Can a New York county issue bonds to acquire land for affordable housing if part of the land will be leased for offices or stores?

Plain-English summary

Westchester County had built up an affordable-housing program by bonding to acquire land, then transferring the land to nonprofit or for-profit developers under covenants requiring use as affordable housing for forty years. The earlier housing projects had been purely residential. Now the County had its eye on parcels that, because of zoning or site features, could not be used entirely for housing. The County wanted to acquire those parcels anyway, dedicate most of the site to affordable housing, and lease the remaining portion for non-residential uses: child care or job placement services for residents, government or nonprofit office space, or even for-profit retail at market rent. Rental income from the non-residential portion would be plowed back into the residential rents.

The County asked whether the constitutional gift-of-public-funds clause (N.Y. Const., art. VIII, § 1) and the public-purpose doctrine permitted this mixed-use structure. The AG said yes.

The starting point was a prior AG opinion (Op. Att'y Gen. (Inf.) No. 92-4) holding that counties have authority to operate affordable-housing programs under the home rule article (art. IX) and Municipal Home Rule Law § 10(1)(ii)(a)(12), with article XVIII as the constitutional background for low-income housing. That opinion established the public purpose framework: counties could provide affordable housing as a proper exercise of the local police power, including by acquiring and financing the necessary land.

The new question was whether adding a commercial component vitiated the public purpose. The Court of Appeals had answered that question over decades in three decisions:

Courtesy Sandwich Shop, Inc. v. Port of New York Authority upheld the Port Authority's use of part of the World Trade Center site for commercial revenue, because the revenue financed the broader port development project. The Court said that revenue-producing portions did not "vitiate the public purpose" if they supported the public purpose of the whole.

Bush Term. Co. v. City of N.Y. upheld a Port Authority building where only the basement and part of the first story were used as a freight terminal and the upper fifteen stories were rented out commercially. The construction would not have been economically feasible without the rental floors.

Denihan Enter., Inc. v. O'Dwyer summarized the rule: "an incidental private benefit, such as a reasonable proportion of commercial space, is not enough to invalidate a project which has for its primary object a public purpose."

Applied to Westchester's plan, the AG concluded that mixed use was constitutional so long as (1) most of the property was used for low-income residential purposes for at least forty years, and (2) all rental income from the non-residential portion was used to subsidize the residential rents.

The AG flagged a separate issue without resolving it: the County said it might charge below-market rent to certain non-residential tenants. Under prior AG opinions, a below-market lease either must be supported by adequate consideration or itself must serve a public purpose. Because the County had not given facts on the tenant mix or rent structure, the AG did not address that question.

Currency note

This opinion was issued in 2003. 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.

Common questions

Q: Why does the gift-of-public-funds clause matter for affordable housing?
A: N.Y. Const., art. VIII, § 1 bars a county from giving or loaning money or property in aid of any individual, private corporation, or private undertaking. Affordable-housing financing routes money through private developers, so the public-purpose test had to be satisfied to keep the program inside the gift clause.

Q: What public-purpose test did the AG use for the mixed-use plan?
A: The "primary object" test from Denihan Enterprises. As long as the primary object of the project is a public purpose (here, affordable housing), an incidental commercial component does not invalidate the project. Murphy v. Erie County was cited for the broader principle that incidental private benefit does not undo a public expenditure.

Q: What conditions did the AG attach to the conclusion?
A: Two. First, most of the property had to be used for low-income residential purposes for at least 40 years. Second, all rental income derived from the leased non-residential portion had to be used to subsidize the residential rents.

Q: Did the AG approve below-market rents to non-residential tenants?
A: The AG did not reach that question. Prior opinions (1980 Op. Att'y Gen. (Inf.) 142 and 1979 Op. Att'y Gen. (Inf.) 60) said leases by counties must either be supported by adequate consideration or themselves serve a public purpose. The County had not provided enough facts for the AG to evaluate the contemplated below-market arrangements.

Q: What kinds of non-residential tenants did the County contemplate?
A: Three categories. Governmental or nonprofit entities providing services like child care or job placement to residents or the community; governmental or nonprofit entities using the space for general administration; and for-profit entities using the space for retail or professional offices. Market rent was contemplated for the for-profit category.

Background and statutory framework

The legal architecture has three layers. Article IX of the State Constitution is the home rule grant; Municipal Home Rule Law § 10(1)(ii)(a)(12) implements the police-power dimension of home rule. Article XVIII of the State Constitution governs low-income housing specifically and authorizes state and local action in this area. Article VIII, § 1 is the counterweight, preventing gifts of public funds to private parties.

