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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 lease-
                          holds 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 assessor-
                          collector 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 assign-
                          ment of the lessor's interest to the City of Edinburg.
                          A third instrument purports to be a direct lease of prop-
                          erty 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




                                                          P. 4535
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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 manufac-
            turer 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 consid-
            eration 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




                                         p. 4536
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 manu-
facturer. Article 7151, V.T.C.S., provides:

            All property shall be listed for tax-
          ation . . . 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 pub-
lic 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 indi-
cation 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, neverthe-
                less. Section 3 of article 11 of the Constitution reads:

                            No . . . city . . . shall . . . become
                          a subscriber to the capital of any pri-
                          vate 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 corpor-
            ation, 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 dif-
            ferences 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 agree-
ment."

     Subsequently, in 1971, the City of Edinburg and the manu-
facturer 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 equaliza-
tion 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 author-
ity 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
                      Attorney
Ind. Sch. Dist., supra;           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, thenvalidity 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 assessor-
            collector can be later reviewed by the
            commissioners court, sitting as the court,
            which may order invalid assessments re-
            assessed.

                                        truly yours,




                                   Attorney General of Texas

APPROVED:




Opinion Committee

jst
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