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Law Firms opinion on installment contracts MEMORANDUM TO: City of Carmel Redevelopment Commission FROM: Barnes & Thornburg LLP Baker & Daniels LLP Bingham McHale LLP Bose McKinney & Evans LLP Hall, Render, Killian, Heath & Lyman, P.C. Krieg DeVault LLP Wallack Somers & Haas, P.C. DATE: April 5, 2010 RE: Redevelopment Commission Installment Purchase Contracts This memorandum will address two issues: (1) the legal basis for a city redevelopment commission in Indiana to enter into installment purchase contracts as a method for acquiring property, and (2) whether a redevelopment commission is required to obtain the approval of the common council of the city, as the city’s fiscal and legislative body, before acquiring property under such an installment purchase contract. Background Indiana Code 36-7-14 (the “Redevelopment Act”) permits a city in Indiana to create a 5- member redevelopment commission (IC 36-7-14-3), with three members appointed by the executive (mayor) of the city, and two members appointed by the legislative body (common council) of the city (IC 36-7-14-6.1(a)). The redevelopment commission is charged with undertaking redevelopment and economic development activities in the city. The redevelopment commission is the governing body of the redevelopment district, which has the same boundaries as the city but is a special taxing district and political subdivision separate and apart from the city (IC 36-7-14-3; see also 2003 Ind. AG LEXIS 8). The questions addressed by this memorandum involve a transaction structure by which a redevelopment commission agrees to purchase property (e.g., a parking garage or theater seats) from a seller which is constructing (or providing and installing) the property, and to pay the purchase price over time by entering into an installment purchase contract with the seller. The purchase price is payable solely from available tax increment or project revenues of the redevelopment commission, and is not payable from a special benefits tax or any other general property tax of the redevelopment commission or the city. The seller under this structure is able to raise funds to construct (or provide and install) the property by (1) pledging the payments to be received by the seller under the installment purchase contract to repay a loan procured by the seller, or (2) selling its interests in the payment stream under the installment purchase contract (commonly called “participations”) to third party investors. The property being acquired under this transaction structure is always located in an “area needing redevelopment” or an “economic development area” that has been validly created under Sections 15-17 of the Redevelopment Act with the approval of the city’s plan commission (IC 36-7-14-16(a)) and common council (IC 36- 7-14-16(b) and IC 36-7-14-41(c)). Legal Basis for Installment Purchase Contracts The general powers of a redevelopment commission are set forth in Section 12.2 of the Redevelopment Act. Section 12.2(a)(1) grants a redevelopment commission the power to “\[a\]cquire by purchase, exchange, gift, grant, condemnation, or lease, or any combination of methods, any personal property or interest in real property needed for the redevelopment of areas needing redevelopment that are located within the corporate boundaries of the unit.” The redevelopment commission is authorized to acquire property in an “area needing redevelopment” or an “economic development area” created by following the procedures set forth in Sections 15-17 (and in the case of economic development areas, Section 41) of the Redevelopment Act. Section 16(a) of the Redevelopment Act requires the local plan commission to approve the establishment of such an area and the redevelopment or economic development plan for the area. Section 16(b) of the Redevelopment Act provides that “\[t\]he redevelopment commission may not proceed with…the acquisition of a redevelopment project area…until the approving order of the plan commission is issued and approved by the municipal legislative body….” Section 41(c) requires the city’s legislative body to approve the creation of all economic development areas. As noted previously, under the transaction structure addressed in this memo, the property being acquired is always located within an area needing redevelopment or an economic development area that has been validly created under Sections 15-17 of the Redevelopment Act with the approvals of the city’s plan commission and common council. Section 19 of the Redevelopment Act sets forth the procedures that a redevelopment commission is required to follow in order to exercise its power to acquire property in an area needing redevelopment or an economic development area. Section 19(b) generally requires the redevelopment commission to obtain two appraisals of the fair market value of the property to be acquired and to adopt an initial list price of the property that does not exceed the average of the two appraisals. However, section 19(b) goes on to provide that “\[t\]he prices indicated on the list may not be exceeded or ordered by a court in unless specifically authorized by the commission condemnation proceedings.” (Emphasis added.) Therefore the redevelopment commission has express statutory authority to pay a purchase price that exceeds