MUNICIPALITIES AND CONVEYANCES OF REAL ESTATE
by John Kelly, ATG Law Clerk


When a municipality seeks to buy or sell real estate, issues arise as to whether the municipality has the authority to do so, whether the real property is acquired for a proper purpose, what procedures must be followed when real estate is bought or sold, and the method municipalities use to finance an acquisition of real estate. This article provides an overview of the authority municipalities have to buy and sell real estate and the procedures they must follow in Illinois, Indiana, and Wisconsin.

Illinois

Purchase

Cities incorporated under the Municipal Code may acquire and hold real and personal property for corporate purposes. 65 ILCS 5/2-2-12. A city may not, however, acquire property for other than corporate purposes. O'Fallon Development Company, Inc v City of O'Fallon, 43 Ill App 3d 348, 356 NE2d 1293, 2 Ill Dec 6 (5th D 1976). The legislature has broad discretion to decide what constitutes a public purpose. Poole v City of Kankakee, 406 Ill 521, 94 NE2d 416 (Ill 1950). However, the court determines whether a purpose is within the legislature's discretion. Courts will look to the following factors: (1) the acquisition must benefit the community rather than only an individual; (2) the law must control the use of the property; (3) the title to the property must not be vested in a person or corporation as private property to be used and controlled as private property; (4) the public must reap the benefit of public possession and use and no one may exercise control over the property except for the municipality; and (5) "all persons must have an equal right to use the property and that right must be on the same terms as all other persons." Times Mirror Cable Television of Springfield, Inc v First Nat'l Bank of Springfield, 221 Ill App 3d 340, 583 NE2d 216, 164 Ill Dec 8 (4th D 1991). In Poole, the court found the acquisition of land for off-street parking would attain the public purpose of regulation of streets and traffic. However, in Southwestern Illinois Dev Authority v National City Environmental, LLC, the court held it was not a pubic purpose for the Authority to condemn property for a parking lot at an automobile race track even if it would foster economic development and promote public safety because the Authority appeared to act as a broker of land and the condemnation would result in the private profit to the racetrack. SWIDA, 199 Ill 2d 225, 768 NE2d 1, 263 Ill Dec 241 (Ill 2002).

Financing

The Illinois Municipal Code does not expressly grant to municipalities the power to encumber land by mortgage. Section 6 of Article 7 of the Illinois State Constitution, however, allows home rule municipalities to "exercise any power and perform any function pertaining to its government and affairs including the power to … incur debt." Article 7, Section 7 of the Illinois Constitution provides that municipalities that are not home rule units only have powers to granted to them by law. Since a municipality does not have the power to encumber its property by mortgage, except for express legislative authority, it does not have the power to acquire and hold property subject to a mortgage. Stripe v Waukegan, 254 Ill App 74 (Ill 1929).

Sale

Any city has the power to convey real estate when the corporate authorities determine the real estate is no longer necessary, appropriate, required for the use of, profitable to, or for the best interests of the city or village. 65 ILCS 5/11-76-1, et seq. The power must be exercised by an ordinance passed by three-fourths of the corporate authorities of the city or village then holding office. The ordinance must specify the location and use of the real estate along with conditions with respect to the real estate the municipality deems necessary and desirable to the public interest. The municipality must publish notice of the proposal for three consecutive weeks starting at least 30 days before the opening of bids. The municipality may accept the high bid or any other bid determined to be in the best interest of the municipality by a vote of three-fourths of the corporate authorities. They may reject any and all bids by a majority vote.


A municipality may authorize the sale of surplus real estate by passing a resolution directing the sale to be conducted by the municipality's staff, by listing with local real estate agencies or by public auction. 65 ILCS 5/11-76-4.1. The municipality may accept by a two-thirds vote of the corporate authorities holding office any proposal they believe to be in their best interest, as long as it has a price of at least 80% of the appraised value. An alternative method of sale is available to municipalities with a population less than 20,000 and with and unemployment rate higher than the national average. In that case, if the municipality does not receive an acceptable bid or offer under Section 2 or Section 4.1, then the corporate authorities may accept any offer or bid determined by them to be in the best interests of the municipality by a three-fourths vote of corporate authorities. 65 ILCS 5/11-76-4.2.


When a municipality acquires land for a particular purpose but does not use all of it for that purpose, it can sell the remaining land without adopting an ordinance. City of Jacksonville v Padgett, 413 Ill 189, 108 NE2d460 (1952). As a general rule, municipalities cannot give away municipal property, however in Humane Society of Springfield and Sangamon County v City of Springfield, the court allowed the municipality to give away a building that had no actual value and was a liability since it would have to be torn down. Humane Society, 17 Ill App 2d 552, 150 NE2d 848 (3rd D 1958, abstract).

