Can a Texas public facility corporation buy property for tax-exempt leases outside its sponsoring district's boundaries?

Plain-English summary

Senator Paul Bettencourt, who chairs the Senate Committee on Local Government, asked about public facility corporations (PFCs) created under Local Government Code chapter 303. A PFC is a quasi-governmental entity that a sponsoring government can set up to finance and provide public facilities, and a leasehold interest in a PFC-owned property can be exempt from property tax. The senator's concern was a PFC sponsored by a municipal management district (MMD) that was acquiring multifamily apartment properties outside the district's territory, which extends the tax exemption to land in other taxing jurisdictions where the local taxing units and their taxpayers have no say.

The AG worked through three statutory layers. Chapter 303 gives PFCs "the broadest possible powers" to acquire and place public facilities in service, and a "public facility" includes a leasehold interest in real property, but the chapter is silent about any geographic limit on a PFC's authority. The AG declined to read a limit into that silence. Chapter 375, which governs MMDs, is not silent: it expressly authorizes an MMD to maintain permanent improvements and provide services "regardless of whether the improvements or services are located inside or outside its boundaries," and to serve areas outside its boundaries when the board determines a benefit to the district. For the specific district in the request, the SH 130 Municipal Management District No. 1, the AG read chapter 3971 of the Special District Local Laws Code together with chapter 375 the same way.

Putting it together, the AG concluded a court could find that a PFC sponsored by an MMD may acquire real property for leasehold outside the district's geographic territory. The AG paired that with two limits. First, the fact that the Legislature gave MMDs certain powers does not necessarily mean it intended the MMD to pass all of those powers along to its PFC, and resolving that is a fact-based analysis for each district and a policy question for the Legislature, outside the scope of an AG opinion. Second, on the senator's questions about whether out-of-district activity must benefit property inside the district, the AG said chapter 375 does require a benefit finding, but that finding is for the district's board to make in the first instance (subject to judicial review for abuse of discretion) and turns on facts an advisory opinion does not resolve. The AG also flagged doubt, in a footnote, about whether a board could reasonably find that housing in counties well outside the district directly benefits property in the district.

What this means for you

If you sit on or run a municipal management district or its PFC

Based on this opinion, the AG reads chapters 303 and 375 to let a PFC sponsored by an MMD acquire leasehold property outside the district's boundaries, and chapter 375 conditions out-of-boundary services on the board finding a benefit to the district. The opinion frames the acquisition authority as something a court "could conclude," not a settled rule, and it expressly leaves to the board (and ultimately a court) whether a given out-of-district project actually benefits the district.

If you are a county or appraisal district affected by an out-of-area PFC exemption

The opinion does not decide whether any specific property qualifies for the tax exemption. The AG noted that this office generally leaves the determination of a tax exemption to the chief appraiser, and that the opinion does not limit the agency's own review of the legality of bond issuances. The opinion describes the authority question, not your appraisal outcome.

If you develop or finance affordable housing through a PFC

The opinion treats a PFC's out-of-district acquisition authority as defensible under existing statutes as the AG reads them, while pointing out that the Legislature was at the time considering bills (S.B. 199 and H.B. 2071) that would change subsection 303.042(f) and impose location limits on PFC-owned multifamily developments. Because this opinion is the AG's reading rather than a court ruling, and because the underlying statutes were in flux, anyone relying on it should check whether the law has since changed.

Common questions

Q: What is a public facility corporation (PFC)?
A: It is a corporation a government can create under Local Government Code chapter 303 to finance and provide public facilities. Chapter 303 gives a PFC "the broadest possible powers" for that purpose, and a leasehold interest in a PFC-owned property can receive a property tax exemption.

Q: Can a PFC own apartments in a different city or county from the district that created it?
A: The AG concluded a court could find that a PFC sponsored by a municipal management district may acquire real property for leasehold outside the district's geographic territory, because chapter 375 lets the district provide improvements and services outside its boundaries. The AG called this the AG's reading, not a guarantee.

Q: Doesn't the project have to benefit the district that sponsors the PFC?
A: Chapter 375 requires the board to find a benefit to the district before providing improvements or services outside its boundaries. The AG said that benefit finding is for the board to make first, subject to a court reviewing it for abuse of discretion, and that it depends on facts the AG does not resolve in an opinion.

Q: Did the AG say this arrangement is good policy?
A: No. The AG repeatedly said whether a PFC should have this authority, and any limits on it, are policy questions for the Legislature, and noted pending bills that would change the rules.

