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# TheAttorney General ofTexas

December 28, 1977 JOHN L.HILL Attorney General

Honorable Oscar B.McInnis Opinion No. H-1108

Criminal District Attorney Hidalgo County Re: Taxation ofproperty Edinburg, Texas 78539 purportedly leased by cities inHidalgo County toprivate manufacturing concerns;and related Dear Mr. McInnis: questions.
You have submitted several instruments relating to the taxable status of certain commercial property located inHidalgo County. We are asked to determine whether the private interests in theproperties are taxable as leaseholds or as fee simple interests in land. You have also asked if it iswithin thepower of the Hidalgo County Commissioners Court, sitting as aboard~ofequalization, todetermine that property listed by the tax assessorcollector as nonexempt property assessable toprivate persons should be exempt from taxation instead.
One of the instruments purports tobe a lease of property from the City ofWeslaco to aprivate concern, Bowie Manufacturing Company. Another purports tobe a lease ofproperty from Edinburg Foundation, Inc., a local nonprofit corporation, to another private business, Edinburg Manufacturing Company, accompanied by an assignment of the lessor's interest to the City ofEdinburg. A third instrument purports tobe a direct lease of property by the City of Edinburg to the same manufacturer. Both cities are inHidalgo County. This office cannot decide disputed questions of fact in the opinion process. Our answers, therefore, are based on the instruments and facts supplied us. As we understand the facts of theWeslaco matter, the property,"leased" by the city to the private concern on February 1, 1977,was transferred to the city that same day by a local nonprofit corporation, Weslaco Development

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Honorable Oscar B.McInnis - Page 2 (H-1108)

Committee, Inc., in consideration of the city assuming both a $20,000 deed of trust note and a $1,591,200 mechanics lien construction loannote against theproperty --property already occupied by themanufacturing company and upon which a large manufacturing facility had been recently built. The "lease contract" specified that the city "shall lease the land and any improvements thereon to Lessee for a term of fifteen (15) years commencing on theday the Lessor acquires theproperty described above.

. . .",making it appear that the "lease" was executed inanticipation of the simultaneous acquisition of theproperty by the city. The notes assumed by the city were originally executed byWeslaco Development, Inc., onApril 20, 1976.
The terms of theWeslaco agreement obligate themanufacturer topay amonthly rental of $13,803.21 per month. You have advised us that this is thebare amount necessary toretire the construction loanpayments as they come due. The contract gives themanufacturer an "option" at the end of the fifteen year term to demand from the city a fee simple title to the land and to the valuable improvements thereon, free and clear of all liens, upon thepayment by themanufacturing company of an additional consideration of ten dollars. At that time the total of the “rental payments" will have equalled the total amount of the construction loan indebtedness assumed by the city. The agreement also gives themanufacturer an "option" to acquire the fee simple title at any earlier time for no consideration other than themanufacturer's assumption of the construction loan note the city had previously assumed; the manufacturer isnot required to assume orpay off the note given topurchase the land. Whether the "option" is exercised early or late, therefore, the city itselfmust pay off the $20,000 purchase price of the land and convey the land in fee, together with the improvements, whenever themanufacturer chooses. As to the construction loan, the instrument provides that if themanufacturer exercises its early "option" and assumes the outstanding construction loan indebtedness, the city "shall be released by the lender from all future liability forpayment of said loan." The lender is not aparty to the agreement and isnot bound by it. The "release" provision isunenforceable. 13 Tex. Jur.Zd, Contracts s 9.Other provisions of the agreement require themanufacturer to keep the premises insured and topay taxes "against all fixtures and personal property" located or situated on the property. Themanufacturer is given the right to sublet the

