A prior post discussed local government authority to make appropriations in support of private construction of affordable housing. The content of that post—particularly the discussion of public purpose and statutory authority—is directly relevant to this discussion and should be read in conjunction with this post. This post expands on that earlier discussion by explaining the legal requirements for conveying local government property for the purpose of providing affordable housing.

General background on disposal of local government property

As explained in a prior post about property conveyance, we start with the general rule that, unless an exception is authorized by statute, North Carolina local governments are required to dispose of real property through competitive bidding procedures: sealed bid (G.S. 160A-268), upset bid (G.S. 160A-269), or public auction (G.S. 160A-270). In addition, case law generally prohibits local governments from placing conditions on a conveyance of property that will depress the price that a buyer would pay (Puett v. Gaston County). These competitive bidding procedures are always available to local governments for disposal of property.

An exception to those general rules is available when local governments convey property for the purpose of providing affordable housing to persons of low and moderate income (LMI). So long as certain public benefits are secured—namely, the recipient uses the property to provide safe, decent, and affordable housing for LMI persons—then a local government may use “private sale” procedures to convey the property to the buyer of its choice without undergoing a public bidding process. The specific statutory authority will be described later in the post.

Conveyance for Less than Fair Market Value – Constitutional Considerations

The authority to convey property by private sale does not mean that the property can be given away for less than it is worth. Gifts of public money or property are prohibited by Article 1, Section 32 of the North Carolina Constitution (for further legal analysis of that constitutional provision, see a blog post on the topic by my colleague Frayda Bluestein). A local government must receive valuable public service in return for any subsidy it provides to a private entity.  Further, the state constitution restricts local governments to expending funds “for public purposes only.” Every expenditure must therefore serve a constitutional public purpose, and the North Carolina Supreme Court is the ultimate arbiter of what does or does not serve a public purpose. If an expenditure serves a public purpose, then is satisfies the constitution’s gift clause as well.

As explained in a prior companion post, a local government expenditure to support the construction of affordable housing for LMI persons serves a constitutional public purpose when it is necessary—that is, in the words of the North Carolina Supreme Court, “Only when the planning, construction, and financing of decent residential housing is not otherwise available” for LMI persons through the normal activities of private enterprise. Martin v. N. Carolina Hous. Corp., 277 N.C. 29, 50 (1970). Indeed, the court suggested that the public purpose might evaporate if the private sector began to provide adequate housing on its own and the identified needs “cease to exist.” Id. at 56-57. Under current economic conditions, the need for safe and decent affordable housing for LMI persons in most North Carolina communities is easily demonstrated.

A conveyance of property for less than fair market value is equivalent to an expenditure for the benefit of the recipient entity, so the same constitutional considerations apply to reduced-price conveyances as apply to appropriations. Accordingly, the public purpose rationale must be articulated in the approvals for the conveyance—that is, documentation should demonstrate the lack of available housing for LMI persons and should include a budget and pricing to show how the public’s financial support will assist LMI persons. Any subsidy in excess of what is necessary to make housing affordable for LMI persons would be inconsistent with the allowable public purpose and would amount to an unconstitutional gift to the housing developer.

The recipient must agree to perform services in furtherance of the constitutional public purpose (provision of affordable housing for LMI persons) and the conveyance must be conditioned on the promised performance. Affordable housing services connected to a conveyance of property are typically described in the following terms.

• Number of affordable housing units to be provided
• Eligibility of households to reside in affordable housing units based on household income
• Affordability level of housing units as a percentage of household income
• Timing and phasing of construction of affordable units
• Process for certification of eligible households and process for transfer from one eligible tenant or owner to another eligible tenant or owner
• Control period in number of years during which units will remain affordable for LMI persons and whether property will be returned to local government at end of period

More information about these typical terms are found in the companion post about affordable housing expenditures, and a more in-depth treatment is available in the affordable housing and inclusionary zoning guide. A common method of securing public services related to a conveyance is through restrictions on the deed with a reverter clause; that is, a clause placed in the deed that requires ownership to revert back to the local government in the event that the recipient entity fails to perform the required activities. A deed of trust or lien is another method, but liens can be wiped out in the event of foreclosure. Sample affordability language for deed restrictions and liens is provided at pages 110-12 of the affordable housing and inclusionary zoning guide.

Securing the constitutional conditions as described above is necessary but not sufficient to convey property for affordable housing. A local government must also identify enabling statutes that provide authority for the conveyance. The applicable statutory authority is different depending on the type of local government (municipality or county) and the recipient of the property (nonprofit or for-profit).

Statutory Authority for Conveyance by Municipalities

Conveyance to nonprofit entity carrying out public purpose

Whenever a local government is authorized to appropriate funds to a not-for-profit entity carrying out a public purpose, the local government is also permitted to convey property “by private sale” to that entity “in lieu of or in addition to the appropriation of funds” pursuant to G.S. 160A-279. As noted earlier, private sale means that the local government may choose its buyer rather than undergoing a competitive bidding process. The procedures for private sale of property are provided in G.S. 160A-267. The local government must attach “covenants or conditions” to the conveyance to ensure that the property will be “put to a public use by the recipient entity.”

A municipality may contract with and appropriate funds to a private entity to carry out a public purpose in which the municipality is authorized to engage. G.S. 160A-20.1. In the affordable housing context, municipalities derive their authority to make appropriations for affordable housing from the Housing Authorities Law, G.S. Chapter 157, through the operation of G.S. 160A-456(b), which states: “Any city council may exercise directly those powers granted by law to … municipal housing authorities, and may do so whether or not a … housing authority is in existence in such city.” See designation procedure at G.S. 157-4.1.

Accordingly, because a city is authorized to exercise the powers of a housing authority and make appropriations for affordable housing pursuant to that authority, G.S. 160A-279 permits a municipality to convey property by private sale to a not-for-profit housing organization that promises to use the property and any associated subsidy for affordable housing for LMI persons. As discussed in the prior companion post, housing authority powers are extensive provided the requirements of the Housing Authorities Law are met, to include:

• Multi-family rental projects must include mandatory set-asides for low-income persons. (G.S. 157-9.4)
• Housing authorities (and local governments exercising the powers of an authority) must “fix the cost of dwelling accommodations for persons of low income at the lowest possible rates consistent with … providing decent, safe, and sanitary dwelling accommodations.” (G.S. 157-29) A municipality should therefore have oversight of the rental rate or sale price of affordable housing constructed with its property or appropriations.
• “No housing authority may construct or operate its housing projects so as to provide revenues for other activities of the city [or, by extension, other entities].” (G.S. 157-29) When property is conveyed to a third party, a municipality must exercise oversight of the budgets for construction and operation of the housing project to ensure that the municipality’s subsidy is going to LMI persons and not toward other activities of the third party.

Of course, these requirements of the Housing Authorities Law are merely reflective and redundant of the constitutional imperatives prohibiting gifts to private entities and requiring all appropriations to serve a public purpose.

Conveyance to for-profit entities

One limitation of G.S. 160A-279 is that it authorizes conveyances to not-for-profit entities only. For-profit entities are explicitly excluded. However, the extensive powers of a housing authority described in G.S. 157-9 include a blanket exemption from property disposition procedures: “No provisions with respect to the acquisition, operation or disposition of property by other public bodies shall be applicable to an authority unless the legislature shall specifically so state.”

Accordingly, conveyance procedures may be ignored by a housing authority or by a properly designated municipality exercising the powers of a housing authority. (In practice, local governments don’t ignore procedures, but rather follow the minimal procedures for private sale enumerated in G.S. 160A-267.) A housing authority may therefore convey property to any entity, whether nonprofit or for-profit, for less than fair market value, provided the subsidy goes toward the constitutional public purpose of making the housing affordable to LMI persons and does not amount to an unconstitutional gift to the recipient. Other provisions of the Housing Authorities Law must be followed, such as the requirement to ensure that housing projects are priced as low as possible and that revenues from housing projects don’t fund other activities. Conditions on the conveyance should be imposed to secure the public benefits.

Statutory Authority for Conveyance by Counties

Like municipalities, counties are permitted to exercise the powers of a housing authority directly. Specifically, G.S. 153A-376(b) states that “[a]ny board of county commissioners may exercise directly those powers granted by law to … county housing authorities.” See G.S. 157-33 for designation procedures. G.S. 157-34 makes the powers of a county housing authority essentially identical to those of a city housing authority. A county may contract with and appropriate funds to a private entity to carry out a public purpose in which the municipality is authorized to engage. G.S. 153A-449. Accordingly, all of the powers of conveyance available to municipalities described in the preceding section also pertain to counties.

However, unlike municipalities, counties possess an additional source of statutory authority for engaging in affordable housing activities. G.S. 153A-378(3) establishes the following independent authority: “Under procedures and standards established by the county, to convey property by private sale to any public or private entity that provides affordable housing to persons of low or moderate income. The county shall include as part of any such conveyance covenants or conditions that assure the property will be developed by the entity for sale or lease to persons of low or moderate income.” [Counties may also convey property by private sale directly to LMI persons under subsection (4).]

Recall that statutory authority to convey property by private sale does not mean that property may be given away for less than it is worth. However, G.S. 153A-378 authorizes the county to impose conditions and restrictions on the conveyance, and those conditions may be considered in determining the fair market value of the property. Presumably, a requirement to use property for affordable housing for LMI persons at lower rent or sale price will reduce the fair market value of the property, and that adjusted fair market value may be used to price the conveyance to any buyer, whether for-profit or nonprofit.

Should the county wish to convey the property for less than the adjusted value, then that would involve an additional subsidy and the county must utilize G.S. 160A-279 for the conveyance. Recall that under G.S. 160A-279, a conveyance for less than fair market value is permitted “in lieu of” an appropriation, but only when the buyer is a not-for-profit entity carrying out a public purpose. For-profit entities are explicitly excluded under G.S. 160A-279. There is only one way for a county to convey property in furtherance of affordable housing to a for-profit entity for less than fair market value: the county must exercise the powers of a housing authority and comply with the Housing Authorities Law as outlined in the preceding section on conveyances by municipalities.

Statutory Authority to Lease Local Government Property for Affordable Housing

There is separate statutory authority for leasing local government property for affordable housing. G.S. 160A-278 authorizes municipalities (and counties through the operation of G.S. 153A-176) to lease property by private negotiation to any entity that will use the property to construct affordable housing for LMI persons. This statutory authority may be employed without requiring the county or municipality to exercise the powers of a housing authority.

