OF)rlCEOFTHEA~ORNEY GENERALOFTEXAS 

AUSTIN 

Ronorable 0. P. Lockhsrt, Chairman 

Board of Insurance Comnlsaionera 

Austin, Texas 

Dear 81rr opinion Llo. o-3924 

Rez Investment8 of a general 

oawalty iwuranae oompany. 

This department has reoeived your requert for an opinion. Ue net out belov the pertinent part of ~rour letter aud the 

enolo8urea contained therein. 

"Please adv%se if a general oa8ualtP lnauranoe oompany such a8 the Employer8 Oarualty Company of Dallar, Tex68, operating under the provlslons of Chapter 18, Title 78 of the Revised 

Olrll Btatutes of fexab, aud governed in it8 iavedment polioy by Articles lr705-6, and 4993, may 

make the lessor a loan and aooept a8 8eourlng 

therefor a mortgage note on the leesor' interest 

under the lease and asalgnment ot rental8 due, 

under what the Federel HOU8ing Act delsrlgnates a8 

Gla88 3 108118." 

The enolosure read8 aa follov8: 

“As you lmov the @over of this oompany to Invert 

funds OOU8titUting 8 p8X’t Of it8 OEipit~~ md 8 

i8 regulated by the provision8 of Art8. 4705, 68 ?&id 

4993 of the Texas 8tatUte8 a8 amended. hll three of 

the8e articlea, aa now amended, authorice investments 

in first mortgagee or lime upon real eatate under 

oertati expressed condltlonrs. 

"Under Title 1 of the Federal Rouelng Act (8eotiona 1702-1705 IJ 8 C A), the Federal Houaing Admln18trator La Fpauring what L8 knovn as Claaa 3 loans. 

Such a loan is made to the lessee of umimproved real 

eetate under a form of lease presorlbed by the Fllk. 
I ‘; 

ganorable 0. P. WA&art, Chalraan, Page 2 

Such lease le for a term of not 1~8s than 31 year8, 

prOVide8 iOr an arm-1 rental of 80 mtmh per year 

peyabls to the ou'Z&er Of the property and pl’OVidk38 

that the lessee shall have the option of purcha8Ing 

the property at -'time for a givea aum. The optlon price 18 the fair value of the -tiproved property aa detennIned by the FE& and the annual rental 

18 fixed OXl a b88iS t0 yield the le88Or a 6$ retUrn 

en that valuation. The leare olao provided that If 

the lerree default8 In the payment of the annual 

rental, or fat18 to perform any Of the other oovonents 

oontalned In the l-80, and rails to oure ths default 

ulthln 90 days, the learre vlll terminate and the 

lerrror can re-enter and take po88e86lon of the tit, 

together vith all Improvement8 vhloh have been ereated thereon by the 1088ee. 

"%-IO le8888 in tUlll bOa'XOlf8 a lUffiOi8Xlt 8m Of 

SlM8y toll th8 -08e Of 8lWOttng illQXWVOllt8~t8 00 the 

pl'O~l'ty, Md t0 8OOW th8 lO&ll, 8XbQUt88 to the 

lendsr a mOrtgage en the learehold 88tate a8 well as 

all other wt.8 l oquired by him under the lease. 

The fO'orm Of thf8 mortgage or deed Of trp8t I8 pre8Orib8d by the FE& and &mOn$ other tbing8, %t provides that the mortgagsevill oolleot the gmtmd rental from the lerre6 and pay It to the lelaor, aad.that 

In the‘ event the 18888e fail8 to #ay the rental, the 

mortgage8 may do 60 and the uwuut 80 advenoed by $he 

Snortgages pill be reoured by mortgage. Loans of thl8 

type 88Oured by a mrtgage on the lea8ehOld estate 

qualify folr insuranoe under fltle 1 of the Fedora 

EOtI8i43 Act, whbre nOt in 8x0088 Of )2500.00. 

"Under the foregoing arrangement the lessor 8tlll 

holds title to the plVfElf888, 8ubj8Ot, Of @OW8e1 t0 

the leaee and the option to puroharre therein oonti&lned. 

Uhen Improvements have been ereoted on the p-888, 

the lensorls seeuwity lr not only the lot, but also 

the zlmprovemente paid for by the FHIL loan. Vnder FBA 

requirement8 the value of the lot a8 fIxed in the option to purchase priae vi11 not exoeed approximately 

25% of the total value of the lot and iprpPovement8. 

"!Fhe question in whloh ve are intweeted is 

whether or not the lessor undelr the above mentioned 

arrangement, following the completion of the lmprove- 
&norable 0. p. Lockhart, Chairman, Page 3 

ments erected on the lot and the clortlug of the 

FIfA loan t0 the 1888ee, ha8 an intePe8t In the property of 8uoh charaater that our company aould make 

the lessor a loan, and accept as seourlty therefor a 

mortgage on the leseorte interest under the lesee 

and an.aesIgment of the rental due thereuuder. This 

company has had submitted to it several requemta for 

loana of this type, but before eating upon 8Uoh requests, ve think It neces8aPy to obtain through you 

an opIulon of the AttOrII8y General on the question of 

vlrether or not 8Uoh lOan8 aPe Of a type in Vhiah this 

company may legklly fZIVeSt it8 fund8. In the oa8e of 

each of these loans the amount of money vhloh the 

lesSOr d88ire8 t0 bOrrOV IS the tOhI VdUe Of the 

unimproved lot, this being the value of the lot fixed 

by FE)& and stated in the lea88 a8 the Option t0 purohase price. Tlm8 should the loan be made Ye vould 

be lendIng 100% of the value whIah the property had 

prior to the time the Improvements vere ereoted by 

the lessee. Hovever, as above stated, at ths.dAte the 

lee8or hae come to us with his request for a loan the 

imprOV~nts ereoted by the le8a88 have enhaaoed the 

value of the property to euoh an extent that it8 mapket value is considerably moc8 than 40$ above th8 amount of the reqUe8t8d loan, uhIoh ia the requIPement 

Set out In APtS. 4705, 4706 and 4993. FUi%h8IlUOZ'Es, 

the lesbor's Interest In the property whloh vould be 

mortgaged t0 U8 18 *uninoutubered,' Unb588 th8 FBA 

mortgage COVePing the 188~86'8 %tJt8P8@t oan b8 uoneldered as an lnoumberance againat the 18bsor18 inteP8st.' 