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property with the approval of the city, but if the city disapproves, themanufacturer isrelieved of all obligations except the obligation to return the property. The tax assessor-collector regards the "lease" as a sham. He assessed the fullvalue of the fee to themanufacturer for 1977 and submitted his tax list to the Hidalgo County Board of Equalization for approval. The Board held ahearing at which itvoted unanimously to consider both theWeslaco and Edinburg properties asbeing exempt properties under lease, and that no 1977 taxes be assessed against themanufacturers for their use, but the Board has not yet taken final action. First, we notewith regard to theWeslaco property that the owner of record on January 1, 1977,was theWeslaco Development Committee, Inc., not the city and not themanufacturer. Article 7151,V.T.C.S., provides:

All property shall be listed for taxation

. . .with reference to the quantity held or owned on the first day of January in the year forwhich theproperty is required tobe listed or rendered. Ordinarily, interests in land acauired after the first day of January are not assessable for thatyear to the grantee. Childress County v. State, 92S.W.Zd 1011 (Tex.1936); Humble Oil &Refining Co.v. State, 3S.W.Zd 559 (Tex.Civ. App. -- Waco 1927,writ ref!d);'54 Tex. Jur.Zd, Taxation 5 92. However, article 7151 further states:

During the taxyear between January 1 and October 1,when title to or any interest in landbeing acquired by

. - . cities

. . .isvoluntarily conveyed by the owner thereof or is acquired for public use by condemnation

. . .such agency's authorized tax official shall estimate the amount of taxes which would have been orwill become due and payable for the year had the landnot been acquired forpublic purposes. When such estimate ofyearly taxes is determined

. . . ,such tax official

. . .shallprorate such taxes on the basis of the number ofmonths the land

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remained inprivate ownership or control

. . .and shall certify same, and shall accept or collect said prorated taxes and issue his receipt therefor which receipt shall constitute a full

. . . satisfaction of all such liens

. . .in favor of the tax units.

. . . Sec. 2. Thus, theWeslaco Development Committee, Inc., appears to be liable for all the 1977 taxes on theWeslaco property unless the landwas validly acquired inFebruary by the city "forpublicpurposes." Unlike leaseholds inpublic land, leaseholds in private land are not taxable to the lessee; the entire value of the fee is taxable to the owner. See 54Tex. Jur.Zd, Taxation - §§ 54, 55, 59. The City ofWeslaco assumed a substantial indebtedness to complete the transaction. In Texas, no debt can ever be validly created by a city, unless at the same time provision ismade to assess and collect annually a sufficient sum topay the interest thereon and to create a sinkinu fund of at least two uercent thereon. Tex. Const. art. ll,-59 5. 7;McNeil1 v. City of Waco, 33 S.W. 322 (Tex.1895); Brodhead v. City of Forney, 538 S.W.2d 873 (Tex.Civ.App. --Waco 1976,writ ref'd n.r.e.1. No indication has been given us that such aprovision was made in this case. See B. L.Nelson &Assoc. v. City ofArgyle, 535 S.W.2d 906 (TecCiv. App. -- Ft. Worth 1976, writ ref'd n.r.e.).

, The constitutional restriction isnot applicable where the obligation assumed ispayable out of current revenues for the year or from any other fundwithin the immediate control of the city, but neither of those exceptions seem applicable here. The city has apparently undertaken an absolute andunqualified obligation to pay the outstanding long-term notes. Under these circumstances, the city's agreement to do sowould violate the Constitution and be ultra vires, void, and unenforceable. City of Ft. Worth v. Bobbitt, 41 S.W.Zd 228 (Tex.Comm'n App. 1931, jdgmt adopted). See 40Tex. Jur.Zd, Rev., part 1, Municipal Corporations $s443-452, 638-646.
On these facts, the fullvalue of theWeslaco property is assessable toWeslaco Development Committee, Inc., for 1977. In that connection article 7174,V.T.C.S., reads inpart:

Each separate parcel of real property shall be valued at its true and full value inmoney, excluding the value of crops growing or ungathered thereon.