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During its special session held yesterday (March 23^rd), the General Assembly enacted the Public Facilities Privacy & Security Act (S.L. 2016-3 / HB2).  The recent media attention leading up to the special session focused on the effect of the City of Charlotte’s non-discrimination ordinance on public restrooms.  While the bill did address this issue, it also modified state laws governing wage and hour requirements and anti-discrimination in employment and access to public accommodations.  In addition, state law now specifically preempts city and county ordinances relating to these issues.  Perhaps not as newsworthy but nonetheless important to local governments, the legislation also places new limits on the contracting authority of cities and counties.  My colleague, Trey Allen, has authored a blog post on the broader implications of this legislation; this post focuses specifically on the changes to local government contracting.  Yesterday’s legislation was signed by Governor McCrory last night.  It went into effect immediately, so it is now the law.

Sections 2.2 and 2.3 of the bill amend the contracting statutes for cities and counties (G.S. 160A-20.1(a) for cities and G.S. 153A-449(a) for counties) in three ways.  Specifically, the amendments:

1. Expand the current prohibition against cities and counties placing requirements on bidders that the city or county could not place on all private employers within its jurisdiction (for example, minimum wage or paid sick leave). The amendments to these statutes now prohibit cities and counties from imposing any regulations or controls on a contractor’s employment practices, such as wage levels, hours of employment, benefits, and leave.
2. Add new language prohibiting cities and counties from imposing on bidders any mandates or prohibitions on to whom among the general public a contractor provides goods, services, or accommodations (in other words, anti-discrimination in commercial transactions or public accommodations).
3. Extend both of the above prohibitions to bidders and respondents to an RFQ under a qualifications-based selection solicitation (the latter commonly referred to as the Mini-Brooks Act, S. 143-64.31, which applies to contracts for architectural, engineering, or surveying services as well as the alternative construction delivery methods of construction management at-risk, design-build, design-build bridging, and public private partnerships).

In short, cities and counties cannot impose requirements in these two categories – employment practices and anti-discrimination measures – as a condition of bidding on a contract or responding to an RFQ.  Despite these broad prohibitions, cities and counties still may impose conditions on bidders’ and respondents’ employment practices and anti-discrimination measures if those conditions are otherwise required or allowed by state law.

What does this mean for cities and counties?  With regard to the newly expanded prohibition against imposing employment-related restrictions on bidders and respondents, cities and counties had little authority to regulate private employment even before the General Assembly enacted HB2, and the previous amendments to G.S. 153A-449 and G.S. 160A-20.1 that restricted their ability to impose employment related requirements on bidders that they could not otherwise impose on all businesses essentially eviscerated their ability to affect private employment through their bidding and contracting practices.  To the extent that employment-related conditions are required by state or federal law – such as complying with Davis-Bacon wage and hour requirements associated with federal grant funds or adhering to OSHA regulations on a construction job site – cities and counties still have the authority to require bidder compliance.  On the other hand, if a local government wished to require that bidders pay their employees a living wage or provide paid sick leave, they could not do so before and cannot do so now.

With regard to the new prohibition against imposing anti-discrimination requirements on contractors in commercial transactions and public accommodations, the impact of this change is less clear and will likely depend on the degree to which cities and counties were imposing this category of requirements on bidders beyond what was already authorized under state law.  Take this example: a city bids a contract for lawn services and requires as a condition of bidding that each bidder provide a statement that the bidder does not discriminate on the basis of race, religion, color, national origin, age, sex, or handicap.  Since discrimination on this basis is prohibited under state law, a city could impose such a condition.  However, if the city went farther than state law by requiring the bidder’s anti-discrimination statement to include sexual orientation, transgender, or gender identity, its requirement would be unlawful inasmuch as state law doesn’t prohibit discrimination on those grounds.  Moreover, cities and counties no longer have the authority to adopt local anti-discrimination ordinances, regulations, or policies, so the city in our example above could not require bidders to comply with such a local measure as a condition of bidding.

Do the new contracting limitations apply to other units of local government?  No.  The new restrictions on bidding and contracting specifically apply only to cities and counties.  These restrictions are not applicable to other units of local government or political subdivisions of the state, such as local school boards, water and sewer authorities, and ABC districts.  However, section 1.3 of the legislation establishing single-sex multiple occupancy bathroom and changing facilities in all public agencies does apply to all units of government at the state and local level, and sections 1.1 and 1.2 establishing the same for public schools apply to local school boards.  Trey discusses these sections of the legislation in his blog post.

What about contracts not subject to competitive bidding requirements?  The new restrictions apply when bidding a contract or soliciting qualifications.  Because the restrictions apply only when bidding or soliciting and not all contracts, contracts that do not require competitive bidding or qualifications-based selection under state law are not subject to the restrictions.  However, since cities and counties no longer have the authority to adopt ordinances relating to private employment or anti-discrimination, attempting to further such issues through a non-competitive contracting process may not withstand legal challenge.

Do the new contracting limitations affect HUB requirements?  No.  State law currently requires good faith efforts to solicit and encourage historically underutilized business participation in building construction projects.  The HUB statutes (G.S. 143-128.2, G.S. 143-128.3, and G.S. 143-128.4) were not affected by the new legislation, so these statutes remain intact and all local governments must still comply with them.  However, to the extent a city or county has adopted a local ordinance or policy that extends HUB good faith efforts requirements for bidders to other categories of contracts beyond those specified under state law (building construction projects costing $300,000 or more), it is unclear whether such an ordinance or policy remains valid.

When does the legislation go into effect and what is the impact on existing contracts?  The new laws went into effect when Governor McCrory signed the bill at 9:57 p.m. on March 23^rd.  The restrictions on contracting apply to all contracts entered into on or after this date.  The legislation does not invalidate existing contracts, but the new restrictions apply to all future contracts, including those that may be going through the bidding or RFQ solicitation process right now.  Cities and counties should examine any contracts currently out for bid or RFQs currently in the solicitation phase to ensure that none of the newly prohibited conditions on bidding or responding are part of the bidding or solicitation process.  Cities and counties should also evaluate all of their standard bid specifications and contract templates to ensure that the prohibited conditions are not part of their bidding and solicitation process going forward.

The post Beyond Bathrooms – Special Session Legislation Impacts City and County Contracts appeared first on Coates' Canons.

However, a threshold determination must first be made. Is it necessary for the town to comply with any procedural requirements prior to acquiring the property? After all, local governments typically don’t comply with any particular procedural requirements when they acquire property. In this case, however, the answer is “yes”—certain procedures must be followed if the town wishes to convey the property to private developers selected through its RFP process. The answer is the same for a county, too. This post explains why it is advisable to issue notice and hold a public hearing prior to acquiring property for redevelopment and discusses risk mitigation for local governments that fail to do so.

Start with the end in mind

The key to understanding why the town needs to hold a properly-noticed public hearing prior to acquisition, is knowing the end result desired by the town. Ultimately, the town hopes to sell each acquired parcel to one or more private developers who will redevelop the property consistent with the town’s vision. It would not be acceptable to the town, for example, to undergo a competitive bidding process, only to find that the highest bidder lacked the experience, access to capital, or intent to redevelop the property in a timely manner. A worst-case scenario might involve a salvage company (not a developer) being the highest bidder for a key historic building, with plans to strip copper and other valuable materials from the building, and then use the building for storage over the next two decades. To avoid these undesirable results, the town desires to sell the property by negotiated private sale to the developer of its choice, with conditions on the conveyance to ensure the property is redeveloped in a way that is compatible with town goals.

There are several options for conveying property to a redeveloper as explained in this prior post on land banking authority, but only one statute grants Renewville authority to convey all of its key properties by private sale and to impose development conditions on the buyer. That one statute is G.S. 158-7.1 in the Local Development Act of 1925, pertaining to economic development activities.

Pursuant to G.S. 158-7.1, counties and cities may convey property “by private negotiation and may subject the property to such covenants, conditions, and restrictions as the county or city deems to be in the public interest….” The consideration (or sale price) for the property “may not be less than” the “fair market value,”[1] and a properly noticed public hearing must be held prior to approving the conveyance (G.S. 158-7.1(d)). In other words, G.S. 158-7.1 provides the conveyance authority that Renewville desires, provided the town complies with all the statutory requirements.

To sell property pursuant to G.S. 158-7.1, the local government should first acquire it by G.S. 158-7.1

There is a catch related to the broad economic development authority of G.S. 158-7.1. In order for the town to convey property pursuant to G.S. 158-7.1 at private sale and subject to conditions, the town must first acquire the property by G.S. 158-7.1. There are two reasons this preliminary step is required.

The first reason is constitutional. In the seminal economic development case, Maready v. City of Winston-Salem, 342 N.C. 708 (1996), the North Carolina Supreme Court opined on whether economic development activities authorized pursuant to G.S. 158-7.1 serve a constitutional public purpose. The court acknowledged that local government economic development activities, which necessarily involve private for-profit actors who stand to benefit from those activities, are ripe for abuse. However, the Supreme Court stated in Maready that the “strict procedural requirements the statute imposes” will prevent abuse. Therefore, local governments have long been advised to adhere carefully to the procedures imposed by G.S. 158-7.1 to remain safely within the bounds of the North Carolina Constitution’s public purpose imperative.

The second reason relates to long-standing rules of statutory construction. Statutes in pari materia (relating to the same subject matter) should be read together. The North Carolina Supreme Court has stated, “It is a fundamental rule of statutory construction that sections and acts in pari materia, and all parts thereof, should be construed together and compared with each other.” Redevelopment Comm’n of Greensboro v. Sec. Nat. Bank of Greensboro, 252 N.C. 595, 610 (1960). In those situations, “When two statutes apparently overlap, it is well established that the statute special and particular shall control over the statute general in nature, even if the general statute is more recent, unless it clearly appears that the legislature intended the general statute to control.” Trustees of Rowan Tech. Coll. v. J. Hyatt Hammond Associates, Inc., 313 N.C. 230, 238 (1985).

G.S. 158-7.1’s broad language is certainly “general in nature,” as discussed in this prior blog post, and arguably there are specific statutes about redevelopment, namely G.S. 153A-377 (counties) and G.S. 160A-457 (cities) pertaining to “acquisition and disposition of property for redevelopment.” The latter two statutes authorize local governments to acquire any “inappropriately developed” property as necessary and convey it for redevelopment, and no procedural requirements are imposed prior to acquisition. Most important for this post’s purposes, those statutes specifically direct local governments to employ competitive bidding procedures upon sale. Accordingly, if a local government acquires property for redevelopment purposes without first issuing notice and holding a public hearing under G.S. 158-7.1, then the unit has, by default, acquired the property pursuant to G.S. 153A-377 or G.S. 160A-457. It also follows that the unit must use competitive bidding procedures as required by those two statutes when the unit later seeks to convey the property to a developer.