Background and statutory framework

The Public Facility Corporation Act, Local Government Code chapter 303, governs PFCs. Its stated purpose is to authorize "the broadest possible powers" to finance or provide public facilities at the lowest possible borrowing cost (§ 303.002(a)). A "public facility" includes an interest in property devoted to public use (§ 303.003(7)), so it can include a leasehold interest (JBrice Holdings, L.L.C. v. Wilcrest Walk Townhomes Ass'n, Inc.). A sponsor (a municipality, county, school district, housing authority, or special district) creates the PFC, which acts on the sponsor's behalf (§§ 303.003(11), 303.021). Chapter 303 grants the PFC the rights and powers "necessary or convenient" to its purposes (§ 303.041(a)) but says nothing about geographic limits, and the AG declined to write a limit into that silence (Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n; Smith v. Davis).

Chapter 375 governs municipal management districts. It authorizes a district to maintain permanent improvements and provide services "regardless of whether the improvements or services are located inside or outside its boundaries" (§ 375.092(f)), and to provide improvements and services to an area outside its boundaries "[i]f the board determines that there is a benefit to the district" (§ 375.111). For the SH 130 Municipal Management District No. 1, chapter 3971 of the Special District Local Laws Code incorporates chapter 375 (§§ 3971.0102, 3971.0302(a), 3971.0107). Reading these together, the AG concluded a court would likely find a PFC sponsored by the district may acquire property outside its territory, while leaving the benefit finding and the scope of delegated authority as fact and policy questions outside an opinion's reach (citing prior opinions GA-0537, GA-0451, KP-0088, KP-0181, and KP-0358).

Citations and references

Statutes:

• Tex. Loc. Gov't Code ch. 303 — Public Facility Corporation Act; broad powers, public facility and sponsor definitions, leasehold tax treatment
• Tex. Loc. Gov't Code ch. 375 — Municipal Management Districts; improvements and services inside or outside boundaries on a benefit finding
• Tex. Tax Code § 25.07 — taxation of leasehold interests in exempt real property

Key cases:

• JBrice Holdings, L.L.C. v. Wilcrest Walk Townhomes Ass'n, Inc., 644 S.W.3d 179 (Tex. 2022) — a lease is a contractual right to use and occupy real property
• Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n, 518 S.W.3d 318 (Tex. 2017) — courts refrain from rewriting the Legislature's text
• Smith v. Davis, 426 S.W.2d 827 (Tex. 1968) — the wisdom of a law is the Legislature's prerogative

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0437
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2023/kp-0437.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

March 8, 2023

The Honorable Paul Bettencourt
Chair, Senate Committee on Local Government
Texas State Senate
Post Office Box 12068
Austin, Texas 78711-2068

Opinion No. KP-0437

Re: Whether a public facility corporation created under Local Government Code chapter 303 has authority to acquire real property for leaseholds outside of its sponsor's geographic jurisdiction and whether such acquisition furthers a public interest (RQ-0481-KP)

Dear Senator Bettencourt:

You ask about the authority of a public facility corporation ("PFC") created by a sponsoring governmental entity under Local Government Code chapter 303 to acquire for leasehold real property outside of the sponsoring entity's jurisdictional boundaries.¹ You tell us that leasehold interests connected with such properties are "taxed in the name of the PFC and [are] 100% exempt from property taxes."² Request Letter at 2. As you explain it, the tax exemption causes a loss of revenue for the territory in which the leasehold property is located, which territory must then "make up for in tax and fee increases on its own citizens." Id. You state that, meanwhile, the sponsoring governmental entity "receives lucrative income from fees paid by the recipients of the tax exemption." Id.

In particular, you present your questions in the context of a PFC created and sponsored by a municipal management district. See id. at 2–3. You relay that a particular PFC is "approving development agreements for multifamily residential developments" and "acquir[ing] existing multifamily residential properties outside of" the municipal management district's territory. Id. at 3 (discussing the SH 130 Municipal Management District No. 1 and its PFC, the Texas Essential Housing PFC). You reiterate your taxation concerns by explaining that "[t]he effect of these types of acquisitions is the granting of significant property tax exemptions to private developers in taxing jurisdictions where both the local taxing units and taxpayers have no opportunity to provide input on the effects" of such an arrangement. Id. You state that allowing a PFC to extend a tax exemption to a property not within the sponsoring governmental entity's jurisdiction "flies in the face of good public policy . . . ." Id. at 2.

