Can an Arkansas city sign a 25-year lease with a financial institution for a building, then sublease most of it to a private college, without violating the Arkansas Constitution's restrictions on aid to private entities and on multi-year debt?

Plain-English summary

Representative Brian Evans described a proposed city campus transaction. A financial institution would buy vacant city land, build a campus, and lease it to the city for 25 years. The city would use part for animal services and offices and sublease the rest to a private college for veterinary and dental programs. College sublease payments would cover at least the city's lease payments. The Attorney General answered four constitutional questions but said he could not determine whether specific agreements were constitutional without finding facts.

For Article 12, § 5, he said adequate consideration would avoid the prohibition at issue, and the described exchange suggested adequate consideration, but he left the factual determination open. He found it unclear whether the lease counted as a short-term financing obligation under Amendment 78. On Article 12, § 4, he cited decisions permitting debt payable solely from a special and separable activity. If the city pledged only college sublease payments and not its full faith and credit, he said a court “may similarly find” no violation. That is a tentative prediction, not a declaration that this pledge automatically qualifies. Finally, given the stated city-council public-purpose finding, he believed a court would likely defer to the council.

What this means for you

City officials considering a similar transaction

Review the actual lease and sublease for consideration, financing terms, pledged payment sources, and public purpose. This opinion identifies legal questions but does not approve a particular contract. In particular, a pledge limited to sublease revenue is a fact the Attorney General said could support a court finding under Article 12, § 4; it is not a guaranteed exception.

College administrators and finance counsel

The proposed college sublease and city lease would be linked financially. The opinion leaves the Amendment 78 characterization unresolved and does not settle the constitutionality of any executed agreement. Assess those uncertainties against the actual terms before relying on the proposed arrangement.

Common questions

Does a 25-year lease automatically violate Amendment 78?

The Attorney General said the answer was unclear. He discussed the difference between ordinary rental and financing arrangements but did not classify this proposed lease definitively.

Does pledging only college sublease revenue guarantee compliance with Article 12, § 4?

No. The opinion says a court may find no violation if the city pledges only those payments and not its full faith and credit. It does not say the result is certain.

Did the Attorney General decide that the city received adequate consideration?

No. He said the facts suggested it was likely but that the actual adequacy of consideration was a factual question beyond his opinion function.

What did he say about public purpose?

Assuming the city council formally found public benefit and specific public purposes, he believed a court would likely defer to that determination. He did not make a factual finding for the city.

Currency note

This March 18, 2024 opinion analyzes the transaction as described in the request. A later or differently worded agreement needs its own review under current law.

Source

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

Original opinion text

Opinion No. 2024-032

March 18, 2024

The Honorable Brian S. Evans
State Representative
Post Office Box 1365
Cabot, Arkansas 72023

Dear Representative Evans:
I am writing in response to your request for my opinion on four questions relating to the potential sale, lease, and sublease of property. You set forth the following factual background:

A Financial Institution intends to purchase land from a city of the 1st class (the City). The land is vacant and will be sold for not less than fair market value. The Financial Institution intends to build a multi-building campus on the purchased land.

The City would like to lease the completed campus and would use some of the buildings to house its animal service department, animal clinic, and certain administrative offices. The City would then sublease the rest of the building to a private college (the College) to house its upcoming veterinary and dental programs. Both the lease and the sub-lease would be for twenty- five years. The monthly sub-lease payments from the College to the City would cover at least the total costs of the City’s monthly lease payments to the Financial Institution. Additionally, the City and the College would cooperate in various ways, especially in regard to animal services and the animal clinic. The College’s veterinary program would not be able to exist in the form it desires without the City’s cooperation as described herein.

Against this background, you ask the following questions:

1. Would the lease and/or sublease discussed herein violate Article 12, § 5 of the
   Arkansas Constitution?

   Brief answer: As long as the lease and sublease are supported by adequate
   consideration, they would not violate Article 12, § 5 of the Arkansas
   Constitution. The facts you have provided suggest that the lease and
   sublease are likely supported by adequate consideration, but this is

The Honorable Brian S. Evans
State Representative
Opinion No. 2024-032
Page 2

ultimately a factual question that is beyond the scope of an Attorney General opinion.

2. Assuming that the City’s lease agreement with the Financial Institution had no interest component and no interest payments of any kind, would the lease constitute a form of financing and therefore violate Amendment 78 of the Arkansas Constitution and other applicable law on municipal short-term financing?

Brief answer: For reasons explained below, the answer to this question is not clear.

3. Assuming that the sublease payments from the College are dedicated by City Council legislation to pay the City’s lease payments to the Financial Institution and assuming that the City’s lease with the Financial Institution has a clause that would allow the City to withdraw from the lease at any time, would the City’s lease with the Financial Institution violate Article 12, § 4 of the Arkansas Constitution?

Brief answer: For reasons explained below, if the city pledges payment under the contract solely from the sublease payments the city receives from the college, a court could find that the contract does not offend Article 12, § 4.

4. Would the lease and sublease discussed herein constitute a valid public purpose?
(You have asked me to assume, for purposes of this question, that the City Council has formally designated the lease and sublease to be in the public benefit and to further several specific public purposes.)