As already discussed, Renewville does not want to use competitive bidding because those procedures would undermine the town’s carefully constructed RFP process. Renewville’s RFP process will function as intended only if the town can utilize private sale procedures and impose conditions as authorized by G.S. 158-7.1(d). To avail itself of G.S. 158-7.1(d)’s conveyance authority, which is provided for property that is “held or acquired pursuant to [G.S. 158-7.1(b)],” Renewville must overcome the presumption that it acquired property pursuant to G.S. 160A-456 (or G.S. 153A-377 for counties) by explicitly operating under G.S. 158-7.1 from the beginning. Renewville should therefore adhere to G.S. 158-7.1(c) acquisition procedures, to include issuing notice and holding a public hearing prior to acquisition, and the town should explicitly refer to G.S. 158-7.1 in resolutions it adopts related to acquiring the key properties.

What if a local government acquires property without following G.S. 158-7.1 acquisition procedures?

There are two situations in which a local government may seek to use G.S. 158-7.1 private sale procedures for disposition of property even though it did not follow G.S. 158-7.1 procedures at the time of acquisition.

Situation 1: Property originally acquired for a purpose other than economic development

The first situation occurs when a local government has acquired property for some reason unrelated to private development. For example, a local government might acquire property as a result of a tax foreclosure process, as described in this post on tax foreclosure and redevelopment by my faculty colleague Chris McLaughlin. Or a local government may acquire property for a purpose unrelated to development—such as construction of government offices—and then later the unit’s plans change and the property becomes surplus.

When property is acquired for a purpose other than redevelopment, and then later the unit desires to avail itself of the special disposition authority of G.S. 158-7.1, the local government should take specific action to mitigate legal risk for itself (and for the eventual purchaser of the property) by formally adopting a resolution that the property is now being held for disposition as economic development property under G.S. 158-7.1. A conservative approach would suggest that the local government should, prior to adopting that resolution, issue notice and hold a public hearing pursuant to G.S. 158-7.1(c). The rationale for the conservative approach is twofold. First, the Maready decision imbues G.S. 158-7.1’s “strict procedural requirements” with constitutional significance, so evading G.S. 158-7.1 procedures at any point is inadvisable. Second, holding a properly noticed public hearing complies with the intent of G.S. 158-7.1 by ensuring that the public is given an opportunity to comment on the unit’s decision to hold and convey the property for economic development, as opposed to simply disposing of the property immediately through competitive bidding.

In addition, from the point that the local government resolves to hold the property for disposition as economic development property, the local government should consistently treat the property as economic development property. This means that all expenditures associated with that property (e.g., marketing, site preparation, etc.) should comply with G.S. 158-7.1 notice and hearing procedures as discussed in this blog post on notice and hearing requirements for economic development appropriations.

Situation 2: Local government simply failed to follow G.S. 158-7.1 acquisition procedures

The second situation occurs when a local government has acquired property with the intent of conveying property for development, but it simply failed to follow G.S. 158-7.1 procedures prior to acquisition. This second situation is more troublesome, because as already discussed above, the local government has essentially acquired the property pursuant to G.S. 153A-377 or G.S. 160A-457 by default, and those statutes call for competitive bidding at disposition.[2] A local government that seeks to convey such property by private sale, rather than using competitive bidding, could be challenged in court as acting outside of its authority.

This is not a theoretical concern. In 2012, a plaintiff filed suit in Superior Court to prevent a local government from conveying property by private sale under G.S. 158-7.1 because the unit had failed to follow the “strict procedural requirements” of the statute at the time of acquisition. The plaintiff’s complaint sought to have the unit’s original acquisition nullified—and the complaint survived summary judgment. Ultimately, the local government was able to “cure” the defect by starting over and following all of the required acquisition procedures, but the developer pulled out of the deal anyway due to the delay and risk associated with the conveyance. No appeal was filed, so it serves as a warning but offers no helpful legal precedent.

Case law therefore leaves no clear answer as to whether it is possible to “cure” a failure to adhere to the “strict procedural requirements” for acquisition under G.S. 158-7.1. A safer alternative to “cure” might be to use other statutory means for conveyance, if appropriate. For example, negotiated sale is permitted for public-private partnerships for construction under G.S. 143-128.1C, as explained in a post by my faculty colleague Norma Houston. In a central business district, a municipality may convey property by private sale when a public facility will be constructed as part of a downtown development project (G.S. 160A-458.3). For historic structures, conveyance by private sale to historic preservation organizations (but not real estate developers) is permitted under separate authority as described in this blog post on sale of historic structures for redevelopment. Finally, an urban redevelopment area could be established around key properties under G.S. Chapter 160A, Article 22, after following the procedures described in a blog post on urban redevelopment areas, and the properties within the redevelopment area could be conveyed by competitive bidding with redevelopment conditions imposed pursuant to G.S. 160A-514.

Outside of those statutory alternatives, a local government that has failed to comply with the procedural requirements of G.S. 158-7.1 upon acquisition, but still wishes to convey the property using the statute’s private sale procedures, could attempt to “cure” the procedural defect after the fact, but it will need to wrestle with the legal risk involved. In addition, local officials should keep in mind that they aren’t the only ones who would worry about the legal risk. Any developer who would purchase the tainted property also faces risk: the property could become a source of protracted litigation, holding up development plans indefinitely—and it is possible that a court could invalidate the original acquisition entirely. As they say, “An ounce of prevention is worth a pound of cure.”

Endnotes:

[1] Some conveyances pursuant to G.S. 158-7.1 may be subsidized as described in this blog post on economic development incentives. However, the typical private developer does not meet the requirements for a subsidized conveyance, as explained in this blog post about the constitutional concerns with providing subsidies to real estate developers.

[2] A narrow exception exists within G.S. 160A-457 for municipalities disposing of property in a “community development project area”—a term with specific meaning related to a federal grant program of the past—so that narrow exception is unlikely to apply to contemporary redevelopment efforts. For examples of community development project areas, see Neighborhood Revitalization Strategy Areas and Community Revitalization Strategy areas.

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In the waning days of the 2015 legislative session, the General Assembly enacted legislation that once again changes the E-Verify contracting prohibition for state and local government contracts. In some respects HB318 (Protect North Carolina Workers Act) limits the prohibition; in many other respects, however, the prohibition has been expanded. Local governments, school units, and public authorities should be aware of these changes and take steps to comply with them, especially since the new law will go into effect as soon as the bill is signed by Governor McCrory and will apply to all contracts entered into on or after that date.[1]

Background

In 2013, the General Assembly enacted legislation which prohibited state agencies and local governments from contracting with businesses that did not comply with North Carolina’s E-Verify hiring requirement. At that time, the prohibition applied to all contracts entered into by cities and counties; for all other local government entities, the prohibition only applied to purchase and construction or repair contracts in the formal bidding ranges. Then, in 2014, the General Assembly amended the law by limiting the prohibition for city and county contracts to only those for purchase and construction or repair in the formal bidding ranges, thus treating cities and counties like all other local government entities (see this blog for more discussion of both the 2013 and 2014 legislation). With the enactment of HB318, the E-Verify contracting prohibition has changed again, and not just for cities and counties.

New E-Verify Contracting Prohibition

HB318 changes the E-Verify contracting prohibition in the following ways:

1. Creates a new statute – G.S. 143-133.3 – which sets out the E-Verify contracting prohibition for all local governments and state agencies.
2. Applies the prohibition to all contracts entered into by all governmental entities except for the following contracts:
   1. Expenses related to travel, including transportation and lodging, for employees, officers, agents, or members of State or local boards, commissions, committees, or councils.
   2. Contracts solely for the purchase of goods, apparatus, supplies, materials, or equipment (contracts that involve a combination of purchase and construction or purchase and service would not be exempt).
   3. Contracts let under S. 143–129(e)(1), (9), or (9a) (the exceptions to competitive bidding requirements for purchases made directly from another unit of government or from a vendor under contract with the State of North Carolina or a federal agency).
   4. Contracts let under S. 143–129(g) (the piggyback exception to competitive bidding requirements).
3. Protects governmental units from noncompliant contractors or subcontractors if the contract includes a provision requiring the contractor and the contractor’s subcontractors to comply with the requirements of Article 2 of Chapter 64 of the General Statutes (North Carolina’s E-Verify hiring requirement)
4. Amends the Local Government Budget and Fiscal Control Act (specifically, S. 159-28(e)) to deem a local government contract compliant with the E-Verify contracting prohibition if the contract includes the provision described in #2 above.
5. Expands the Commissioner of Labor’s E-Verify enforcement jurisdiction to include government contracts subject to the prohibition. If the Commissioner finds that a complaint filed against a governmental entity is not false or frivolous, the Commissioner is required to hold a hearing to determine if a violation of the statute has occurred. If the Commissioner then finds that a violation has occurred, the Commissioner must notify the governmental entity’s governing board. The Department of Labor is also charged with maintaining a list of governmental entities found to be in violation of the statute and must make that list available on its website.

The changes to the E-Verify contracting prohibition summarized above impact local governments significantly as described in more detail below.

Broader Scope

The scope of the prohibition is now broader in that it applies to all contracts entered into by all local government entities regardless of the type of contract or its cost, except for those now specifically exempted under the new statute (see the next paragraph for a discussion of these exemptions). Cities and counties are familiar with this breadth of scope as that was the state of the law as it applied to them in 2013. For other units of local government, however, this broad scope is new. Until now, local boards of education, water and sewer authorities, transit authorities, and all other political subdivisions have dealt with the prohibition only when contracting for purchases or construction in the formal bidding ranges (purchase contracts costing $90,000 and above and construction contracts costing $500,000 and above). These –local government entities, as well as cities and counties, must now apply the prohibition to all contracts except those discussed in the next paragraph.

New Exemptions

Although the scope of the prohibition is broader, the new law exempts certain categories of contracts that were not previously exempt. Significantly, all purchase contracts are exempt from the prohibition, regardless of cost, so long as the contract is solely for the purchase of apparatus, supplies, materials, and equipment (this language tracks the description of a purchase contract under Article 8 of G.S. Chapter 143). Previously, purchase contracts in the formal bidding range were subject to the prohibition; now they are not.