Public Facility Corporations

Found in Local Government Code chapter 303, the Public Facility Corporation Act governs PFC's. See generally TEX. LOC. GOV'T CODE §§ 303.001–.124. Chapter 303's stated purpose is to authorize the "creation and use of public facility corporations with the broadest possible powers to finance or to provide for the acquisition, construction, rehabilitation, renovation, repair, equipping, furnishing, and placement in service of public facilities in an orderly, planned manner and at the lowest possible borrowing costs." Id. § 303.002(a) (emphasis added). A "public facility" is "any real, personal, or mixed property, or an interest in property devoted or to be devoted to public use, and authorized to be financed, refinanced, or provided by sponsor obligations or bonds issued under [chapter 303]." Id. § 303.003(7).

Chapter 303 authorizes a sponsoring entity to create a PFC. See id. § 303.021(a). A sponsor can be a "a municipality, county, school district, housing authority, or special district . . . ." Id. § 303.003(11). A special district includes a "district created under Section 52, Article III, or Section 59, Article XVI, Texas Constitution[.]" Id. § 303.003(10)(A). A PFC acts on behalf of its sponsor to "acquire, construct, rehabilitate, renovate, repair, equip, furnish, or place in service public facilities[.]" Id. § 303.021(b)(1). And chapter 303 broadly grants the PFC "the rights and powers necessary or convenient to accomplish the [PFC's] purposes," including a long list of specific powers. Id. § 303.041(a) (emphasis added); but see id. §§ 303.045 (providing that the sponsor "in its sole discretion" may alter the PFC's organization or activities subject to certain limitations), 303.041(c) (prohibiting the sponsor from delegating "the power of taxation or eminent domain, a police power, or an equivalent sovereign power of this state or the sponsor").

From chapter 303, we generally conclude that because a "public facility" includes real property or "an interest in property," it can include a leasehold interest in property. Id. § 303.003(7); see generally JBrice Holdings, L.L.C. v. Wilcrest Walk Townhomes Ass'n, Inc., 644 S.W.3d 179, 186 (Tex. 2022) (noting that a lease is a contract in the right to use and occupy real property in exchange for consideration). And as a PFC may acquire, furnish or place in service public facilities on behalf of its sponsor, a PFC has authority to acquire, furnish, or place in service a leasehold interest in property. But chapter 303 is silent with respect to the geographical limitations of a PFCs authority.³ See TEX. LOC. GOV'T CODE §§ 303.001–.124.

Municipal Management Districts

As you are concerned about a particular PFC acting on behalf of a municipal management district, we consider Local Government Code chapter 375, which governs such districts. See Request Letter at 2–3; TEX. LOC. GOV'T CODE §§ 375.001–.357. Chapter 375 provides that "[t]he creation of a municipal management district is declared to be essential to the accomplishment of the purposes of Article III, Section 52, [and] Article XVI, Section 59 . . . of the Texas Constitution and to the accomplishment of the other purposes stated in [chapter 375]." TEX. LOC. GOV'T CODE § 375.001(a). A municipal management district created under one of these two constitutional provisions is a special district and therefore can be the sponsoring entity of a PFC under Local Government Code chapter 303. See supra at 3.

As a general matter, chapter 375 authorizes a municipal management district to acquire "real property or any interest in real property in connection with an improvement, project, or services authorized by this chapter, Chapter 54, Water Code, . . . or Chapter . . . 441, Transportation Code," essentially giving a municipal management district the powers of a municipal utility district and a road utility district. TEX. LOC. GOV'T CODE § 375.112(a)(3); see also TEX. WATER CODE §§ 54.001–.813 (providing for municipal utility districts); TEX. TRANSP. CODE §§ 441.001–.233 (providing for road utility districts). Additionally, a "district may acquire . . . and may hold, use, sell, lease, or dispose of real . . . property . . . necessary, convenient, or useful for the full exercise of its powers" under chapter 375. TEX. LOC. GOV'T CODE § 375.092(e).

Relevant to your question about geographical territory, chapter 375 grants a municipal management district power to "acquire, construct, complete, develop, own, operate, and maintain permanent improvements and provide services that directly benefit property in the district, regardless of whether the improvements or services are located inside or outside its boundaries." Id. § 375.092(f) (emphasis added). In addition, a municipal management district has powers related to levying and collecting special assessments for projects and services that confer a special benefit on property in the district. See id. § 375.111. With respect to such special assessments, a municipal management district board may "provide improvements and services to an area outside the boundaries of the district." Id. (emphasis added). In these provisions, the Legislature authorizes a municipal management district to maintain permanent improvements and provide services outside of its territorial boundaries.⁴ See id. §§ 375.092(f), .111. A court could have a basis to conclude that a PFC sponsored by a municipal management district is authorized to acquire property to provide and maintain improvements and services outside the municipal management's geographical territory. At the same time, the fact that the Legislature affirmatively gave municipal management districts certain rights and privileges, does not necessarily mean that the Legislature affirmatively intended this quasi-governmental entity to pass along all of those rights and privileges to a PFC.⁵ Ultimately, this is a fact-based analysis for each municipal management district and a policy question for the Legislature and thus outside the scope of an Attorney General opinion. See Tex. Att'y Gen. Op. No. KP-0358 (2021) at 2–3 (stating that attorney general opinions do not address fact questions).

