HARK WHITE 

.Attorney General 

Supreme Court Building 

P. 0. Box 12546 

Austin. TX. 76711 

5121475.2501 

Telex 9101674.1367 

Telecopies 5121475-0266 

1607 Main St.. Suite 1400 

Oaltas. TX. 75201 

2 141742.6944 

4624 Alberta Ave.. Suite 160 

El Paso. TX. 79905 

9151533.3464 

1220 Dallas Ave.. Suite 202 

HOUS~O”. TX. 77002 

713/650-0666 

606 Broadwav. Suite 312 

Lubbock, TX: 79401 

606f747.5236 

4309 N. Tenth. Suite B 

McNen. TX. 76501 

- 5 12,662-4547 

;i 

* 200 Main Plaza. suite 400 

San Antonio. TX. 76205 

51212254191 

The Attorney General of Texas 

January 21, 1982 

Honorable Chris Victor Semos 

Chairman 

House Committee on Business 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 a hospital project consisting of an office 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. We do not understand you to be 

asking whether a lessee or a purchaser will be subject to ad valorem 

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, 0 r mixed property, or any interest 

therein, the... constructing... of which is found 

by the governing body of an issuer to be required 

or necessary for medical care. research, training, 

and teaching, any one or all.... Without limiting 

the generality of the foregoing, and when found by 

the governing body or an issuer to be so required, 

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). See also V.T.C.S. art. 4437e. $91, 3, 6. 

Clearly a” office building and parking lot such as you describe, when 

found to be “required, nccesssry, or convenient” by the 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 a view to generating R private 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. And finally, section 16 of artic1.e 

4437e. V.T.C.S., provides that ::incc the property owned by the 

authority will be held for public purposes only and will 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: 

The property of counties, cities and towns, owned 

and held only for public purposes. such as public 

itilildings and the 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 

1 ilWS, ‘xr*nq,t I ram taxnt J~“rl i>llbliC property used for Q"bl:C 

pI!rposes....” Article VIII, aectlun I of 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 be ascertained as may be provided 

by ],a~.” 

Property of a political 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 the 
i 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 tit y of Beaumont v. Fertitta. 415 S.W.Zd 902, 

915 (Tex. 1967) (Walker, .I., dissenting); Galveston Wharf Company v. 

City of Galveston, 63 Tex. 14 (1884); Cf. Santa Rosa Infirmary v. City 

of San Antonio, 259 S.W. 926 (Tex. Coxn App. 1933); City of Dallas 

V. Smith, 107 S.W.2d 872 (Tex. 1937) ; tit y of Palestine v. 

Missouri-Pacific Lines Hospital Association, 99 S.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 who would 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. We must 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 by virtue thereof. 

It has been suggested that Fertitta is controlling. This case 

held that property owned~by the city, though leased to private persons 

for the purpose of carrying on a private commercial enterprise, was 

exempt from ad valorem taxation regardless of the fact that the use to 

which the property was put was not public. 

The court 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 a political subdivision and whether 

it was used or held for a public purpose, while assuming that, if ir 

were not so used, it would be taxab1.e under article VIII, sections 1 

and 2 of the Texas Constitution. See A 8 M Consolidated Independent 

-- 

School District 1:. Citv of Bryan SUE; Daoghertv v. Thompson, 9 S.W. 

18R8); (.ity 

-_._-’ - --.-- 

99 (Tex. tof Abilenc 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 to exempt it. It chose to do I:(, in the now-repealed article 

7145, V.T.C.S. This stdtute required that ally property, except that 

which is expressly exempted, he taxed. The now-repealed article 7150, 

VA.C.S., exempted “lall~l property, whether rcnl or personal, 

belonging exclusively to this State, or any political subdivision 
Honorable Chris Victor Semos - Page 4 (MW-430) 

‘i 

thereof, or the United States. . ..‘I Public owneiship was enough, no 

public use was required. 

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 and using 

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 be deemed tax-exempt. must fall 

within the limitations set forth in article VIII, section 2 or article 

XI. section 9 of the Texas Constitution. No other case has explicitly 

emuloved such an analysis. 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 owned by a political 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 a lower court judgment 

sustaining the tax-exempt status of such property, the court 

specifically held that property, to be exempt, must be used 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 be a public 

use before property- owned by a political subdivision be declared 

tax-exempt. 

If the traditional method of analysis were applied to the instant 

situation, a court 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. In fertitta, the court looked 

to the now-repealed article 7150, V.T.C.S., which did not require that 

property owned by a political subdivision be used 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 Tax Code does require that property owned by 

:I political subdivision he exempt from ad valorem taxation only if it 

Is used for public purposes. Therefore, regardless of which method of 

analysis a court would employ, it is clear that a requirement 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 may permissibly 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 

make the ownership “public” for purposes of article VIII, sections 1 

and 2. On motion for rehearing. the waste disposal authority urged 
Honorable Chris Victor Semos - Page 5 (MW-430) 

that the property still be held tax-exempt under that provision of 

article XI, section 9 which 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 and devoted exclusively to the use and benefit 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, an additional 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 a special district ~was not. within the meaning of 

article VIII, sections 1 and 2 of the Texas Constitution, the owner of 

what had been n privately-owned water supply system. The special 

district was not empowered to exercise 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 a state conservation and reclamation district 

did not acquire exclusive ownership of property on which an industrial 

waste treatment center was constructed where thp special 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~ld that such a conveyance created a determinable fee, 

that exclusive ownership and control of the property had not 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 a court would probably declare that, in the event that a 

political. subdivision sold office space as a condominium, the 

political subdivision would no l~onger “own” the property in the sense 

required by article VTII. section 2 or article X~C, section 9 of the 

Texas Constitution, regardless of tlw use 01~ such office space. 

SUMMARY 

The mere fact that a charge is made for the 

use of property owned by a political subdivision 

or a profit is generated thereby will not cause 

such property to be denied ad valorem tax-exempt 

status. Property owned by :I political 

subdivl:;ion, but leased to ~1 privxtc 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 2 or article XI, section 9 of the Texas 

Constitutio". Property owned by a political 

subdivision, but sold as a condominium to a 

private person, would not be entitled to exemption 

from ad valorem taxation. regardless of the use of 

such property, because it is not "owned" by a 

political subdivision within the meaning of 

article VIII, section 2 or article XI, section 9 

of the Texas Constitution. 

Attorney General of Texas 

JOHN W. FAINTER, JR. 

First Assistant Attorney General 

RICHARD E. GRAY III 

Executive Assistant Attorney General 

Prepared by Jim Moellinger 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Susan L. Garrison. Chairman 

Rick Gilpin 

Jim Moellinger 

p. 1.474