It is important to note that the exemption for purchase contracts applies only if the contract is solely for that purpose. If the contract includes a combination of purchase and some other kind of activity, such as construction or a service, then the exemption does not apply. For example, a contract for new carpet typically includes both a purchase (the carpet materials) and a service (the installation labor). This contract would not be eligible under the exemption because it is not solely a purchase contract. However, if the local government purchases the carpet (either through competitive bidding or under a bidding exception) and then contracts separately for the installation service, only the installation contract would be subject to the prohibition. Of course, local governments should be mindful of the prohibition against dividing a contract for purposes of evading bidding requirements (G.S. 143-133).

In addition to the general exception for purchase contracts, the new law also exempts contracts entered into under certain competitive bidding exceptions. Purchases made from other units of government anywhere in the country, purchases made from vendors under contract with the State of North Carolina or a federal agency (the latter typically referred to as GSA contracts), and purchases made from vendors under contracts previously bid by another unit of government (commonly referred to as piggyback contracts) are exempt from competitive bidding requirements (G.S. 143-129(e)(1), (9), (9a), and (g)). Contracts let under these bidding exceptions are also exempt from the E-Verify contracting prohibition. While these specific exemptions may seem redundant with the more general exemption for all purchase contracts discussed above (and in many cases they will be), the overlap is not entirely complete. A purchase contract entered into under one of these bidding exceptions that includes a service component would be exempt from the E-Verify contracting prohibition even though it is not solely a purchase contract. Take the carpet contract example discussed above. If the contract includes both the purchase of the carpet materials and the installation labor, it is not eligible under the general purchase contract exemption. However, if this same contract is entered into under the piggyback exception (G.S. 143-129(g)), it would be covered under the E-Verify contracting prohibition exemption applicable to piggyback contracts.

A final category of contracts exempt from the E-Verify contracting prohibition are those related to travel, including transportation and lodging, for public officials and employees. This means that payment of travel expenses such a hotel room or an airline ticket are not subject to the prohibition.

Protection from Contractor’s Noncompliance

The new E-Verify contracting prohibition statute provides two important protections for governmental entities when a contractor or subcontractor fails to comply with the state’s E-Verify hiring requirement.

First, local government entities are deemed compliant with the E-Verify contracting prohibition if the contract includes a provision requiring the contractor and that contractor’s subcontractors to comply with Article 2 of G.S. Chapter 64 (the state’s E-Verify hiring requirement). As a result, if a contractor or subcontractor are found to be in violation of the E-Verify hiring requirement, the local government is still compliant with the contracting prohibition if the contract contained the compliance provision. Many local governments began including such a provision in the standard terms and conditions of their contracts when the E-Verify contracting prohibition was first enacted in 2013. Below is a simple example of a compliance provision:

E-VERIFY. CONTRACTOR shall comply with the requirements of Article 2 of Chapter 64 of the General Statutes. Further, if CONTRACTOR utilizes a subcontractor, CONTRACTOR shall require the subcontractor to comply with the requirements of Article 2 of Chapter 64 of the General Statutes.

A local government should consult with its attorney in developing a standard compliance provision.

The second protection for local governments included in the new law benefits local government finance officers. If a contract includes the compliance provision described above and the contractor or subcontractor violate the E-Verify hiring requirement, the finance officer is not subject to personal liability under G.S. 159-28(e) for any funds expended under the contract. Of course, preaudit requirements still apply and failure to preaudit may still result in personal liability (see Kara Millonzi’s blog post on recent preaudit legislative changes).

Enforcement

The Commissioner of Labor is authorized to investigate allegations of E-Verify hiring requirement violations (G.S. 64-27 – 64-30) and to impose sanctions on employers found to be in violation (G.S. 64-31 – 64-33). Under the old law, the Commissioner’s investigative jurisdiction did not extend to local governments. Now, it does.

The Commissioner is now authorized to investigate a complaint made against a local government entity alleging a violation of the E-Verify contracting prohibition. If such a complaint is made, the Commissioner is required to hold a hearing to determine if a violation has occurred. If the Commissioner does find that a violation has occurred, the Commissioner is required to notify the governing body, and must include that government on a list of governmental units found to be in violation of the E-Verify contracting prohibition which will be posted on the NC Department of Labor’s website.

Fortunately, the civil sanctions and fines that the Commissioner is required to impose on private employers who violate the E-Verify hiring requirement do not apply to governmental entities. So, while the Commissioner now may investigate alleged violations by local government entities, the only sanction against that entity is notification to its governing board and publically listing it along with other governmental entity violators.

Where Can You Get More Information?

In the coming weeks I will be revising the E-Verify FAQ’s that I developed after the initial E-Verify legislation was enacted in 2013 and updated after last year’s legislative changes. Please email me your questions so that I can incorporate them into the ever-evolving E-Verify FAQ’s. My email address is nhouston@sog.unc.edu and I look forward to hearing from you.

[1] As of the date and time of this post, Governor McCrory has not yet acted upon HB318.

The post IT’S BACK . . . New E-Verify Contracting Requirements appeared first on Coates' Canons.

Background

G.S. 160A-272 establishes the procedures most local governments must use when leasing government-owned property. While leases of government-owned property typically involve real property, the statute also applies to personal property. The procedural requirements vary depending on the length of the lease, and can be divided into three categories:

1. Leases for a term of one year or less: The governing board may approve the lease without any public notice, and may delegate approval authority to the manager.
2. Leases for a term between one and 10 years:  The lease must be approved by resolution adopted by the governing board at a regular meeting after public notice.  The notice must be given by publication in a newspaper of general circulation in the jurisdiction and must describe the property to be leased, state the annual lease payments, and announce the board’s intent to authorize the lease at its next regular meeting (notice by electronic means is not authorized).
3. Leases for a term longer than 10 years:  The lease must be treated as a sale, and the local government must follow one of the methods authorized for the sale of government property under Article 12 of G.S. Chapter 160A.

Section 9 of S.L. 2015-246 (H44) changes these procedural requirements by (1) increasing the time for giving published notice of leases in category #2, and (2) when the lease involves a communications tower, extending the length of the lease term that triggers sale requirements for leases in category #3.

Notice Requirement

Under the previous version of G.S. 160A-272, notice of intent to approve a lease with a term of between one and 10 years had to be published at least 10 days prior to the board meeting at which the resolution approving the lease was to be considered. Section 9 of S.L. 2015-246 (H44) changed the 10-day notice period to 30 days. The change became law on Wednesday, September 23^rd and is now in effect.

What does this mean? If a city, county, school board, or other unit of local government subject to Article 12 property disposal requirements intends to lease property for a period of between one and 10 years, formal notice of the governing board’s intent to approve the lease must be published at least 30 days prior to the regular meeting at which the board will take action.

Does this change apply to leases of less than one year? No. If the lease term is less than one year and there are no options for extension or renewal (see the next paragraph for discussion of renewal periods), no public notice is required. That was the law previously and Section 9 of S.L. 2015-246 (H44) does not change this.

Do renewal periods count toward the term of the lease? Yes. When calculating the length of the term of a lease for purposes of determining which set of procedures apply (see the categories of leases described above), G.S. 160A-272 remains very clear: “In determining the term of a proposed lease, periods that may be added to the original term by options to renew or extend shall be included.” The legislative amendments do not change this requirement. So, if the lease is for a term of one year with an option to renew for one additional year, it is really a 2-year lease for purposes of the statute. Consequently, it would fall into category #2 described above and would be subject to governing board approval after 30-days’ published notice.

When does this change go into effect? It’s already in effect. The Governor signed HB44 into law on Wednesday, September 23^rd, and Section 9 of this bill which amends G.S. 160A-272 went into effect immediately. So, the 30-day notice requirement applies now to all leases with terms of between one and 10 years.

Communications Tower Leases

Section 9 of S.L. 2015-246 (H44) also amends subsection (c) of G.S. 160A-272 to give more flexibility to local governments when they lease property for siting and operating communications towers. Under the previous version of the statute, a lease of government property for siting and operating a communications tower was treated like any other lease. For example, if the lease was for a term of 10 years, the governing board approved it by resolution at a regular meeting after giving the required published notice. If, however, the lease was for a term of greater than 10 years, it had to be treated like a sale. Private communications providers typically require leases for a term longer than 10 years (25 years seems to be the industry norm), so the sale requirement triggered by long-term leases has posed a challenge to both local governments and private providers in siting towers in ideal geographic locations. The amendment to subsection (c) of G.S. 160A-272 addresses this problem by authorizing leases with terms of up to 25 years for siting and operating communications towers without treating those leases as a sale of property.

What does this mean? A local government may now lease property for siting and operating a communications towers for a term of up to 25 years without having to treat that lease as a sale of property. The local government may enter into the lease following the procedural requirements for lease category #2 described above – governing board approval by resolution adopted at a regular meeting after 30 days’ published notice.

What is a communications tower? A communications tower is specifically defined under G.S. 146-29.2(a)(7) as “new or existing structures, such as a monopole, lattice tower, guyed tower, fire observation tower or water tower that are designed to support or are capable of supporting equipment used in the transmission or receipt of television broadcast signals, radio wave signals, or electromagnetic radio signals used in the provision of wireless communication service.” Think tall communications poles or towers to which an array of antennae is attached. The antennae often serve both private and public communications systems and broadcast signals.

Do renewal periods count toward the term of the lease? Yes. As discussed above, when calculating the length of the term of a lease for purposes of determining which set of procedures apply under G.S. 160A-272, renewal and extension periods count toward the total length of the lease term. So, if a communications tower lease is for a term of 25 years with one option to renew for an additional 25 year term, it is really a 50-year lease for purposes of the statute. Consequently, it would fall into category #3 described at the beginning of this post and must be treated as a sale of property.

When does this change go into effect? It’s already in effect. The Governor signed HB44 into law on Wednesday, September 23^rd, and Section 9 of this bill which amends G.S. 160A-272 went into effect immediately. So, the authorization for long-term communications tower leases is effective now.

Are there other situations where a local government can enter into a long-term lease without treating it as a sale? Yes. In 2014, the General Assembly enacted similar long-term lease authorization for siting and operating renewable energy facilities (S.L. 2014-120). Long-term renewable energy facility leases are discussed in my 2014 purchasing and contracting legislative summary.

For more information about this and other legislative changes, be sure to stay tuned for announcements about the SOG’s legislative wrap-up webinars.

The post Leasing Government Property 2015 Legislative Changes: Notice Requirements and Communications Towers appeared first on Coates' Canons.

