Attorney General of Florida — Opinion
October 7, 1992
Mortgage on surplus municipal property
Robert A. Butterworth Attorney General
Michael W. Connors Village Attorney Village of Royal Palm Beach
QUESTION:
Does s. 10, Art. VII, State Const., preclude the village, when selling surplus real property to a private purchaser and taking back a mortgage on the property, from subordinating that mortgage to a mortgage secured by the purchaser for the construction of improvements?
SUMMARY:
While a municipality would not be precluded from taking back a mortgage on surplus municipal property, the subordination of that mortgage to a mortgage secured by the purchaser for the construction of improvements would appear to be precluded by s. 10, Art. VII, State Const., when the primary beneficiary of such a subordination would be the purchaser, a private for profit corporation.
According to your letter, the Village Council of the Village of Royal Palm Beach is considering entering into a real estate purchase agreement for the sale of surplus municipal property to a private for profit corporation. Under the agreement, the property would be sold for a purchase price of 498,000 with the buyer delivering at closing 50,000 and executing a promissory note for the balance of 448,000 secured by a mortgage, payable over ten years. Under the agreement the village’s mortgage will be subordinated to the lien of any mortgage securing indebtedness incurred by the buyer for the construction of improvements.
Municipalities in Florida possess broad governmental, corporate and proprietary powers to enable them to conduct municipal government, perform municipal functions and render municipal services.[1] This office has recognized the authority of a municipality, absent a charter provision to the contrary, to dispose of surplus municipal property in whatever manner it deems to be in the best interest of the municipality and most likely to produce the best price for the property.[2]
Section 10, Art. VII, State Const., provides in pertinent part:
Neither the state nor any . . . municipality . . . or agency of any of them, shall become a joint owner with, or stockholder of, or give, lend or use its taxing power or credit to aid any corporation, association, partnership or person . . . .
The purpose of the above constitutional provision (and its predecessor under the 1885 Constitution)[3] is “to keep the State out of private business; to insulate State funds against loans to individual corporations or associations and to withhold the State’s credit from entanglement in private enterprise.”[4]
In determining whether the public credit has been loaned, the courts have generally stated that the public must be directly or contingently liable to pay something to someone.[5]
As The Supreme Court of Florida stated in State v. Housing Finance Authority of Polk County,[6] the lending of credit means the assumption by the public body of some degree of the direct or indirect obligation to pay a debt of the third party. In situations where there is no such undertaking by the public body to pay the obligation from public funds and no public property is placed in jeopardy by default of the third party, there is no lending of the public credit.[7]
In AGO 82-42, this office considered a municipality’s authority to sell surplus real estate under an agreement whereby the municipality took back a mortgage on the property sold in light of the above constitutional provision.[8] This office concluded that the taking back of a mortgage by a municipality did not constitute a loan or pledge of the public credit within the meaning of s. 10, Art. VII, State. Const., since the municipality was not directly or contingently liable to pay something to some-body and the property was not placed in jeopardy by a default.[9] If there was a default on the promissory note, the municipality could seek to recover the property through foreclosure.
Your inquiry, however, concerns not only the granting of a mortgage but the subordination of that mortgage to the lien of any mortgage obtained by the buyer for the construction of improvements on the property. As you note, the municipality is not directly liable on the construction loan.[10] However, in the event of a default on such loan, the municipality would be forced to assume the debt of the purchaser in order to prevent the loss of the property.
Thus, the arrangement would appear to place the municipality’s interests in the property in jeopardy and would appear to be an indirect obligation on the part of the municipality to pay off the construction loan in order to protect its interest in the property.[11] Such subordination, therefore, would appear to implicate the provisions of s. 10, Art. VII, State Const. While there may be instances where the purpose to be served by such an arrangement would be primarily public,[12]
this office has not been presented with any information indicating that the benefits to the public are the primary purpose of the arrangement in question in the instant inquiry.
Therefore, while a municipality is not precluded from taking back a mortgage on the surplus property it sells, I am of the opinion that the subordination of that mortgage to that of a private lender where the primarily beneficiary of such an arrangement is the private for profit corporation purchasing the property is impermissible.
RAB/tjw