Introduction to Local Government Finance

Getting your book ready.

Chapter 15

Financing and Public-Private Partnerships for Community Economic Development

by C. Tyler Mulligan

Community Economic Development (CED) refers to efforts to stimulate markets in low-income communities in order to attract private investment in job-creating businesses, downtown revitalization, affordable housing, and other public benefits.1 These efforts occur at the intersection of the related fields of community development and economic development. Community development programs include improving the appearance of neglected neighborhoods or commercial areas, constructing housing that is affordable to low-income workers, and alleviating problems associated with unemployment and underemployment.2 Economic development programs often include place-based development activities, such as downtown revitalization and promotion of tourism, to complement their business recruitment, retention, and entrepreneurship efforts.3 The hope is that improving the built environment and leveraging the natural attributes, cultural heritage, and distinctive character of a place will encourage investment and growth.4 Some CED projects are publicly owned and can be financed through traditional public financing mechanisms discussed in earlier chapters of this book. The focus of this chapter, however, is local government authority to use financing tools to participate directly in private development in furtherance of CED goals, typically through creative public-private partnerships.

This chapter proceeds in three parts. The first part articulates the rationale for local government involvement in the revitalization or redevelopment of a community’s built environment—a primary focus of CED efforts. The second part describes federal and state programs that support such CED efforts. Finally, the third part explains local government legal authority to participate in public-private partnerships in order to attract private investment for CED purposes.

Revitalization and Redevelopment of the Built Environment

The built environment of a community—the buildings (houses, retail stores, manufacturing facilities) and infrastructure (roads, water and sewer, telecommunications)—is essential to attracting private investment. When built assets are dilapidated, inadequate, or lacking altogether, the implications can be far-reaching. Water and sewer infrastructure is almost always a prerequisite for economic development and job creation.5 Access to broadband contributes to economic development and is increasingly necessary to obtain education and health care, especially in rural areas.6 A well-maintained historic downtown—even in a rural area—confers benefits on the wider community.7 In addition, there is evidence of a link between the built environment in a community and public health outcomes because residents who live in a thriving “walkable” neighborhood or have convenient access to full-service grocers are more likely to engage in greater physical activity and consume a healthier diet.8 Furthermore—and of great significance to local governments—the financial health of a community is often dependent on the amount of private investment in built assets because such assets make up the bulk of the tax base on which local governments rely to finance public priorities. For these reasons, among others, local governments typically seek to preserve and revitalize existing built assets.

Local governments rarely possess sufficient financial resources on their own to accomplish all of the development and revitalization that a community needs. Private capital is required, too. Local governments therefore must leverage their limited resources to attract private investment in order to achieve their development goals. In the best-case scenario, a local government can simply establish appropriate zoning and make investments in public infrastructure, and private investment will follow on its own without any further public involvement. However, in some circumstances, especially in distressed areas, more direct public involvement in private development may be required.

The legal authority for local governments to participate in a private development project is entirely dependent on the public purpose for the government’s involvement. For example, in the case of industrial recruitment, local governments possess special authority to induce an industrial facility to locate in a community only when substantial jobs and tax base might be lost to other states.9 To create affordable housing for low-income persons, a local government may provide financial assistance to a private developer so long as the assistance flows to eligible low-income households and otherwise meets statutory requirements.10 For all other businesses and real estate development, subsidies are not permitted, but fair market value transactions are available and adequate to achieve public goals.11

This chapter goes into further detail on those examples and others, and it describes the limited situations in which local government participation is permitted by North Carolina law. Before describing local government authority in this area, it is first helpful to set the context by summarizing federal and state programs that may be available to fund such efforts.

