When a NC town leases private land for public parking and beach access, can the town claim the property is tax-exempt as 'municipal property'?
Plain-English summary
Starting in 1994, the Town of Ocean Isle Beach leased a piece of private land in Brunswick County to provide beach access and public parking. Under the lease, the Town agreed to pay all ad valorem taxes on the property and to handle upkeep. The lease was open-ended, with either party able to cancel on 60 days' notice.
Through a tax collector's clerical error, the parcel was marked as "exempt." When Brunswick County eventually realized the error, it "discovered" the property under § 105-312, assessed back taxes, and collected from the Town. The Town then asked for a refund, arguing the property was exempt under § 105-278.1(b) (municipal property exemption) because the Town had effectively assumed all the burdens of ownership during the lease.
Huey Marshall asked the AG to sort it out. Senior Deputy AG Reginald L. Watkins and Special Deputy AG George W. Boylan answered.
No exemption for the leasehold. § 105-278.1(b) exempts real property "belonging to" municipalities. The AG read "belonging to" to mean "titled to" or "owned by," consistent with how § 105-302 frames general listing requirements (which look to who has title). A leasehold, even one where the lessee assumes all the burdens of ownership, is not ownership. The Town did not own the property; the private landowner did. The exemption didn't apply.
The property was properly discovered. § 105-273(6a)c defines "discovered property" to include property that was improperly granted an exemption. The County's error in marking the parcel "exempt" was the kind of mistake the discovery statute was designed to catch. Once the error was identified, the County had the right to discover the property and assess back taxes.
Compromise authority under § 105-312(k). The Town wanted a refund. The AG noted that while § 105-380 generally bars releases or compromises of properly levied taxes, § 105-312(k) is different. The compromise powers conferred by § 312(k) are "extraordinary and not limited by traditional prohibitions against release of taxes set by G.S. § 105-380." § 312(k) doesn't impose overt standards; the County can compromise in good faith after considering all the circumstances. Stone v. Commissioners of Stoneville, 210 N.C. 226 (1936) is the leading citation.
So the Town's request was legally cognizable but discretionary. The County could refund some or all of the assessed taxes if its board concluded that was a fair resolution, given the long-standing exempt classification, the Town's reliance on that classification, the public purposes the leased land served, and any other relevant factors. The AG didn't direct a refund or block one. The decision was the County's to make.
Currency note
This opinion was issued in 2000. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Chapter 105's listing and discovery provisions have been amended several times since 2000. The municipal exemption under § 105-278.1 has likewise evolved. Anyone in a similar dispute today should check the current statute text.
Background and statutory framework
Ocean Isle Beach parking lease. Starting in 1994, the Town leased private land to operate beach access and public parking. Two practical features mattered:
- The Town assumed all ad valorem taxes.
- The Town handled upkeep and maintenance.
- The lease was open-ended (no fixed term), terminable on 60 days' notice.
The Town's argument was substance-over-form: it had assumed all the economic burdens of ownership, so it should get the benefit of the municipal exemption. The AG rejected that argument as a matter of statutory interpretation.
§ 105-278.1(b) (municipal exemption). Exempts real property "belonging to" municipalities. The word "belonging" carries an ownership connotation in property law. The AG read the term consistently with that connotation, supported by § 105-302's general listing rules tying tax liability to ownership.
§ 105-302 (listing requirements). Sets out who is required to list real property for taxation. The general rule ties listing to ownership, which reinforces a reading of "belonging" in § 105-278.1(b) as connoting title rather than economic burden.
§ 105-273(6a)c (discovered property). Defines "discovered property" to include "property granted exemption or exclusion to which it is not entitled." That was the Ocean Isle Beach parcel: improperly granted an exemption.
§ 105-312 (discovery procedure). The statute lets the tax assessor add discovered property to the tax rolls and collect back taxes, subject to penalties. § 105-312(k) gives the governing body of the taxing unit discretion to compromise the discovered taxes. The compromise authority is broad and not constrained by the strict-release bar of § 105-380.
§ 105-380 (no release once levied). The general rule: once taxes are properly levied, the taxing unit cannot release them. Without § 312(k), this would foreclose any compromise of the back taxes. The AG read § 312(k) as a specific carve-out from § 380's general bar, applicable to discovered-property assessments.