the appraised value of the property being acquired. Under Section 19(c) of the Redevelopment Act, once the redevelopment commission has obtained its appraisals and established its authorized purchase price, the commission or its agents may negotiate with the seller for the purchase of the property, but no contract to purchase is binding upon the redevelopment commission until it is approved and accepted by the commission in writing. Section 19(c) specifically provides that “\[p\]ayment for the property purchased shall be made but only on delivery of proper when and as directed by the commission instruments conveying the title or interest of the owner to the ‘City (Town or County) of ______ for the use and benefit of its department of redevelopment’.” (Emphasis added.) This provides clear authority for a redevelopment commission to pay its approved purchase price for property in installments over time, rather than all up front. As it does so, with each payment the 2 redevelopment commission receives an increasing equitable interest in the fee simple estate of the property being purchased from the seller. , 301 N.E.2d 641, 646 See Skendzel v. Marshall (Ind. 1973). To summarize, a redevelopment commission has clear authority under the Redevelopment Act to purchase property from a seller which is constructing (or providing and installing) the property, and to pay the purchase price over time by entering into an installment purchase contract with the seller, by following the procedures outlined above. Common Council Approval of Installment Purchase Contracts The question has been raised as to whether a redevelopment commission is required to obtain the approval of the common council of the city, as the city’s fiscal and legislative body, before acquiring property under an installment purchase contract as described above. Nothing in Sections 12 or 19 of the Redevelopment Act, or any other provision of the Redevelopment Act or the Indiana Code, requires common council approval of the acquisition of property by a redevelopment commission, or the manner in which the redevelopment commission pays the purchase price for that property. In its Official Opinion 2003-8 issued on August 27, 2003 (the “2003 OAG Opinion”), the Office of the Indiana Attorney General (the “OAG”) addressed whether various redevelopment commission actions and transactions must be approved by the fiscal or legislative body of the unit. In that opinion, the OAG made the following general conclusion: “Although initially established by a unit of government, a redevelopment commission created pursuant to Ind. Code § 36-7-14-3 is a special taxing district and a political subdivision, and not merely an agency of the unit. Redevelopment commissions have been granted broad powers by the General Assembly regarding acquisition and disposition of property, issuance of bonds for redevelopment, and the general conduct of business. Ind. Code chapter 36-7-14 contains comprehensive and detailed sections governing the powers of a redevelopment commission, its acquisition and disposition of property, and the various mechanisms available for funding its activities. While approval of the fiscal or legislative body of the establishing unit is required for some transactions, other transactions do not require such approval.” A redevelopment commission is authorized to incur any number of different types of financial obligations under the Redevelopment Act, but only two types of commission obligations—bonds and financing leases—require the approval of the city’s common council. Nowhere does the Redevelopment Act require common council approval of the purchase of property by a redevelopment commission or the manner in which the redevelopment commission pays the purchase price for that property. The OAG recognizes this in the 2003 OAG Opinion when it concludes that “the statutes do not require a redevelopment commission to obtain approval of the municipality or county in acquiring property, although the commission is required to make certain filings from time-to-time.” Section 25.1 of the Act authorizes the redevelopment commission, as one means of raising money under the Redevelopment Act, to issue bonds of the redevelopment district, as a special taxing district. Section 25.1(p) provides, “\[b\]onds…may not be issued without the 3 approval of the legislative body of the unit” (in this case the common council of the city). Section 25.2 of the Act authorizes the redevelopment commission to enter into a lease of any property that could be financed with the proceeds of bonds under the Redevelopment Act. Section 25.2(c) provides, “\[a\]ny lease must be approved by an ordinance of the fiscal body of the unit” (again, in this case the common council of the city). As discussed in greater detail below, acquiring property and paying for that property through an installment purchase contract is not issuing bonds, nor is it a lease, and therefore these two provisions do not apply. The question has been further raised as to whether the 2008 version of House Enrolled Act 1001 (“HEA 1001”) changes this result. HEA 1001 did add a new section to the Indiana Code—Indiana Code § 6-1.1-17-20.5—which applies to certain non-elected governing bodies, including redevelopment commissions operating under the Redevelopment Act. Subsection (c) of that section