February 7, 2005
Dear Mayor:
You have the following question: Are the payments in lieu of taxes (PILOT) that
occupants of an industrial park have been paying to the County Industrial Development Board
(IDB) either under state law or under leases between those occupants and the IDB required to
continue to be paid to the IDB, or to the county and the city?
I cannot answer that question without further information on the county’s claim that it is
entitled to the PILOT. However, I will speculate below what might be the basis of the county’s
claim.
As I understand the facts, five businesses are in the industrial park. You sent to me a
copy of a lease between the IDB and a company. That lease is expired, but you told me that the
other four leases are written in identical language, and that those leases are not expired. You also
told me that during the term of all the leases, the businesses paid PILOT contemplated in the
lease agreements to the IDB, but that the county executive recently required that the PILOT that
would otherwise go to the IDB be paid into the county’s general fund. You indicate that the
county executive believes that there was a defect of some kind in setting up the IDB that justifies
his action. Your position is that it was the intention of the parties from the time the IDB
resolutions were adopted by the city and the county, and the leases entered into by the IDB and
the businesses in the industrial park that the IDB receive the in lieu of tax payments.
Without knowing the county’s basis for concluding that the in lieu of taxes should be paid
to it, I cannot say for sure that his contention has no legal basis. I do note that the copy of the
resolution of the city and county authorizing the establishment of an IDB is not signed, but it
contains the date the resolution was passed by their governing bodies: May 10, and May 9, 1994,
respectively. I also note that the resolution electing directors to the IDB board contains no
names, and also lacks signatures. I do not have the actual incorporation certificate for the IDB.
However, apparently the IDB did enter into certain lease agreements with businesses that
presently occupy the industrial park. If the lease between the IDB and the company accurately
reflects all the other leases, those leases do appear to contemplate the payment of the in lieu of
tax payments to the IDB. Article III, Section 2, of the lease, says with respect to such payments,
that:
February 7, 2005
Page 2
As a further portion of the consideration for this Lease Agreement,
the Lessees shall, during the term of this Lease, make certain
payments in-lieu-of-taxes to the Lessor. The parties acknowledge
and understand that these payments in-lieu-of-taxes are in lieu of
real property taxes only, and to facilitate this Agreement, the
improvements to be constructed on the leased premises will be
appraised/assessed in the normal conduct of business for the
purpose of determining the appraised/assessed value of such
improvements, and the amount of the payments in-lieu-of-taxes
shall be based upon the formula below as applied to the County
and Municipal real property taxes which would be owed if owned
by the Lessee: [The formula follows]....
All payments in-lieu-of-taxes shall be due and payable annually
during the term of this Lease, with the due date of each annual
payment to subsequently agreed upon by the parties hereto and
reduced to writing in a form mutually acceptable.
Under that provision, payment of the in-lieu-of taxes is to be made to the Lessor (IDB). I
can find nothing in that provision or any other provision of the Agreement for the PILOT to be
paid to the city or the county. The fact that apparently for the terms of the leases thus far, some
of which have gone on for several years, both the city and the county have “allowed” the PILOT
to be paid to the IDB is an indication that the city and county intended that under the leases the
PILOTS be paid to the IDB.
It appears clear that the state law contemplates that PILOTS can be paid to an IDB.
Tennessee Code Annotated, ' 7B53-305(b), which is part of the Industrial Development
Corporations Act, provides that:
The municipality has the power to delegate to the corporation the
authority to negotiate and accept from the corporation’s lessees,
payment in lieu of ad valorem taxes; provided, that any such
authorization shall be granted only upon a finding that such
payments are deemed to be in furtherance of the corporation’s
public purposes as defined in this section. The legislative body of
the municipality making such delegation may, in its sole discretion,
require the corporation to submit any such agreement to such
legislative body for its approval....
February 7, 2005
Page 3
However, there has been a change of opinion by the Tennessee Attorney General on the
question of what role a local governments that establishes an IDB has in determining to whom
the PILOT is paid. Indeed, Tennessee Attorney General’s Opinion 83-28 (January 13, 1983)
flatly opined that “Payments made to the Industrial Board in lieu of ad valorem taxes under the
provisions of T.C.A. ' 7-53-305 are collected, retained, and used by the Industrial Board until
such time as the Industrial Board is dissolved, at which times all assets of the Industrial Board
will revert to the County.” [At page 1.] Tennessee Attorney General’s Opinion 85-264 (October
22, 1985) opined that a city and an IDB could agree for the latter to give the former a portion of
the PILOT.