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But even if there are facts ofwhich we are unaware that would take the transaction with Weslaco Development Committee, Inc., out of the reach of sections 5and 7of article 11of the Texas Constitution, we believe all the transactions which tookplace on February 1, 1977, would be heldvoid, nevertheless. Section 3of article 11of the Constitution reads:

No
. . .city

. . .shall

. . .become a subscriber to the capital of any private corporation or association, ormake any appropriation or dona'tionto the same, or inanywise loan its credit:

. . . . The city, themanufacturer, and the nonprofit corporation have constructed their contractual arrangements soas to allow theuse of the city's credit for the benefit of theprivate corporation, and to secure for themanufacturer adonation of land from the city. The purpose of article 11, section 3of the Constitution is toprevent such transactions. Citv of Cleburne v. Brown, 11 S,W. 404 (Tex.1889); City of Cleburne v. Gulf, C. & S. F. Ry. Co., 1 S.W. 342 (Tex.1886);Attorney General Opinion H-357 (1974).
Persons who deal with municipalities are deemed to be on notice of the legal limitations under which citiesmav exercise contractual powers. City of Beaumont v. Moore, 202 S:W.Zd 448 (Tex.1947); Zachry v. City of SanAntonio, 296 S.W.Zd 299 (Tex. Civ.App. -- SanAntonio 1956), aff'd, 305 S.W.Zd 558 (Tex. 1957). Thus, we think the nonprofit corporation was bound to know the city could not so easily assume-the indebtedness the corporation had incurred, and we think themanufacturer was bound to know the city could not lend itsmunicipal credit or donate land to themanufacturer. With regard to theWeslaco property, we are of the opinion that the transaction between the city and the nonprofit corporation, Weslaco Development Committee, Inc., cannot be given legal effect, and that the nonprofit corporation, as owner of the fee on January 1, 1977, is liable for all 1977 taxes on the property. The legalprinciples applicable to theWeslaco transaction are equally applicable to the Edinburg transactions. In 1968, the Edinburg Foundation, Inc., anonprofit corporation, entered into a twenty-five year lease agreement with the Edinburg Manufacturing Company which contained provisions similar to those contained in the laterWeslaco agreement, themajor differences being that the "option" to obtain the fee title at the end of the primary termwas not supported by a separately

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expressed consideration, and the "lessor" was obligated topay "all taxes
. . .assessed

. . .against the building and land.

. . ." The agreement obligated the "lessor" to construct abuilding on the property to the specifications of the "lessee." Rental payments were pegged at $2,000 permonth. Later that year a "corrected lease contract" between the same parties was executed, and in 1970 the nonprofit corporation assigned its interest in the lease to the City of Edinburg, inreturn for which the city agreed to "assume all of the obligations of Edinburg Foundation, Inc., under and,arising out of said agreement." Subsequently, in 1971, the City of Edinburg and themanufacturer entered directly into an additional "lease" agreement whereby the city agreed to build another building on adifferent parcel of land and "lease" it to the samemanufacturer for a term of fifteen years at a rental of either $7,172.78 permonth, or $6,945.21 permonth, depending on the rate of interest at which the city could obtain financing for the project. The other terms of the additional agreement were very similar to those of the agreement which the nonprofit corporation had previously assigned to the city. There isno evidence in our file to suggest that the City of Edinburg complied with the "debt"provisions of the Texas Constitution. Unless itdid so, the city could notvalidly assume the Edinburg Foundation, Inc., indebtedness, nor borrow construction money for the additional lease, nor assume the tax liabilities of the "lessee." Further, the city could not validly loan its credit to themanufacturer or donate property to it. Webelieve the financial obligations undertaken by the city were ultra vires, void and unenforceable. Tex. Const. art. 3, 5 52; art. 11, §S 3, 5, 7. SeeMoore v. Meyers, 282 S.W.Zd 94 (Tex.Civ. App. -- Ft.Worth 1955,writ ref'd n.r.e.). Inasmuch as the city never legally acquired the property it "leased" to themanufacturer, itwould appear that the Edinburg Foundation, Inc., is still theowner of at least the first parcel transferred to the city. The original ownership of the addition parcel "leased" and the circumstances Of its acquisition by the city are not clear from thematerial you have submitted. As owner, Edinburg Foundation, Inc.,would be liable for all 1977 taxes assessed against the fee. The fact that the name of the owner was incorrectlv placed on the tax assessor-collector's listswould not invalidate the assessment. V.T.C.S. art. 7171. Victory v. State, 158 S.W.Zd 760 (Tex. 1942). But seeBashara v. Saratoga Ind. Sch. Dist., 163 S.W.Zd