provides that “the governing body of the taxing unit may not or issue bondsenter payable in whole or in part from property taxes unless it obtains the approval of the into a lease city or town fiscal body.” (Emphasis added.) Once again, the fiscal body approval requirement only applies to bonds issued by and leases entered into by a redevelopment commission, consistent with the similar provisions contained in the Redevelopment Act, and does not apply to the acquisition of property by a redevelopment commission or the manner in which the commission pays the purchase price for that property. Approval of redevelopment commission installment purchase contracts by the common council of the city is not required under this or any other provision of HEA 1001. For the reasons set forth below, an installment purchase contract by its very nature is a very different legal instrument than either a bond or a lease. Acquiring Property under an Installment Purchase Contract is not an Issuance of Bonds The acquisition of property and payment of the purchase price via an installment Bonds. purchase contract is not issuing a “bond” within the meaning of Section 25.1 of the Redevelopment Act or IC 6-1.1-17-20.5. The characteristics of a bond as a legal instrument are very different from those of an installment purchase contract. For example: 1.Bonds issued under the Redevelopment Act must be negotiable. IC 36-7- 14-25.1(c). Installment purchase contracts are not negotiable instruments. 2.The Redevelopment Act requires that bonds be issued in specified “denominations” (e.g., increments of $5,000). IC 36-7-14-25.1(c)(1). An installment purchase contract is simply an agreement to buy property and pay the purchase price over time; the concept of breaking an installment purchase contract into “denominations” does not apply. 3.The Redevelopment Act imposes term limits for bonds, generally 25 years. IC 36-7-14-25.1(c)(3). Nothing in the Redevelopment Act specifies a prescribed maximum term for an installment purchase contract. Rather, as noted earlier, Section 19(c) of the Redevelopment Act authorizes a redevelopment commission to pay for property purchased “when and as directed by the commission.” 4 4.Under the Redevelopment Act, bonds may be subject to “redemption” prior to maturity. IC 36-7-14-25.1(c). Redemption is a term that has no meaning in the context of installment purchase contracts. 5.Section 25.1(f) states that bonds issued by a redevelopment commission “are exempt from taxation for all purposes.” There is no similar provision for a blanket exemption from taxes for payments made under an installment purchase contract. 6.Section 25.1(g) sets forth specific provisions governing the sale of bonds issued by a redevelopment commission, in some cases by competitive bid to prospective bond purchasers. No similar “sale” provisions have meaning in the context of an installment purchase contract. 7.Bonds are typically registered in the name of each bondholder. See IC 36- 7-14-25.1(c). No similar registration concepts apply to an installment purchase contract. Put simply, an installment purchase contract is not a bond, in form or in substance. Installment purchase contracts and bonds are authorized under different statutory provisions, have vastly different characteristics, and have different legal consequences that attach to their execution. Common sense and common usage also support this conclusion. In construing statutes, words and phrases are taken in their “plain, or ordinary and usual, sense.” IC 1-1-4-1(1). The plain, ordinary and usual meaning of “bond” is an evidence of a borrowing. A “bond” means: A document . . . issued by a government or public company borrowing money; in modern use synonymous with debenture. nd THE OXFORD ENGLISH DICTIONARY (2 ed.) (1989). Similarly, the statutory definition of “bonds,” for purposes of Indiana Code Title 36, including the Redevelopment Act, is: any evidences of , whether payable from property indebtedness taxes, revenues, or any other source, but does not include notes or warrants representing temporary loans that are payable out of taxes levied and in the course of collection. IC 36-1-2-2 (emphasis added). The plain, ordinary and usual meaning of “indebtedness”, in turn, is an obligation to repay borrowed money. “Indebted” means: Under obligation on account of money borrowed; owing money; in debt. nd THE OXFORD ENGLISH DICTIONARY (2 ed.) (1989). 5 The foregoing definitions make clear that not all contracts are “bonds”. A contract is a “bond” only if it evidences an obligation to repay borrowed money. An installment purchase contract does not evidence an obligation to repay borrowed money. It is simply a contract to purchase property. The purchaser does not receive any money to be repaid. There is no borrowing and, therefore, there is no “bond”. Other statutory definitions in the Indiana Code further support the distinction between bonds and installment purchase contracts. For example, IC 8-9.5-9-3 defines "obligations" to mean “, loan contracts, notes, bond anticipation notes, commercial paper, bondsleases, lease- , , certificates of participation in agreements or programs, other purchasesinstallment purchases evidences of indebtedness, or other agreements or purchasing programs, whether or not the obligations have been issued or entered into.” (Emphasis