LAW OFFICES OF
JOE H. STALEY, JR., P.C._________________________________________
5949 Sherry Lane, Suite 501
Dallas, Texas 75225
(214) 739-3700
Fax: (214) 739-1919
March 17, 2008
Opinion Committee
Attorney General of Texas
Mail Code - 024
209 W. 14th Street
Austin, TX 78701
RE: Request No. 0639-GA; Constitutionality of the use of a particular formula by which the Brazos River Authority proposes to sell real property surrounding Possum Kingdom Lake
Dear Attorney General Abbott and Opinion Committee Members:
We represent the Possum Kingdom Lake Association and Possum Kingdom Lake Preservation Association, (collectively referred to as the “Lessees”) and previously submitted to your office on December 12, 2007 a letter brief (“Staley Letter”) which responded to the original request of Senator Averitt for an Attorney General Opinion (the “Request”) and the attached memorandum (the “Request Memorandum”) submitted by outside counsel for the Brazos River Authority (“BRA”) concerning the sale of leased properties on and near Possum Kingdom Lake (the “lake lots”). Since our submission, an additional letter brief on behalf of a separate group of Possum Kingdom Lessees was filed (the “Shields Letter”) as was a response brief filed by BRA’s outside counsel (“BRA Response Brief”).
The BRA and its counsel in the BRA Response Brief continue to deal in assumption and conjecture rather than facts and the law; the result is a clouding of the issues before your office. Therefore, our clients have asked us to draft this response which will address the fallacies in the BRA position and to hone (without modifying) our prior legal analysis to better assist your office in developing its Opinion in response to the Request.
The BRA Response Brief states the “key question” is whether the Texas Constitution permits the Lessees’s to “reap a huge windfall” from the BRA by purchasing certain “property” at a price based upon below market leases – “resulting in the BRA receiving much less than the fair market value of the property.”[1] The problems with the BRA’s phrasing of the issue are threefold: (1) it presumes, incorrectly, that the leases are below market,[2] (2) it presumes, incorrectly, that a merger of the estates will occur, and (3) it presumes, incorrectly, that in transferring “the property” the BRA will be transferring the fee simple to the Lessees. As a result of its presumptive logic, the BRA patently misstates the issue. At the heart of this misstatement is the apparent desire of the BRA to control unilaterally its appraisal values by adopting and enforcing a self-defined meaning of “the terms of the lessee’s purchase” of the lake lots as called for in its Divestiture Policy.[3]
As your office has previously held and the BRA most assuredly knows in light of its heavy reliance on the cited Attorney General opinion, a governmental entity “must not” instruct an appraiser to value the land in any particular manner as such instructions “may taint” the appraisal process.[4] Thus, the issue is not as the BRA would have you believe, whether the appraiser should be instructed to value the lake lots as though unencumbered; rather, the issue is: does Texas law define the manner for appraising a leased property interest which is being purchased by a lessee from the lessor, and if so, what is that manner? Texas law undoubtedly specifies how the fair market value of such an interest must be determined, and it is not as the BRA would contend.
I. THE BRA CANNOT RECOVER DOUBLE THE FAIR MARKET VALUE OF THE LEASED FEE INTEREST
It is undisputed that the BRA should receive fair market value for the property interest that it owns and will convey to the Lessees in a sale.[5] While the BRA acknowledges the definition of “fair market value” to be well established,[6] it inexplicably is trying to modify this well established meaning. In so doing, the BRA Response wholly misrepresents both the property interest which the BRA owns and therefore can convey, as well as the method for valuing that interest under Texas law. In fact, this misinformed (and misleading) argument of the BRA serves only to propagate a double recovery by the BRA from the Lessees. Yet, in an attempt to obfuscate the issue, the BRA claims the Lessees will be the ones receiving a “windfall” if the law is followed. One shudders to think that an agency of the State of Texas would urge adoption of such nefarious posturing when it is dealing with the citizenry.
