HARKWHITE

.Attorney General

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# TheAttorney General ofTexas

January 21, 1982

Honorable Chris Victor Semos Chairman House Committee onBusiness and Industry Capitol Building Austin, Texas 

### 78711

Dear Representative Semos: Opinion No.MW-430

Re: Whether hospital project is subject to ad valorem tax

The Grand Prairie Connnunity Hospital, a hospital authority organized under article 4437e, V.T.C.S., the Hospital Authority Act, plans to construct ahospital project consisting of anoffice building and parking lot immediately' adjacent to the presently existing hospital facility and to lease or sell that office space as condominiums to doctors practicing therein. You ask whether the project will be subject to ad valorem taxation levied against the hospital authority if the revenue which U generates through rental or sale agreements is sufficient to show a profit, even though such profit will either be placed in the general funds of the hospital authority or be used for the continued improvement, expansion and development of the office building. Wedonot understand you to be asking whether a lessee or apurchaser will be subject to advalorem taxation in the situation you describe.

The hospital authority is empowered to construct hospital projects defined as follows:

'Hospital project' means and includes any real, personal, 0r mixed property, or any interest therein, the... constructing... of which is found by the governing body of anissuer to be required
or necessary for medical care. research, training, and teaching, any one or all.... Without limiting the generality of the foregoing, andwhenfound by the governing body or anissuer tobe sorequired, necessary. or convenient 'hospital project' shall include the following:llonornh~r Chris Victor Srrnon- Pngc 2 !Mw-430)

.-

office building, parking lot or building. or “ainte”a”cc. !;nfc ”ty, or utll,tty Facility. and related equipment.

V.T.C.S. art. 4437e-2 63(g). Seealso V.T.C.S. art. 4437e. $91, 3, 6. Clearly a” office building andparking lot such as you describe, when found tobe“required, nccesssry, or convenient” bythe governing body of the authority would fall within the definition of “hospital’ project” as set nut above.

Senate RI11 No. 1067, amending article 4437e-1, V.T.C.S.; authorizes the governing body of any hospital authority created pursuant to the Hospital Authority Act to lease or to sell to any person any hospital, or part thereof. owned by the authority. Acts 1981, 67th Leg., ch. 5H3, 55 at 2363. It amends section 14 of the Hospitol Authority Act to provide that the hospital should not be operated with aview to generating Rprivate profit, but that, in any event, it must be operated to generat.e suffic,ient revenue to pay all expenses and all indebtedness incurred by the facility. Acts 1981, blth l.cg., ch. 583, $4 at 2362. Andfinally, section 16of artic1.e 4437e. V.T.C.S., provides that ::incc the property owned by the authority will be held for public purposes only andwill be devoted exclusively to the use and benefit of the public, it shall be exempt from all forms of taxation. You ask whether the authority will be subject to ad valorem taxation tf it leases or sells the above-described office space and parking lot as it is empowered by statute to do.

e Article XI, section Y of the Texas Constitution provides in pertinent part the following:

Theproperty of counties, cities and towns, owned andheld only for public purposes. such as public itilildings andthe sitcs thert:for,

...nnd all other
Q?-OQ‘!rt,' devoted cxclunively to the use and benefit of the public shnll be exempt from.

.. taxation....
Arti,,!‘

. VTlI. st.ccion 2 of the 1’ev.a~ Constitution provides in pert~i~:crtc port the fol IowIng: “I‘I’)hc I.cgisl;lturr mny, by gener?,l 1ilWS, ‘xr*nq,t Iram taxntJ~“rl i>llbliC property used for Q"bl:C pI!rposes....” Article VIII, aectlun Iof the ‘Texas Constitution sets forth the following I.” Qertinellt pnrt: “All real property and tangible personal property in this state, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to Its value. which shall beascertained asmaybeprovided by ],a~.”
Property of apolitical subdivision which would otherwise qualify for exemption from ad valorem taxation under one of the foregoing constitutional provisions will not lose its tax-exempt status merely becnuse .? charge is made for “se of the property or a profit is generated thereby provided the charges are incident to its use by thei Honorable Chris Victor Semos- Page 3 (MW-430)

