North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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REPLY TO: FAX: Grayson G. Kelley Special Litigation (919) 716-6900 (919) 716-6763
November 26, 2002

Representative Martin L. Nesbitt North Carolina General Assembly 420 Legislative Office Building Raleigh, NC 27601

Re: Advisory Opinion: Centennial Campus Executive Conference Center

Dear Representative Nesbitt:

You have asked for our opinion concerning a series of legal questions related to the proposed conference center/hotel and golf course to be located on the Centennial Campus of North Carolina State University. In order to respond to your request we have reviewed background information provided by the university in addition to that included in your letter. We have also received information and the views of interested outside parties. Many concerns expressed to this Office involve the public policy issue of whether the proposed conference center/hotel and golf course should be built. In this letter, of course, we only address legal issues you have raised and not the public policy concerns.

It is our understanding that the Centennial Campus Master Plan has included an Executive Conference Center/Hotel and Golf Course project (the “Project”)since 1986. The Board of Governors of the University of North Carolina (the “Board”) approved the Master Plan on January 9, 1987. The Council of State approved rezoning associated with the Master Plan on September 6, 1988.

The original Project concept involved the lease of land on the Centennial Campus to private interests, which would be responsible for financing, constructing and managing the facility. The Project would be operated as a commercial facility, but would be utilized by North Carolina State University (NCSU) for conferences and other university related activities. The golf course facilities would be available for use by the NCSU golf team, other programmatic users, and for turf grass research. On January 14, 2000, the Board approved a lease of approximately 200 acres on the southern section of the Centennial Campus to Benchmark Hospitality and Hines Interests, a private firm selected to develop and manage the Project.

We are informed that subsequent negotiations resulted in a determination by NCSU that financial guarantees required by the private sector would minimize the advantages of the original concept to such an extent that the university’s interests would be better served by the elimination of direct, commercial-sector involvement in Project development. As a result, the Board, on September 14, 2001, passed a resolution authorizing the establishment of a non-profit corporation, North Carolina State University Conference Center, LLC (the “LLC”) for the purpose of financing, constructing and managing the Project. The ground lease resolution was modified to provide for conveyance to the LLC. Previously, on May 11, 2001, the Board had approved a resolution authorizing NCSU to purchase the use of the Project facilities as necessary to assist the LLC in securing bond financing for the Project.

Articles of Organization creating the LLC as a limited liability company were filed on January 25, 2002. A Single Member Operating Agreement (the “Operating Agreement”) was executed on the same date, reflecting the creation of the LLC by the N.C. State University Partnership Corporation (the “Corporation”), which is also the LLC's sole member. These corporate formation documents reflect that the LLC’s charitable purposes include the authority to develop, construct, own and manage a non-profit hotel, golf course, conference center and related meeting facilities on the Centennial Campus, and to finance these facilities through the issuance of debt.

In May, 2002, the Board suggested that further outside review of the Project would be appropriate. Subsequently, in a report dated August 23, 2002, Hospitality Valuation Services International (HVS) presented additional findings and recommendations to the NCSU Board of Trustees. The NCSU Board of Trustees, on September 20, 2002, approved moving forward with the Project in accordance with HVS recommendations related to reducing the Project scope and schedule, and subject to the condition:

That no State appropriations, no tuition payments by N.C. State students, no funds whose purpose has been restricted by the gift, grant or payee, no revenue generated by Special Facilities and no funds restricted by law may be used to support this project.

Your first question is whether the proposed Project constitutes a permissible “public purpose” for which public funds may be expended or public credit committed. You specifically reference the case of Nash v. Town of Tarboro, 227 N.C. 283 (1947), in which our Supreme Court concluded that the expenditure of tax revenues by a town for the construction and operation of a hotel was not a “public purpose” within the meaning of the North Carolina Constitution.

Article V, Section 2(1) of the Constitution provides that “[t]he power of taxation shall be exercised in a just and equitable manner for public purposes only.” This “public purpose” requirement has been construed to extend to all expenditures of public funds. Hughey v. Cloninger, 37 N.C. App. 107, aff’d, 297 N.C. 86 (1979). The initial responsibility for determining what constitutes a public purpose rests with the legislature and its determinations are entitled to great weight. In re Housing Bonds, 307 N.C. 52, 57 (1982).