The leading mixed-use precedents are the three Court of Appeals decisions discussed above. Courtesy Sandwich Shop framed the rule in the context of condemnation for the World Trade Center. Bush Terminal Co. applied it to a Port Authority freight terminal-cum-office tower. Denihan Enterprises restated it as a general principle.

The AG followed an earlier formulation that affordable housing programs by counties are valid exercises of home rule and police power, citing Op. Att'y Gen. (Inf.) No. 92-4. The new opinion extended that framework to mixed-use parcels acquired through bond financing.

The County also raised, but the AG did not resolve, the below-market rent question. Under 1980 Op. Att'y Gen. (Inf.) 142, a public lease must rest on adequate consideration; 1979 Op. Att'y Gen. (Inf.) 60 recognized a public-purpose alternative.

Citations and references

Constitution:

• N.Y. Const., art. VIII, § 1 (gift-of-public-funds clause)
• N.Y. Const., art. IX (home rule)
• N.Y. Const., art. XVIII (low-income housing)

Statutes:

• Municipal Home Rule Law § 10(1)(ii)(a)(12) (police power)

Cases:

• Murphy v. Erie Co., 28 N.Y.2d 80 (1971)
• Courtesy Sandwich Shop, Inc. v. Port of New York Authority, 12 N.Y.2d 379 (1963)
• Bush Term. Co. v. City of N.Y., 282 N.Y. 306 (1940)
• Denihan Enter., Inc. v. O'Dwyer, 302 N.Y. 451 (1951)

Prior AG opinions:

• Op. Att'y Gen. (Inf.) No. 92-4
• 1980 Op. Att'y Gen. (Inf.) 142
• 1979 Op. Att'y Gen. (Inf.) 60

Source

• Landing page: https://ag.ny.gov/libraries-documents/opinions/opinions-year
• Original PDF: https://ag.ny.gov/sites/default/files/opinions/I_2003-14_pw.pdf

Original opinion text

N.Y. CONST., ART. IX, ART. VIII, § 1, ART. XVIII; MUNICIPAL HOME RULE LAW § 10(1)(ii)(a)(12).

A county may finance the acquisition of property for the development of affordable housing where most of the property will be used for low-income residential purposes for at least 40 years and all rental income derived from the leased non-residential portion of the property will be used to subsidize the residential rents.

October 28, 2003

Charlene M. Indelicato, Esq.
County Attorney
County of Westchester
Michaelian Office Bldg., Room 600
148 Martine Avenue, 6th Floor
White Plains, New York 10601

Informal Opinion
No. 2003-14

Dear Ms. Indelicato:

You have inquired as to whether the County may issue bonds to finance the acquisition of property for the development of affordable housing, where, although a majority of the property will be used for affordable housing purposes, a portion will be leased for non-residential use by governmental, not-for-profit, or for-profit entities. We conclude that the County may do so.

I. Background

In response to a request from your predecessor, we have previously concluded that Article XVIII of the State Constitution, which governs the provision of low-income housing, does not prohibit the involvement of counties in the development of affordable housing. Op. Att'y Gen. (Inf.) No. 92-4. We explained in this opinion that "a local law enacted by a county to provide needed low-income housing would serve a valid public purpose and is a proper exercise of local police power" granted by Article IX of the New York Constitution (the home rule article) and implemented by Municipal Home Rule Law § 10(1)(ii)(a)(12). We concluded that "counties can undertake significant programs in the provision of affordable housing which include, as possible components, county provision or acquisition of necessary land . . . and the financing of the costs of the affordable housing program consistent with general constitutional debt limitations." Id.

You have indicated that, pursuant to our previous opinion, the County has established a fund through which it has financed several housing projects for low-income families or other special needs populations. According to your letter, the County frequently issues bonds to finance the acquisition of property and subsequently transfers the property to a non-profit corporation or a for-profit developer for the establishment of affordable housing. The transfers have been accompanied by a covenant requiring that the property be used for affordable housing for a specified period of time, typically 40 years. To date, the property developed pursuant to the County's program has been for purely residential use.

The County has, however, identified several available properties that could be partially used for residential purposes, but, because of zoning restrictions or features of the property, cannot be used entirely for such purposes. Thus, the County is considering acquiring the property and, while requiring that a majority of the property be used for affordable housing, allowing the remainder of the property to be rented to lessees who would use it for non-residential purposes.