suhdivlslon. ~.ower Culornrhr Klvrr Authority v. Chrmical Hank and Trust Company,.‘190 S.W.Z;?---&H. SO (TcFT945); A h M~onsolidnted Independent School District v. City of Bryan, 184~!.W.Zd 914, 915-16 (Tex. 1945). See also tity of Beaumont v. Fertitta. 415 S.W.Zd 902, 915 (Tex. 1967) (Walker, .I., dissenting); Galveston Wharf Companyv. City of Galveston, 63Tex. 14(1884); Cf. Santa Rosa Infirmary v. City of SanAntonio, 259 S.W. 926 (Tex. Coxn App. 1933); City of Dallas V. Smith, 107 S.W.2d 872 (Tex. 1937); Palestine v. tit of y Missouri-Pacific Lines Hospital Association, 99S.W.2d 311~(Tex. Civ. ADD. - Amarillo 1936. writ ref ’dj (cases involved not oolitical subdivisions but rathe; institutions. of.purely public charityj.

Our inquiry, however, does not end here. In your letter requesting our opinion you state: “Offices would be leased and/or office space would be sold on a ‘condominium theory’ to doctors including specialists whowould also be using the hospital facility for the care and treatment of their patients.” The office space leased or sold to doctors would then be subject to private use and control. Wemust first address the issue whether public property not used for public purposes or not used exclusively for public purposes will be denied tax-exempt status byvirtue thereof.

It has been suggested that Fertitta is controlling. This case held that property owned~by the city, though leased toprivate persons for the purpose of carrying on a private commercial enterprise, was exempt from advalorem taxation regardless of the fact that the use to which the property wasput wasnot public.

Thecourt In Fertitta departed from the method of constitutional analysis which courts had traditionally invoked when the issue was whether property owned by a political subdivision was entitled to receive tax-exempt status. City of Beaumont v Fertitta, supra (see dissenting opinion). Prior to Fertitta, courts had always looked to whether the property was owned by apolitical subdivision andwhether it was used or held for apublic purpose, while assuming that, if ir
were not so used, it would be taxab1.e under article VIII, sections 1 and 2of the Texas Constitution. See A8MConsolidated Independent
-- School District 1:.Citv of Bryan SUE; Daoghertv v. Thompson, 9S.W.

18R8); (.ity -_._-’ - --.-- 99 (Tex. tofAbilenc v. State 11’) S.W.2d 631 (?cx. Civ. APP

. - Eastland 1937, writ dism’d) (holding disapproved of on other grounds in Fertittnj. The court In _Fcrtitta departed from the traditional mode of constitutional analysis in declaring that the constitution does not require that property owned by a municipality but not used for a public purpose be taxed. It only requires that private property held by untural persons or private corporations be taxed. Therefore, since the constitution does not require municipal property to be taxed, the legislature needs no constitutional authority toexempt it. It chose to doI:(,in the now-repealed article 7145, V.T.C.S. This stdtute required that ally property, except that which is expressly exempted, hetaxed. Thenow-repealed article 7150, VA.C.S., exempted “lall~l property, whether rcnl or personal, belonging exclusively to this State, or any political subdivisionHonorable Chris Victor Semos- Page4 (MW-430)

‘i

thereof, or the United States.

...‘I Public owneiship was enough, no public usewasrequired.

The dissent in Fertitta readily pointed out that this constitutional and statutory argument is novel; indeed, earlier decisions which went to great length discussing the holding andusing requirements of public property make sense only if one accepts the claim that the constitution requires all property to be taxed unless it is specifically exempted pursuant= a constitutional provision, that public property, in order that it bedeemed tax-exempt. must fall within the limitations set forth in article VIII, section 2or article XI. section 9of the Texas Constitution. Noother case has explicitly emuloved such ananalysis. Moreover, the Texas Supreme Court clearlv na;ro;ed the reach of.Fertitta in Learider Independint School Distric;
v. Cedar Park Water Supply Corporatioa. 479 S.W.2d 908. 911 (Tex. 1972) and in Satterlee v. Gu,lf Coast Waste Disposal Authority, 576 S.W.2d 773 (Tex. 1978).

Leander did not concern property ownedbyapolitical subdivision leased to a private person for the purpose of a private commercial enterprise; rather, it concerned property owned by a private person but used for pubiic purposes. In overturning alower court judgment sustaining the tax-exempt status of such property, the court specifically held that property, tobe exempt, mustbeused for public purposes. The court in Leander did not. however, explicitly reject the mode of constitutional analysis employed in Fertitta. In Setterlee, the court reaffirmed the requirement that there beapublic
use before property- owned by a political subdivision be declared tax-exempt.

