Can an Arkansas city lease its property to a private business below fair market value, and does that violate the constitution?
Plain-English summary
Representative Carlton Wing asked the AG about a Sherwood city restaurant lease. The current tenant was paying well below market rent. Sherwood put the space out for bid and got six bids; five were above the bottom of fair market value. The city council threw out all the bids and went back into 30-day negotiations with the existing tenant. Wing wanted to know whether that kind of below-market arrangement is even legal.
The AG's answer: Arkansas cities have express statutory authority to lease their property (A.C.A. § 14-54-302(a)(1)). Below-market rent is permissible, but only if the lease is supported by adequate consideration. Consideration is a contract-law concept, and it is not limited to dollars. Non-financial public benefits count too: an increase in business activity in town, growth in city population that flows from the contract, lasting improvements to the city property, or other "discernable advantages that accrue to the city." The Arkansas Supreme Court went so far in Little Rock Chamber of Commerce v. Pulaski County (1914) as to say a political subdivision can convey public property for "no money at all" in exchange for specific public advantages.
The constitutional question (Article 12, Section 5, which prohibits cities from giving away public money or making donations to private interests) collapses into the same adequate-consideration analysis. If there is adequate consideration, there is no unconstitutional gift. If there is not, the lease is outside the city's authority.
The AG declined to answer Wing's other two questions (how to assess fair market value, and whether a below-market lease creates an unfair competitive advantage) because both are fact-dependent and outside the scope of an AG opinion.
What this means for you
City councils and mayors
Below-market leasing of city property is legal but not a free pass. If the rent is below fair market, the difference must be made up by non-financial public benefits that the city receives under the lease. Document those benefits in the lease itself or in council minutes. Common patterns that have survived legal challenge: lessee builds capital improvements at lessee's cost; lessee anchors a development that draws other tenants; lessee provides a public service (community center, recreation programming) that the city would otherwise have to fund.
What does not work as consideration: vague references to "supporting local business" or "community goodwill." If a court is asked to identify the consideration, "we like the lessee" is not it. Be specific.
If a council (like Sherwood here) tosses higher bids to negotiate with an existing below-market tenant, expect scrutiny. Make sure the record shows what the city is getting in return that the higher bids did not offer.
City attorneys
When you draft or review a below-market municipal lease, build the consideration analysis into the contract recitals. List the specific public benefits and try to quantify them where you can (capital improvements at $X cost; programming at $Y annual value). Do this even if the lessee resists, because the file you create now is what defends the lease later if a citizen challenges it under Article 12, Section 5.
If the lease is to a for-profit lessee, the analysis is the same in form but the public-benefit threshold is higher in practice. A nonprofit providing community services is easier to characterize as a public benefit; a private restaurant is harder.
Small business lessees of city property
If you are negotiating to lease city property at a favorable rate, expect the city to ask you to identify what the city gets in return. Coming to the table with a written proposal that lists capital investment, jobs, public access, or other benefits will be more persuasive than asking for a discount and hoping for the best. The lease's defensibility depends on the city being able to articulate adequate consideration; helping the city articulate it helps both sides.
Citizens and taxpayer watchdogs
A below-market lease is not automatically a sweetheart deal. The legal test is whether the city receives adequate consideration, including non-financial benefits. To challenge a lease, you would need to show that the consideration is not adequate, which is a factual question for the courts. Look for the city council's stated rationale, then evaluate whether the public benefits are real and quantifiable.
State legislators
This opinion sets the framework but the AG explicitly says many questions about specific leases are fact-dependent and outside the AG's role. If the legislature wants to constrain below-market leasing, that would require a statute, not a clarifying AG opinion. Topics the legislature could address: minimum competitive-bidding requirements, mandatory written findings of public purpose, or limits on negotiated extensions of below-market leases.
Common questions
Can my city give away land to a private business?
Not really. The city must receive adequate consideration. The Arkansas Supreme Court in Little Rock Chamber of Commerce v. Pulaski County did say a political subdivision can convey property for no money "if the public advantage" is enough on its own. So technically yes, but the bar for "specific public advantages" is real and would be tested in court if challenged.