added.) Similarly, IC 21-29-1-2 defines "obligations" to mean “, notes, bond anticipation notes, commercial paper, bondsleases, , certificates of participation in agreements or programs, lease-purchases, installment purchases other evidences of indebtedness, or other agreements or purchasing programs.” (Emphasis added.) These provisions clearly recognize that bonds, leases, lease-purchases and installment purchases are each different types of legal instruments. Finally, an agreement to pay the purchase price for property acquired under installment purchase contract of the type addressed in this memo is not an “indebtedness” of the redevelopment commission for purposes of constitutional or statutory debt limitations. As the OAG points out in the 2003 OAG Opinion, “redevelopment commissions constitute special taxing districts and are not independent municipal corporations subject to Indiana constitutional debt limitations.” Moreover, the installment purchase contract is not payable from a special benefits tax or any other general property tax of the redevelopment commission or the city. As such the contract is not an indebtedness of the redevelopment commission or the city for purposes of constitutional or statutory debt limitation provisions. The execution and delivery of an installment purchase contract is not an Issuance. “issuance” within the meaning of Section 25.1 of the Redevelopment Act or IC 6-1.1-17-20.5. The plain, ordinary and usual meaning of “issuance” is a borrower’s offer and sale of its securities. “Issue” in the sense means: The action of sending or giving out officially or publicly; an emission of bills of exchange, notes, bonds, shares, postage- stamps, etc. nd THE OXFORD ENGLISH DICTIONARY (2 ed.) (1989). The execution and delivery of an installment purchase contract is simply the entry into a contract. Nothing is sent or given out; nothing is emitted. Therefore, there is no “issuance.” The Indiana Supreme Court has already decided that entering into a purchase Precedent. contract is not an issuance of bonds. In W.H. Dreves v. Osolo School Tp. of Elkhart County, 28 NE2d 252 (1940), the court held that a school’s entering into a contract for the purchase of plumbing and heating improvements was not an issuance of bonds for purposes of IC 5-1-1-1. The court concluded: 6 \[W\]e are of the opinion that the words “bonds, notes and other written obligations” as used therein refers only to such bonds, notes and other written obligations as were used in financing or for some municipal project or improvement. procuring funds W.H. Dreves v. Osolo School Tp. of Elkhart County, 28 NE2d 252, 256 (1940) (emphasis added). An installment purchase contract, like the improvement contract in Dreves, does not involve financing or procuring funds. It is simply a contract to purchase. Therefore, there is no issuance of any bonds. An Installment Purchase Contract is not a Lease A lease agreement creates a leasehold estate, which Indiana law recognizes as a unique interest in real property independent of the fee simple estate. Indiana Code 32-17 Compareet (fee interests) Indiana Code 32-31 (leasehold interests). An installment seq.withet seq. purchase contract, like a land sale contract, creates an equitable interest in the fee simple estate in favor of the contract purchaser. , 301 N.E.2d 641, 646 (Ind. 1973). In See Skendzel v. Marshall addition, while a lease agreement may be terminated by the landlord without legal process, see, , Indiana Code 32-31-1-8 (describing circumstances when a lease may be terminated without e.g. notice), an installment purchase contract generally may be terminated only upon a foreclosure action by the contract seller, , 827 N.E.2d 1135, 1140 (Ind. Ct. App. see McLemore v. McLemore 2005) (citing , 301 N.E.2d at 650). Clearly, Indiana law draws a sharp distinction Skendzel between leases and installment purchase contracts as a matter of real estate law. These are very different property interests with different characteristics and different rights attaching to them. The OAG recognized the distinction between a lease and a purchase contract in the 2003 OAG Opinion when it stated that “a redevelopment commission may enter into a lease ( as ) of a property to serve the public purpose only with the approval ‘by opposed to purchase ordinance of the fiscal body of the unit.’” (Emphasis added.) In doing so it recognized by negative implication that approval of the fiscal body of the unit is required for a contract to not purchase property entered into by a redevelopment commission. Conclusions Our conclusions are that (1) Indiana law clearly permits a city redevelopment commission in Indiana to acquire property and to pay the purchase price for the property over time in installments pursuant to an installment purchase contract with the seller of the property, and (2) Indiana law does not require a redevelopment commission to obtain the approval of the city’s common council before entering into such an installment purchase contract. This memorandum and its conclusions have been reviewed and approved by one or more partners who practice municipal finance law at the firms of Barnes & Thornburg LLP, Baker & Daniels LLP, Bingham McHale LLP, Bose McKinney & Evans LLP, Hall Render Killian Heath & Lyman, P.C., Krieg DeVault LLP, and Wallack Somers & Haas, P.C. 7