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The Attorney General of Texas 

December 28, 1977 

JOHN L. HILL 

Attorney General 

Honorable Oscar B. McInnis Opinion No. H-1108 

Criminal District Attorney 

Hidalgo County Re: Taxation of property 

Edinburg, Texas 78539 purportedly leased by 

cities in Hidalgo County 

to private manufacturing 

concerns ; and related 

Dear Mr. McInnis: questions. 

You have submitted several instruments relating to 

the taxable status of certain commercial property located 

in Hidalgo County. We are asked to determine whether the 

private interests in the properties are taxable as leaseholds or as fee simple interests in land. You have also 

asked if it is within the power of the Hidalgo County 

Commissioners Court, sitting as a board ~of equalization, 

to determine that property listed by the tax assessorcollector as nonexempt property assessable to private 

persons should be exempt from taxation instead. 

One of the instruments purports to be a lease of 

property from the City of Weslaco to a private concern, 

Bowie Manufacturing Company. Another purports to be a 

lease of property 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 of Edinburg. 

A third instrument purports to be a direct lease of property by the City of Edinburg to the same manufacturer. 

Both cities are in Hidalgo 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 the Weslaco 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 loan note against the property -- property already 

occupied by the manufacturing 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 the day the Lessor acquires the property 

described above. . . .", making it appear that the "lease" was 

executed in anticipation of the simultaneous acquisition of 

the property by the city. The notes assumed by the city were 

originally executed by Weslaco Development, Inc., on April 20, 

1976. 

The terms of the Weslaco agreement obligate the manufacturer to pay a monthly rental of $13,803.21 per month. You 

have advised us that this is the bare amount necessary to retire 

the construction loan payments as they come due. The contract 

gives the manufacturer 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 the payment by the manufacturing 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 the manufacturer an "option" to 

acquire the fee simple title at any earlier time for no consideration other than the manufacturer's assumption of the 

construction loan note the city had previously assumed; the 

manufacturer is not required to assume or pay off the note 

given to purchase the land. 

Whether the "option" is exercised early or late, therefore, 

the city itself must pay off the $20,000 purchase price of the 

land and convey the land in fee, together with the improvements, 

whenever the manufacturer chooses. As to the construction loan, 

the instrument provides that if the manufacturer exercises its 

early "option" and assumes the outstanding construction loan 

indebtedness, the city "shall be released by the lender from 

all future liability for payment of said loan." The lender is 

not a party to the agreement and is not bound by it. The 

"release" provision is unenforceable. 13 Tex. Jur.Zd, Contracts 

s 9. 

Other provisions of the agreement require the manufacturer 

to keep the premises insured and to pay taxes "against all 

fixtures and personal property" located or situated on the 

property. The manufacturer is given the right to sublet the 

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Honorable Oscar B. McInnis - Page 3 (H-11081 

property with the approval of the city, but if the city 

disapproves, the manufacturer is relieved of all obligations 

except the obligation to return the property. 

The tax assessor-collector regards the "lease" as a sham. 

He assessed the full value of the fee to the manufacturer for 

1977 and submitted his tax list to the Hidalgo County Board 

of Equalization for approval. The Board held a hearing at 

which it voted unanimously to consider both the Weslaco and 

Edinburg properties as being exempt properties under lease, 

and that no 1977 taxes be assessed against the manufacturers 

for their use, but the Board has not yet taken final action. 

First, we note with regard to the Weslaco property that 

the owner of record on January 1, 1977, was the Weslaco 

Development Committee, Inc., not the city and not the manufacturer. 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 for which the property is 

required to be listed or rendered. 

Ordinarily, interests in land acauired after the first 

day of January are not assessable for that year to the grantee. 

Childress County v. State, 92 S.W.Zd 1011 (Tex. 1936); Humble 

Oil & Refining Co. v. State, 3 S.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 tax year between January 1 

and October 1, when title to or any 

interest in land being acquired by . - . 

cities . . . is voluntarily 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 or will become due and 

payable for the year had the land not 

been acquired for public purposes. 

When such estimate of yearly taxes is 

determined . . . , such tax official 

. . . shall prorate such taxes on the 

basis of the number of months the land 

P. 4537 
Honorable Oscar B. McInnis - Page 4 (H-1108) 

remained in private 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, the Weslaco Development Committee, Inc., appears to 

be liable for all the 1977 taxes on the Weslaco property unless 

the land was validly acquired in February by the city "for public purposes." Unlike leaseholds in public land, leaseholds in 

private land are not taxable to the lessee; the entire value of 

the fee is taxable to the owner. See 54 Tex. Jur.Zd, Taxation - 

§§ 54, 55, 59. 

The City of Weslaco 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 is made to 

assess and collect annually a sufficient sum to pay 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 a provision was made in this 

case. See B. L. Nelson & Assoc. v. City of Argyle, 535 S.W.2d 

906 (TecCiv. App. -- Ft. Worth 1976, writ ref'd n.r.e.). 

, The constitutional restriction is not applicable where the 

obligation assumed is payable out of current revenues for the 

year or from any other fund within the immediate control of the 

city, but neither of those exceptions seem applicable here. 