Federal Programs

The federal government offers multiple programs to support state and local development efforts. This section describes federal grant and tax credit programs that are commonly used to finance CED projects.12

Community Development Block Grants

The Community Development Block Grant (CDBG) program is the largest and most flexible source of federal community development funds. Created in 1974 as an offshoot of several different existing community development programs, the CDBG program operates in furtherance of three objectives: (1) to benefit low- and moderate-income persons,13 (2) to prevent or eliminate slums or blight, and (3) to meet urgent needs.14 The amount of CDBG funds distributed annually to states and populous jurisdictions is determined by a formula that comprises several measures of community need, including population, housing overcrowding, age of housing, population growth lag in relationship to other metropolitan areas, and the extent of poverty.15

North Carolina communities have devoted CDBG funds to a wide range of activities, including the creation of affordable housing, improvements in public infrastructure, and the enhancement of community facilities and services. The program’s funds may be used to support a wide range of activities, but Congress and the U.S. Department of Housing and Urban Development have mandated that, at a minimum, no less than 70 percent of all CDBG funds must be used for activities that directly benefit low- and moderate-income persons.16 When CDBG funds are used to provide financing for a private development project, a local government must conduct underwriting to determine (1) that private contributions in equity and debt are appropriate, (2) that federal funds are necessary to make the project go forward, and (3) that the project, which was infeasible without the federal financing, will attain long-term feasibility and achieve the approved public purpose after the financing is provided.17

The CDBG program is divided into two parts, the Entitlement Program (for large municipalities and urban counties) and the Small Cities Program (for the remainder of the state’s municipalities and counties). Communities that are eligible for Entitlement Program CDBG funds are generally municipalities that have fifty thousand or more residents and urban counties. These communities receive a direct block-grant allocation from the federal government each year. In North Carolina, twenty-four municipalities and four counties participate in the CDBG Entitlement Program.18 Several cities and one county have been added to the ranks of these entitlement communities since 2010. Together, all North Carolina entitlement communities received a total of approximately $31 million in fiscal year 2023 (excluding separate special allocations for disaster recovery), and that total is up from more than $28 million in fiscal year 2010, due in part to the addition of several entitlement communities since that time.

The Small Cities Program provides North Carolina (and other states) with annual block grants, which the state in turn awards to local governments that are not part of the Entitlement Program. Each state develops its own method of distributing its received funds to eligible local governments. To maximize the impact of Small Cities Program funds, most states (including North Carolina) create programs with relatively large awards and then hold annual competitions for the available funds. States may reflect statewide priorities by earmarking funds for specific activities (e.g., housing rehabilitation or economic development). States also may keep a small percentage to cover administrative costs and to provide technical assistance to local governments and nonprofit organizations. North Carolina received approximately $46 million in CDBG funds for the Small Cities Program in fiscal year 2023, down from almost $49 million in fiscal year 2010. The North Carolina Department of Commerce administers the portion of the state’s CDBG funds designated by the General Assembly for economic development and revitalization projects, and the Department of Environmental Quality administers the portion designated for water and wastewater infrastructure.

The HOME Investment Partnerships Program

HOME is a federal program designed to increase the supply of housing for low-income persons. HOME provides funds to states and local governments to implement local housing strategies, which may include tenant-based rental assistance, assistance to homebuyers, property acquisition, new construction, rehabilitation, site improvements, demolition, relocation, and administrative costs. After certain mandated set-asides, the balance of HOME funds is allocated by formula between qualified municipalities, urban counties, consortia (contiguous units of local government), and states. In North Carolina, the state portion is then reallocated to remaining jurisdictions by the North Carolina Housing Finance Agency (NCHFA). In fiscal year 2023, the federal government allocated approximately $23 million in HOME funds directly to qualified local jurisdictions (up from $20 million in fiscal year 2010). Approximately $19 million went to NCHFA for use statewide (down from $21 million in fiscal year 2010). The statewide funds are allocated based on each region’s housing needs and are available through both competitive and noncompetitive funding programs.

Other Federal Grant Programs

The Economic Development Administration (EDA) provides funding for local governments to engage in economic development planning and to implement projects. EDA targets its funding to economically distressed communities and regions by making grants for public works (infrastructure), technical assistance, economic and trade adjustment assistance, and planning.19 Other federal agencies administer and fund various types of loan guarantees for private lenders, support revolving loan programs, and provide funding for community facilities. These agencies include the Small Business Administration, the U.S. Department of Agriculture, and the U.S. Treasury Department.