Intergovernmental Transfers

The Local Government Property Transfer Act provides the procedure for transfers of property between two municipalities. 50 ILCS 605/1, et seq. For the purposes of this Act, the term "municipality" includes all of the following: cities, villages, incorporated towns, counties, school districts, trustees of schools, boards of education, sanitary districts or their trustees, forest preserve districts or their commissioner, park districts or their commissioner, airport authorities, and township. If the real estate is held without restriction, the transferor municipality may transfer it to the transferee municipality upon terms agreed upon by both municipalities. If the property is limited by a restriction and the transferee wishes to use the property free from the restriction, the transferor may secure a release of any or all restrictions upon terms agreed between either of the municipalities and the persons benefiting from the restrictions. If neither municipality can secure a release, they may file in court a petition to remove the restriction and determine the compensation to the owners of the restriction. If the transferor municipality holds an easement for a purpose different from the purpose the transferee municipality wishes to use the real estate, the transferor may petition the court to terminate the easement and determine the compensation to due to the easement's owners. If the transferor municipality owes installment payments on the purchase or improvement of the property, the transferee must deposit with the transferor the amount remaining due.

Indiana

Purchase

A city may acquire and own interests in real and personal property. IC 36-1-4-5. The statute setting forth the procedure for a municipality to purchase land may be found at IC 36-1-10.5-1, et seq. The municipality's fiscal body must pass a resolution that it plans to purchase the land and appoint two appraisers to conduct appraisals within 30 days. The municipality may not purchase the land for a price higher than the average of the two appraisals. However, the required procedures in Chapter 10.5 do not apply to the purchase of real property having a total value of $25,000 or less or land or structures used for airports, libraries, schools, hospitals, road or street right of ways, federal aid projects, redevelopment commissions or municipally owned water utilities.

Financing

A Federal Court applying Indiana law held that a municipality had no power to encumber its property by mortgage in the absence of express legislative authority and did not have the power to purchase and hold property subject to a mortgage. Fidelity Trust & Guaranty Co v Fowler Water Co, 113 F 560 (DC Ind 1902). However, Indiana's Home Rule Statute, IC 36-1-3-1, et seq., sets forth the powers granted to local governments, and grants all the powers they need for their effective operation. A municipality has all the powers granted by statute and any other power necessary or desirable in the conduct of its affairs even if not granted by statute. If there is any doubt as to the existence of a power of a municipality, it should be resolved in the favor of its existence. Finally, a municipality may issue bonds in payment for property unless there is a statutory or civil prohibition. Rushville Gas Co v City of Rushville, 23 NE 72 (Ind 1889).

Sale

Indiana allows a municipality to use, improve, develop, insure, protect, maintain, lease, and dispose of its interests in property. IC 36-1-4-6. However, property held and used by a city for public purposes is held in trust for the inhabitants and cannot be sold or disposed of unless the city is specially authorized by the legislature to make such sale or disposition. Lake County Water & Light Co v Walsh, 65 NE 530 (Ind 1902). Though municipalities have the implied right to dispose of any property of a private nature unless a charter or statute restrains them, they cannot dispose of public property in violation of the public trust. However, a municipality may dispose of property at any time before it is dedicated to a public use. City of Fort Wayne v Lake Shore & M S RY Co, 32 NE 215 (Ind 1892). In City of Fort Wayne, the city had fee-simple title, and therefore the city had the power to convey it for private use at any time before it was dedicated as a public park.


The Local Government Disposal of Real or Personal Property statute sets forth the requirements for a municipality to sell real estate. IC 36-1-11-1, et seq. Before selling real property, the municipality must have the property appraised by two appraisers and publish notice in accordance with IC 5-3-1, including a detailed description of the property, and the tax parcel numbers. Bids are open to public inspection and take effect after the board gives written notice of the bid. The municipality also may use an auctioneer licensed under IC 25-6.1 to conduct the sale by public auction. The municipality may sell the property to the highest bidder before the expiration of the time set out in the notice.


A person who could have redeemed a tract from sale as a result of delinquent taxes and did not do so before a tax deed was issued to a county may not purchase the tract back from the municipality or exchange property with the municipality. IC 36-1-11-16. However, there are exceptions where the tax deed was issued more than five years ago, and where the buyer pays an amount equal to the amount required to redeem the tract at the time the county was issued the deed.


A municipality may exchange property only after advertisement following the procedure described above for a sale. The property the municipality conveys will count as partial or full payment for the property it receives. IC 36-1-11-7.


Several types of transfers are not subject to the procedural requirements described above for a sale, as follows:

  • Leaseback: If the municipality plans to sell and lease the property back, the municipality must publish notice. Following the period for receiving bids, the municipality may sell the property to the highest and best eligible bidder. IC 36-1-11-4.1.



  • Economic development: In some cases, a municipality may seek to sell real property that was not acquired through eminent domain to promote an economic development project or facilitate compatible land use planning. In those cases, the municipality must have two appraisers present a joint appraisal, and then it may negotiate a sale or transfer and dispose of the property at a value of at least the appraised value. IC 36-1-11-4.2.