Brief answer: Based on the information you have provided, I believe a court would likely defer to the city council’s determination that that the lease meets the public-purpose requirement.

DISCUSSION

Because this office is not a factfinder when issuing opinions, I cannot opine on whether any specific contract or lease agreement is constitutional. I can, however, explain the constitutional principles that apply and respond to your questions in a general manner.

Question 1: Would the lease and/or sublease discussed herein violate Article 12, § 5 of the Arkansas Constitution?

Cities have specific statutory authority to lease city property. Under state law, cities are considered “bodies politic and corporate” with express authority to “[c]ontract and be contracted with.” 1 Cities are also authorized to “acquire and hold real estate” 2 and to “sell,

1
A.C.A. § 14-54-101.
2
A.C.A. § 14-54-301.

The Honorable Brian S. Evans
State Representative
Opinion No. 2024-032
Page 3

convey, lease, rent, let, or dispose of any real estate or personal property owned or controlled by the municipal corporation.” 3

Yet Article 12, § 5(a) of the Arkansas Constitution prohibits cities from becoming stockholders in any company, association, or corporation, or obtaining or appropriating money for, or loaning their credit to, private individuals or entities. The Arkansas Supreme Court has interpreted this constitutional provision to bar municipal donations of “financial aid” to private individuals or entities, which would allow a city to do “indirectly what the Constitution forbids to be done directly.” 4 As a result, this office has consistently opined that Article 12, § 5 prohibits not only the donation of public money but also prohibits the donation of any public resources, including property, to private individuals or entities. 5

Thus, any purported city 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. 6 Consideration can be either financial or nonfinancial benefits that the city receives from the lease. The facts you have described above suggest that the lease and sublease are valid contracts supported by adequate consideration, but this is ultimately a factual question that is beyond the scope of an Attorney General opinion.

Question 2: Assuming that the City’s lease agreement with the Financial Institution had no interest component and no interest payments of any kind, would the lease constitute a form of financing and therefore violate Amendment 78 of the Arkansas Constitution and other applicable law on municipal short-term financing?

Section 2 of Amendment 78 allows municipalities and counties to “incur short-term financing obligations maturing over a period of, or having a term, not to exceed five (5) years” if the obligations are undertaken “[f]or the purpose of acquiring, constructing, installing or renting real property or tangible personal property having an expected useful life of more than one (1) year.” 7 A “short-term financing obligation” is defined as “a debt, a note, an installment purchase agreement, a lease, a lease-purchase contract, or any other similar agreement, whether secured or unsecured.” 8

3
A.C.A. § 14-54-302(a)(1).
4
Halbert v. Helena-West Helena Indus. Dev. Corp., 226 Ark. 620, 625, 291 S.W.2d 802, 806 (1956).
5
See, e.g., Ark. Att’y Gen. Ops. 2023-036, 2017-088, 2017-035, 2015-141, 2008-179, 2007-161, 2005-205, 2004-055, 2002-099, 2000-243. 6 See generally City of Dardanelle v. City of Russellville, 372 Ark. 486, 490, 277 S.W.3d 562, 565–66 (2008) (“The essential elements of a contract are (1) competent parties, (2) subject matter, (3) legal consideration, (4) mutual agreement, and (5) mutual obligation.”); see also Ark. Att’y Gen. Ops. 2023-093, 2017-008, 2010-129, 2009-193, 96-351. 7 Ark. Const. amend. 78, § 2(a).
8
Ark. Const. amend. 78, § 2(b)(1).

The Honorable Brian S. Evans
State Representative
Opinion No. 2024-032
Page 4

Although a “lease” is included in this definition of a “short-term financing obligation,” it is not entirely clear whether the situation you describe would implicate this constitutional provision. Amendment 78, which was proposed by the General Assembly and adopted by Arkansas voters in 2000, has been the subject of very little caselaw. But this office has previously opined that Amendment 78, § 2 should not be read to prohibit cities and counties from entering “simple rental agreement[s].” 9 Instead, it should be read in conjunction with
§ 1, which permits counties and municipalities to form redevelopment districts and issue bonds to help finance development projects within those districts. 10 Reading these two sections together suggests that § 2 was intended to broaden “the constitutionally permissible range of financing options for making public improvements.” 11 Amendment 78’s implementing legislation, the Local Government Short-Term Financing Obligations Act of 2001, 12 also appears to support this interpretation, as it suggests that the “obligations” have “proceeds” 13 and are “negotiable instruments.” 14 Under this interpretation of what constitutes a “short-term financing obligation,” a standard lease agreement for real property would not be the sort of short-term financing obligation contemplated by § 2. As such, the proposed lease would not run afoul of this provision. But because it is not clear that this interpretation of § 2 is proper, judicial clarification is warranted.

Even if the city’s lease with the financial institution falls within Amendment 78’s definition of a “short-term financing obligation,” it is also possible that the lease’s 25-year duration would not violate Amendment 78 if the lease contained a clause (as suggested by your third question) allowing the city to withdraw from the lease at any time. A court might determine that such an escape clause prevents the lease from violating the five-year limitation found in § 2. But, again, this is a question of fact that will depend on the exact terms of the lease.

