Can an Arkansas county lease out a building it bought with road department money to a non-profit fitness center?

Plain-English summary

Ashley County bought a former Ideal True Value hardware store property using road department funds because the lot adjoined the county's road equipment parking facility. The road department needed the parking and equipment storage but not the building. Three other entities, including the County Clerk (for election-equipment storage) and a non-profit health and fitness coalition, wanted to lease parts of the building. Representative Beaty asked the AG whether road-fund-purchased property could be leased out, and to whom, and at what rate.

Attorney General Leslie Rutledge answered: yes to both governmental and non-profit lessees, and a below-market lease is allowed if supported by "adequate consideration," which can be non-monetary (such as a "public advantage").

The reasoning: the County Road Tax under Ark. Code Ann. § 26-79-105(a) and Amendment 61 of the Arkansas Constitution restrict how road-fund revenues are spent (only on roads and bridges), but they do not restrict how property purchased with those revenues is later used. Once the building is owned, ordinary county property law governs. Section 14-16-105 generally requires sales of county property to be at three-fourths fair market value or better, but subsection (f)(2)(D) carves out leases. The remaining constitutional constraint comes from Article 12, § 5, which prohibits county donations of property to private entities. A non-profit lease at nominal rent must avoid being a disguised donation; the Arkansas Supreme Court in City of Blytheville v. Parks held "public advantage" can supply the missing consideration.

Currency note

This opinion was issued in late 2021. The road-fund statutes, the county property statute (§ 14-16-105), and the constitutional provisions cited may have been amended. Verify the current text and any superseding case law before relying on this opinion to structure a specific lease.

What this means for you

If you are a county judge or quorum court member

Based on this opinion, road-fund property can be leased out to fill empty space, including to non-governmental non-profits. Build the lease record around the public advantage: better election security from the County Clerk's storage, public health benefits from a community fitness center, expanded county footprint without acquisition cost. Document that benefit in the lease and the supporting board minutes. A below-market or nominal lease to a non-profit is constitutionally vulnerable if there is no public benefit on the record.

If you are a non-profit seeking to lease county-owned space

You can negotiate below-market rent, but the county will want and need a "public advantage" record to defend the deal against an illegal-exaction challenge. Quantify your services to the public, your local employment, your reach. Reverter clauses (returning the lease if you stop providing the public benefit) tend to strengthen the consideration analysis, as City of Blytheville v. Parks illustrates.

If you are a county clerk needing to store election equipment

Sub-leasing road-fund-purchased space from the road department is allowed under this opinion. The intra-county nature of the arrangement avoids the Article 12, § 5 donation concern (which applies only to transfers to private entities). The McCutchen v. Huckabee line confirms that contributions among public entities do not violate the donation prohibition.

If you are an Arkansas taxpayer concerned about road-fund leakage

This opinion stands for a narrow rule: road-fund money can only build and maintain roads, but property bought with road money is just county property. Counties cannot use road-fund revenues to subsidize a fitness center, but they can lease unused space in a road-fund-purchased building to one. The leasing revenue, if any, is a separate question, and footnote 3 suggests the county should consult its own counsel on whether lease proceeds must be returned to the county road fund.

Common questions

Q: What's the difference between the County Road Tax and the State Aid Road Fund?
A: The County Road Tax is a property tax authorized by Amendment 61 and Ark. Code Ann. § 26-79-101 et seq. for use on county roads and bridges. The State Aid Road Fund, governed by § 27-72-305 et seq., is a state allocation for the state aid road system. Both restrict how the revenue may be spent.

Q: Why don't those restrictions follow the property after purchase?
A: Because the statutes restrict revenue use, not asset use. Once the county takes title to a building or lot, the property exists in the county's general portfolio. The road-fund language locks in only how the dollars were spent, not what the resulting asset can do.

Q: How is "public advantage" measured for a lease to a non-profit?
A: It is fact-bound. In City of Blytheville v. Parks, the city kept a reverter clause and showed that population and business growth from the conveyance benefited the city. AG opinions have looked for measurable public services delivered by the lessee, employment, accessibility, and a reverter or termination right tied to continued service.