Local government experts who are in the know have probably heard that governing boards can’t “bind future boards.” What some don’t know is that the legal principle that prevents binding future boards also prevents a board from binding itself. Here’s why:

North Carolina courts have held that government agencies can’t contract away its core governmental powers. Unfortunately, there is no complete list of what powers are off limits. The leading case on this subject, Plant Food Company v. City of Charlotte, 214 N.C. 518 (1938), held that a contract that “deprives a governing body, or its successor, of a discretion which public policy demands should be left unimpaired,” is not enforceable. Id at 519-20. There aren’t very many cases on this topic, so it’s hard to develop a comprehensive list of things that are off limits for government agreements. But we can be certain that a government can’t enter into an agreement exercise its legislative authority. Both annexation and rezoning are legislative actions. See Bessemer Improvement Co. v. Greensboro, 247 N.C. 549 (1958); Thrash v. City of Asheville, 95 N.C. App. 457, 472-74 (1989) rev’d, on other grounds, 327 N.C. 251 (1990) (We conclude that the power to annex is such a discretionary power which must remain unfettered for the public good. The annexation power, like a municipality’s power to lay out and maintain streets, to build bridges and to levy taxes, is an exercise of a City’s governmental discretion.); Rockingham Square Shopping v. Town of Madison, 45 N.C.App. 249 (1980) (“Our courts have previously held that zoning is a governmental rather than a proprietary function.” citing Taylor v. Bowen, 272 N.C. 726, 158 S.E.2d 837 (1968)).

Now if you’re really in the know, you might ask, “Don’t cities have authority to enter into annexation agreements?” The answer is “yes.” How can that be? The legal doctrine that bars contracting away government powers is based in common law. That means it’s a principle developed by courts and in this case, it does not involve an interpretation of any statutory or constitutional provisions. See Edwards v. City of Goldsboro, 141 N.C. 60, 53 (1906, emphasis added.) (“Powers are conferred upon municipal corporations for public purposes; and as their legislative powers cannot, as we have just seen, be delegated, so they cannot, without legislative authority, express or implied, be bargained or bartered away.) The North Carolina General Assembly can override this court-made law and specifically authorize contracts that involve legislative or other governmental powers. Indeed, the legislature has enacted laws that authorize cities to enter annexation agreements but only with other cities. Cities and counties also have statutory authority to enter into development agreements that including binding zoning conditions and other commitments for a specific project. See G.S. 160A-400.25, 153A-349.6. There is, however, no statutory authority to enter into annexation agreements with private entities.

Well isn’t it the case that many cities enter into annexation agreements requiring property owners to petition for annexation as a condition of receiving water and sewer services to out-of-town properties? Are those all void contracts? The answer is “no.” Remember that the legal restriction is about the government binding itself to exercise (or not exercise) its core governmental powers. When the city requires a property owner to petition to annex, the city typically does not promise to annex. Instead, it requires the property owner to request annexation and the city retains its discretion to act on the petition or not.

What options do the City of Promiseland and the developer have? One option is to move forward with an agreement that the developer will petition for annexation, and with a nonbinding understanding that the board will annex and rezone. It may even be possible for the city to begin processing the rezoning application before the annexation vote occurs so that those decisions can be made immediately following the annexation decision. An example of this type of a “pre-annexation” agreement was upheld in Town of Brockway v. City of Black River Falls, 285 Wis.2d 708 (2005). The mutual expectations for actions to be taken after the annexation were set out in an agreement that was created prior to the annexation, but not executed by the city until after the vote on the annexation. The court held that since the city retained its discretion to approve the annexation the contract was enforceable.

A second option would be to obtain a local act specifically authorizing the agreement.

For more information on contracts that bind government boards see my blog post here.

This blog post was originally published in the Community and Economic Development in North Carolina and Beyond blog. 

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Here are five things you should know about this statute:

1. The statute applies to any kind of contract. The statute does not define “contract.” A general definition of contract from The Law Dictionary is: a promise that is a legally enforceable agreement between two or more parties. So the law applies to purchase orders; service contracts (including payment for using companies or facilities owned by a public official or employee); employment contracts; leases, sales and purchases of real and personal property; and any other type of contract through which the public official or employee, or their spouse, obtains any of the three types of direct benefit as defined in the statute. The prohibition extends to oral or written contracts, regardless of whether they are otherwise legally valid.

2. An elected board member does not avoid liability simply by being excused from voting on the contract. A violation occurs when a government official (or his or her spouse) derives a direct benefit from a contract they make or administer. The statutory definition provides that a person “administers a contract” if he or she has the authority to make decisions about or interpret the contract. Governing board members always have authority to do those things, since the ultimate authority to contract rests with the board, even when aspects of contracting have been delegated to others. So contracts with governing board members are always potentially problematic. But excusing the interested member from voting doesn’t solve the problem. The statute makes clear that an official can violate the statute even if he or she is excused from voting on the contract. If the board approves the contract, even with the interested board member not voting, that member is still in a position to interpret or make decisions on the contract, therefore the violation still occurs. The statute’s definition of “making a contract” says: “A public officer is also involved in making a contract if the board, commission, or other body of which he or she is a member takes action on the contract, whether or not the public officer actually participates in that action, unless the contract is approved under an exception to this section under which the public officer is allowed to benefit and is prohibited from voting.” (Emphasis added). So if a board member (or his or her spouse) stands to derive a direct benefit, and there is no exception that applies, the contract simply cannot lawfully be made. If the contract is allowed under a statutory exception, the board member is prohibited from participating in the process or voting on the contract. See G.S. 14-234 (b1). So in that limited situation, the board member may be excused from voting, but that’s not what makes it legal. It’s the exception that makes it legal. If there is no exception that applies, a board member cannot avoid liability by not voting.

3. Some officials and employees may legally contract with the units they serve, but there may be good reasons to limit this practice. Some public officials and many employees are not involved in making or administering contracts. They are not prohibited from benefiting from a contract with their units of government. Even so, there are reasons to think twice before entering in to such contracts. First, citizens may feel that it’s unethical for contracts to be awarded to individuals who work for or serve the unit, and might assume that they have some sort of inside advantage that they’ve used for their own benefit. (Note that there are separate statutory prohibitions for using one’s public position to derive personal financial benefit. See G.S. 14-234(a)(2) and G.S. 14-234.1. Second, the unit may violate the federal wage and hour laws and the Internal Revenue Code’s provisions on Medicare and social security withholding if it enters into a contract with an employee that involves work that is substantially the same as the employee’s regular work. And finally, it can be awkward at best, and legally messy at worst, if an employee or public official contracts with the unit and things don’t work out and the parties end up in a dispute over the contract.

4. The exception for small jurisdictions only applies to certain types of contracts and certain elected and appointed board members. Under G.S. 14-234(d1) municipalities, counties, and local school administrative units that are below specified population thresholds may contract with their governing board members, and with appointed members of specified county boards. The exception does not apply to contracts with employees. Contracts made under this exception must meet dollar limitations set out in the statute. The dollar limitations relate to “medically related services” ($20,000 limit per contract) and “other goods and services” ($40,000 limit per contract). The statute also specifies that the exception does not apply to contracts that are subject to statutory bidding requirements (formal or informal). There is no indication in the statute that the exception can be used for contracts involving real property transactions, including leases or sales of real property. It’s also not clear whether the exception would apply to an employment contract, although that could be considered to be a contract for services. The small jurisdiction exception also comes with its own set of procedural requirements. Contracts must be approved by special resolution with the interested board member not voting, and there are posting and documentation requirements designed to provide transparency about these transactions.

5. A violation of the statute is a Class 1 misdemeanor and renders the contract void. Prosecutions under this statute are rare, but a violation definitely makes headlines. If the contract is void, the unit has no authority to expend funds under it. The statute allows continuation of a void contract in cases where immediate termination is detrimental to the public health and safety. See G.S. 14-234 (f). An example might be a contract for ambulance services with a company in which a board member acquires a more than 10% ownership interest.

Defintions:
Administering a contract [G.S. 14-234(a1)(2)]: A public officer or employee is involved in administering a contract if he or she oversees the performance of the contract or has authority to make decisions regarding the contract or to interpret the contract.

Making a contract [G.S. 14-234(a1)(3)]: A public officer or employee is involved in making a contract if he or she participates in the development of specifications or terms or in the preparation or award of the contract. A public officer is also involved in making a contract if the board, commission, or other body of which he or she is a member takes action on the contract, whether or not the public officer actually participates in that action, unless the contract is approved under an exception to this section under which the public officer is allowed to benefit and is prohibited from voting.

A public officer or employee is not involved in making or administering a contract solely because of the performance of ministerial duties related to the contract. [G.S. 14-234(a1)(5)]

Deriving a direct benefit [G.S. 14-234(a1)(4)]: A public officer or employee derives a direct benefit from a contract if the person or his or her spouse: (i) has more than a ten percent (10%) ownership or other interest in an entity that is a party to the contract; (ii) derives any income or commission directly from the contract; or (iii) acquires property under the contract.

Related blog posts:

Conflicts of Interest: How Do The Voting Statutes Relate to the Criminal Statute?

Excusing Board Members From Voting

Board Members as Employees

Candidates and Conflicts of Interest – What Happens If You Win?

Boards of Health and Conflicts of Interest

The post The North Carolina Criminal Self-Dealing Statute (G.S. 14-234): Five Things You Should Know appeared first on Coates' Canons.

What is a donation? Using the Webster’s Dictionary definition, a donation is “the making of a gift especially to a charity or public institution; a free contribution.” So when I use the term donation, I’m assuming there is no monetary payment or other value – no “consideration,” in legal terminology – coming back to the local government in exchange for the donation. That turns out to be the main issue under the constitution. Under North Carolina law, local governments can’t donate property.

Article I, section 32, titled “Exclusive emoluments” says: “No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.”

This provision has been interpreted by the North Carolina courts in several contexts, including economic development, appropriations of public funds, and the use and conveyance of public property. The core principle is that public money must be used for purposes benefitting the public. So when there is authority to contract with or convey property to a private entity, there must be some consideration flowing back to the government entity, whether in monetary form, or in the form of services that benefit the public. This is the constitutional limitation on making donations – a public benefit must be received in return.