The city is leasing to my friend's business at half market rate. Can I sue?
You may have standing as a taxpayer to challenge the lease as an unconstitutional gift under Article 12, Section 5. The case will turn on whether the city received adequate consideration. Get the lease, the council minutes, and any RFP and bid records before deciding.
Does the AG enforce this rule?
No. The AG opines on legal questions; enforcement is up to citizens, prosecuting attorneys, or the state in appropriate cases. Most below-market lease challenges are taxpayer suits in circuit court.
What about leases to nonprofits or churches?
Same legal framework but the public-benefit analysis is usually easier. A YMCA, food bank, or arts nonprofit providing services to city residents has obvious public benefit. The city should still document the consideration in the lease.
The city threw out the bids and renegotiated with the existing tenant. Is that allowed?
Cities generally have discretion to manage their property, including rejecting bids. But if the rejection results in a lease that lacks adequate consideration, the lease is vulnerable. The fact pattern in Wing's question (existing tenant paying "well below" market, five bids above bottom of market thrown out, return to negotiations) is the kind of pattern that invites taxpayer scrutiny. The city should be ready to articulate the public benefit it expects from the existing tenant that the higher bidders did not offer.
Is "fair market value" a fixed number?
No, and the AG explicitly declined to opine on how to determine it. Common methods are appraisal, comparable lease analysis, or competitive bidding. Whatever method the city uses, it should document the basis.
Background and statutory framework
Arkansas cities derive their property-management authority from a chain of statutes. A.C.A. § 14-54-101 establishes cities as "bodies politic and corporate" with authority to "contract and be contracted with." A.C.A. § 14-54-301 authorizes cities to "acquire and hold real estate." A.C.A. § 14-54-302(a)(1) authorizes cities to "sell, convey, lease, rent, or let any real estate or personal property owned or controlled by the municipal corporation." So the basic authority is express.
The contract-law constraint comes from general Arkansas contract doctrine. The Arkansas Supreme Court summarized the elements in City of Dardanelle v. City of Russellville, 372 Ark. 486, 277 S.W.3d 562 (2008): competent parties, subject matter, legal consideration, mutual agreement, and mutual obligation. The "consideration" element is what does the work in below-market lease cases. The Court has long recognized that consideration includes non-financial benefits: City of Blytheville v. Parks, 221 Ark. 734, 255 S.W.2d 962 (1953), and Little Rock Chamber of Commerce v. Pulaski County, 113 Ark. 439, 168 S.W. 848 (1914). Both are Arkansas Supreme Court decisions.
The constitutional layer is Article 12, Section 5 of the Arkansas Constitution, which prohibits cities and counties from giving public funds or property to private entities. Adequate consideration in a lease defeats the gift-clause challenge.
Citations
- A.C.A. § 14-54-101 (cities as bodies politic and corporate)
- A.C.A. § 14-54-301 (city authority to acquire and hold real estate)
- A.C.A. § 14-54-302(a)(1) (city authority to sell, convey, lease, rent or let property)
- Ark. Const. art. 12, § 5 (gift-clause prohibition)
- City of Dardanelle v. City of Russellville, 372 Ark. 486, 490, 277 S.W.3d 562, 565–66 (2008)
- City of Blytheville v. Parks, 221 Ark. 734, 738–39, 255 S.W.2d 962, 964–65 (1953)
- Little Rock Chamber of Com. v. Pulaski Cnty., 113 Ark. 439, 444, 168 S.W. 848, 850 (1914)
- Ark. Att'y Gen. Ops. 2017-008, 2010-129, 2009-193, 96-351
Source
Original opinion text
Opinion No. 2023-093
October 18, 2023
The Honorable Carlton Wing
State Representative
2513 McCain Boulevard, Suite 208
North Little Rock, Arkansas 72116
Dear Representative Wing:
I am writing in response to your request for an opinion about a city's authority to lease city-
owned property for less than the property's fair-market rental rate. As background for your
questions, you explain that the City of Sherwood leases restaurant space on city-owned
property. You say that the current lessee has been paying "well below the bottom of the fair
market value for similar establishments within and around the Sherwood area." The city
recently asked the lessee to pay more, but the lessee said it was "unable to pay even the
bottom of the determined fair market rate."
