ATTORNEY GENERAL OF TEXAS GREG ABBOTT

June 5, 2008

The Honorable Kip Averitt Chair, Committee on Natural Resources Texas State Senate Post Office Box 12068 Austin, Texas 78711-2068

Dear Senator Averitt: Opinion No. GA-0634

Re: Valuation ofreal property surrounding Possum Kingdom Lake that the Brazos River Authority proposes to sell to the lessees ofthe property (RQ-0639-GA)

You ask about the valuation ofreal property owned by the Brazos River Authority (the "Authority") and leasedto private individuals. 1 You informus thatthe Authority "owns substantial property surrounding Possum Kingdom Lake, and much ofthat property is subject to long-term residential leases to private individuals." Request Letter, 

### supra note 1, at 1. You explain that a majority ofthese leases "reflect a below-marketrate, and many of[them] have a number [of] years remaining in their·terms." 

### Id. In response to legislation proposed but not enacted during the 2007 legislative session that would have required the Authority to sell the leased property to the lessees, the Authority is formulating procedures to offer to sell the property to the lessees. 

### Id. You specifically ask whetherthe leasedproperty "shouldbe valued as thoughunencumberedby existing leases where the sale is to the lessee, or whether the sales price should be discounted to reflect the remaining term ofthe existing leases." 

### Id. at 1-2. You also ask whetherusing the discounted sales price reflecting the unexpired lease term would violate article III, section 52 of the Texas Constitution. 

### Id. at 2.



### I. Background

To provide acontextforyourquestions and our subsequentdiscussion, webrieflyreviewthe type ofreal-property interests implicatedhere. A title infee is the mostcomplete form ofownership and establishes an interest in real property known as a fee simple interest. 34 TEX. JUR. 3d

### Estates § 3 (2002); THE APPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE 68-69 (12th ed. 2001). The fee simple interestmaybe dividedby alease into the leasedfee (the lessororlandlord's) interest and the leasehold (the lessee's) interest. THE APPRAISAL INSTITUTE, THE APPRAISAL OF REAL

ILetterfrom Honorable Kip Averitt, Chair, Committee onNatural Resources, Texas State Senate, to Honorable Greg Abbott, Attorney General ofTexas, at 1-2 (Oct. 16,2007) (on file with the Opinion Committee, also available at http://www.texasattorneygeneral.gov) [hereinafter Request Letter].The Honorable Kip Averitt

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ESTATE 81 (12th ed. 2001). A leased fee interest generally includes the right to be paid rent for the term ofthe lease and the right ofrepossession at the end ofthe lease term. Id. "[T]he value ofthe leased fee interest represents the owner's interest in the property." Id. at 82. A leasehold interest generally includes the right to possess the property for the lease period in return for the obligation to pay rent. Id. at 83. Under the facts presented, the Authority holds a leased fee interest and a private lessee a leasehold interest. As particularlyrelevanthere, "[t]he value ofa leased fee interest encumbered [by] a fixed [contract] rent that is below market rates2 may be worth less than the unencumbered fee simple interest or the leased fee interest with rent at market levels." Id.
Whether the property at issue should be valued as encumbered by the leases (as leased fee estates) to which the property is subject or as unencumbered (as fee simple estates) is a significant issue for the Authority and the lessees because ofthe particular facts. You explain that certain lessees contendthatthe property shouldbe valued as encumberedbythe remaining term ofthe lease
on the property, which would result in a lower sales price in this particular instance because ofthe existing below-market lease rates. RequestLetter, supra note 1, at 1.3 The Authority, however, has been advised by its outside counsel that any sale ofthe leased property at a price reflecting "the existing lease wouldresultin awindfallto the lessee" andthat such awindfall is prohibitedbyTexas Constitution article III, section 52. Id. 4 This view, as we understand it, is premised in part on the application ofthe legal doctrine ofmerger5underwhichthe lessee "wouldacquirethe full fee simple interest in the property for a price discounted by a below-market lease that would cease to existthe momentthepropertyis sold." Id.; see also Authority's Brief, supranote 4, at2-3; Authority's Reply Brief, supra note 4, at 3, 5. The lessees contendthatthe mergerdoctrine does notorwouldnot apply here. See Staley Brief, supra note 3, at 10-13.