The SH 130 Municipal Management District

Again, your letter indicates a particular concern about the activities of the PFC sponsored by the SH 130 Municipal Management District No. 1. See Request Letter at 3 (inquiring about the Texas Essential Housing PFC). Chapter 3971 of the Special District Local Laws Code governs the SH 130 Municipal Management District No. 1 ("SH 130 MMD"). See TEX. SPEC. DIST. CODE §§ 3971.001–.0901. Chapter 3971 provides that the SH 130 MMD is "a special district created under Section 59, Article XVI, Texas Constitution." Id. § 3971.0102. Thus, it is a "special district" under Local Government chapter 303 and can therefore be a "sponsor" of a PFC. TEX. LOC. GOV'T CODE § 303.003(10), (11); see supra at 3.

The SH 130 MMD has the "powers and duties necessary to accomplish" its purposes. TEX. SPEC. DIST. CODE § 3971.0301. Chapter 3971 states the creation of the SH 130 MMD is "necessary to promote, develop, encourage, and maintain . . . housing . . . in the district." Id. § 3971.0103(c). Though nothing in chapter 3971 expressly authorizes the SH 130 MMD to operate outside its geographical territory, it does have authority to "construct, acquire, improve, . . . operate, maintain, or finance an improvement project or services authorized under [chapter 3971] or Chapter 375, Local Government Code." Id. § 3971.0302(a) (emphasis added). As previously discussed, Local Government Code subsection 375.092(f) and section 375.111 expressly authorize a municipal management district, including one such as the SH 130 MMD, to maintain permanent improvements and provide services outside of its territorial boundaries. See supra at 5; see also supra at 5, n.4 (discussing the applicability of Water Code section 49.211 and its authority for a district to operate outside of its territory). And we previously determined that a PFC and municipal management district can own a leasehold interest. See supra at 5–6. Accordingly, a court would likely conclude that, as a general matter, a PFC sponsored by the SH 130 MMD may acquire real property or an interest in property outside its geographical territory.

Benefit Within a Municipal Management District's Geographic Territory

Your second question and aspects of your third question inquire whether a municipal management district acting outside its geographic territory must demonstrate and determine a benefit to the residents and property owners within its geographic territory and whether ownership of property outside of the district must nonetheless be in the public interest of the municipal management district. See Request Letter at 3.

As a general matter, Local Government Code chapter 375 addresses your question. The two subsections that affirmatively speak to a municipal management district's authority outside its boundaries require some finding of benefit. See TEX. LOC. GOV'T CODE §§ 375.092(f) (authorizing a municipal management district to operate and maintain permanent improvement and provide services "that directly benefit property in the district, regardless of whether the improvements or services are located inside or outside its boundaries" (emphasis added)), 375.111 ("If the board determines that there is a benefit to the district, the district may provide improvements and services to an area outside the boundaries of the district." (emphasis added)). But the initial determination about the benefit required by chapter 375 is one for the governing body of the district to make in the first instance, subject to judicial review for abuse of discretion.⁶ See id. § 375.111 ("If the board determines that there is a benefit to the district, the district may provide improvements and services to an area outside the boundaries of the district." (emphasis added)); see also Tex. Att'y Gen. Op. Nos. GA-0451 (2006) at 3 ("It is not within the purview of an attorney general opinion to make such determinations for a governmental body . . . ."), KP-0181 (2018) at 3 (recognizing that governmental body's decision is subject to judicial review for abuse of discretion). Moreover, such a determination requires the consideration of fact issues, a task outside the scope of an advisory opinion.⁷ See Tex. Att'y Gen. Op. No. KP-0088 (2016) at 3 (noting that the investigation and determination of fact questions is outside the purview of an Attorney General opinion).