Q: Does the county have to bid out a lease of county-owned property?
A: This opinion did not address bidding requirements. The county property statute requires bids for certain sales, but the lease carve-out in § 14-16-105(f)(2)(D) suggests the bidding requirements do not extend to leases. Confirm with county counsel and any local ordinance that may impose its own bidding rules.

Q: What if the lease is to another county or municipal government?
A: The Article 12, § 5 donation prohibition does not apply to transfers among public entities. Per McCutchen v. Huckabee, a county may even contribute to a public facilities board it has created. So a sublease at nominal rent to the County Clerk is unproblematic on the Article 12 ground.

Background and statutory framework

The Arkansas Constitution and Code build several layers of restriction around how counties handle public property and money:

• Road revenue restrictions. Amendment 61 and § 26-79-105(a) restrict the County Road Tax to "the opening, construction, and repair of roads in the road districts in the county." The State Aid Road Fund under § 27-72-312(a) is restricted to "construction, reconstruction, and improvements of roads on the state aid road system."

• Property disposition restrictions. Section 14-16-105 sets up a structured sale procedure for county property, including a minimum-three-fourths-fair-market-value rule under § 14-16-105(c)(2) and (e)(1)(B). Subsection (f)(2)(D) explicitly excludes leases.

• Donation prohibition. Article 12, § 5 forbids any county "gift" of property to "any corporation, association, institution or individual." That prohibition applies to transactions with private entities, not transactions among public bodies.

• Adequate consideration. Where the donation prohibition would otherwise apply, the Arkansas Supreme Court has held in City of Blytheville v. Parks (1953) and Little Rock Chamber of Commerce v. Pulaski County (1914) that "public advantage" can constitute adequate consideration for a transfer of public property, sustaining transfers that look like donations on their face.

The structural takeaway: counties have flexibility to lease out unused space at non-market rates, but the lease record needs to surface concrete public benefits so that the deal can withstand an illegal-exaction challenge.

Citations and references

Constitutional provisions:

• Ark. Const. amend. 61 (county road tax authorization and use restriction)
• Ark. Const. art. 12, § 5 (prohibition on county gifts to private entities)

Statutes:

• Ark. Code Ann. § 26-79-101 et seq. (County Road Tax)
• Ark. Code Ann. § 26-79-105(a) (use restriction on county road tax revenue)
• Ark. Code Ann. § 27-72-305 et seq. (State Aid Road Fund)
• Ark. Code Ann. § 27-72-312(a) (use restriction on State Aid Road Fund)
• Ark. Code Ann. § 14-16-105(c)(2), (e)(1)(B), (f)(2)(D) (county property sales and lease carve-out)
• Ark. Code Ann. § 14-16-113 (proceeds from sale of county road-fund property)

Cases:

• City of Blytheville v. Parks, 221 Ark. 734, 255 S.W.2d 962 (1953) (public advantage as adequate consideration; reverter clause analysis)
• Little Rock Chamber of Com. v. Pulaski Cnty., 113 Ark. 439, 168 S.W. 848 (1914) (non-monetary consideration in conveyances of public property)
• McCutchen v. Huckabee, 328 Ark. 202, 943 S.W.2d 225 (1997) (Article 12, § 5 does not bar transfers among public entities)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2021-045
December 20, 2021

The Honorable Howard M. Beaty Jr.
State Representative
1001 Elm Street
Crossett, AR 71635-3619

Dear Representative Beaty:

This is in response to your request for an opinion concerning the potential lease of real property purchased with county road department funds. In this regard, you have provided the following scenario:

Earlier this year, Ashley County, Arkansas, used road department funds to purchase a parcel of real property located in Hamburg, Arkansas. The property was previously owned and operated by Ideal True Value hardware store, hereafter referred to as True Value. The property adjoins the Ashley County Road Department equipment parking facility on one side and U.S. Highway 425 on the front. The road department wanted this parcel of property primarily for expanded storage of its equipment and parking space. As noted, the property also contains a large building that formerly housed True Value.