Remedially, the BRA, as owner of the “leased fee” in the lake lots, does not have the right to use or to occupy that property --- that right is owned by the Lessees. [7] The leased fee is the basic right to receive rent during the lease term. Bottom line, in a sale of the interest of the BRA to the Lessees, it is only that right under the lease to receive rents which, as lessor, the BRA has to sell; indeed, it is those rights of the lessor to receive rent which the Lessees will be purchasing. It follows that the fair market value of this right is properly determined by a capitalization of the rents over the terms of the lease plus any residual value. [8] Upon sale to a Lessee, as a result of the property conveyance, the right to receive rents by the BRA is effectively transferred by the sale, and the BRA will have been paid fair market value for the leased fee. In addition, the BRA may be due some amount for its residual right to lease after termination; residual right values will vary depending on the remaining time on the primary or renewal terms of the respective lease.
Yet, the BRA has conjured up (incorrectly) the misconception that the interest purchased by the Lessee will, after the sale, merge with the right to use and occupy the property, and that the Lessee should, because of this fact, pay additionally for being relieved of its obligation to pay future rents. It is this most basic misunderstanding of what will be transferred upon sale of the subject property interests that drives the obdurate stance of the BRA on the valuation issue. Indeed, the right to be relieved of the rental obligations is subsumed within the Lessees’ purchase of the leased fee interest owned by the BRA. The monies the BRA will receive upon sale is direct compensation based upon the abrogation of its rights to receive rentals under the lease (i.e. the price paid is effectively prepayment of future rentals). To dictate recovery of a purchase price upon sale of the Lessor interest based upon a theory of merger of estates will allow the BRA to compound unjustly the purchase price the Lessees will be required to pay; it forces them to pay twice to be relieved from that same obligation to pay rent under the lease. The result is a doubling of the purchase price paid for the transfer of the leased fee interest. Certainly in this instance, the only party receiving a windfall would be the BRA.
By paying the BRA for its lessor interest, the Lessees are acquiring the right to be relieved from paying further rent. This is all the BRA can convey, and hence it is the only interest for which the BRA should receive fair market value… to do otherwise, would only advance the self-serving, impractical merger theory of the BRA and thereby trigger a double recovery.
II. Assertions of Below Market Rentals Are Pure Conjecture
The next charge by the BRA is that “it is undisputed” that the leases are for below market rentals[9] and therefore the purchase price paid by the Lessees for the leased fee based upon these rentals would be both patently unfair and unconstitutional. The theory of the BRA is that sales based upon existing, self-determined rentals would permit a Lessee to pay less than fair market value for the property interest it is acquiring and therefore receive a “gift” in violation of Art. III, Sec. 52 of the Texas Constitution.[10] Ignoring its total lack of merit, probably the most tell tale quibble with this posture would be that the Request, the Request Memorandum, and the Response Brief all assume without a scintilla of proof that the leases are at below market rates. [11] The sole evidence which has been brought forth by the BRA to support its position is an uncorroborated statement in its Request Memorandum and a newspaper article from the Lake Country Sun (BRA Response Brief Exhibit A). Neither of these sources is per se legal authority or precedent which can support any rendering or conclusion regarding the legal issues before your office; moreover, the cited newspaper article does not even state, let alone imply, that the BRA leases are below market. To represent that it is undisputed that the leases are below market is a fallacy which is once again derived from a gross mischaracterization by the BRA.
