of the department. 

Currently, to quality as a project as defined by section 2(10), facilities required or 

suitable for the promotion of commercial development must be located in “blighted 

or economically depressed areas, development areas or federally assisted new 

communities located within a home-rule city or a federally designated economically 

depressed county of less than 50,000 persons according to the last federal decennial 

census.” As originally enacted, the Development Corporation Act included facilities 

“required or suitable for the promotion of commercial or industrial development 

and expansion” within the definition of “project,” as generally applicable to facilities 

wherever located. Acts 1979,66th Leg., ch. 700,s 2, at 1676. 

%%e interest oo such bonds may be tax exempt under provisions of the Internal Revenue 

Code that provide for federal iacome tax exemption oa the obligations of states aad political 

subdivisions thereof. 26 USC. 5 103. when the proceeds of such obligatioas are to be ased ia the 

trade or business of a persoa other thaa a goverame~tal unit, tbue obligations arc referred to as 

“private achity bonds’ Federal income tax exemption for the interest oa private activity bonds 

requires compliaace with a number of provisioas of the Internal Revcauc Code. See general& 26 

U.S.C. 0 141, d seq. Some projects eligiile for fmaaciag with tax exempt bonds uader the Internal 

Revenue Code of 1954, md enumerated ia the Developmeat Corporation Act, are no longer so eligible 

under the Internal Revenue Code of 19% While it appears clear that the legislature enacted the 

Development Corporation Act to facilitate tax exempt fmanciag, tbc Development Corporation Act 

does not make federal tax exemption a criterion for projects to be fmanced by industrial development 

corporations. An industrial development corporation could fuwce a project through the issuaace of 

taxable bonds. 

p. 401 
Honorable Temple Dickson - Page 3 (DM- 8 0 ) 

In its original form, the Development Corporation Act authorized the 

creation of medical development corporations in addition to industrial development 

corporations, and included “medical research projects” as a discrete item 

enumerated in section 2 of the act. Id While a medical research project is not 

synonymous with a hospital or a clinic, the inclusion of a specific authorization for 

such projects nevertheless indicates that the legislature considered medical facilities 

to be conceptually distinguishable from industrial facilities. 

References to medical development corporations and medical research 

projects were deleted from the Development Corporation Act in 1981. Acts 1981, 

67th Leg., ch. 792, at 3025. In the same act, the legislature reworked the definition 

of “project,” limiting projects for “commercial development” to facilities in certain 

areas. Id at 3826. In the same session, the legislature enacted the Health Facilities 

Development Act. Acts 1981, 67th Leg., ch. 783, at 2966 (now Health and Safety 

Code section 221.001, et seq.). The Health Facilities Development Act permits the 

creation of health facilities development corporations which may issue bonds on 

behalf of cities, counties, or hospital districts for the purpose of financing health 

facilities as defined in that act. Hospitals and clinics are expressly within the 

definition of health facilities permitted to be financed by bonds issued by health 

facilities development corporations, as are medical research facilities. Health & 

Safety Code S 221.003(8)(B), (D).3 

The biIl analysis prepared by the House Committee on State Affairs with 

respect to the bill that enacted the Health Facilities Development Act stated, in 

part, as follows: 

3At the time that the Health Facilities Developmeat Act was enacted, for-profit health 

facilities could take advantage of the provisions of section 103 of the 1954 Internal Revenue Code, 

which permitted the tax exemption oa the interest of private activity bonds to apply to so-called ‘small 

issuq* i.e. issues of bonds under a set dollar amount. Under that former provisioa, as with bonds 

ismxi by iadostrial development corporations, the interest OIL bonds issued by health facilities 

development corporations to fmaace for-profit health facilities would have beea, under proper 

circamstaaces, exempt t+om federal income taxation, permitting financing at advantageous iatcrest 

rates. Under current federal tax law for-profit hospitals may DO longer qualify for the tax exemption 

provided for small issues. Howcvcr, the Health Facilities Development Act does not make tax 

exemption a criterion for a project to be financed by a health facilities development corporation. 

Health facilities development corporations may fmaacc projects through the issuance of taxable bonds. 

p. 402 
Honorable Temple Dickson - Page 4 (DM-80) 

BACKGROUND 

Under present state law, hospital authorities and certain 

other public bodies are authorized to issue “tax-exempt” bonds 

to finance hospitals and related facilities operated by non-profit 

corporations. . . . However, many privately operated community 

hospitals, particularly those in less populated areas, are not 

organized under the state’s general non-profit corporation act 

and are therefore currently ineligible for such a financing 

Program. 

PURPOSE: 

This bill authorizes the creation of non-profit health 

facilities development corporations to finance privately operated 

hospitals and related facilities with “tax-exempt” bonds. 

The bill analysis characterizes the enactment of the Health Facilities 

Development Act as necessary to permit for-profit hospitals to take advantage of 

tax-exempt financing. See note 2, mpra. The Development Corporation Act was in 

existence at the time of the enactment of the Health Facilities Development Act. 

The perceived necessity for the enactment of the Health Facilities Development 

Corporation Act despite the existence of the Development Corporation Act 

indicates the legislative view that the latter does not authorize the Snancing of 

hospitals by industrial development corporations. In addition, the removal in 1981 

of references to medical research facilities in the Development Corporation Act and 

the provision in the same session for financing such facilities in the Health Care 

Development Act indicates a legislative intent to provide for the iinancing of health 

care facilities in a statutory framework discrete from that which provides for funding 

of the kinds of facilities described in the Development Corporation Act See 

Heerson v. State, 758 S.W.2d 694 (Tex. App.-Austin 1988, writ dism’d) (when 

construing acts passed at the same legislative session, the courts will read them as 

one act). 

To summarize. we find that the legislature did not intend the terms 

“manufacturing and industrial facilities” or facilities “required or suitable for the 

promotion of commercial development” as used in the Development Corporation 

Act to encompass medical or health care facilities. Such facilities may not be 

p. 403 
Honorable Temple Dickson - Page 5 (DM-80) 

financed by bonds issued by industrial development corporations created pursuant 

to that statute. 

SUMMARX 

Hospitals are not “manufacturing or industrial facilities” or 

facilities “required or suitable for the promotion of commercial 

development” and may not be financed by bonds issued by 

industrial development corporations created pursuant to the 

Development Corporation Act of 1979, as amended. 

DAN MORALES 

Attorney General of Texas 

WILL PRYOR 

First Assistant Attorney General 

MARYKELLER 

Deputy Assistant Attorney General 

JUDGE ZOLLIE STEAKLEY (Ret.) 

Special Assistant Attorney General 

RENEAHIcKs 

Special Assistant Attorney General 

MADELEINE B. JOHNSON 

Chair, Opinion Committee 

Prepared by John Steiner 

Assistant Attorney General 

p. 404