In 1945, the North Carolina Supreme Court decided a case involving property that the City of Charlotte conveyed to a Recreation Authority for the purpose of creating a recreational facility for WWII veterans. There was no monetary consideration for the conveyance. The court noted that the facility would be used for the benefit of the many veterans who lived in the area and who had provided important service to their country. The court held that the provision of services to veterans under this scenario was a public benefit sufficient to constitute consideration under the Exclusive Emoluments clause. Brumley v. Baxter, 251 N.C. 691, 700 (1945). But there was a problem with the conveyance, and in the end, the court ruled against the city, invalidating the deed.

The problem with the deed in Brumley was that it did not restrict the use of the property to service for veterans. In fact, the deed provided that “in the event the grantee determines the public purpose has failed, or the recreational facilities placed thereon for veterans are not being sufficiently used, the grantee may dispose of the property in its discretion and apply the proceeds to such charity as it may elect.” Charlotte’s failure to restrict the use of the property to a public purpose exceeded its statutory and constitutional authority.

The Brumley case establishes two key principles for interpreting the Emoluments Clause: First, if a conveyance of property is without monetary consideration then there must be consideration in the form of an enforceable promise to provide public services that benefit the taxpayers in the jurisdiction. Second, if the consideration is in the form of public service, the conveyance must be conditioned on the continued use for that purpose, which must include reversion to the grantor in the event that the grantee ceases to use it for a public purpose.

Most local governments are required to follow specific statutory procedures for disposing of surplus property. These are primarily found in Article 12 of Chapter 160A, which applies directly to cities, and applies to counties under G.S. 153A-176, and to local school administrative units under G.S. 115C-518(a). The general rule is that local governments must use the applicable procedures, which are designed to maximize the recovery of tax dollars when disposing of government assets. Several provisions modify that standard, providing specific authority to use the conveyance of property to promote specific statutorily authority purposes, such as economic development (G.S. 158-7.1), historic preservation (G.S. 160A-266(b)), and redevelopment (G.S.160A-514).

The legislature has given cities and counties broad authority in G.S.160A-279 to convey property to nonprofit organizations. This statute incorporates the constitutionally mandated standards by requiring a promise to use the property for a purpose for which the local government has authority to appropriate funds. It further provides that “[t]he city or county shall attach to any such conveyance covenants or conditions which assure that the property will be put to a public use by the recipient entity.” This statute applies only to cities and counties, and not to any other unit of government that is otherwise governed by the property disposal provisions in that article. Although some may refer to conveyances under this statute as donations, it’s clear that they cannot be donations in the “gift” sense of the word, and that there must be some consideration, whether monetary or the promise to use the property for a public purpose.

A later enacted statute, G.S. 160A-280 muddies the waters a bit. This statute specifically authorizes cities (and other units that are subject to the Article 12 provisions) to “donate” personal property to any other government or nonprofit anywhere in the United State, and to sister cities in other countries. The statute does not mention any requirement for consideration, nor does it include any restriction on the use of the property by the grantee. Nonetheless, since those requirements are necessary to avoid a violation of the constitutional bar against exclusive emoluments, local governments should assume that they apply, and should make sure that any conveyance under this statute is supported by some type of constitutionally valid consideration, and is restricted to use for a public purpose that benefits the taxpayers of the jurisdiction.

Now back to the school board member’s idea about donating property to the arts council. Can they do it? Well, based on what has been discussed so far, it might be argued that as long as the arts council uses the property for purposes that benefit the citizens in the school district, it would be ok. That would be the right answer if the grantor were the city or the county. But a different rule applies to schools –Article IX, section 7 of the North Carolina Constitution.

That provision says, “[A]ll moneys, stocks, bonds, and other property belonging to a county school fund, and the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.” In another case involving a conveyance of real property, this provision was interpreted by the North Carolina Supreme Court to limit the school’s ability to convey property without monetary consideration for a non-school use.

The case is Boney v. Board of Trustees of Kinston Graded Schools, 229 N.C. 136 (1948). The Court addressed the question of whether the Kinston school board could legally convey real property – without receiving monetary consideration  –  to the City of Kinston to construct an athletic stadium. The main issue in the case was whether this conveyance violated an earlier version of Article IX, section 7. The court noted that this provision was “designed in its entirety to secure two wise ends, namely: (1) To set apart the property and revenue specified therein for the support of the public school system; and (2) to prevent the diversion of public school property and revenue from their intended use to other purposes.” The transaction in Boney was authorized by the legislature in order to facilitate the issuance of bonds by the city for the construction of the stadium, since the school board had no authority to incur debt. Demonstrating a bit of inter-branch critique, the court noted: “This case provokes a judicial regret that practical considerations sometimes prevent the law makers from legislating upon the theory that a straight line is the shortest distance between two points in law as well as in geometry.” The shorter distance would have involved giving the school the authority to incur the debt. In taking the indirect approach, the court noted, the legislature might have run afoul of the constitutional limitation on the use of property purchase with school funds.

Ultimately, however, the court upheld the legislation and the conveyance because sufficient school use and control was guaranteed in both the statute authorizing the deal, as well as the actual agreement, which provided broad use by the schools as well as residual rights in the property. The lesson learned from the Boney case is that a local school unit must obtain monetary consideration, or nonmonetary consideration in the form of a promise of continued use and benefit to the school.

All this means that the school cannot legally donate the property to the arts council, and will be required to sell it using the applicable statutory procedures.

What about conveyances to other governmental units? Does this raise the same constitutional concerns? Perhaps not, at least for cities and counties. G.S. 160A-274 provides broad authority for local governments to convey property to other governmental units (defined in the statute), “with or without consideration.” Of course, this should be read to mean “with or without monetary consideration,” since some form of consideration is constitutionally required. It seems reasonable to assume that use by another North Carolina governmental unit constitutes sufficient constitutional consideration for cities and counties.

The separate constitutional requirement for schools, as interpreted in Boney, suggests that local school units must obtain monetary consideration when conveying property, even  to other governmental units, unless the property will be used school purposes. G.S. 160A-274 may still be useful for school conveyances to other governmental units, since it provides a simplified procedure for these intergovernmental transactions. This statute also contains specific authority for local school units to lease real property to another governmental unit for $1 per year. Like the donation provision in G.S. 160A-280, conveyances under this provision may not always satisfy the constitutional requirement that applies to schools. Nominal consideration of $1 per year would not satisfy the requirement to obtain monetary consideration if the value of the lease exceeds that amount, and if the property will be used for non-school purposes, the conveyance will not meet the standard set in Boney.

Local school units do have authority to provide school facilities to charter schools free of charge under G.S. 115C-281.35. Since charter schools are public schools, this type of conveyance meets the constitutional requirement for use of school property for school purposes.

The post Donating Property: Beware of Constitutional Constraints appeared first on Coates' Canons.

The EDC hasn’t amassed enough privately-raised capital to undertake the project on its own, and private developers and investors don’t have an appetite for the project, so Ray’s plan depends on direct local government support. Ray proposes for the county to contribute the land for the park by conveying a 500-acre tract of land, which the county already owns, to the EDC for one dollar. The tract lies outside of city limits, but Ray thinks he can convince the city to provide water and sewer. Ray plans to market the tract to manufacturing companies, and when a company decides to locate in the park, the EDC will sell the required land to the company. Ray hopes the EDC can keep the proceeds from any sale, and then the EDC would use those retained proceeds for future economic development activities.

Is the EDC’s proposed structure allowable? In a word, no. Specifically, the property conveyances are problematic unless subject to very specific conditions, and the EDC cannot retain the proceeds from the sale of county land to businesses. This post describes some of the legal issues involved with the EDC’s proposal and explains how the EDC and the county can execute the project lawfully.

General background on disposal of local government property for economic development

As explained in a prior post, we start with the general rule that, unless an exception is authorized by statute, North Carolina local governments are required to dispose of real property through competitive bidding procedures: sealed bid (G.S. 160A-268), upset bid (G.S. 160A-269), or public auction (G.S. 160A-270). In addition, case law generally prohibits local governments from placing conditions on conveyances of property that will depress the price that a buyer would pay (Puett v. Gaston County).

Economic development, however, is an exception to those general rules. So long as certain public benefits are secured, G.S. 158-7.1(d) permits local governments to convey property for commercial or industrial use at private sale (see G.S. 160A-267), meaning the local government may select the buyer of its choice without undergoing a public bidding process. Furthermore, G.S. 158-7.1(d) permits the local government to impose covenants and restrictions on the conveyance in order to secure the public benefits required by the statute, such as job creation and increasing the tax base.

The authority to convey property by private sale does not mean that the property can be given away for one dollar. In fact, G.S. 158-7.1(d) states that the price paid by businesses for land “may not be less than” the “fair market value” of the property. In addition, there is a constitutional requirement to consider: gifts of public money or assets are not permitted under Article 1, Section 32 of the North Carolina Constitution (for further legal analysis of that constitutional provision, see a blog post on the topic by my colleague Frayda Bluestein).

Disposal for less than fair market value

In rare instances, some statutes permit a local government to sell property for less than fair market value, provided some other lawful form of consideration or “payment” is provided. In the economic development context, G.S. 158-7.1(d2) allows “prospective tax revenues or income” coming to the local government “over the next 10 years as a result of the conveyance” to be counted toward the payment for the land. However, prospective tax revenues alone are not sufficient. Other public benefits must be secured as well, such as the creation of a “substantial number of jobs” that pay at least the average wage in the county. The statute also requires local governments to “contractually bind the purchaser” to construct improvements within five years that will generate the tax revenue that was counted toward the company’s payment.

In addition, when economic development property is sold to a private entity for less than fair market value, the government-subsidized sale amounts to an economic development incentive—a transfer of public funds over to a private company—which triggers constitutional public purpose concerns. For most of the last century, North Carolina courts held that such incentives were not permitted, because they violated the state constitution’s public purpose clause. It wasn’t until 1996, following the loss of economic development projects to other states, that the North Carolina Supreme Court finally decided in Maready v. City of Winston-Salem that economic development incentives serve a constitutionally-permitted public purpose—under certain conditions.

The conditions under which incentives are permitted are described in more detail in a separate blog post, When May NC Local Governments Pay an Economic Development Incentive? To boil it down, Maready approved incentives that adhered to the “strict procedural requirements” of G.S. 158-7.1 and that obtained the following public benefits: (1) substantial job creation, (2) new tax revenue that paid back the incentive within 3-7 years, and (3) the incentive was “necessary” to cause the company to locate in the jurisdiction (to prevent it from being “lost to other states”). Lower courts have stated that they will uphold incentives that are “parallel” to the incentives approved in Maready.