2"Market rent" is "[t]he rental income that a property would probably command in the open market; indicated by the current rents that are either paid or asked for comparable space as ofthe date ofthe appraisal." THEApPRAISAL INSTITUTE, THE ApPRAISAL OF REAL ESTATE 83 (12th ed. 2001). In contrast, the "contractrent" is "[t]he actual rental income specified in a lease." Id.

3See also Letter BriefofConcerned Lessees ofPossum Kingdom Lake, from James D. Shields, Rebecca C. Lucas, Mark Lane, and Jim Handy, to Honorable Greg Abbott, Attorney General ofTexas (Dec. 14, 2007) (on file with the Opinion Committee) [hereinafterLessees' Brief]; LetterBriefof PossumKingdomLakeAss'nandPossumKingdom Lake PreservationAss'n, from Law Offices ofJoe H. Staley, Jr., P.C., to Opinion Committee, Attorney General ofTexas (Dec. 12, 2007) (on file with the Opinion Committee) [hereinafter Staley Brief].

4See also Opinion Letter Regarding Sales ofProperty to Lessees at Possum Kingdom Lake, from Jennifer Knauth, Scott, Douglass & McConnico, L.L.P., to Mr. Steve Pefia, Presiding Officer, Board ofDirectors, Brazos River Authority, at 2-3 (Aug. 16,2007), attached to RequestLetter [hereinafterAuthority's Brief]; LetterBrieffrom Jennifer Knauth, Scott, Douglass & McConnico, L.L.P., to Honorable Greg Abbott, Attorney General ofTexas, at 3 (Jan. 24, 2008) (on file with the Opinion Committee) [hereinafter Authority's Reply Brief]. 5"Merger ofestates is the absorption ofa lesser estate in land into the greater; however, application ofthis doctrine is disfavored in Texas." Steger v. MuensterDrilling Co., Inc., 134 S.W.3d 359, 376 (Tex. App.-Fort Worth 2003, pet. denied) (footnotes deleted). Whether a merger oftwo estates-such as the leased and leasehold interests here-is intended, is a question offact determined by looking at the estate owner's-here the lessees'-intentions and all the related circumstances. Id. "Equity will not, however, decree a merger of estates when it would be disadvantageous to the person acquiring both interests." Id.The Honorable Kip Averitt

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### II. Analysis
A. Statutory Authority (GA-0634)

We begin by considering the Authority's statutory power to sell the leased property. The Authority is a special law conservation andreclamation district establishedpursuantto article XVI, section 59 ofthe Texas Constitution. See TEX. CaNST. art. XVI, 

### § 59(b); 

### TEx. SPEC. DIST. CODE ANN. 

### § 8502.001(a)-(b) (Vernon 2007). The Authority is governed by its special enabling legislationandbycertaingenerallaws applicableto waterdistricts, including chapter49 of theWater Code. See Tex. Att'y Gen. Ope No. GA-0599 (2008) at 2-3. We understand that the Authority proposes to sell the leased properties to the lessees in private sales pursuantto section 49.226(a) of the Texas Water Code. 6 See Authority's Brief, supra note 4, at 2-3. Section 49.226(a) generally requires a water district to exchange real or personal property "for like fair market value": Any personal property valued at more than $300 or any land or interest in landowned by the district which isfound by the boardto be surplus and is not needed by the district may be soldunder order ofthe board either bypublic orprivate sale, or the land, interest in land, orpersonal property may be exchanged for other land, interest in land, or personal property needed by the district. Except as provided in Subsection (b) [abandonment or release ofproperty not acquired with district funds], land, interest in land, or pers0l?-al property must be exchanged for likefair market value, which value may be determined by the district. In connection with the sale of surplus land, the board, at its discretion, may impose restrictions on the development and use ofthe land.

TEX. WATERCODEANN. 