Federal Tax Credit Programs

Three federal tax credit programs are designed to induce private investment for CED purposes: the New Markets Tax Credit, the Low-Income Housing Tax Credit, and the Historic Rehabilitation Tax Credit. The New Markets Tax Credit (NMTC) was enacted as part of the federal Community Renewal Tax Relief Act of 2000. Designed to stimulate billions of dollars of new investment in distressed areas, the NMTC allows taxpayers to receive a credit against their federal income taxes for investing in commercial and economic activities in low-income communities. The Low-Income Housing Tax Credit provides tax credits to private investors who develop housing with set-asides for persons earning 60 percent or less of the area median income.20 The Historic Tax Credit provides tax credits to those who invest in the rehabilitation of historic structures. North Carolina has intermittently offered complementary state tax credits for investments in historic rehabilitation projects and affordable housing, and when combined with federal tax credits, eligible projects are even more attractive to private investors.

Most real estate developers cannot use all of those tax credits themselves, so they sell investment interests in their projects (through a tax credit intermediary or “syndicator”) to persons or companies with large tax liabilities. When those entities with large tax liabilities invest in a project in order to receive tax credits—in other words, when they buy tax credits—the investment provides an infusion of capital (or equity) into the project. The amount of equity a project can receive for selling its tax credits may depend on the demand for such tax credits. When tax credits are valuable, a developer can attract more equity for a project, making the project more financially feasible. When tax credits are less valuable, which typically occurs when federal tax rates go down and therefore companies have less tax liability, developers cannot obtain as much equity for a project, thereby making it more difficult to finance a project with tax credits.

Local governments do not typically get involved with tax credit syndication, but the types of projects that take advantage of federal or state tax credits are often those that local governments wish to support. Thus, local governments must understand how tax credits work in order to evaluate the necessity of their participation in a private project that is utilizing tax credits.21 In addition, due to the fact that tax credits help make private development projects possible, local governments are usually active partners in seeking to have projects and qualified areas of their communities designated for special tax treatment.22

State Programs

The state’s community economic development programs are centered in the Department of Commerce. Statewide economic development efforts are coordinated through the Department of Commerce and its associated nonprofit arm, the Economic Development Partnership of North Carolina.23 These entities are often the initial points of contact for prospective businesses seeking financial incentives to locate or expand a facility in the state. The Department of Commerce also administers grants and loans for CED projects in rural or distressed communities through its Rural Economic Development Division.24

Approval for Industrial Revenue Bonds

Industrial Revenue Bonds (IRBs) are a potential source of financing that businesses can use for land, building, and equipment purchases as well as for facility construction. The interest paid to bondholders is exempt from federal and state income taxes, making it possible for businesses to access debt at below-market rates for the construction of industrial facilities. Only manufacturing companies are eligible to receive IRB funds, and the maximum issuance for a single company in a jurisdiction is related to job creation. IRB issues must be backed by a letter of credit from a bank, so most IRB transactions are completed in partnership with a bank that issues the letter of credit and places the bonds. Counties are authorized to create financing authorities25 to issue the bonds after approval has been obtained from the county, the secretary of the Department of Commerce, and the Local Government Commission.26 Although government approvals are part of the process, no government guarantees the bonds. The bonds are secured only by the credit of the company.

Discretionary Incentive Grants for Competitive Industrial Projects

At the state level, the two primary discretionary grant programs are the Job Development Investment Grant (JDIG) and the One North Carolina Fund. The JDIG program provides discretionary grants directly to new and expanding companies to induce them to increase employment in North Carolina rather than in another state. The grant amount is based on some percentage of withholding taxes paid for each eligible position created over a period of time, with higher amounts awarded for higher levels of capital investment and job creation.27 The terms of the grant are specified in an agreement that requires a recipient company to comply with certain standards regarding employee health insurance, workplace safety, and wages paid. The grant agreement must include a clawback provision to recapture funds in the event that the company relocates or ceases operations before a specified period of time.

The One North Carolina Fund awards grants to local governments to secure commitments from private companies to locate or expand within the local government’s jurisdiction. The grants must be used to install or purchase new equipment; make structural repairs, improvements, or renovations of existing buildings in order to expand operations; construct or improve existing water, sewer, gas, or electric utility distribution lines; or equip buildings.28 Applications for the grants are submitted according to guidelines promulgated by the state Department of Commerce, with grants being awarded on the basis of the strategic importance of the industry, the quality of jobs to be created, and the quality of the particular project. The local government must provide matching funds for any award made by the state.