The proposed non-residential tenants include (1) governmental or not-for-profit entities that would provide services, such as child care or job placement services, to the residential tenants or the community at large, (2) governmental or not-for-profit entities that would use the property for purposes not directly related to the tenants or the community (e.g., general administrative offices), and (3) for-profit entities that would use the space for various purposes, e.g., retail or professional offices. You have indicated that, depending on the renting entity and the anticipated use of the space, the County may permit the tenant to pay below-market rent; for-profit entities, however, would be charged the market rent. The rental income earned from the non-residential tenants would be used to subsidize the affordable housing rental units.

II. Analysis

As we noted in Op. Att'y Gen. (Inf.) No. 92-4, a county's authorization pursuant to home rule powers to provide affordable housing must be read in conjunction with provisions of the State Constitution relating to local finances and debt limitations. These provisions prohibit the County from "giv[ing] or loan[ing] any money or property to or in aid of any individual, or private corporation or association, or private undertaking." N.Y. Const. Art. VIII, § 1. An incidental benefit to a private individual or entity does not invalidate an expenditure of public funds if a public purpose is primarily served by that expenditure. Murphy v. Erie Co., 28 N.Y.2d 80, 88 (1971). For the reasons discussed below, we are of the opinion that the County may proceed consistent with these restrictions.

The Court of Appeals has considered the question of whether property to be used for a public purpose does in fact serve that public purpose when it also has a commercial component. For example, in considering whether the condemnation of property amounted to an unconstitutional taking, the Court of Appeals in Courtesy Sandwich Shop, Inc. v. Port of New York Authority, 12 N.Y.2d 379 (1963), concluded that the inclusion of commercial space in a building proposed to be built on the condemned land did not vitiate the public purpose for which the land was claimed. In that case, the Court upheld as constitutional a statute authorizing the Port of New York Authority to use portions of property acquired to develop the World Trade Center for the production of incidental revenue for expenses of all or part of that port development project. Specifically, the Court reasoned as follows:

No further demonstration is required that improvement of the Port of New York by facilitating the flow of commerce and centralizing all activity incident thereto is a public purpose supporting the condemnation of property for any activity functionally related to that purpose. Nor can it be said that the use of property to produce revenue to help finance the operation of those activities that tend to achieve the purpose of the project does not itself perform such a function, provided, of course, that there are in fact such other activities to be supported by incidental revenue production.

Id. at 389. See also id. at 390-91 (holding that because the statute at issue "allow[ed] only 'portions' of structures otherwise devoted to project purposes to be used for 'the production of incidental revenue . . . for the expenses of all or part of the port development project,'" it did "not vitiate the public purpose of the development as a whole").

Similarly, in Bush Term. Co. v. City of N.Y., 282 N.Y. 306, 315-16 (1940), the Court concluded that property held by the Port Authority was held primarily for a public purpose when, of 16 stories, only the basement and part of the first story were used as a freight terminal and the remainder of the building was used for revenue-producing purposes. This was based on the apparent intent of the Legislature to confer upon the Port Authority the power to construct a building with additional space for rental, as well as the finding that construction of an inland terminal building by the Port Authority would have been economically impossible without the addition of upper stories that could be utilized to produce revenue. Id. at 315; see also Denihan Enter., Inc. v. O'Dwyer, 302 N.Y. 451, 458 (1951) ("Of course an incidental private benefit, such as a reasonable proportion of commercial space, is not enough to invalidate a project which has for its primary object a public purpose.").

In light of these decisions by the Court of Appeals, we conclude that the County's transfer of property to be developed for low-income housing, a portion of which property will be used for the production of incidental revenue, promotes the public purpose of providing affordable housing and thus is constitutional. Our opinion is, however, limited to the situation you have described, in which most of the property will be used for low-income residential purposes for at least 40 years, and all rental income derived from the leased portion of the property will be used to subsidize the residential rents by providing an income stream to help to maintain lower rents on the residential units.

You have also indicated that the County may permit tenants on the commercial portion of the property to be charged below-market rent. In prior opinions, we have interpreted section 1 of Article VIII to mandate that if such a lease is entered into, the consideration for the lease must be adequate, 1980 Op. Att'y Gen. (Inf.) 142, unless the below-market rent serves a public purpose. See 1979 Op. Att'y Gen. (Inf.) 60. Because the issue of whether the rent charged constitutes adequate consideration or serves a public purpose falls outside the scope of your request and involves facts not available to us, we do not address it here.

The Attorney General renders formal opinions only to officers and departments of State government. This perforce is an informal and unofficial expression of the views of this office.

Very truly yours,

KATHRYN SHEINGOLD
Assistant Solicitor General
In Charge of Opinions

By:
MELANIE OXHORN
Assistant Solicitor General