### §49.226(a) (Vernon 2008) (emphasis added); see also Tex. Att'y Gen. Ope Nos. GA-0371 (2005) at 3 ("Section 49.226(a) expressly authorizes a districtto sell surplus land by public orprivate sale."); DM-441 (1997) at4-5 ("fairmarketvalue is generally understoodto mean a fixed, ascertainable sum"). By its terms, section49.226(a) authorizes a district's board ofdirectors to determine the fair market value ofland or an interest in land to be exchanged: "land [or] interest in land

... must be exchanged for like fair marketvalue, which value may be determined bythe district." 

### TEx. WATER CODE ANN. 

### § 49.226(a) (Vernon 2008). While by its literal terms this provision regarding fair

6you do not ask and we do not determine whether Water Code section 49.226 is in all respects consistent with the Authority's enabling legislation. See TEX. WATER CODE ANN. § 49.002(a) (Vernon 2008) (providing that chapter 49 applies to special law districts such as the Authority to the extent that its provisions do not directly conflict with the district's enabling legislation); see also, e.g., TEX. SPEC. DIST. CODEANN. §§ 8502.013(b) (Vernon 2007) (authorizing the sale ofproperty for cash "if the boardby affirmative vote of 11 of its members determines thatthe property orinterest is not necessary to the business ofthe Authority and approves the terms ofthe sale") (emphasis added); 8502.009(a) (providing that the Authority's board consists oftwenty-one members).The Honorable Kip Averitt

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market value applies to an exchange? ofreal property, the Authority and the lessees assume that it also applies or would effectively apply as a matter of practice to the proposed sale ofreal property here. See Authority's Brief, supra note 4, at 2-3 (suggesting that statutory fair market value requirement applies to sale ofproperty); Authority's Reply Brief, supra note 4, at 4 (stating thatthe statute requires the Authority to receive fair market value for property sold); Lessees' Brief, supra note 3, at 2 (suggesting that appraisal practices require valuing the property to be sold at its fair market value); Staley Brief, supra note 

### 3, at 3 ("It is not disputed that the Texas Water Code

... requires the [Authority to] receive fair market value

... for any 'interest in land' that it sells.") (footnote omitted). Butsee TEX. SPEC. DIST. CODEANN. §§ 8502.012(f) (Vernon2007) (permitting the Authority to sell property "on terms and conditions

. . . or sale prices, on which the parties agree"), 8502.013(b) (permitting the Authority to "sell for cash any property or interest ifthe board by affirmative vote of 11 ofits members determines that the property or interest is not necessary to the business ofthe Authority and approves theterms ofthe sale"). Assuming forthe purposes of this opinion thatthe fair market value requirement also applies or would effectively apply to the sale of property, the statute does not directly state that a water district board must or must not, in arriving at the fair market value ofthe land or interest in land, consider any leases on the land. See TEX. WATER CODE ANN. § 49.226(a) (Vernon 2008).

In the absence ofsuch a direct expression in section 49.226 regarding a lease, we consider whether the definition offair market value itself, as a matter oflaw,8 imposes any constraints on a district board's discretion to make that determination. Section 49.226 does not define or otherwise elaborate on the phrase "fair market value." Nor has a court construed the phrase as used in this statute. However, Texas courts have generally defined "market value" as the "'price the property will bring when offered for sale by one who desires to sell, but is not obligatedto sell, and is bought by one who desires to buy, but is under no necessity ofbuying.'" City of Harlingen 

### v. Estate of Sharboneau, 48 S.W.3d 177,182 (Tex. 2001) (quotingState 

### v. Carpenter, 89 S.W.2d979,980 (Tex. 1936)); accordState 

### v. Windham, 837 S.W.2d 73, 77 (Tex. 1992); see also Tex. Att'y Gen. LO-98- 082, at 2; Tex. Att'y Gen. Ope No. DM-441 (1997) at 4.