The General Assembly has enacted numerous provisions recognizing that the educational mission of the University of North Carolina system may be furthered by the development and operation of auxiliary and service facilities which expand university functions beyond traditional classrooms and libraries. For instance, the Board is authorized by Article 1, Part 4 of Chapter 116 to issue revenue bonds for financing the construction and operation of facilities such as water and sewer systems, gas and electric transmission systems, telephone systems, bookstores, student supply stores, and rental housing for faculty members. N.C.G.S. § 116-41.1(9) specifically references the Carolina Inn hotel in Chapel Hill as a facility for which public funds may be expended. In a related context, N.C.S.G. § 66-58 (the Umstead Act), which generally prohibits public sector competition with private sector business activities, includes an exemption for the University’s operation of utilities and other services which are incidental to instructional activities, including “the operation by the University of North Carolina of an inn or hotel and dining facilities usually connected with a hotel or inn.” This premise was recently ratified by Section 9.15(a) of S.L. 2002-126, in which the legislature mandated certain reporting requirements by the University of North Carolina prior to the issuance of debt or execution of a contract “for a golf course or for any transient accommodations facility, including a hotel or motel.” It is therefore clear that the legislature considers the expenditure of public funds for a university-related hotel facility to be a “public purpose” within the meaning of the North Carolina Constitution.

It is, of course, the ultimate responsibility of the courts to determine whether the expenditure of public funds is for a constitutionally permissible public purpose. Our Supreme Court, which has addressed this issue on numerous occasions, has expressly declined to define “public purpose,” instead allowing “each case to be determined by its own peculiar circumstances as from time to time it arises.” Stanley v. Department of Conservation & Dev., 284 N.C. 15, 33 (1973) (quoting Keeter v. Town of Lake Lure, 264

N.C. 252, 264 (1965)). The Court has also recognized that:

A slide-rule definition to determine public purpose for all time cannot be formulated; the concept expands with the population, economy, scientific knowledge, and changing conditions.

Mitchell v. North Carolina Indus. Dev. Fin. Auth., 273 N.C. 137, 144 (1968).

In Maready v. City of Winston-Salem, 342 N.C. 708 (1996), the Supreme Court held that the expenditure of public monies for economic development incentive programs does not violate the public purpose clause of the North Carolina Constitution. In reaching this conclusion the Court reaffirmed the applicable test for determination of the public purpose question: (1) the expenditure must involve a reasonable connection with the convenience and necessity of the particular public entity; and (2) the expenditure must benefit the public generally as opposed to special interests or persons. Notably, the Court in Maready recognized an evolving concept of public purpose as the passage of time and societal changes impact contemporary standards:

While Mitchell and its progeny remain pivotal in the development of the doctrine, they do not purport to establish a permanent test for determining the existence of a public purpose. The majority in Mitchell posed the question: “Is it today a proper function of government for the State to provide a site and equip a plant for private industrial enterprise?” Mitchell, 273 N.C. at 145, 159 S.E.2d at 751 (emphasis added). This explicit recognition of the importance of contemporary circumstances in assessing the public purpose of governmental endeavors highlights the essential fluidity of the concept. While the Mitchell majority answered the question in the negative, the passage of time and accompanying societal changes now suggest a positive response.

Maready, 342 N.C. at 720.

Applying this test NCSU submits that the Project is designed for university-related uses and in furtherance of the development of the Centennial Campus, and is reasonably related to the public purposes for which NCSU has been established. NCSU also maintains that the Project, which is to be financed, constructed and operated by a nonprofit corporation which is itself controlled by a university supporting organization, will primarily benefit public, as opposed to private interests. As such, we cannot conclude that the proposed project would necessarily fall outside a contemporary application of “public purpose” analysis, as set out in Maready.

Your second question is whether the exemption of the Centennial Campus from the Umstead Act’s limitations on public competition with the private sector allows NCSU unlimited authority to engage in business activities. It is our opinion that the expenditure of public funds by NCSU for all purposes, business-related and otherwise, is not unlimited, but is subject to the “public purpose” constitutional analysis discussed above. That is, an expenditure must be reasonably related to the purposes for which the university was established, and must primarily benefit public, as opposed to private interests. See Maready, 342 N.C. at 722.

Therefore, each of the hypothetical Centennial Campus activities described in your letter would have to be considered within the context of NCSU’s educational mission, as well as other legal limitations which may restrict such commercial ventures by a constituent institution of the university system. An act of the legislature exempting the Centennial Campus from the limitations of the Umstead Act does not necessarily resolve the fundamental, underlying issue of the extent to which business-related activities may be pursued by NCSU as permissible public purposes. As such, the hypotheticals you have suggested appear problematic.

Your third question is whether the University of North Carolina, or a constituent campus, has legal authority to finance a project of this type through the issuance of bonds by a non-profit corporation and to “subsidize the entire project’s operating losses and guarantee repayment of the bonds” without legislative or other approvals. A response to this question must be predicated upon our understanding of the financing structure which has been developed for this Project.