But Tennessee Attorney General’s Opinion 96-083 (June 5, 1996), “withdrew” so much
of the Tennessee Attorney General’s Opinion 83-28 that restricted the payment of the PILOT to
the IDB. It opined that:
Under Tenn. Code Ann. ' 7-53-305(b) industrial development
corporations must negotiate and be a party to an agreement with
their lessees for payments in lieu of ad valorem taxes. The statute,
however, impliedly authorized the municipality in behalf of which
the industrial development board was created to actively participate
in the negotiations and to receive the payment in lieu of ad valorem
taxes directly from the lessee.
It also opined that with respect to the IDB’s authority to negotiate PILOT agreements: (1)
PILOT agreements of of any kind had to be approved by the municipality; (2) any PILOT
agreement must be supported by a finding by the municipality that such payments are in
furtherance of the corporation’s public purpose:
The municipality is required, before authorizing its industrial
development corporation to negotiate an agreement with its lessees
for payments in lieu of ad valorem taxes, to find that requiring the
lessee to make such payments will be in furtherance of the
corporations public purposes. The municipality has the authority
to review and approve or reject any proposed agreement for such
payments. The municipality may use all monies paid to it pursuant
to such agreements for any use to which property tax revenues may
be put. [At page 1]....
The municipality has the power to delegate to the corporation the
authority to negotiate and accept from the corporation’s lessees,
payments in lieu of taxes; provided that any such authorization
February 7, 2005
Page 4
shall be granted only upon a finding that such payments are
deemed to be in furtherance of the corporations public purposes as
defined in this section. The legislative body of the municipality
making such delegation may, in its sole discretion, require the
corporation to submit any such agreement to such legislative body
for its approval. [At page 2]
The county might be relying on the above opinion for the proposition that there was no
such “delegation” of authority, or finding of public purpose, on the part of the County and the
City, or that there was a defect in such delegation. If we simply assume for the moment that
Attorney General’s Opinion 96-083 is an accurate reflection of the law, then none of the
resolutions pertinent to the establishment of the IDB reflect a connection between the IDB and
the PILOT. Section V of the petition to establish the joint city-county industrial board of the
County and the City does contain the purpose of the IAB. In addition, Section 4 the resolution
authorizing the establishment of the IDB delegates to the IDB the powers granted to the City
under Tennessee Code Annotated, ' 13-16-206. That latter delegation appears to allow the IDB
to run the industrial park, with all the authority contained n the Industrial Park Act found in
Tennessee Code Annotated, Title 13, Chapter 7, Part 4. The genesis of the Industrial Park Act is
Public Acts 1959, Chapter 169. Section 2 of that Act contains the public policy of that Act. That
public policy would seem to be the implied public purpose of the IDB without its express
recitation in the petition. In any event, that petition likewise contains no reference to the IDB’s
authority to negotiate PILOTS.
But it is likely that at least some of the leases between the IDB and the businesses in the
industrial park were negotiated before Tennessee Attorney General’s Opinion 96-083 was even
issued.
Even if Tennessee Attorney General’s Opinion 96-083 is correctly reasoned, we still
come back to the effect of the lease agreements entered into by the IDB and the businesses in the
industrial park which provide that the PILOT be paid to the “Lessor” (IDB), and to the conduct
of the County and the City over a period of years during which neither apparently made a claim
to the PILOT. But I cannot here conclusively argue that their conduct operates to stop them from
laying claim to the PILOT. The rules that govern the impact of the conduct of private parties do
not always operate in the same way where governments are involved.
A complete review of the whole process by which the IDB was established and the leases
entered into by the IDB needs to be done before any further conclusions can be drawn on the
question of to whom the PILOTS at issue should be paid.
Sincerely,
February 7, 2005
Page 5
Sidney D. Hemsley
Senior Law Consultant
SDH/