Presently, the road department does not need the building for its purposes. Accordingly, the Ashley County Clerk and the Hamburg Economic Development Team, in cooperation with the Ashley County Medical Center and the Ashley County Medical Center Wellness Center, have expressed interest in leasing parts of the building for separate uses. The Ashley County Clerk seeks to utilize a portion of the building for storage of its election equipment. The Hamburg Economic Development Team and its aforementioned partners want to operate a health and fitness center for a nominal fee or membership. For further background purposes and perspective, the Hamburg Economic Development Team and the Ashley County Medical Center are 501(c)(3) non-profit corporations, respectively.

In light of the foregoing information, you have asked the following questions:

Question 1: Whether real property purchased with road department funds, garnered by either the County Road Tax, as prescribed in Arkansas Code § 26-79-101 et seq., or the State Road Fund, as found in Arkansas Code § 27-72-305 et seq., can be leased to other Ashley County governmental entities?

Question 2: Whether real property purchased with road department funds, garnered by either the County Road Tax, as prescribed in Arkansas Code § 26-79-101 et seq., or the State Road Fund, as found in Arkansas Code § 27-72-305 et seq., can be leased to non-governmental entities, more specifically to non-profit entities?

Question 3: Assuming the real property mentioned above and herein can be leased to non-governmental or non-profit entities, can said property be leased to those entities for a nominal sum or must it be for fair market value?

RESPONSE

The answer to both Questions 1 and 2 is yes. With regard to your third question, the property may be leased for less than fair market value, but the lease must be supported by adequate consideration. The Arkansas Supreme Court has held that non-monetary consideration can be adequate if a "public advantage" will result from the lease. The adequacy of consideration is a question of fact in each instance.

DISCUSSION

Questions 1 & 2: I will address these questions together because the applicable analysis and conclusions are the same. I gather the questions are prompted by the fact that both the County Road Tax and the State Road Fund are restricted in the manner in which they may be used. County road-tax revenues must be used for "the opening, construction, and repair of roads in the road districts in the county . . . ." The State Aid Road Fund must be used "exclusively for the construction, reconstruction, and improvements of roads on the state aid road system . . . ." The concern, presumably, is that these restrictions apply to both the use of county and state road-fund revenues and the use of real property purchased with such revenues.

I believe that concern is unwarranted. The above statutory restrictions plainly apply to the use of road-fund revenues. There is no similar state-law restriction on the use of property purchased with road-fund revenues.

Question 3: There is no requirement that a lease of county property be at fair market value. General procedures for the sale of county property include a requirement that the property not be sold for less than three-fourths of its fair market value. But those procedures are expressly inapplicable "[w]hen the county is leasing county property . . . ."

However, in the case of a lease to a non-profit entity, the lease must be supported by adequate consideration because the Arkansas Constitution prohibits a county's gift of property to "any corporation, association, institution or individual."

With respect to the issue of consideration, it is well established that a municipal corporation may convey public property or an interest therein based upon consideration other than money. In Parks, the Arkansas Supreme Court held that "public advantage" constituted adequate consideration to support the city's conveyance of property without money consideration.

The adequacy of consideration, whether in the form of money or not, is a fact question that cannot be resolved in an opinion from this office.

Sincerely,

LESLIE RUTLEDGE
Attorney General

Note: Proceeds from the "sale" of county property purchased with county road funds "shall be paid into the county road fund." Ark. Code Ann. § 14-16-113. This statute on its face does not apply to proceeds from a lease. However, consultation with the county's legal counsel is advisable in this regard.

Note: The donation prohibition in Article 12, § 5 does not apply where the recipient is another public entity. See McCutchen v. Huckabee, 328 Ark. 202, 943 S.W.2d 225 (1997) (approving a county's contribution to a public facilities board created by that county).