No decision thatwe find addresses whetherfair marketvalue as used in Water Code section 49.226(a) or in a similar context requires valuing leased public property as encumbered or

7While a court has construed the term "sale" to include an "exchange" ofproperty, we fmd no Texas case that has construed the term "exchange" to include a sale. CfBowling v. City of El Paso, 525 S.W.2d 539, 541 (Tex. Civ. App.-EI Paso 1975, writ refd n.r.e.) (acknowledging "that there is a technical distinction between a sale and an exchange ofproperty," and construing the term "sale" in the statute at issue to encompass an "exchange" because ofthe purpose ofthe statute); see also THENEW OXFORD AMERICAN DICTIONARY 592 (2001) (defming the term "exchange" when used as a verb as to "give something and receive something of the same kind in return"); BLACK'S LAW DICTIONARY 585 (7th ed. 1999) (defming "exchange" when used as a noun as "[t]he act oftransferring interests, each in consideration for the other").
8See Tex. Att'y Gen. LO-98-082, at 3 ("The method used to calculate the fair market value ofa particular property and the factors that must be considered in arriving at the fair market value ofa particularpiece ofproperty are for a qualified appraiser to determine in accordance with accepted standards ofappraisal; they are not questions oflaw that are susceptible to the opinion process.") (footnote deleted).The Honorable Kip Averitt

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unencumberedbythe lease. Andno statutorydefinitionofgeneral application aids us inmakingthat determination. The only Texas decision we find addressing this issue is in the context ofa private equipment lease containing an option to purchase.

In a 2007 unpublishedmemorandum opinion, the Amarillo CourtofAppeals consideredthe fair market valuation ofequipment leased under an operating agreement and soldto the lessee. See Brogan, Ltd. 

### v. Brogan, No. 07-05-0290-CV, 2007 WL 2962996, *6 (Tex. App.-Amarillo Oct. 11, 2007, pet. denied) (mem. op.). Underthe operating agreement, the value ofthe equipmentincluded the equipment's value atthe end ofthe lease term plus the lease payments representing payment of principal and interest. Id. Because the sale had occurred before the end ofthe lease term, the equipmentwas valued, in accordance withthe operating agreement, by adding the "remaining lease payments discountedbythe interestremaining to bepaid, andthe fair marketvalue ofthe equipment at the end ofthe lease period." Id. The court determined that the valuation was consistent with Texas law, as well as the governing partnership agreement, because the valuation comported with the broad definition Texas courts give to the phrase "fairmarket value," namely, "the price a piece ofproperty would bring on the open market ifthe seller and buyerwere not compelled to enter into the transaction." Id. (citing City of Harlingen, 48 S.W.3d at 187). More significantly, as relevant here, theBrogan court, citingthe FifthCircuitCourtof Appeals's 2001 decisioninPetulaAssociates
v. Dolco Packaging Corp., stated: "Moreover, the value ofa lease is considered under Texas law in a determination offair marketvalue whenthe property is sold from lessorto lessee." Id.; see also PetulaAssocs. 

### v. DolcoPackaging Corp., 240 F.3d 499, 503-04 (5th Cir. 2001). Even though no Texas court had considered this precise issue, the Brogan court did not provide further analysis.

In Petula, the Fifth Circuit Court ofAppeals considered a commercial building lease giving the lessee the option to purchasethe premises. at fair marketvalue. Petula, 240 F.3d at 501 (reciting factual background). The lessee's appraiser valuedthe property as ifitwere not subjectto the lease and arrived at the figure of$2.75 million; the lessor's appraiser valued it subject to the lease and arrived at a $5.15 million value. Id. (The leased fee was more valuable than the unleased fee because the lease provided for increasing the rents over the life ofthe lease. See id at 503.) The district court, among other things, had ordered another appraiser to be appointed to value the property as unleased. Id at 501-02. The lessor appealed to the Fifth Circuit Court ofAppeals.