As a corollary point, no party has challenged the validity of the leases, nor did the BRA Board of Directors ever authorize the BRA to lease at below market rentals. In fact, as is pointed out in the Staley Letter, the BRA was the sole architect of the terms and provisions of the leases.[12] Under § 49.225 of the Texas Water Code, the BRA is instructed to lease the properties for terms “the board determines to be advantageous to the district.” To now permit the BRA to circumvent the existence of such a lease (which it previously found was advantageous to its position) would be blatantly inequitable. No authority we are aware of supports such an act of reneging on a “valid contract simply because it is financially advisable to do so.”[13]
To this end, the Lessees do not question whether the BRA had the legal authority to lease at below market; however, a finding that it did (which the Lessees dispute) if made by your office would necessitate the determination of a question of fact and as such is beyond the spectrum of this office’s jurisdiction regarding official opinions.[14]
III. THE MORALES ATTORNEY GENERAL OPINION HAS BEEN OVERRULED
The BRA in its Request Memorandum and Response Brief predicates its position on the Texas Attorney General opinion, issued during Dan Morales tenure, addressing a similar sale of leased lake lots by a city (the “Morales Opinion”).[15] BRA counsel attempts to flail the Lessees with this sole non-judicial authority concerning the applicability of the merger doctrine in what it disingenuously refers to as a “well established principle of real property law”; yet, it, perplexingly, offers not one single Texas case citation to bolster such an assertion.[16] The Lessees certainly feel the Attorney General would be better served to review two cases by appellate courts which interpret Texas law regarding the issue before this office (i.e. the purchase of leased property by the lessee), rather than an outdated, overruled and hence inconsequential Attorney General opinion.
As discussed at length in the Staley Letter,[17] the primary case on the valuation issue is: Petula Associates, Ltd. v. Dolco Packaging Corp[18] in which the Fifth Circuit of the United States applied Texas law in adjudicating a case arising out of the Northern District of Texas to determine the proper valuation method when a lessee is purchasing leased property from a lessor. In finding that the term “fair market value” has been uniformly defined by Texas courts to mean the price property would receive on the open market under the hypothetical buyer/hypothetical seller standard, the Fifth Circuit panel concluded that, under Texas law, the term “fair market value” is not “ambiguous.”[19]
Moreover, the Fifth Circuit cited kindred case law from Arizona[20] which likewise held that with regard to a purchase of leased property by the lessee “because a buyer on the open market [i.e. the hypothetical buyer] would purchase the property as a leased fee estate, the lease would affect the value of the property and therefore must be considered in the property valuation”[21]; the reason for this is that the “fair market value must reflect the value of that which can be sold.”[22]
With respect to the BRA’s contention that Petula is distinguishable from this set of facts because the lease in Petula carried a “purchase option,” a thorough review of the opinion reveals that because “fair market value” in Texas is defined with reference to hypothetical, unobligated buyers and sellers, the Fifth Circuit panel found it incumbent to “disregard the obligations placed on [the lessor] and [lessee] by the purchase option contained in the lease.”[23] Hence the BRA’s contention that this aspect of the case affects its authority or persuasiveness on the issue at hand is unfounded and unconvincing.
While Petula may not have cited particular Texas case law for the proposition that the lease must be considered when determining fair market value, it certainly relied on Texas law in developing its opinion.[24] It is unclear why an opinion from the second highest court in our country regarding the very same set of facts and interpreting Texas law would not be considered by the Attorney General as persuasive authority on this issue.[25] If your office fails to find Petula compelling, we would point out that contrary to another mistaken assertion of the BRA, there is additional Texas authority which has cited Petula favorably for its holding on the valuation issue.[26] In passing on the requirements for valuing leased property that was being purchased by the lessee from the lessor, the Amarillo Court of Appeals recently relied upon and cited the Petula opinion in holding that:
Texas courts have consistently defined fair market value broadly to mean the price a piece of property would bring on the open market if the seller and buyer were not compelled to enter into the transaction. Moreover, the value of the lease is considered under Texas law in a determination of fair market value when the property leased is sold from lessor to lessee. [emphasis added] [27]
Therefore, under the Attorney General’s own guidelines, Texas Attorney General opinions, while persuasive, are not the law; and, more pointedly, when any such opinion is overruled by a “judicial decision” it loses its persuasive authority.[28] The heavy reliance by the BRA on the Morales Opinion[29] is thus rendered misplaced as the opinion and conclusions therein have, as discussed above, been superseded by Brogan, which is Texas appellate authority based upon the Fifth Circuit’s ruling in Petula.