The city has apparently undertaken an absolute and unqualified 

obligation to pay the outstanding long-term notes. Under these 

circumstances, the city's agreement to do so would 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 40 Tex. Jur.Zd, Rev., part 1, 

Municipal Corporations $s443-452, 638-646. 

On these facts, the full value of the Weslaco property 

is assessable to Weslaco Development Committee, Inc., for 1977. 

In that connection article 7174, V.T.C.S., reads in part: 

Each separate parcel of real property 

shall be valued at its true and full 

value in money, excluding the value of 

crops growing or ungathered thereon. 

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Honorable Oscar B. McInnis - Page 5 (H-1108) 

But even if there are facts of which we are unaware that 

would take the transaction with Weslaco Development Committee, 

Inc., out of the reach of sections 5 and 7 of article 11 of 

the Texas Constitution, we believe all the transactions which 

took place on February 1, 1977, would be held void, nevertheless. Section 3 of article 11 of the Constitution reads: 

No . . . city . . . shall . . . become 

a subscriber to the capital of any private corporation or association, or make 

any appropriation or dona'tion to the same, 

or in anywise loan its credit: . . . . 

The city, the manufacturer, and the nonprofit corporation 

have constructed their contractual arrangements so as to allow 

the use of the city's credit for the benefit of the private 

corporation, and to secure for the manufacturer a donation of 

land from the city. The purpose of article 11, section 3 of 

the Constitution is to prevent 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 cities mav exercise 

contractual powers. City of Beaumont v. Moore, 202 S:W.Zd 448 

(Tex. 1947); Zachry v. City of San Antonio, 296 S.W.Zd 299 (Tex. 

Civ. App. -- San Antonio 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 the manufacturer was 

bound to know the city could not lend its municipal credit or 

donate land to the manufacturer. 

With regard to the Weslaco 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 legal principles applicable to the Weslaco transaction 

are equally applicable to the Edinburg transactions. In 1968, 

the Edinburg Foundation, Inc., a nonprofit corporation, entered 

into a twenty-five year lease agreement with the Edinburg 

Manufacturing Company which contained provisions similar to 

those contained in the later Weslaco agreement, the major differences being that the "option" to obtain the fee title at the 

end of the primary term was not supported by a separately 

P. 4539 
Honorable Oscar B. McInnis - Page 6 (H-1108) 

expressed consideration, and the "lessor" was obligated to pay 

"all taxes . . . assessed . . . against the building and 

land. . . ." The agreement obligated the "lessor" to construct 

a building on the property to the specifications of the "lessee." 

Rental payments were pegged at $2,000 per month. 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, in return 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 the manufacturer entered directly into an additional "lease" agreement 

whereby the city agreed to build another building on a different 

parcel of land and "lease" it to the same manufacturer for a 

term of fifteen years at a rental of either $7,172.78 per month, 

or $6,945.21 per month, 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 is no evidence in our file to suggest that the City 

of Edinburg complied with the "debt" provisions of the Texas 

Constitution. Unless it did so, the city could not validly 

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 the manufacturer 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. See Moore 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 the manufacturer, it would appear that the 

Edinburg Foundation, Inc., is still the owner 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 the material 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 lists would not invalidate the assessment. 

V.T.C.S. art. 7171. Victory v. State, 158 S.W.Zd 760 (Tex. 

1942). But see Bashara v. Saratoga Ind. Sch. Dist., 163 S.W.Zd 

p. 4540 
Honorable Oscar B. McInniS - Page 7 (H-1108) 

631 (Tex. Comm'n App. 1942, opinion adopted). Of course, 

whoever the rightful owner of the property might be, the 

taxable interest therein is subject to sale for any unpaid 

taxes validly assessed against it. V.T.C.S. art. 7172. 

We now turn to your second question. The authority of 

the county commissioners court to sit as a board of equalization is derived from article 5, section 18 of 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 to valuations 

placed on the property 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 has placed 

the fee interests of both the Weslaco property and the Edinburg 

properties on the tax rolls. The Board of Equalization has 

tentatively determined that portions of the fee interests 

placed on the rolls are exempt from taxation and should be 

struck, leaving only the leasehold interests to be 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 if property is to be considered 

tax exempt, when its tax exempt status is in dispute. 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 a decision is 

vested in the tax assessor-collector, and that the commissioners 

court, sitting as a board of equalization, has no authority to 

consider questions relating to tax exemptions. Its authority 

in that capacity is limited to matters 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 such decisions of 

the tax assessor-collector and if they are invalid, to order 

their reassessment. See V.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 

p. 4541 
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Honorable Oscar B. McInnis - Page 8 (H-1108) 

in the disputed properties from the tax rolls. While it might 

correct the name of the owner, then validity of the assessment 

is not affected, even if then board'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 a board of 

equalization, does not have the power to determine that property 

listed on the tax rolls by the tax assessor-collector as taxable 

property is wholly or partially exempt from taxation. 

SUMMARY 

Properties purportedly leased by cities 

to private 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 can be later reviewed by the 

commissioners court, sitting as the court, 

which may order invalid assessments reassessed. 

APPROVED: 

truly yours, 

Attorney General of Texas 

Opinion Committee 

jst 

p. 4542