  • Low value: If the value of the land is less than $5,000 or if the municipality determines that sale to an abutting landowner is the highest and best use, the municipality may negotiate with abutting landowners. For this provision to apply, the municipality must not have had a higher bid from another party. IC 36-1-11-5.



  • School to nonprofit: School corporations may transfer real property for no compensation to a nonprofit corporation created for educational or recreational purposes. IC 36-1-11-5.5.



  • Nonprofit grantee: A municipality in a county having a population between 55,000 and 65,000 may transfer real estate for no compensation to a nonprofit organization created for agricultural, educational or recreational purposes. IC 36-1-11-5.6.



  • Governmental exchange: Two governmental entities can exchange property upon terms and conditions agreed upon by the entities as evidenced by the adoption of identical resolutions by each entity. IC 36-1-11-8.



  • Gift property: If a tract was originally transferred to the municipality as a gift and public funds have not been spent to improve the property, the municipality may convey it back to the original grantor with the grantor's consent and without consideration. The municipality must determine that the property is surplus. IC 36-1-11-14.



  • Gift property, nonprofit grantor: The same provision applies for a nonprofit corporation grantor. IC 36-1-11-15.



Wisconsin

Purchase

Under Wisconsin's Municipalities Code, "the governing body of any city may by purchase acquire property within or outside the city, for parks, recreation, water systems, sewage or waste disposal, airports or approaches thereto, cemeteries, vehicle parking areas, and for any other public purpose; may acquire real property within or contiguous to the city, by means other than condemnation, for industrial sites; may improve and beautify the same; may construct, own, lease and maintain buildings on such property for public purposes." Wis Stat § 62.22(1). What constitutes a public purpose is a question for the city council. The municipality must be able to show a public purpose that might rationally justify the expenditure. The court will conclude there is no public purpose only if it is clear there can be no benefit to the public.Bishop v Burlington, 246 Wis 2d 879, 631 NW3d 656 (Wis Ct App 2001). InBishop, the court found the public purpose test was satisfied where the city conveyed a parking lot to a developer who purchased a neighboring building because the conveyance would redevelop a deteriorating section of downtown. In contrast, a transfer of a public parking lot to a manufacturing corporation in return for a payment of only part of the fair market value of the property was not a public purpose because the purchaser intended to allow only employees and not the general public to have parking privileges.Hermann v Lake Mills, 275 Wis 537, 82 NW2d 167 (Wis 1957).

Financing

Section 3 of the Municipalities Code provides that "cities and villages organized pursuant to state law may determine their local affairs and government subject only to the constitution and to such enactments of the legislature of statewide concern as with uniformity…." Section 67.03(1)(a) limits the aggregate amount of indebtedness of any municipality to five percent of the value of the taxable property located in the municipality. The test of whether a municipality has incurred indebtedness is whether it is under an obligation to pay and the creditor has a right to enforce payment against the municipality or its assets. Indebtedness is not incurred where payments are made solely at the municipality's option. Dieck v Unified School District of Antigo, 165 Wis 2d 458, 477 NW2d 613 (Wis 1991). As a result, a municipality has the power to mortgage its property so long as its debt does not exceed five percent of its assets. Wis Stat § 67.03(3). Finally, a municipality may borrow money and issue bonds to finance any project undertaken for a public purpose, subject to the limitations in Sections 67.03 and 67.045. Wis Stat § 67.04(2)(a).

Sale

Under Wisconsin Statute Section 62.22(1), the governing body of any city may sell and convey property. After completion of improvements, a city may convey any property not necessary for the improvements with restrictions. These restrictions may limit the future use and occupation of the real estate to protect public works and improvements and to preserve the view, appearance, light, air and usefulness of such public works, and to promote public health and welfare. Wis Stat § 62.23(17)(b). When conveying property, the council and governing body have discretionary power and there is no requirement to solicit bids or to sell to the highest bidder.Newell v Kenosha, 7 Wis 2d 516, 96 NW2d 845 (Wis 1959). For the court to void a municipality's sale, there must be illegality, fraud, or clear abuse of discretion on the part of the governing board of the municipality that authorized the sale.Hermann v Lake Mills, 275 Wis 537, 82 NW2d 167 (1957). In that case, the court held that a transfer of municipal property to a manufacturing corporation in return for a payment of only part of the property's fair market value, which was knowingly made for the purpose of promoting industrial expansion, is beyond the power of the municipality.

Conclusion


Municipalities in Illinois, Indiana, and Wisconsin have the authority to acquire and sell real property. A common theme in all three states is that the property is held in trust for the public and that property bought must serve a public purpose. Municipal property can be sold only after the property is no longer necessary for a public purpose. None of the states expressly give municipalities the power to mortgage property. However, all three states allow home rule municipalities to exercise powers necessary as long as they are not prohibited by statute. Finally, municipalities must follow the required procedures as set forth in the statutes when acquiring and selling real estate in order to ensure the transaction serves the public.

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