Evaluating the subsidized conveyance by the county to the EDC

Returning to the EDC scenario, Ray’s proposed price of one dollar for 500 acres is certainly below fair market value. Can the property be conveyed to the EDC at that price? Not likely. There are two possible sources of statutory authority for a below-market sale to the EDC. Each will be evaluated and ultimately rejected.

1. Conveyance for economic development (G.S. 158-7.1)

As already explained above, subsection (d2) of G.S. 158-7.1 specifically permits a local government to convey land at a price below fair market value, provided the conveyance will “result in the creation of a substantial number of jobs in the county” and the local government “contractually bind[s] the purchaser” to construct improvements within five years that will generate sufficient tax revenue to make up the difference between fair market value and the subsidized price. Any related land purchase contract would also trigger G.S. 158-7.1(h), which requires economic development agreements to include recapture provisions in case the company fails to create the promised jobs, fails to make the promised capital investment, or fails to maintain operations for a specified period of time.

With that background, it becomes clear that there are at least three problems with using G.S. 158-7.1 for the proposed conveyance.

First, the EDC, as the purchaser, cannot be “contractually bound” to construct improvements to generate tax revenue, because it has no intention of constructing those improvements itself. Rather, the EDC plans to sell the land to businesses, and those businesses are supposed to construct the improvements. But even if we assume that the EDC is prepared to make a capital investment itself, the EDC is a nonprofit and might not generate any (or enough) property tax revenue to pay back the incentive. The most the EDC could promise is that it will use best efforts to find a business to purchase the land and construct improvements—but best efforts do not satisfy subsection (d2)’s job creation and tax revenue standards.

Second, subsection (h) recapture requirements related to job creation, capital investment, and maintaining operations, pose a problem. A purchase contract for conveyance of land to the EDC for less than fair market value would be an economic development agreement for purposes of subsection (h) and would therefore need to contain the enumerated recapture provisions. However, in this scenario, the EDC cannot make promises related to job creation and capital investment, because the EDC has no way of knowing whether and how much job creation and capital investment will be generated in the park, nor can the EDC make promises pertaining to maintaining business operations related to those jobs and investments.

Third, a conveyance for less than fair market value would amount to an incentive for the EDC and therefore would fall within the purview of the NC Supreme Court’s analysis in Maready (discussed previously). As already explained, courts will uphold incentives that are “parallel” to the incentives approved in Maready, but the EDC’s transaction doesn’t fit the Maready model. Not only is the EDC unable to promise to create the jobs and tax-generating investment that were promised by the companies receiving incentives in Maready, but also the incentive to the EDC is not “necessary” to attract the EDC to the county—there is no competition with other jurisdictions for the EDC to locate at the site.

Accordingly, the EDC cannot rely on G.S. 158-7.1 as authority for its proposed transaction.

2. Conveyance to entities carrying out a public purpose (G.S. 160A-279)

Whenever a local government is permitted to appropriate funds to a not-for-profit entity for carrying out a public purpose, G.S. 160A-279 permits the local government to convey property to that entity “in lieu of or in addition to the appropriation of funds.” In other words, the local government may make a conveyance of property for less than fair market value just as it would make an appropriation through its general fund. The statute requires the conveyance to be subject to covenants ensuring that the property will be “put to a public use by the recipient entity.” In the EDC scenario, the EDC is a nonprofit entity working on behalf of the county, but this particular statute does not work for the EDC’s proposal for two reasons.

First, although the EDC will initially own the property and put it to a public use by creating an industrial park as authorized under G.S. 158-7.1(b)(1), the EDC intends to sell the property to private for-profit companies. Such a use is specifically prohibited by G.S. 160A-279, which states that “no such conveyance may be made to a for-profit corporation.” The EDC cannot get around this requirement—if local governments could simply pass property through a nonprofit in order to sell it to a for-profit at a discount, it would elevate form over substance and evade the clear intent of the property disposition statutes.

Second, a G.S. 160A-279 conveyance must attach covenants or restrictions to ensure the property will be “put to a public use by the recipient entity.” The EDC is “the recipient entity,” but the EDC does not intend to retain the property. Therefore, if the county were to proceed to convey the property to the EDC under G.S. 160A-279, then at the time the EDC attempted to sell the property to a business, the covenants would be activated and would likely lead to a reversion of the property back to the county. Bottom line: The county, not the EDC, would handle the ultimate sale to a company and would retain any proceeds from the sale.

In summary, the statutory and constitutional limitations make it difficult or impossible to execute the transaction as proposed by the EDC.

Can a local government just give cash to the EDC to purchase the property?

After the county rejected the EDC’s proposal, Ray went to the city instead. He proposed for the city to make a cash grant to the EDC in an amount sufficient for the EDC to purchase a similar tract in another location. Ray hopes that this will get around all of the G.S. 158-7.1 requirements, because he hopes the city can simply appropriate funds to the EDC for economic development and allow the EDC to decide how to spend those funds. Is Ray’s proposition to the city permitted under the law? The answer is no.

The explanation begins with G.S. 158-7.2, which states that whenever appropriated economic development funds “are turned over to any agency or organization other than the county or city for expenditure, no such expenditure shall be made until the county or city has approved the same, and all such expenditures shall be accounted for … at the end of the fiscal year.” This requirement applies to the EDC, which is independent of the city and county, so the city must approve every expenditure by the EDC that uses city funds. In our scenario, that means the city must formally approve the purchase of the land if city funds are used.

The city’s specific approval of the land purchase thereby triggers all related procedures as if the city was purchasing the land itself. Professor David Lawrence explains in his book on economic development law that the city is undertaking the “economic equivalent” of an activity when it provides funds to another entity to conduct that activity. Any other result would evade the procedural requirements of G.S. 158-7.1 and -7.2, and would run afoul of Maready’s emphasis on following the “strict procedural requirements” of G.S. 158-7.1. Accordingly, the city must issue the appropriate notices and hold a public hearing for the acquisition of real property as required by G.S. 158-7.1 when its funds are used by the EDC to purchase land. To secure its interest in the property, it would be advisable for the city to place a lien on the property in the amount of its contribution.

Adherence to the “strict procedural requirements” of the statute would also involve two consequences upon sale of the property by the EDC. First, any land sale by the EDC to a private company should comply with all procedures as if the city were selling the land itself—including obtaining fair market value for the land under G.S. 158-7.1(d) unless a subsidized sale is permitted under G.S. 158-7.1(d2). In either case, the city must approve the sale and will retain any proceeds from the sale (the lien mentioned above is helpful in this regard). If the EDC were permitted to retain the proceeds from the sale of land rather than returning it to the local government, it would be equivalent to the city making an appropriation to the EDC without following the approval mandated by G.S. 158-7.2, and it would amount to an unconstitutional gift of property to the EDC because there would be no contractual requirement for the EDC to use the funds for public benefit.

As a result, the EDC cannot use an appropriation from the city to accomplish what it could not with the county. To suggest that the city could avoid all of the constitutional and statutory requirements associated with appropriations and conveyances for economic development, simply by making a cash grant to the EDC, would elevate form over substance and undermine the overriding purpose of the law’s procedural requirements.

Lawful Alternatives to the EDC’s Proposals

The root cause for the failure of the EDC’s various proposals is that they fail to respect all of the procedures related to appropriations and land conveyances for economic development. Is it possible to identify lawful alternatives that accomplish the EDC’s economic development goals without forfeiting the accountability demanded by the statutes and constitution? Finally, we can answer “yes.” There are at least three lawful alternatives to the EDC proposal: (1) make a loan to the EDC secured by a deed of trust, (2) grant an option on the property rather than fee simple conveyance, and (3) execute a conditional G.S. 160A-279 conveyance.

1. Make a loan to the EDC secured by a deed of trust

If it is helpful for the EDC to own the land (for example, if EDC ownership facilitates joint development of the park with private investors), the city or county could make a loan to the EDC for the land purchase and then secure that loan with a deed of trust on the land. The loan would be an appropriation under G.S. 158-7.1 and would require compliance with the procedural requirements for such appropriations. Furthermore, the loan should be offered on typical market terms, not for a below-market interest rate—otherwise the loan becomes an incentive and implicates the Maready constitutional analysis for incentives as described previously (a bar the EDC has trouble clearing). A market rate loan involves not only an appropriate interest rate that would be offered in the market, but also standard equity requirements and the recordation of a deed of trust. Through a deed of trust, a local government is able to retain its interest in the property and could ensure that all procedural requirements are met. In the event of a future sale to a private company, the loan could either be paid back in full, thereby resulting in no subsidy (a G.S. 158-7.1(d) transaction), or the local government could authorize a subsidy by forgiving the loan to facilitate a conveyance to a job-creating business when permitted under G.S. 158-7.1(d2). Also see a prior post on making a loan instead of a grant.

2. Grant an option on the property rather than fee simple conveyance

Rather than conveying the property to the EDC in fee simple, the county could instead grant the EDC an option (or options) to purchase the land at fair market value. The option could be assignable under specific conditions—namely, assignable to a company that qualifies for an unsubsidized conveyance under G.S. 158-7.1(d) or a subsidized conveyance under G.S. 158-7.1(d2). An option still allows the EDC to exercise positive site control over the land, thereby ensuring that the property will remain available for economic development during the term of the option. Another benefit of this approach is that the option could be granted to the EDC for no monetary consideration, because the EDC would put that option to public use. At the time that the EDC was ready to sell some of the land to a private company, the EDC could assign the pertinent option(s) over to the company, and then the company would exercise those option(s) and purchase the property directly from the county. This ensures that proceeds from any sale are returned to the local government, or, if a subsidized conveyance is appropriate, that the proper procedural requirements are followed.

3. Execute a conditional G.S. 160A-279 conveyance

Although this option is cumbersome, the county could convey the property to the EDC for no monetary consideration under the typical G.S. 160A-279 requirement that the EDC put the property to a public use. The EDC would be in compliance with the public use requirement of G.S. 160A-279 for so long as it was holding and marketing the property. Once the EDC found a private company to locate in the park, the property to be sold would be returned to the county because the EDC no longer intends to put it to a public use. In this way, the county makes the actual conveyance to the private company, retains the proceeds from the sale, and can ensure compliance with all procedures.

Whatever method the county selects for granting the EDC control over the property, whether by making a loan, granting an option, or making a conditional conveyance under G.S. 160A-279, the county will receive most or all of the proceeds from the later sale of land to a business. Once the county receives the sale proceeds, it may at that time appropriate some of the proceeds of the sale to the EDC. Of course, in appropriating funds to the EDC, the county would be required to follow all procedural requirements for the appropriation, such as G.S. 158-7.2 approval of expenditures by entities other than the county, and G.S. 158-7.1(c) notice and hearing requirements. The key to compliance with the procedural requirements is thinking about the conveyance of land as separate from any appropriation to the EDC, even if they happen nearly simultaneously.