APtlcles 4705, 4706 and 4993, Vernon's Annotated Civil 

8tatUt88, gOVePn the inV88tment8 Of a g8n8l'al Oa8llalty inSUlUnO8 

o=pany. Only OePtain tWCtIOn8 Of tho88 artiales are applloable 

to our situation here. They follow 

Article 4705. "The capital stock of any suoh 

Insurance company, except any vrltIng Life, Health 

and Aaoldent Insurance, shall oonalstt 

"3. In fir& mortgages upon unencumbered real 

e&ate in this atate l l *." 
%@tlO~b$SO. I', Loo~~E&, Gbalrm~sn, page 4 

Article 4706. "Xl0 company, exoept any writ; 

Ing Wfe, Health andaooldent Insuranoe, organized 

ImdeP the p~ovl4ions of this Ghapter 4hall Invest 

Its funds over and above its paid-up capital rtook 

in sny other manner than as fo11owsr 

'(b) In bonds or flrrt liens or unenoumbered 

r ea l 8ta te l l l .î 

Artlole 4993 pH4Crib88 the &USOUat Of Capital 8tOck 

that gM8~:?088Wlt~ CClllp8IliC8 XUSt h&V8 8lld then add8 a8 fO11OV81 

(That) 'Gapital shall be prrld up or inverted 

In l l l bond8 or fiP4t 1I8rUr Upon M8nCU4ibeP8d 

l'8al 8Stat8 + f*.' 

The oonslstent uIIe of the phrase *unenoumbePed real estate" by the fP8i~CP8 Of the Vapi0~8 8IUiC~entS is t0 be Peadlly 

n0ted. 

The 8upr8me GouPt of Texas In the 0088 of Ttwneb v. Ro88, 

s3 Tex. 218, 18 8. Y. 578, 15 L.R.A. 262, ably announoed what is 

nov a well knovn mile of rtatutery oan8traotlon, to-wit: 

'It 18 the duty of a oowt to give~to me 

U8.4 in a 8frtUte the m?aDing vith l7hIoh it m8 U8Od 

by the Isgl4latur8, if that oan be asoertaInedJ and 

to do this, if th8 wopd8 used be not euoh as have a 

peou.lIar meaning when applied to an art 0~ trade vlth 

PefePenoe to vhloh they aP8 used In the statute, they 

4hould be given their ordinary nmanlng, as the Lsgls1atuP8 must be pr88rOned to have used them In that 

881188 in vhloh they aP8 ordinrrily tinderrtood." 888 

also T. &I P. RR Go. v. Railroad GemmI4slo~ of Texas, 

150 8.U. 878, 105 Texas 386. 

In the oa8e of Thomson v1 lo&e, 1 8. W. 112, 66 Texas 

383, the Supreme Court of Texas adopted the follovlng defInltlon 

of the word "InoxnnbPano~e' or "enoumbranoet' 

'In a legal sense the voPd ~inourabrancel mean8 

an estate, Interest or right In land4, dilSln18hing 

their value to the genera1 OVLLer, a paramount right 

In or weight upon land whloh mrry 188Sen its value." 
Ronorable 0. P. Lookbart, Ghalnsan, Page ~5 

Tiffany In hi8 treatl8e On Real Property define8 an 

~~lLSb~MC8 63s 'every right t0 or interest in the land whioh 

uy subrist In third person8, to the diminution of the value 

of the land." Also: 

"Any right existing in another to use the 

land, or whereby the u8e of the owner 18 restricted, 

Is an inounbmnoe vUh3n the legal meaning of the 

wo r d. l Bull Q. Burton, 124 111.K 124, 227 X.X. 101. 

In the 8Ituatlon before us, the leaa ha8 a lea88 for 

v8 d M OptfOIl t0 pul'ohr8e the ;le88Or'8 int;el'eSt in the 

pxwpertyatanytlme. Further, In antePIng into the agreement 

the parties bind their rerpeotlve helrr, exeoutors, admfnirtzutOP8, 811008880~ and assiepla. 

It 14 our opinion that the w 18 

23 

_. fact that an estate 

or Jesse for year8 outrtan~ in a thl parson la weighted 

8g4fWt the les8Or'8 b¶tOXWEt in the land COWtftUtb8 suoh an 

ensuabranoe within the meknIng of the term and oont&wy to the 

prOri81OIl8 Of the 8tatUt88 a8 to pPeV8at the In~tU%Ulo@ OOISpany 

trots inverting it8 fuuda in the lWwor'8 Interest In the property. 

jbrth8rmor8, we think the les8eets option to purahase L8 it8elf 

8n enomabranoe within the meaning of the rules above dison88ed. 

‘Phrr~ Ye adViS8 you. 

w8. tPUSt that thf8 8118V8P8 y0w qu8~tfOn~ 

YOura very truly 

ATTORRRX GR%ERAL OF TEXAS