If the traditional method of analysis were applied to the instant situation, acourt would find that since the property of the political subdivision is used for private purposes, it should not receive tax-exempt status. If the method of analysis employed in Fertitta
were employed instead, a court woul,d also find that the property should not rccetvc tax-exempt status. Infertitta, the court looked to thenow-repealed article 7150, V.T.C.S., which did not require that property owned by apolitical subdivision beused for public purposes in order that it be tax-exempt; mere public ownership was enough.

. However, the statute which replaced article 7150, V.T.C.S., section 11.11(a) of the Property TaxCode does require that property ownedby :Ipolitical subdivision heexempt from advalorem taxation only if it Is used for public purposes. Therefore, regardless ofwhich method of analysis acourt would employ, it is clear that arequirement that the property be used for public purposes would be imposed. The final issue is whether that public use must be exclusive or whether a private person maypermissibly be incidentally benefitted.

In Satterlee. the court declared to be taxable real property which was conveyed to a political subdivision. The court held that the instruments did not convey interest in the property sufficient to makethe ownership “public ” for purposes of article VIII, sections 1 and 2. Onmotion for rehearing. the waste disposal authority urgedHonorable Chris Victor Semos- Page 5 (MW-430)

that the property still be held tax-exempt under that provision of article XI, section 9which purports to exempt “...a11 other property devoted exclusively to the use and benefit of the puhljc..

..‘I The court disagreed and, citing Lower Colorado River Authority and Daugherty. declared that the property must be held only for public purposes anddevoted exclusively to the use andbenefit of the public.
On the basis of this language, we conclude that, by the arrangement here contemplated, the property would lose its tax exempt status because it is not used exclusively for the benefit of the public.

With respect to office space which the authority proposes to sell

“On a ‘condominium theory”’ to doctors, the foregoing argument is relevant. There is, moreover, anadditional argument. Both article VIII, section 2 and article XI section 9 of the Texas Constitution speak of property owned by a political subdivision. Even if office space which was sold as condominiums were to meet the “public use” test, it is highly unlikely that it would meet the ownership test. In Calvert v. Harris County Water Control and Improvement District No. 2. 368 S.W.Zd 833 (Tex. Civ. App. - Austin 1963, writ ref ’d n.r.e.), the court held that aspecial district ~wasnot. within the meaning of article VIII, sections 1and2of the Texas Constitution, the owner of what had been n privately-owned water supply system. The special district wasnot empowered toexercise any control over disposition of the property of the system, though legal. title to the property vested in the district; the control was vested in a trustee created by private individuals, and for their benefit. In Satterlee, the Texas Supreme Court held that astate conservation and reclamation district did not acquire exclusive ownership of property onwhich anindustrial waste treatment center wasconstructed where thpspecial warranty deed conveyed the property to the district only for “so long as” the property was used for industrial waste treatment and restricted the ability of the district to subsequently convey such property. The supreme court he~ldthat such aconveyance created adeterminable fee, that exclusive ownership andcontrol of the property hadnot vested in the district, and that the property was not exempt from ad valorem tnxntion. Though no Texas court hns yet expli.citly so held, we conclude that acourt would probably declare that, in the event that a political. subdivision sold office space as a condominium, the political subdivision would nol~onger “own” the property in the sense required by article VTII. section 2or article X~C,section 9of the Texas Constitution, regardless of tlw use 01~such office space.

SUMMARY

The mere fact that a charge is madefor the
use of property owned by a political subdivision
or a profit is generated thereby will not cause such property to be denied advalorem tax-exempt status. Property owned by :I political subdivl:;ion, but leased to ~1privxtc person for the purpose of engaging in il private cummercial enterprise. wou1.d not be enLitl,ed to exemption from :~d vnlorom 1:lxation under article VIII,.” Honorable Chris Victor Semos- Page 6 (MW-430)

section 2or article XI, section 9of the Texas Constitutio". Property owned by a political subdivision, but sold as a condominium to a private person, would not beentitled toexemption fromadvalorem taxation. regardless of the use of such property, because it is not "owned" by a political subdivision within the meaning of article VIII, section 2or article XI, section 9 of the Texas Constitution.

Attorney General of Texas

JOHNW.FAINTER,JR. First Assistant Attorney General

RICHARDE. GRAYIII Executive Assistant Attorney General Prepared byJimMoellinger Assistant Attorney General

APPROVED: OPINIONCOMMITTEE

Susan L. Garrison. Chairman Rick Gilpin JimMoellinger

p. 1.474