Why the carve-out makes sense. Discovered-property assessments often arise from years-old errors. Property owners (or, here, tenants assuming the tax burden) may have relied on the exempt classification when making their plans. The General Assembly built in compromise discretion to let local boards adjust for equity considerations without violating the strict bar on tax releases. Stone v. Commissioners of Stoneville gives the doctrine its modern shape.
Common questions
Q: Could the Town have negotiated a tax-paid-by-landlord structure instead?
A: Yes, that's what most municipal leasing arrangements do when the parcel is privately owned. The economic substance is the same (the Town funds the taxes either through the rent or through a separate payment), but the property is taxable to the owner, and the Town just pays the underlying obligation as part of the lease consideration.
Q: Why didn't the Town's assumption of all economic burdens trigger the exemption?
A: NC law looks to title for municipal exemption purposes, not to economic burden. Two parties could rearrange the costs of property via lease without changing tax exempt status. The AG opinion confirmed the formalist reading.
Q: Could Brunswick County have refunded the taxes anyway?
A: The AG concluded yes, but only via the § 105-312(k) compromise authority. The County's board would need to consider the circumstances in good faith and decide whether a refund (full or partial) was warranted. The decision was discretionary, and the AG didn't suggest one outcome over another.
Q: Would the answer change if the Town owned the parking lot outright?
A: Yes. If the Town held title (e.g., bought the property), § 105-278.1(b) would exempt the property from ad valorem tax because it would then be "belonging to" the Town. The opinion turns on the difference between leasehold and fee ownership.
Q: What's the practical lesson for municipalities considering lease arrangements?
A: If a municipality leases private property for a public purpose and wants exemption, it should consider buying the property instead. If purchase is not feasible, the municipality should price the lease to cover the underlying taxes (which will continue to be owed by the private owner) and avoid relying on the municipal exemption. Tax collectors should also avoid marking leased property as exempt by reflex; the exemption follows ownership, not the public use.
Citations from the opinion
- N.C. Gen. Stat. §§ 105-273, 105-273(6a)c, 105-278.1, 105-278.1(b), 105-302, 105-312, 105-312(k), 105-380
- Stone v. Commissioners of Stoneville, 210 N.C. 226 (1936)
Source
Original opinion text
Reproduced from the NCDOJ landing page. The linked landing page is authoritative.
Re: Advisory Opinion; Imposition of ad valorem taxes upon real property
individually owned but leased to municipality; compromise of discovered property; G.S. § 105-278.1(b); G.S. § 105-312(k); G.S. § 105-380
Dear Mr. Marshall:
From your recent letter as supplemented by that from Elva L. Jess, attorney for the Town of Ocean Isle Beach ("Town") we understand that since 1994 the Town has leased real property from a private individual to provide beach access and public parking. As consideration for the lease, the Town assumed responsibility for ad valorem taxes and for necessary upkeep and maintenance upon the premises. The term of the lease is indefinite and allows cancellation by either party upon 60-days written notice.
The property was properly listed, but erroneously recorded as "exempt" by the tax collector for Brunswick County ("County"). The County "discovered" the property under G.S. § 105-312, the Town paid the assessed taxes, and now has requested their refund.
The Town contends the real estate was exempt under G.S. § 105-278.1(b) since it held substantially all rights to the property and had assumed most burdens of ownership during the lease period. Moreover, the Town questions whether the property in fact was "discoverable," and if so, whether all attendant taxes can be compromised under G.S. § 105-312(k).
G.S. § 105-278.1(b) exempts from taxation real property "belonging to" municipalities. The words "belonging to" suggest "titled to" or "owned by," consistent with general listing requirements. G.S. § 105-302. Since the Town simply possessed a leasehold interest, the real estate was not exempt as property belonging to a municipality. Under G.S. § 105-273(6a)c, property improperly granted exemption constitutes "discovered property." Consequently, the County properly discovered the land leased to the Town.
The powers of compromise conferred by Section 312(k) are extraordinary and not limited by traditional prohibitions against release of taxes set by G.S. § 105-380.
G.S. § 105-312(k) has few overt standards. Under Section 312(k), Brunswick County may compromise the liability for the taxes assessed upon the discovered property if it so elects in good faith after considering all the circumstances. Stone v. Commissioners of Stoneville, 210 N.C. 226, 229 (1936).
We hope the foregoing is helpful.
Signed by:
Reginald L. Watkins, Senior Deputy Attorney General
George W. Boylan, Special Deputy Attorney General
cc: Elva L. Jess