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631 (Tex.Comm'n App. 1942, opinion adopted). Of course, whoever the rightful owner of theproperty might be, the taxable interest therein is subject to sale forany unpaid taxes validly assessed against it. V.T.C.S. art. 7172.
We now turn toyour second question. The authority of the county commissioners court to sit as aboard of equalization isderived from article 5, section 18of the Texas Constitution, and article 7206,V.T.C.S. The statute empowers the board "to correct errors in assessments," and this authority extends to the correction of erroneous designation of the owner, to the description of the property, and tovaluations placed on theproperty by the tax assessor-collector, but the Board of Eaualization has no authority to strike property from the tax roils. Harris County v. Bassett, 139 S.W:Zd-180-(Tex. Civ. App. -- Gal-; Rosch v. First Savings &Loan, 203 S.W.Zd 1006 (Tex.Civ.App. -- 8th Dist. 1947,no writ).
We understand that the tax assessor-collector hasplaced the fee interests of both theWeslaco property and the Edinburg properties on the tax rolls. The Board of Equalization has tentatively determined that portions of the fee interests placed on therolls are exempt from taxation and should be struck, leaving only the leasehold interests tobe taxed, and has also determined that each leasehold has no taxable value.
In 1969, this office was asked which county'officials have responsibility for deciding ifproperty is to be considered tax exempt, when its tax exempt status is indispute. Attorney General Opinion M-328 (1969),after noting that the final authority rests in a court of competent jurisdiction, declared that the administrative responsibility for such adecision is vested in the tax assessor-collector, and that the commissioners court, sitting as aboard of equalization, has no authority to consider questions relating to tax exemptions. Its authority in that capacity is limited tomatters affecting valuation. However, the opinion concluded that the county commissioners, functioning as the commissioners court, have authority under articles 7346 and 7347,V.T.C.S., to review suchdecisions of the tax assessor-collector and if they are invalid, to order their reassessment. SeeV.T.C.S. art. 7225; Bashera v. Saratoga Ind. Sch. Dist., supra; Attorney General Opinion O-7251 (1946). But see Bass v.Aransas County Ind. Sch. Dist., 389 S.W.Zd 165 (Tex.Civ.App. -- Corpus Christi 1965,writ ref'd n.r.e.1.
It follows that the board of equalization, as a separately constituted body, has no authority to strike the fee interests

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Honorable Oscar B.McInnis -Page 8 (H-1108)

in the disputed properties from the tax rolls. While itmight correct the name of the owner, thenvalidity of the assessment isnot affected, even if thenboard's designation of the owner should itself be erroneous. V.T.C.S. art. 7171. In our opinion the Hidalgo County Commissioners Court, sitting as aboard of equalization, does not have thepower todetermine thatproperty listed on the tax rolls by the tax assessor-collector as taxable property iswholly orpartially exempt from taxation.
SUMMARY Properties purportedly leased by cities toprivate manufacturers were taxable to true owners of the fee interests where the cities never legally acquired ownership interests in them. Property which the tax assessor-collector lists on the tax rolls as nonexempt cannot be reclassified,as property exempt from taxation by the county commissioners court sitting as a board of equalization, even though such assessments made by a tax assessorcollector canbe later reviewed by the commissioners court, sitting as the court, which may order invalid assessments reassessed.

APPROVED: truly yours,

Attorney General ofTexas

Opinion Committee jst
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