S U M M A R Y

Local Government Code chapters 303 and 375 respectively govern public facility corporations (PFCs) and municipal management districts (MMDs), including authorizing the creation of a PFC by a MMD. A court could conclude that, as a general matter, the two chapters allow a PFC to acquire real estate for leasehold outside its geographic boundaries. Whether a PFC should have this authority and the limitations of such authority are policy questions for the Legislature, especially when impacting taxing authority for another district.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
Chief of Staff

D. FORREST BRUMBAUGH
Deputy Attorney General for Legal Counsel

AUSTIN KINGHORN
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee

¹ See Letter from Honorable Paul Bettencourt, Chair, Senate Comm. on Loc. Gov't, to Honorable Ken Paxton, Tex. Att'y Gen. at 3 (Oct. 10, 2022), https://texasattorneygeneral.gov/sites/default/files/request-files/request/2022/RQ0481KP.pdf ("Request Letter"). You use the term "jurisdictional boundaries" in your question. See id. at 1, 3. Yet the term "jurisdiction" has a broad meaning capable of myriad constructions. From your letter, we understand you to mean the sponsoring entity's geographical boundaries or territory. See id. at 1–3.

² By successive references to other statutes, Local Government Code subsection 303.042(f) changes the usual tax treatment of a leasehold interest held by a private entity under Tax Code subsection 25.07(a). See TEX. LOC. GOV'T CODE § 303.042(f). Tax Code subsection 25.07(a) provides that when real property that is exempt from taxation to the property owner is leased, the lease is not exempt to the lessee. See TEX. TAX CODE § 25.07(a) (applying to leases of a duration of at least one year). Subsection 303.042(f) states that a leasehold or other possessory interest in the real property of the public facility granted by the PFC "shall be treated in the same manner as a leasehold or other possessory interest in real property granted by an authority under Section 379B.011(b)." TEX. LOC. GOV'T CODE § 303.042(f) (referring to subsection 379B.011(b) of the same Code). Subsection 379B.011(b) then refers to Local Government Code section 505.161, which relates to development corporations and states that subsection 25.07(a) does "not apply to a leasehold or other possessory interest granted by a Type B corporation during the period the corporation owns projects on behalf of the authorizing municipality." Id. § 505.161(a)(2); see also id. § 379B.011(b). We are aware that the Legislature is already considering legislation amending subsection 303.042(f). See Tex. S.B. 199, 88th Leg., R.S. (2022). Though your concern centers around the taxation framework, you do not ask about a tax exemption. See Request Letter at 1–3. This office generally leaves the determination of a tax exemption to the chief appraiser. See Tex. Att'y Gen. Op. No. GA-0537 (2007) at 3 (stating that "whether any specific property is exempt from taxation depends on the facts and circumstances and is initially determined by the chief appraiser of the appraisal district").

³ Given this silence, we accept the statute as we find it and "refrain from rewriting the Legislature's text." Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n, 518 S.W.3d 318, 326 (Tex. 2017). Moreover, we leave policy considerations to the Legislature. See Smith v. Davis, 426 S.W.2d 827, 831 (Tex. 1968) ("The wisdom . . . of the law is the Legislature's prerogative[.]"). We note that the Legislature is considering a bill that would expressly authorize a PFC to own a multifamily residential development and that would impose limits on the location of the multifamily residential development. See Tex. H.B. 2071, 88th Leg., R.S. (2023).

⁴ Additionally, a district created under article XVI, section 59 with the powers of a municipal utility district provided by chapter 54 of the Water Code operates under chapter 49 of the Water Code. See TEX. WATER CODE § 49.002(a) (providing that chapter 49 "applies to all general and special law districts to the extent that the provisions of this chapter do not directly conflict with a provision in any other chapter of this code or any Act creating or affecting a special law district"); see also TEX. SPEC. DIST. CODE § 3971.0102. Water Code section 49.211 expressly authorizes a district to "purchase, construct, acquire, own, operate, maintain, repair, improve, or extend inside and outside its boundaries any and all land, works, improvements, facilities, plants, equipment, and appliances necessary to accomplish the purposes of its creation or the purposes authorized by this code or any other law." TEX. WATER CODE § 49.211(b) (emphasis added).

⁵ See supra note 3.

⁶ We question, however, whether the board could reasonably determine that the provision of housing in counties well outside the boundaries of the district directly benefits property in the district as required by subsection 375.092(f), particularly when subsection 3971.0103(c) provides that the creation of the district is necessary to promote, develop, encourage, and maintain housing in the district. In other words, the two sections must be harmonized, with any conflict resolved in favor of chapter 3971. See TEX. SPEC. DIST. CODE § 3971.0107 ("Except as otherwise provided by this chapter, Chapter 375, Local Government Code, applies to the district.").

⁷ This opinion may not be construed to limit this agency's determination in its review of the legality of the issuance of bonds, which necessarily includes the consideration of facts regarding the particular project to be financed and the reasonableness of any benefit determination.