Ultimately, the terms of any proposed lease agreement must be scrutinized by local counsel to determine whether the agreement complies with Amendment 78.

9
Ark. Att’y Gen. Op. 2016-128.
10
See id.
11
Ark. Att’y Gen. Ops. 2016-128, 2003-152.
12
A.C.A. §§ 14-78-101 to -110.
13
See A.C.A. § 14-78-103(a)(4) (“Proceeds of the obligations may pay all or a portion of the costs of issuing the obligations.”). 14 See A.C.A. § 14-78-107 (“Unless set forth in the ordinance, obligation, or short-term financing agreement, all obligations issued under the provisions of this chapter are negotiable instruments within the meaning of the negotiable instruments law of the state.”).

The Honorable Brian S. Evans
State Representative
Opinion No. 2024-032
Page 5

Question 3: Assuming that the sublease payments from the College are dedicated by City Council legislation to pay the City’s lease payments to the Financial Institution and assuming that the City’s lease with the Financial Institution has a clause that would allow the City to withdraw from the lease at any time, would the City’s lease with the Financial Institution violate Article 12, § 4 of the Arkansas Constitution?

Article 12, § 4 of the Arkansas Constitution requires cities to conduct their fiscal affairs on a sound financial basis, and it prohibits any city from entering into a contract for an amount that exceeds its annual revenue for the fiscal year in which the contract is made. But the Arkansas Supreme Court has held that this constitutional provision “does not prohibit the creation of a debt exceeding current annual revenues if the debt is secured by and payable solely out of the income or assets of a special and separable activity.” 15 That is because such contracts only pledge generated revenue, not “the full faith and credit of the town.”16 Consequently, the Court has affirmed the authority of cities to purchase water through multiyear contracts 17 and to issue bonds payable solely from a city’s electric light and power plant revenues, even when the amount exceeds the city’s total fiscal year revenues. 18 Assuming that the city in this case pledges payment under the contract solely from the sublease payments the city receives from the college and that it does not pledge its full faith and credit, a court may similarly find that such a contract does not offend Article 12, § 4.

Question 4: Would the lease and sublease discussed herein constitute a valid public purpose? (You have asked me to assume, for purposes of this question, that the City Council has formally designated the lease and sublease to be in the public benefit and to further several specific public purposes.)

The public-purpose doctrine, which the Arkansas Supreme Court has rooted in due process, requires that all public transactions serve a public purpose. 19 This doctrine acts as a safeguard against the misuse of tax dollars for private ends. 20 Consequently, any city contract involving the appropriation or expenditure of municipal funds must further a

15
Hink v. Bd. of Dirs. of Beaver Water Dist., 235 Ark. 107, 110, 357 S.W.2d 271, 273 (1962).
16
Town of Lead Hill v. Ozark Mountain Reg’l Pub. Water Auth., 2015 Ark. 360, at 6, 472 S.W.3d 118, 123.
17
See Lead Hill, 2015 Ark. 360, 472 S.W.3d 118; Hink, 235 Ark. 107, 357 S.W.2d 271; McGehee v. Williams, 191 Ark. 643, 87 S.W.2d 46 (1935). 18 See Williams v. Harris, 215 Ark. 928, 224 S.W.2d 9 (1949) (repudiated on other grounds in City of Hot Springs v. Creviston, 288 Ark. 286, 705 S.W.2d 415 (1986)). 19 See Ark. Const. art. 2, § 8 (“No person shall be … deprived of life, liberty or property, without due process of law.”); Chandler v. Bd. of Trs. of Teacher Ret. Sys., 236 Ark. 256, 258, 365 S.W.2d 447, 448 (1963) (“No principle of constitutional law is more fundamental or more firmly established than the rule that the State cannot, within the limits of due process, appropriate public funds to a private purpose.”). 20 Cf. Barker v. Frank, 327 Ark. 589, 597, 939 S.W.2d 837, 841 (1997) (stating that Arkansas citizens may file illegal-exaction suits premised on the “misapplication of public funds.”).

The Honorable Brian S. Evans
State Representative
Opinion No. 2024-032
Page 6

public purpose. Whether any specific contract or expenditure meets this requirement is a question of fact to be decided by the judiciary, but courts afford “great weight” to “legislative determinations of public purposes.” 21 That is because the legislature is tasked with determining whether a particular expenditure is for a public purpose. 22

You have asked me to assume that the city council has formally designated the lease and sublease to be in the public benefit and to serve multiple public purposes. You also include a list of the specific public purposes that would be served by the lease and sublease, including furthering access to veterinary and dental education and care, allowing for additional community health programs, and creating hundreds of jobs. Based on the information you have provided, I believe a court would likely defer to this municipal determination that the lease and sublease fulfill the public-purpose requirement.

Senior Assistant Attorney General Kelly Summerside prepared this opinion, which I hereby approve.

Sincerely,

TIM GRIFFIN
Attorney General

21
Turner v. Woodruff, 286 Ark. 66, 72, 698 S.W.2d 527, 530–31 (1985).
22
Id. at 72, 698 S.W.2d at 530.