Lastly, the BRA urges that Petula is unpersuasive because it fails to address Article III, Section 52 of the Constitution which prohibits public entities from making gratuitous transfers to private parties. Petula, for obvious reasons (no governmental entity was involved), did not need to address Art. III, § 52; such an omission does not render the holding unpersuasive. To the contrary, the conclusions of the Fifth Circuit, as confirmed by the Amarillo Court of Appeals in Brogan, are clearly transferable to the facts of this case as both address, under the hypothetical buyer/seller standard, a purchase by a lessee of the property interest of the lessor for the fair market value of the lessor’s interest (the leased fee) as defined by Texas law.
In addressing the constitutional questions raised by the BRA, the issue is not whether BRA should receive fair market value for “the property” or the “unencumbered fee” as the BRA states, because the BRA cannot convey fee simple; it can only convey the leased fee and the Lessees can only acquire the leased fee. Thus, to state that the Lessees are “acquiring fee simple title” from the BRA is disingenuous and incorrect. To further exacerbate the incongruity of the posture of the BRA on its claim of conveying fee simple, the Divestiture Policy of the BRA explicitly reserves a multitude of property rights including the right of ingress and egress, and “all its interest in oil, gas and other minerals in and under any and all real property sold under this Policy.”[30] The Lessees are only acquiring the surface from the BRA; certainly with horizontal severance, the buyer is not acquiring a merged fee simple as the BRA would have your office believe and recompense must also reflect these reserved rights which run with the land.
The key point is that under the hypothetical buyer/seller standard, which must be applied, the lease and other reserved property interests (as delineated in the Divestiture Policy) must be considered; consequently, the BRA should by law receive valuable consideration (i.e. fair market value as required by § 49.226 of the Texas Water Code) only for the interest it will convey, i.e. the leased fee --- if this occurs at sale, there will be no gift or gratuitous transfer of any interest because the BRA unquestionably will receive all the consideration due to it in accordance with its respective property interests. Therefore, the consideration of the leases in the valuation of the lake lots will not run afoul of the constitutional provision prohibiting gratuitous transfers to private parties.
IV. CONCLUSION
Putting talk of mergers and leased fees aside, the reality of the situation is that for many members of the Possum Kingdom Lake Association and the Possum Kingdom Lake Preservation Association the lake lots which are at the heart of this Request serve as their home sites. The State and the BRA appear to have determined that the BRA should divest itself of its leased fee interest in the lake lots and in so doing, afford the Lessees the opportunity to purchase these home sites. Many Lessees are anxious to follow through with this directive and are willing and able to purchase the lake lots by paying fair market value; but they are intent, understandably so, to pay fair market value only for the property interests that will be conveyed to them upon sale. Hence, the Lessees sole purpose in pursuing these issues with the Attorney General is to assure that their individual interests are protected as provided by Texas law.
On behalf of the Lessees and homeowners at Possum Kingdom Lake, I appreciate your thoughtful consideration of these matters.
Very truly yours,
Law Offices of Joe H. Staley, Jr., PC
Joe H. Staley, Jr.
cc: Mr. Robert C. Upham
Possum Kingdom Lake Preservation Assoc.
13355 Noel Road
Dallas, Texas 75240
Mr. Monte Land
Possum Kingdom Lake Assoc.
155 River Road
Graford, Texas 76449
Ms. Jennifer Knauth
Scott, Douglas & McConnico
One American Center
600 Congress Ave., 15th Fl.
Austin, Texas 78701-2589
[1] BRA Response Brief at 1-2.
[2] The central arguments of the BRA are based on its assumption that the leases are below market, and therefore the Lessees will receive a discounted price for “the property” which in turn will violate article III, Section 52. First, the BRA is wrong in stating that it is undisputed the leases are below market. Quite clearly, the Lessees spelled out in the Staley Letter that they disagreed with the contention the leases were below market. Assuming arguendo, the leases are below market; such a conclusion is nevertheless beyond the scope of the subject request as it is a question of fact and questions of fact are not addressed by the Attorney General. See Op. Tex. Att’y Gen. DM 98-082 (Sept. 28, 1998) (stating that questions of fact are not susceptible to the opinion process).