All three of the alternatives above allow the EDC to be in control of the industrial park property while concurrently ensuring that the local governments comply with the “strict procedural requirements” of the economic development statutes and case law. As a final comment, it should be noted that many local governments avoid all of these issues by simply keeping industrial park property titled in a city’s or county’s name at all times while the local EDC markets the property to businesses.

Now that a legal path for the EDC has been laid out, only one question remains. If Ray builds it, will they come?

The post Conveyance of Local Government Property to Nonprofit EDC for Industrial Park appeared first on Coates' Canons.

The town recognizes that it needs to market the building more actively—and that it may need the help of experts. “Old Mills R Us,” a regional historic preservation nonprofit with a mission to preserve historic mill buildings, has a proposal for the town:

• The town will sell the mill to the nonprofit for one dollar.
• Old Mills R Us (OMRU) will market the property and sell the mill to a private developer who will redevelop the property while retaining the historic features.
• Rather than charging a broker fee, OMRU will simply keep the proceeds from the sale at whatever price OMRU can get.

Can the town enter into this transaction with OMRU? Short answer: not on these terms. This post explains why and suggests some alternatives.

General Background on Disposal of Local Government Property

We start with the general rule that, unless an exception is authorized by statute, North Carolina local governments are required to dispose of real property through competitive bidding procedures. Three procedures are available: sealed bid (G.S. 160A-268), upset bid (G.S. 160A-269), or public auction (G.S. 160A-270). These bidding procedures are fair to the public in the sense that anyone with the means can submit a bid—there are no back-room deals. The procedures are assumed to be favorable to the government because theoretically, the process should yield the highest possible price. The law assumes that price is the most important factor to local governments; indeed, case law generally prohibits local governments from placing conditions on conveyances of property that will depress the price that a buyer would pay (Puett v. Gaston County).

However, from time to time, compelling and overriding public interests have led the General Assembly to enact exceptions to the competitive bidding requirement. Historic preservation is one of those exceptions. In such instances, the statutes permit local governments to engage in a private sale (as described in G.S. 160A-267)—that is, the local government may select the buyer of its choice without following a public bidding process and, when allowed by statute, may impose covenants and restrictions on the conveyance.

The authority to convey property by private sale does not mean that the property can be given away for nothing. Rather, the property is to be sold at or near fair market value, because gifts of public money or assets to private persons are not permitted under Article 1, Section 32 of the North Carolina Constitution (for further legal analysis of that constitutional provision, see a blog post on the topic by my colleague Frayda Bluestein). Note, however, that when a statute permits a local government to impose covenants or restrictions on a conveyance, the law recognizes that the property’s value may be impaired by those restrictions and appraisers may take the restrictions into account when calculating fair market value.

In rare instances, the statutes may even permit a local government to sell property for less than full fair market value, provided some other allowable form of consideration or “payment” is provided. For example, whenever a local government is permitted to appropriate funds to a nonprofit entity for carrying out a public purpose, it may also convey property to that entity “in lieu of or in addition to the appropriation of funds.” In other words, the local government may make a conveyance of property for less than fair market value just as it would make an appropriation through its general fund. In that case, the conveyance must be subject to covenants ensuring that the property will be “put to a public use by the recipient entity” (G.S. 160A-279).

The next section examines how and whether these exceptions apply to the sale of historic property.

Private Sale of Historic Property

There is specific statutory authority for the sale of historic property. G.S. 160A-266(b) authorizes local governments to convey historic property by private sale—meaning, the unit gets to pick its buyer and impose covenants and restrictions to preserve the historic property. Notably, the local government may use this private sale authority only for conveyance to a nonprofit or trust whose purpose is to conserve or preserve historic property, and the deed must be subject to a conservation agreement as defined by G.S. 121-35. The preservation nonprofit, after it purchases the property under G.S. 160A-266, is permitted to turn around and sell the property subject to covenants that promote the preservation or conservation of the historic property.

In addition, if the local government has established a statutory historic preservation commission (G.S. 160A-400.7), then the commission actually possesses greater authority than the governing board. A governing board is limited to using private sale only when selling to a nonprofit with a historic preservation mission, but a statutory commission is empowered to purchase historic properties and then convey at private sale to any party, subject to covenants that will “secure appropriate rights of public access and promote the preservation of the property.” It is not surprising that the General Assembly granted more authority to statutory commissions, because, after all, a majority of the members of a commission must have special interest or expertise in fields related to historic preservation (G.S. 160A-400.7), so presumably they will act knowledgably when selling historic assets without the aid of a historic preservation nonprofit.

Let’s return to our scenario involving OMRU and the historic mill property. OMRU is a nonprofit with a historic preservation mission, so the private sale procedures of G.S. 160A-266 are available. Accordingly, the local government may sell the historic mill to OMRU through private sale, provided a conservation agreement is placed in the deed. If the local government has formed a historic preservation commission, then that commission could exercise essentially the same powers and sell the property to OMRU—and it could even sell the property directly to a private developer—subject to preservation covenants and restrictions (G.S. 160A-400.8(3)).

However, there is a still a wrinkle to resolve. OMRU wants to purchase the property for only one dollar—far below the fair market value. Is such a low price permissible?

Consideration to be Paid in Sale of Historic Property

Recall the constitutional prohibition against making gifts of public assets that was mentioned previously. In a sale of public property, the buyer must either participate in a public bidding process (where the winning bid is assumed to be fair market value) or, if private sale is authorized, pay fair market value. There are only two ways that the property could be sold to OMRU for less than fair market value:

1. Fair market value is reduced as a result of the covenants and restrictions imposed pursuant to G.S. 160A-266(b). The value of commercial property is typically reflective of the income potential of the property. If the income potential is high, then the value of the property will be high. When a property is subject to historic preservation restrictions that limit how the property may be redeveloped, the additional costs and lost revenues associated with complying with the restrictions could reduce the income potential of the property and therefore reduce its value. However, the additional costs associated with historic preservation are mitigated by the use of long-term debt, historic tax credits and other subsidies, and rent premiums that redeveloped historic structures command in the market. As long as there is adequate market demand for space in a redeveloped historic structure, it is essentially inconceivable that the value of the property would be reduced to one dollar by historic preservation covenants. The School of Government’s Development Finance Initiative can help local governments assess the market potential for redeveloped historic properties, and a property appraiser could assess the value of the property after factoring in the effect of historic preservation covenants.

2. OMRU agrees to put the property to public use and the local government is permitted to appropriate funds to OMRU for that purpose pursuant to G.S. 160A-279. A private sale pursuant to G.S. 160A-279 is not related to the historic character of the property. As mentioned earlier, G.S. 160A-279 allows conveyance by private sale provided there are covenants and restrictions to assure the property is put to a public use by the recipient entity (OMRU in this case). A public use might include using the space as, for example, a museum, or police sub-station. OMRU could certainly promise to put the property to a public use, but in this case, OMRU intends to sell the property to a for-profit private developer (G.S. 160A-279 specifically prohibits conveyances to a for-profit corporation), and the intended use is not a public use. Additionally, in order to avail itself of the private sale procedures of G.S. 160A-279, the local government must be authorized to appropriate funds to OMRU. Local governments are permitted to establish statutory historic preservation commissions and to appropriate funds to those commissions (G.S. 160A-400.12), but OMRU is not such a commission and therefore it is questionable whether a local government possesses authority to appropriate funds directly to OMRU.

Accordingly, in our scenario, it appears that the local government cannot reduce the sale price below fair market value.

This conclusion makes even more sense when placed in context with other, similar authorities. The most similar situation involves local government authority to convey property for redevelopment. When a local government employs the vast powers of a redevelopment commission (as described here), private sale is not permitted at all—competitive bidding procedures must be used. A set of alternative redevelopment statutes, G.S. 160A-457(3) (cities) and G.S. 153A-377(3) (counties), may be used to convey property for redevelopment when a redevelopment commission is not available. Under those statutes as well, competitive bidding procedures must be used. Private sale is available only in very limited circumstances when cities are following a community development plan for the benefit of low and moderate income persons, and even in that case, the property must be sold for the appraised value of the property. Likewise, in the economic development context, G.S. 158-7.1(d) permits local governments to convey property by private sale to a business that will employ workers at the site, but the sale price must be no less than the “fair market value” (note there is an exception under G.S. 158-7.1(d2) for competitive economic development projects when a substantial number of jobs and new tax revenue will result). Reading these statutes together, and in the absence of specific statutory authority allowing local governments to reduce the price of historic property, it seems clear that the authority to convey historic properties for redevelopment does not include the power to accept payment of less than fair market value.

No discount on sale price—but alternatives?

Having determined that the local government must sell the property to OMRU for fair market value (after accounting for the effect of any historic preservation restrictions)—not for one dollar as OMRU proposed—are there lawful alternatives that might compensate OMRU for its assistance with selling the mill property? There are a few options, but they are not as lucrative for OMRU as its original proposal. One possibility is for the local government to purchase a preservation easement on the property and to pay a fee to OMRU for assisting with monitoring and compliance (a local historic preservation commission is empowered to purchase easements and manage them pursuant to G.S. 160A-400.8(3)). Another possibility is that the unit could pay OMRU a customary broker’s fee for marketing the property and for identifying a high-quality developer to buy the property.

Options without OMRU in the deal

Keep in mind, too, that there are other options that don’t involve OMRU at all. For example, G.S. 160A-400.8(3) empowers a historic preservation commission to restore, preserve, hold, and manage historic properties, so a commission could rehabilitate the property on its own. In addition, local governments, regardless of whether they have an active statutory preservation commission, possess authority to construct and lease out commercial space for economic development pursuant to G.S. 158-7.1(b)(4), or, if the property is well-suited for residential units, to construct and manage housing for low- and moderate-income persons (G.S. Chapter 157, G.S. 160A-456, G.S. 153A-376). Finally, the local government could even engage a developer directly for the rehabilitation as part of a public-private partnership for construction (P3), provided the local government intends to include a public facility (such as public staff offices) as part of the project. For an example of a historic mill redevelopment accomplished through a P3 led by a North Carolina town, see this post on the School’s Community and Economic Development blog. See this post for more information about local government legal authority to enter into a P3 for construction of public facilities.

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