Tax Credits, Benefits, and Exemptions by County Tier

The state’s tax system has long been used to encourage development, and several different types of tax credits are available to companies meeting specified criteria. As noted earlier, the state has its own historic rehabilitation tax credits that are designed to complement the parallel federal tax credits.29 The state has, at various times, also enacted other tax credits and various exemptions for companies that create jobs and invest in facilities and equipment in the state.30 Benefits and credit amounts under state programs are often based on the relative distress of the county in which the project is located, as signified by a county tier designation assigned by the Department of Commerce. For example, the tier designation system employed in 2023 assigned the forty most-distressed counties to tier one, the next forty as tier two, and the twenty least-distressed counties as tier three.31 The most generous benefits and tax credits are reserved for projects located in tier one counties, with lower benefit amounts offered in higher tiers.32

Industrial Development Fund Utility Account for Infrastructure

The Industrial Development Fund Utility Account (Utility Account) provides funds to local governments in the most economically distressed counties for infrastructure projects that are reasonably anticipated to result in job creation.33 Utility Account funds may not be used for any retail, entertainment, or sports projects. Eligible public infrastructure projects include construction or improvement of water, sewer, gas, telecommunications, high-speed broadband, electrical utility facilities, or transportation infrastructure.

Limited Local Government Authority to Participate in Private Development

Local governments have broad authority to engage in CED-related activities. Most of these activities involve traditional public functions. These include such economic development activities as employing agents to meet and negotiate with and assist companies interested in locating or expanding within the community, developing strategic plans for economic development, administering unsubsidized revolving loan funds, and advertising the community in industrial-development publications and elsewhere. They also include such community development endeavors as forming redevelopment commissions to purchase and improve blighted properties, offering homebuyer counseling to first-time homebuyers, developing community development plans, applying for government and charitable grants, and managing community facilities.

In addition, counties and municipalities may construct public facilities for CED purposes, such as by extending utility lines, expanding water supply and treatment facilities and sewage treatment facilities, building publicly owned affordable housing, and constructing road improvements. Publicly owned improvements can be financed by local governments through traditional public financing mechanisms discussed in earlier chapters of this book.

However, North Carolina local governments are often asked to participate directly in private development in furtherance of CED goals. This section describes the limited circumstances under North Carolina law when such participation is permitted.

As a threshold matter, local governments are not permitted to provide “exclusive emoluments”—in other words, gifts of public property—to private entities (Section 32 of Article I of the North Carolina Constitution).34 This same constitutional rule, sometimes called a gift clause, appears in state constitutions across the nation.35 Exclusive emoluments are permitted only “in consideration of public services.” That is, the public must get something in return—known as “consideration” in contract law—for a payment to a private entity. North Carolina local governments are not even permitted to make donations to charitable not-for-profit entities.36 Every government payment or transfer of property to a private enterprise must be made in exchange for adequate consideration.37 For example, a grant may be paid to a nonprofit in exchange for the nonprofit’s promise to provide services of equivalent value managing the government’s homeless shelter.

A separate set of constitutional provisions requires that expenditures by local governments and contractual payments to private entities must serve a public purpose (Section 2 of Article V of the North Carolina Constitution). As long as a payment or expenditure serves a valid public purpose, it satisfies not only the constitutional provisions regarding public purpose, but the exclusive emoluments provision as well. The courts alone—not the legislature, not statutes—decide what is a valid public purpose under the constitution.

Together, these constitutional rules indicate that direct government participation in private development is disfavored under North Carolina law, and therefore caution is required when local governments seek to partner with private entities. North Carolina courts have stated in multiple decisions that “direct state aid to a private enterprise, with only limited benefit accruing to the public, contravenes fundamental constitutional precepts.”38 In addition, government is not permitted to engage in private business.39 These rules should be axiomatic to local government officials. If it were permissible for governments to engage in business or make grants or donations to private enterprise without requiring services in return, then legal requirements discussed in earlier chapters of this publication would become irrelevant. Laws governing property conveyance at fair market value could be worked around. Grants could be used to undermine uniformity of taxation because classes of grant recipients could receive the equivalent of tax refunds. Utility law requirements about treating similarly situated customers the same could easily be avoided. Procurement rules and the outcomes of bidding processes could be nudged up or down by offering grants to preferred vendors. State law, rooted in longstanding constitutional principles, contains a carefully constructed web of requirements and prohibitions designed to prevent direct government aid to private enterprises.40