[3] See BRA Response Brief, p. 3 (“The BRA’s proposed divestiture policy will provide the terms of the lessees’ purchase option”). See also Exhibit B, Divestiture Policy – Possum Kingdom Lake, sec. E (“An appraisal of the Fair Market Value of a Leased Lot under this Policy may not (i) include consideration of a freeze or other suspension of lease rate increases for the homestead of a person who is 65 years of age or older, (ii) take into account the value of any improvements constructed on the Leased Lot or over the water, or (iii) take into account any leasehold interest.”). Note that we have maintained the same lettering for the Exhibits so as to be consistent for purposes of your review.
[4] Op. Tex. Att’y Gen. DM 98-082 (Sept. 28, 1998). Notably, the BRA cites this opinion for virtually every point of law, except this one.
[5] BRA Response Brief at 4.
[6] BRA Response Brief at 3.
[7] See Exhibit C: The Sample “Residential Ground Lease” issued by the BRA Board of Directors. http://www.brazos.org/generalPdf/PK_Sample_Residential_Lease_7-30-07.pdf.
[8] For a more comprehensive discussion of this point see the Staley Letter at 4-6.
[9] BRA Response Brief at 2.
[10] As pointed out in the Staley Letter there is without question no violation of Art. III, Sec. 52. See Staley Letter at 8-10.
[11] See Request at 1; Request Memorandum at 4; and, BRA Response Brief at 2.
[12] Staley Letter at 9.
[13] City of Harlingen v. Sharboneau, 48 S.W. 3d 177, 182 (Tex. 2001)(citing Kirby Forest Indus. Inc. v. United States, 467 U.S. 1, 10 (1984); State v. Carpenter, 126 Tex. 604, 89 S.W.2d 979 (1936)).
[14] Texas Gov’t Code Ann. § 402.041; see also Op. Tex. Att’y Gen. DM 98-082 (Sept. 28, 1998) (stating that questions of fact are not susceptible to the opinion process).
[15] T Op. Tex. Att’y Gen. DM 98-082 (Sept. 28, 1998).
[16] BRA Response Brief at 3.
[17] Staley Letter at 3-5.
[18] 240 F.3d 499 (5th Cir. 2001).
[19] Petula Associates, Ltd. v. Dolco Packaging Corp., 240 F.3d 499, 503 (5th Cir. 2001).
[20] Teak C. C. Enters v. Estate of Erny, 717 P.2d 936 (Ariz. Ct. App. 1986).
[21] Estate of Erny, 717 P.2d at 937.
[22] Petula, 240 F.3d at 503. See also, Reeves v. City of Dallas, 195 S.W.2d 575, 578 (Tex. Civ. App. – Dallas 1946, writ ref’d n.r.e.) (“the value of the fee necessarily was affected by the value of the lease.”).
[23] Petula, 240 F.3d at 503 n.4.
[24] See Petula, 240 F.3d at 503 (citing State v. Windham, 837 S.W.2d 73 (Tex. 1992); State v. Carpenter, 126 Tex. 604, 89 S.W.2d 194 (1936)).
[25] Confusingly, the BRA asserts that the Petula opinion out of the Fifth Circuit is “questionable” authority at best, yet in its Request Memorandum, counsel for the BRA devotes over a page to describing an opinion some 30 years older from a federal circuit (the First Circuit Court of Appeals) in the Northeast United States that did not cite one Texas case in the entirety of its opinion. So to say Petula is “questionable” authority when the opinion was rendered just over 7 years ago and applied Texas case law is not only inaccurate, it is flatly untrue.
[26] BRA Response Brief at 3 n.7.
[27] Brogan v. Brogan, 2007 WL 2962996 (Tex. App. – Amarillo 2007, pet. filed)(mem. op.)(citing Petula Assoc., Ltd. 240 F.3d at 502-03.).
[28] The Official Home Page of the Texas Attorney General, http://www.oag.state.tx.us/opinopen/opinhome.shtml
[29] The BRA relies heavily on Letter Opinion 98-082 issued by Dan Morales. See BRA Response Brief, pp. 3, 5, and 7; BRA Request, p. 7.
[30] Exhibit B: Divestiture Policy – Possum Kingdom Lake, sec. (m).