At that point, the city "sent out an RFP seeking new tenants for the space." Six businesses
submitted bids, including one by the existing lessee. With the exception of the bid from the
existing lessee, all the bids were more than the "bottom of the fair market value." Yet the
Sherwood City Council "threw out all the bids" and requested a 30-day negotiation with
the existing lessee.
With this background in mind, you ask the following four questions:
1. Can a city or other municipality lease city-owned property for below fair market
rental rates?
Brief answer: Yes, as long as the lease is supported by adequate consideration,
which can include nonfinancial benefits that accrue to the city.
2. How should a city or other municipality assess and determine fair market value for
any potential property or space that it may lease to third party/non-governmental
entities?
Brief answer: This is a highly fact-dependent question that is beyond the scope of
a legal opinion from the Attorney General.
3. If a city leases city-owned property to a for-profit/non-governmental entity and it
is determined that the rental rate is below the fair market value, would that be
considered a subsidy that potentially violates the Arkansas Constitution, more
specifically Article 12, Section 5?
Brief answer: Not necessarily; if the lease is supported by adequate consideration,
then the lease would not violate the state constitution.
4. Would a city or other municipality that leases below fair market value be creating
an unfair competitive advantage against other similarly situated businesses?
Brief answer: The answer to this question depends on whether the consideration
for the lease agreement is adequate, which is a highly factual
question that is beyond the scope of an Attorney General opinion.
DISCUSSION
Because your questions overlap, I will describe the general law governing your questions
before briefly answering each.
1. Leasing authority. Cities have specific statutory authority to lease city property. Under
state law, cities are considered "bodies politic and corporate" with express authority to
"contract and be contracted with." Cities are also authorized to "acquire and hold real
estate" and to "sell, convey, lease, rent, or let any real estate or personal property owned
or controlled by the municipal corporation."
2. Adequate consideration. Because cities have authority to lease city property, any
purported lease must be just that, a lease, not a donation. And all leases, in order to be
valid and enforceable contracts, must be supported by adequate consideration. In its legal
sense, the term "consideration" means something, "such as an act, a forbearance, or a
return promise", that a promisor and promisee "bargain for." Consideration includes
money, of course, but can also include any nonfinancial benefit the city receives as part of
the agreement. In fact, the Arkansas Supreme Court has declared that a political
subdivision has the authority to convey public property for no money at all in exchange for
specific public advantages that would accrue from the conveyance. Whether a specific
lease agreement includes adequate consideration is a factual question that is beyond the
scope of an Attorney General opinion.
3. Questions 1 & 3. Your first and third questions ask about cities' authority to lease public
property to private companies at below-market rates. Your first question asks whether such
a lease is allowed, and your third asks whether the constitution prohibits it.
The answer to both questions turns on whether the lease agreement is supported by
adequate consideration. When a city leases its property for less than its fair-market rate, the
lease must be supported by additional consideration, which can include any discernable
advantages that accrue to the city through the lease. Examples of public advantage include
any increase in business activity or city population that would result from the contract or
lasting improvements to the city property. If these or some other additional public
advantages are absent, then the lease would not be supported by adequate consideration
and would fall outside the city's authority. Whether any specific consideration is sufficient
is always a question of fact and would, therefore, fall outside the scope of an Attorney
General opinion.
4. Question 2. Your second question asks how cities should determine the fair market value
of any public property for purposes of a lease agreement. This question is highly factual
and beyond the scope of an Attorney General opinion.
5. Question 4. Your fourth question asks whether a below-market lease agreement would
give the lessee "an unfair competitive advantage against other similarly situated
businesses." The answer to this question, like your first and third questions, turns on
whether the lease agreement is supported by adequate consideration, which is a highly
factual question that is beyond the scope of an Attorney General opinion.
Deputy Attorney General Ryan Owsley prepared this opinion, which I hereby approve.
Sincerely,
TIM GRIFFIN
Attorney General