It is our understanding that Articles of Organization were filed with the Secretary of State on January 25, 2002 by an organizer with no official relationship to NCSU, establishing the LLC pursuant to N.C.G.S. § 57C-2-20 as a limited liability company for exclusively charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986. The sole member of the LLC is the Corporation, which was originally created in 1984 by three private individuals as the North Carolina State University Research Corporation. The Corporation, which itself has been recognized by the IRS as tax-exempt under Section 501(c)(3) and as a “supporting organization” as defined by Section 509(c)(3), has performed a variety of activities benefitting research at NCSU, but has no legal relationship to the university. We are advised that neither the Board nor the NCSU Board of Trustees controls the management or operations of the Corporation or the LLC.

The Corporation and the LLC entered into the Operating Agreement on January 25, 2002 for the purpose of establishing the terms and conditions governing the operation and affairs of the LLC. Section 2.1 of the Operating Agreement establishes the purposes of the LLC as financing the Project through the issuance of bonds, developing the Project, managing and operating the Project, and entering into other agreements as necessary to carry out these purposes. Section 2.3 of the Operating Agreement mandates extensive “Separateness Requirements” for the LLC's operations in order to maintain its status as an independent “special purpose entity.”

On May 11, 2002, the Board authorized NCSU to contract with the LLC for the purchase of room nights, conference space and golf course useage “as often as may be necessary during each fiscal year . . . so that the Net Revenues in such fiscal year will be at least equal to 125% of the principle and interest requirements to become due during that fiscal year.” This contractual commitment is restricted to the extent of “available funds,” which includes unrestricted General Fund balances and unrestricted Quasi-Endowment Fund balances. The Board resolution specifically excludes from this commitment state appropriated funds, tuition payments, funds whose purpose has been restricted by the gift, grant or payee, revenue generated by special facilities, and funds otherwise restricted by law. It is our understanding that the commitment approved by the Board will become a contractual agreement between NCSU and the LLC, which will be used in turn by the LLC to secure, in part, the bonds which it will issue to finance the Project.

To summarize our understanding of the financing structure, the Corporation, which is a private, non-profit, supporting organization, has created the LLC, a private, non-profit, limited liability company, for the purpose of financing, constructing and operating the Project. The LLC will issue bonds as necessary to finance the Project, and the bonds will be partially secured by a useage commitment from NCSU. The commitment by NCSU is for the contractual purchase of facility usage in an amount at least equal to the difference between net revenues generated by the Project and 125% of the annual principal and interest requirements incurred by the LLC in financing the Project. This commitment, however, is limited by the amount of “available funds” in each fiscal year.

NCSU cannot, consistent with the North Carolina Constitution, guarantee the debt of a private corporation through a pledge of the State's taxing power. North Carolina Constitution, Article V, § 3. Bonds to be issued by the LLC, however, will not constitute debts either of NCSU or the State of North Carolina, but will be secured by revenue generated by the Project. An agreement between NCSU and the LLC for use of the Project facilities will provide a portion of such revenue. Our Supreme Court has held under similar circumstances that a lease made for adequate consideration, the revenues from which are pledged for the retirement of financing bonds, is not a loan of the credit of the state or of the agency making such lease. See Ports Authority v Trust Co., 242 N.C. 416 (1955). As such, provided we are correct in our assumption that NCSU's facility usage commitment is reasonably related to its actual requirements for university-related needs, we cannot conclude that the Project, or the proposed financing mechanism, will violate the Constitution or any state law.

Finally, you have asked what State approvals will be required for a ground-lease of Centennial Campus property to the LLC for construction of the Project. N.C.G.S. § 116

198.34 authorizes the Board to exercise a variety of powers related to Centennial Campus projects, including the lease of real property. N.C.G.S. § 198.34(5) requires that dispositions by lease be approved in accordance with normal Department of Administration and Council of State procedures except that “a disposition by . . . lease . . . on the Centennial Campus . . . made for a period of 10 years or less shall not require the approval of the Governor and the Council of State”. The lease of real property authorized by the Board, however, is for a term of fifty years with three five-year renewal options. Therefore, concurrence of the Department of Administration and formal approval by the Governor and Council of State will be required. It is our understanding that the State Property Office of the Department of Administration has been fully consulted in regard to the lease.

We trust that this opinion is responsive to your concerns.

Sincerely,

Grayson G. Kelley Senior Deputy Attorney General

GGK/fa