An additional constitutional requirement is that North Carolina local governments are authorized to make expenditures only as specifically permitted by statute.41 Statutes do not supersede the constitutional rules regarding exclusive emoluments and public purpose described above. All statutes must be interpreted to be consistent with the state constitution.42 Indeed, statutes may contain broad language with the presumption that constitutional rules control.43 In the context of CED projects, there are several different statutes that permit a local government to participate in development in pursuit of CED goals.

The specific powers available to a local government are different depending on the purpose being pursued, whether affordable housing, historic preservation, industrial recruitment, blight remediation, or others. Each defined purpose has its own statutes and corresponding set of authorized activities. Thus, the discussion below describes the legal authority for a local government to participate in a private development project, with each allowable purpose treated separately.

First Pursue Partnership Options That Involve No Subsidy to Private Entities

As explained above, the exclusive emoluments clause of the North Carolina Constitution prohibits local governments from making gifts to private entities. There are many options for participating in a private CED project—options that improve project feasibility—without providing a subsidy (or gift) to the project. Fair market value transactions involve no subsidy, but when properly structured, they can improve the financial feasibility of a private development project. If a non-subsidy approach makes a project financially feasible, then a subsidy cannot be necessary—and any unnecessary subsidy amounts to an unconstitutional gift. Creativity is permitted so long as the local government follows procedural requirements and utilizes fair market value transactions. Some effective and legally permissible approaches include the following:

  • Educate the project developer about lawful property tax exemptions enacted by the General Assembly and made available statewide. For example, a development project that is on a contaminated site and is made subject to a brownfield agreement with the State of North Carolina is entitled to the brownfield tax exclusion of 90 percent in the first year, decreasing to 75 percent, 50 percent, 30 percent, and 10 percent, respectively, in years two through five.44 A property designated as a historic landmark and maintained as such is entitled to a 50 percent exclusion in perpetuity.45 Special appraisal procedures are available to certain types of affordable housing.46 Local governments are not permitted to invent their own tax exemption or abatement programs, but they can educate private businesses about the myriad lawful exemptions that are available.47

  • Construct publicly owned infrastructure to support private development. Examples include lighting, public parking, and street improvements. Public parking spaces can be leased to private businesses at fair market value, subject to some limitations.

  • Enter into a public-private partnership (P3)48 or reimbursement agreement49 with a developer. A P3 or reimbursement agreement involves a developer constructing public facilities and, following construction, a local government buying the public facilities from the developer for a reasonable price.

  • Offer loans with appropriate market-rate terms based on the risk profile of the loan (loan forgiveness and below-market interest rates are typically impermissible gifts).50

Professionals with experience financing real estate development know that a loan, properly structured, will almost always make a project financially feasible. However, if a loan is not adequate, then a local government should demand a share of ownership for any equity it invests in a private project. Investing equity into a private project should be handled with care due to the prohibition against governments engaging in private business.51 One example of an equity investment is paying the owner of a historic building a fair price for a preservation easement on the building façade.52 An easement obtains ownership and secures important public rights such as the right to enter the property to make repairs and to charge the owner for a portion of the costs. By securing such rights for the public, the local government may possibly avoid the claim that it has made an unconstitutional gift to a private entity.

In the vast majority of development projects—even difficult projects in distressed areas—the above options are sufficient to make a project feasible. Development finance experts with a deep understanding of real estate development and finance can assist local governments with evaluating options that avoid unconstitutional subsidy.53

Form of Subsidy: Permissible Cash Payments and Impermissible Tax Abatements

There are limited situations in which it is necessary for a local government to provide a direct subsidy to a project. The most common examples are (1) business location competitions in which significant jobs and capital investment “might otherwise be lost to other states”54 if no incentive is awarded and (2) privately owned affordable housing for low-income persons in which deep subsidization is necessary to make the housing development feasible.55 In these cases, provided statutory procedures are followed, case law indicates that it is permissible to provide the required subsidy.