The Petula court concluded thatthe leasedproperty mustbe valued subjectto the lease. Id. at 503-04. The court noted that the Texas courts had consistently defined "fair market value" broadly as the price apiece ofpropertywouldreceive onthe openmarketif the sellerandbuyerwere not required to enter into the transaction. Id. at 503 (citing Windham, 837 S.W.2d at 77). Consequently, the Petula court stated that when the phrase is used in a contract governed by Texas law, "it may be presumed that the parties intended the term to be understood according to this meaning, absent a clear indication to the contrary." Id. (citing RESTATEMENT (SECOND) OF CONTRACTS 

### § 202(3)(a) (1981)). The court then concluded that "[i]fTexas's definition of 'fair marketvalue' is applied, the value ofthe lease should be considered." Id ThePetulacourt offered
as an example an Arizona case-TCC Enterprises v. Estate of Erny-that applied the definition of fair market value, characterizedby the Petula court as identical to the Texas definition, to conclude that the lease must be considered because a buyer in the open market would purchase the propertyThe Honorable Kip Averitt

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only as a leased fee estate. Id.;9 see 

## Tee Enters. 

### v. Estate of Erny, 717 P.2d 936 (Ariz. Ct. App. 1986). The Petula court explained that, here, what the lessor had to sell was an "estate subject to a lease"lo and "fair market value must reflect the value ofthat which can be sold." Id. Finally, the court concluded:
Absent explicit language indicating that the lease should or should not be included in determining fair market value, the district court erred in deviating from the definite and fixed meaning given to the term "fairmarket value" in Texas contractlaw, which would include the value ofthe lease.
Petula, 240 F.3d at 503-04. In short, the Petula courtheld that, under Texas law, fair marketvalue includes the value ofa lease unless the governing contract clearly provides otherwise.

We make the following observations aboutthe Brogan andPetula decisions. First, they are factually distinguishable from the facts with which we are presented. Both cases construed private leasetransactions thatcontainedexpress andnegotiated options to purchasethe leasedproperty. See Petula, 240 F.3d at 501-02; Brogan, 2007 WL 2962996 at *6. In contrast, at issue here is a statute governing the sale of surplus public property that does not, on its face, even contemplate the existence ofa lease on such property. Moreover, the property leases here, we are informed, do not provide an option to purchase. See Authority's Reply Brief, supra note 4, at 3. Second, a Texas court construing Water Code section 49.226 or a similar statute may not necessarily follow the two cases' view ofthe law. The Arizona case that the Fifth Circuit Court ·ofAppeals relied on is not representative ofthe case law in otherjurisdictions as to the valuation ofland encumberedby a lease when sold to the lessee. See, e.g., Napleton 

### v. Ray Buick, Inc., 704 N.E.2d 864, 870-71 (Ill. App. 1999) (relying on affirmative lease terms "clearly indicat[ing] thatthe parties did not intend for the

9The Arizona court stated: Emy's estate is not now in a position to sell unencumbered fee simple to the subject property, for it does not own such fee. The estate they now hold and could sell is a "leased-fee" estate. Market value is determined by hypothesizing a sale; it is that price a desirous but unobligated purchaser would pay a desirous but unobligated seller after consideration ofall uses to which the property is adapted and for which itis capable ofbeingused. Until 2002 the subjectproperty is capable ofuse only in accord with the lease terms; the hypothetical sale price must be adjusted accordingly. We holdthatthe currentmarketvalue ofthe lessor's interest in leasedproperty is the value apurchaserwouldpay for whatthe owner-lessorhas to sell, the fee subject to the lease. 

### Tee Enters. v. Estate ofErny, 717 P.2d 936,937 (Ariz. Ct. App. 1986) (citation and footnote omitted).

laThe Petula court noted in a footnote the following with respect to what the lessor had to sell, i.e., an estate subject to a lease: "Because Texas law defines 'fair market value' with reference to an unobligated seller and an unobligatedbuyer, we mustdisregardthe obligations placed onPetula [the lessor] andDolco [the lessee] bythepurchase option contained in the lease." Petula, 240 F.3d at 503 n.4.The Honorable Kip Averitt

