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 parcel with road department funds. The road department wanted the lot for equipment storage and parking but did not need its former hardware-store building. The county clerk and two nonprofit organizations expressed interest in leasing parts of the building for election-equipment storage and a health and fitness center. A state representative asked whether road-funded property could be leased to government and nonprofit entities and whether nonprofit rent had to equal fair market value.

The AG answered yes to both kinds of lease. She reasoned that county road-tax and State Aid Road Fund restrictions govern use of the revenues, and no similar state-law restriction limits later use of property purchased with those revenues. County property-sale rules, including a minimum fraction of fair market value, expressly exclude leases.

A nonprofit lease may be below market value but must have adequate consideration to avoid the constitutional prohibition on county gifts to private entities. The AG cited an Arkansas Supreme Court decision recognizing that a public advantage can be nonmonetary consideration. Whether a proposed lease supplies enough consideration is a fact question the AG could not decide. The opinion gives no checklist of services, jobs, access terms, or lease clauses required for this Ashley County proposal.

What this means for you

If you administer county property

The opinion allows a county to consider leasing this road-funded property to another public entity or a nonprofit. For a nonprofit lease, assess and document the consideration, including any claimed public advantage. The AG did not decide whether the particular fitness-center plan met that standard.

If you propose a nonprofit lease

A nominal or below-market rent is possible under the opinion, but the transaction cannot be a gift. Explain what the county receives in return. The sufficiency of any proposed benefit must be evaluated from the actual facts.

If you are concerned about road-fund proceeds

Footnote 3 says Ark. Code Ann. § 14-16-113 directs proceeds from a sale of county property bought with county road funds to the road fund. The AG said that statute does not on its face apply to lease proceeds and advised consulting county counsel on the issue.

Currency note

This opinion was issued in 2021. Verify current Arkansas law before structuring a county lease.

Common questions

Can the county lease the property to another county entity? Yes, under the AG's answer. She also noted that the constitutional prohibition on gifts to private entities does not apply when the recipient is another public entity.

Can it lease to a nonprofit for nominal rent?
Potentially. The lease must be supported by adequate consideration. The AG said a public advantage can supply nonmonetary consideration, but did not decide whether the proposed lease provided one.

Did the AG set a formula for measuring public advantage? No. She called adequate consideration a fact question. Her footnote describes the benefits and reverter clause in City of Blytheville v. Parks as features of that case, not mandatory terms for every lease.

Do the county-property sale rules govern leases?
The AG said the cited sale procedures, including the three-fourths fair-market-value rule, expressly do not apply when a county leases county property.

Background and statutory framework

Amendment 61 and the road-fund statutes restrict how specified revenues are spent. The AG read them as placing no comparable restriction on using a parcel after lawful purchase. Ark. Code Ann. § 14-16-105 contains procedures for sales but excludes leases from those procedures. Ark. Const. art. 12, § 5 requires adequate consideration for a nonprofit lease so that it is not a county gift.

Citations and references

• Ark. Const. amend. 61
• Ark. Const. art. 12, § 5
• Ark. Code Ann. § 26-79-105(a)
• Ark. Code Ann. § 27-72-312(a)
• Ark. Code Ann. § 14-16-105(c)(2), (e)(1)(B), (f)(2)(D)
• Ark. Code Ann. § 14-16-113 (sale proceeds footnote)
• City of Blytheville v. Parks, 221 Ark. 734, 255 S.W.2d 962 (1953)
• Little Rock Chamber of Com. v. Pulaski Cnty., 113 Ark. 439, 168 S.W. 848 (1914)
• McCutchen v. Huckabee, 328 Ark. 202, 943 S.W.2d 225 (1997)

Source

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

Original opinion text

STAT E O F ARKAN SAS
ATTO RN EY G ENERAL
LE SLI E RU T LEDG E

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 house 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 Ashl ey 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

323 CENTE R STR EE T . SU ITE 200 · LI TTLE ROCK . ARKAN SAS 72201 TELEP H O NE (50 1) 682-200 7 ·FAX (501) 682-8084 ARKA N SAS AG. GOV

The Honorable Howard M. Beaty, Jr.
State Representative
Opinion No. 2021-045
Page 2

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

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?

The Honorable Howard M. Beaty, Jr.
State Representative
Opinion No. 2021-045
Page 3

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 .... " 1 The State Aid Road Fund must be used "exclusively for the construction, reconstruction, and improvements of roads on the state aid road system .... " 2 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 ofroad-fund revenues. There is no similar state-law restriction on the use of property purchased with road-fund revenues. 3

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/or a nominal sum or must it be/or fair market value?

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. 4 But those procedures are expressly inapplicable "[w ]hen the county is leasing county property .... ,,5

1
Ark. Code Ann.§ 26-79-105(a) (Rep!. 2020). See also Ark. Const., amend. 61 (authorizing the county road tax and providing that the revenues must be used "for the sole purpose of constructing and repairing public roads and bridges within the county wherein levied.").

2
Ark. Code Ann. § 27-72-312(a) (Rep!. 2010).

3
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 (Rep!. 2013 ). 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.

4
Ark. Code Ann.§ 14-16-105(c)(2), (e)(l)(B) (Supp. 2019).

5
Id. at§ 14-16-105(t)(2)(D).

The Honorable Howard M. Beaty, Jr.
State Representative
Opinion No. 2021-045
Page 4

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. " 6

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. 7 In Parks, the Arkansas Supreme Court held that "public advantage" constituted adequate consideration to support the city's conveyance of property without money consideration. 8

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,

~:~:-___:,:>_ L. //~1~
LESLIE RUTLEDGE
Attorney General

6
Ark. Const, art. 12, § 5. See Op. Att'y Gen. 2010-134 (noting that "[art. 12, §S's] prohibition on municipal donations can alternatively be characterized as a requirement that municipalities receive adequate consideration for transfers of public prope1iy.").

This prohibition 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); Ops. Att'y Gen. 20 I 2-02 I, 95-046.

7
See City of Blytheville v. Parks, 221 Ark. 734, 255 S.W.2d 962 (1953); Little Rock Chamber of Com. v. Pulaski Cnty., 113 Ark. 439, 168 S.W. 848 (1914).

8
221 Ark. at 739, 255 S.W.2d at 965. The court held that the conveyance was not a true "donation" because the city would receive many benefits in terms of increases in business and population, and because the city included a reverter clause in the deed that required that the land be returned to the city if it ceased to be used for the purposes of the grant. Id.