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leaseholdto merge withthe fee whenthe lessee exercisedthe optionto purchase" andlease language stating "that the lease and the options to purchase should be included in the calculation ofthe purchaseprice" for its conclusionthatthe lease wouldbe consideredin determiningpurchase price); Taylor v. Fusco Mgmt. Co., 593 So.2d 1045, 1047 (Fla. 1992) (stating that absent specific language to the contrary, the market value of leased property at the time a lessee exercises an option to purchase should be calculated as ifthe property were unencumbered by the lease; "[a]ny intent to value the property otherwise should be clearly stated in the lease"). Third, because Water Code section 49.226 predates the Petula and Brogan decisions, a court might not necessarily find them persuasive in construing the statute. See Act ofMay 25, 1995, 74th Leg., R.S., ch. 715, 

### § 2, 1995 Tex. Gen. Laws 3755, 3775. It cannot be presumed that the Texas Legislature intended in section 49.226(a) to adopt the construction placed on the phrase "fair market value" by these courts. See Morris v. JTMMaterials, Inc., 78 S.W.3d 28,46 (Tex. App.-Fort·Worth 2002, no pet.) ("Because the provisions in the Texas statute predate their federal counterpart, we cannot presume that the Texas Legislature intended to adopt the construction placed on the wording by federal courts."). And, ofcourse, a Texas court is not bound by federal interpretations ofTexas statutes. See Jeffery
v. State, 169 S.W.3d439,443 n.1 (Tex. App.-Texarkana2005, pet. refd) ("AlthoughFifthCircuit opinions

... may be relied on as persuasive authority, we are obligated to follow only higher Texas courts and the United States Supreme Court.").
But, while recognizing the distinctions and the absence of fully developed Texas jurisprudence supportingtheBrogan andPetula decisions, we cannotdisregardthesetwo decisions. See, e.g., Tex. Att'y Gen. Ope Nos.GA-0563 (2007) at 6 ("[T]his office cannot ignore or overrule judicial decisions

...."), GA-0279 (2004) at 5 (stating that the attorney general cannot legislate or establish binding judicial precedent, but "may advise only about the current status ofthe law"), JC-0507 (2002) at 8 ("[T]he Office ofthe Attorney General cannot overrule ajudicial decision."). The two cases' statement ofthe law-that application ofthe Texas courts' definition offair market value includes the value of the lease-is not limited to their particular facts. We can see no reasonable basis for not applying this judicially established definition ofthe phrase "fair market value" to that phrase as it is used in Water Code section 49.226(a). Moreover, the Brogan and Petula statement ofthe law is consistentwith appraisal industry standards thatrequire the effects of
a lease be considered when appraising property. See APPRAISAL STANDARDS BOARD, UNIFORM STANDARDS OFPROFESSIONALPRACTICE, S.R. 1-2(e) (2008-2009); see also Petula, 240 F.3d at 503 n.6 ("Indeed, appraisal industry standards indicate that the effects ofa lease must be considered."). Texas lawrequires persons licensedorauthorizedto appraisepropertyto complywiththese industry standards or other standards provided by rule that are at least as stringent. TEX. OCC. CODE ANN. § 1103.405 (Vernon Supp. 2007) (Real Estate Appraisals). Finally, we have not found any direct Texasjudicial authority to the contrary. Thus, we presume that when the Legislature used the phrase "fair market value" in section 49.226(a), it intended the phrase to have its establishedmeaning under Texas law. Petula, 240 F.3d at 503-04; Brogan, 2007 WL 2962996 at *6; see also Acker v. Tex. Water Comm 'n, 790 S.W.2d 299, 301 (Tex. 1990) (stating that a court must presume that the Legislature adopted an enactment "with complete knowledge ofthe existing law and with reference to it" (citing McBride 

### v. Clayton, 166 S.W.2d 125, 128 (Tex. 1942))). Because section 49.226(a) does not contain explicit statutoryThe Honorable Kip Averitt

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language to the contrary, "fair market value" as used in the statute includes the value ofa lease to which the property is subject. Accordingly, we conclude that the established definition of "fair market value" requires the Authority's board to value the real property leased to the private lessees
as encumbered by the existing leases on the property. Given our conclusion, we do not consider application ofthe equitable doctrine ofmerger. 11 

### See also infra p. 9 (discussing Tex. Att'y Gen. LO-98-082).


### B. Constitutional Constraints

You also ask whether using the discounted sales price reflecting the unexpired lease term-which we understand to mean the lower sales price resulting in this particular instance from valuing the property as encumbered by the existing leases-would violate article III, section 52 of the Texas Constitution. RequestLetter, 

### supra note 1, at 2. We do not-and cannot-determine the actual value or sale price ofany property. Nor do we determine here that valuing the Authority's property as encumbered by the leases results in a lower sale price. You indicate that valuing the Authority's property as encumbered by the leases results in a lower sale price because ofthe belowmarket rates charged under those leases. 

### See id at 1; 

### cfPetula, 240 F.3d at 503 (noting that in an Arizona case, the effect ofincluding the value ofthe lease was to decrease the fair market value, whereas in the Texas case, because ofthe graduated rent schedule, the effect ofincluding the lease is to increase the fair market value); THEAPPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE 82, 83 (12th ed. 2001) (explaining that the value ofa leased fee or fee simple may be less when the lease rent is below market and suggesting that ifthe rent is at the market rate, consideration ofthe lease generally has a neutral effect). We assume that to be the case for the purposes ofaddressing your concern regarding article III,

.section 52.

Article III, section 52(a) generally forbids the Legislature from authorizing a political corporation or political subdivision "to grant public money or thing ofvalue in aid of, or to any individual, association or corporation." TEX. CaNST. art. III, 

### § 52(a); 

### see also TEX. SPEC. DIST. CODE ANN. § 8502.001(a) (Vernon 2007) ("The [A]uthority is a river authority, a governmental agency, a municipality, and a body politic and corporate.").

The suggestion that a valuation ofpublic property as encumbered by unexpired lease terms may violate article III, section 52(a) is largely premised on this office's conclusion in Attorney General Letter Opinion 98-082. 

### See Authority's Brief, 

### supra note 4, at 7; Authority's Reply Brief, 

### supra note 4, at 3. In that opinion, this office addressed the sale ofcity land to the private lessees

llWe also note that Texas courts disfavor application ofthe merger doctrine and do not apply it when it would be "disadvantageous" to the person acquiring the two differentproperty estates. See Steger, 134 S.W.3d at 376 (stating that "application ofthis doctrine is disfavored in Texas" (citing Ferguson v. Ragland, 243 S.W. 721,724 (Tex. Civ. App.-San Antonio 1922, writrefd), Montgomery v. Browder, 930 S.W.2d 772, 781 (Tex. App.-Amarillo 1996, writ denied), Smithv. U.S. Nat'lBank, 767 S.W.2d 820,823 (Tex. App.-Texarkana 1989, writdenied), Westv. Seigler, 265 S.W.2d 618, 620-21 (Tex. Civ. App.-FortWorth 1954, writrefdn.r.e.), Huselbyv. Allison, 25 S.W.2d 1108, 1112-13 (Tex. Civ. App.-Amarillo 1930, writ dism'd w.o.j.»). The lessees argue that application ofthe mergerdoctrine would be disadvantageous to them. See Lessees' Brief, supra note 3, at 11. We do not determine whether application ofthe merger doctrine would or would not be disadvantageous to the lessees.The Honorable Kip Averitt

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ofthe land at a price equal to the land's fair market value pursuant to Local Government Code section 272.001 (h). 

### See Tex. Att'y Gen. LO-98-082, at 1. The city had appraised the land based on its "underlying fee and reversionary interest," but the lessees asserted that the appraisal should consider "the fact that the land is burdened for some period oftime by the lease." 

### Id. The opinion first concluded that because the sale would be to the lessees ofthe property, the merger doctrine12 would apply to extinguish the leases, the lessees would acquire the whole ofthe city's estate, and thus, the land must be valued as unencumbered by the leases. 

### Id. at 3-4. Accordingly, the opinion advised, the lessees in these circumstances must pay for the whole fee estate-which included the right to receive rents for the remaining lease term and the city's reversionary interest-because section 272.001(h) did not authorize the city to give the lessees the value offuture rental payments as the lessees contended. Additionally, the opinion suggested, discounting the purchase price by subtracting the value offuture rents could violate the article III, section 52's prohibition against granting a "thing ofvalue

... to any individual." 

### Id. at 4.

Texas Attorney General Letter Opinion 98-082 did not construe "fair market value,,13 in relation to a lease and preceded the 

### Brogan and 

### Petula decisions. Our conclusion here is based on this case law that provides that the established definition offair market value includes the value of
a lease. By definition, the sale ofproperty at its fair market value cannot violate article III, section 52(a). "It has been uniformly held that the resale of [] property at its fair [market] value is not a gratuity or an extension ofpublic credit." 

### Davis v. City of Lubbock, 326 S.W.2d 699,709 (Tex. 1959) (rejecting the contention that property purchased by a city for urban renewal "may not be resold atits'fair value' whichmightbe less thanthe [city's] costofacquisition and clearance ofsuch land"); 

### see also Tex. Att'y Gen. Ope No. GA-0371 (2005) at 3 n.4 ("Certainly a land sale for fair market value could not be challenged as a gratuitous transaction." (citing 

### Walker v. City of Georgetown, 86 S.W.3d 249, 260 (Tex. App.-Austin 2002, pet. denied))). Moreover, in this instance, the "windfall" or "discount" the Authority's lessees may receive is notthe directresult of valuing the property as encumberedby the lease, butthe result ofthe previously granted discounted
or below-market lease rates. 

### CfPetula, 240 F.3d at 503 (noting that in the Arizona case, the effect ofincluding the value ofthe lease was to decrease the fair market value, whereas in the Texas case, because ofthe graduatedrent schedule, the effect ofincluding the lease is to increase the fair market value); THE ApPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE 82-3 (12th ed. 2001) (explaining that the value ofa leased fee or fee simple may be less when the lease rent is below market). The question ofthe validity ofthe discounted orbelow-market lease rates is notbefore us.
Texas AttorneyGeneralLetterOpinion98-082hasbeen supersededbyrecentcourtdecisions and is modified to the extent inconsistent with our conclusion here.

12See supra notes 5 & 11.

13See supra note 8.The Honorable Kip Averitt

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### SUMMARY

The Brazos River Authority (the "Authority"), a special law conservationandreclamationdistrictunderTexas Constitutionarticle XVI, section 59., owns real property surrounding Possum Kingdom Lake thatis leasedto private parties atbelow-marketlease rates. The Authority is formulating procedures to offerto sellthe propertyto the lessees ofthe property.
The first question presented is whether the leased property mustbe valued as unencumberedby the leases or encumberedby the unexpiredterms ofthe existing leases forthepurposes ofdetermining the sales price ifthe property is offered for sale to the lessees. Ifthe property is offeredfor saleto the lessees, the Authoritywould sellthe property pursuant to Water Code section 49.226. Section 49.226(a) generally provides that surplus real or personal property owned by a water districtmay be sold in aprivate orpublic sale orbe exchanged. Section49.226(a) requires thatthe surplus propertybe exchangedfor "like fair market value." The Authority and the lessees assume that this fair market provision applies to the sale of the Authority's property. The lessees contend that the fair market value provision in section 49.226 requires the Authority to value the property as encumbered by the leases. Because section 49.226(a) does not explicitly state that a lease may not be considered, fair market value
as used inthe statutehas the meaning establishedbythe Texas courts, whichmeaning includes the value ofa lease. Thus, application ofthe established judicial definition of fair market value requires the Authority to value the property as encumbered by the leases.

The second question presented is whether using the discounted sales priceresulting fromvaluingtheAuthority'sproperty as encumberedbythe leases would violate Texas Constitution article III, section 52(a), which prohibits gratuitous transfers of public funds to individuals or private parties. Using a discounted sales price-resulting in this particular instance from valuing the property as encumbered by the existing leases-would not violate article III, section 52(a).The Honorable Kip Averitt

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KENT C. SULLIVAN First Assistant Attorney General

ANDREW WEBER Deputy Attorney General for Legal Counsel

NANCY S. FULLER Chair, Opinion Committee (GA-0634)

Sheela Rai Assistant Attorney General, Opinion Committee