In other states, such subsidies from local governments can come in the form of special property tax breaks or tax abatements. The tax abatements do not violate those states’ constitutional gift clauses because they are available statewide and involve a reduction in taxes owed, not an expenditure of public funds.56

In North Carolina, local governments have almost no authority to offer such tax abatements. Under Article V, Section 2, of the state constitution, property tax exemptions and classifications may be made only by the General Assembly and then only on a statewide basis. In other words, a local government may not constitutionally offer a special tax classification to a property owner unless that classification is available statewide. Examples of such statewide property classifications were provided above.57

However, in the case of high-stakes interstate business recruitment, a number of municipalities and counties have developed a cash-grant incentive policy that very much resembles tax abatements. These policies follow a common pattern: a local government offers to make annual cash grants over a number of years (typically five) to businesses that make investments of certain minimum amounts in the county or municipality. The investment might be either a new industrial facility or the expansion of an existing facility. The grant payment reimburses a business for qualifying investments, but the amount of the cash grant is explicitly tied to the amount of property taxes paid by the business. For example, a company that made an investment of at least $5 million might be eligible for a cash grant in an amount up to 50 percent of the property taxes it paid on the resulting facility; larger investments would make the company eligible for a grant that represented a larger percentage of the property taxes paid.

These policies closely approach tax abatements but with two important differences: the company receiving the cash incentives pays its property taxes first, and the grant payment is contingent not solely on payment of property taxes, but also on performance of some public purpose or benefit approved in case law, namely, locating substantial jobs and tax base in North Carolina that “might otherwise be lost to other states.”58 One note of caution: no court has directly addressed whether this tax-calculated grant is an unconstitutional attempt to enact a tax abatement or whether it is indeed a constitutionally permitted cash grant.59 With that background established, the following sections describe the various statutes that permit a local government to participate in private development in pursuit of CED goals.

Economic Development

In the economic development context, statutory authority for offering incentive payments to companies is found within the remarkably broad language of G.S. 158-7.1, a provision in the Local Development Act of 1925.60 Local governments are authorized to undertake economic development activities and to fund those activities by the levy of property taxes.61 When a North Carolina local government turns funds over to a private entity for expenditure (such as through an incentive payment), the local government must give prior approval to how the funds will be expended by the private entity, and “all such expenditures shall be accounted for” at the end of the fiscal year.62 Furthermore, the funds must be made subject to recapture in an incentive agreement in which the private entity promises to create a certain number of jobs, exceed some minimum level of capital investment, and maintain operations throughout a defined compliance period.63 Additional procedural requirements are imposed when the expenditure involves the purchase or improvement of property, which is almost always the case for an economic development incentive that requires improvements to real property (the only way to increase the tax base).64

The restrictions imposed by statute, however, are not the final word. Economic development incentives involve payments of public funds to private entities in service of a mix of public and private purposes, thereby colliding with the constitutional provisions described above regarding exclusive emoluments and public purpose. This makes economic development different from other purely public activities of local governments and results in far more constitutional scrutiny from the courts. For this reason, it is necessary to look closely at case law to determine the extent of a local government’s authority to offer economic-development incentives.

For most of the past century, North Carolina local governments were not permitted to make incentive payments to private entities. Even loans to private enterprises were prohibited.65 It wasn’t until 1996, following the loss of economic development projects to other states, that the North Carolina Supreme Court finally decided in the seminal case Maready v. City of Winston-Salem66 that economic development incentives serve a constitutionally permitted public purpose—under certain conditions. Those conditions were reinforced in subsequent cases decided by the North Carolina Court of Appeals and therefore merit closer examination.67

In Maready and progeny, courts examined dozens of economic-development incentives provided by local governments to private companies pursuant to G.S. 158-7.1. In Maready, the court opined that economic-development incentives authorized by G.S. 158-7.1 are constitutional “so long as they primarily benefit the public and not a private party.”68 The requisite “net public benefit,” according to the court, is accomplished by providing jobs, increasing the tax base, and diversifying the economy. A driving force behind the Maready decision was the sense that, without incentives, job-creating facilities would be “lost to other states.”69 The court openly fretted about “the actions of other states” and “inducements . . . offered . . . in other jurisdictions.”70 There was, therefore, an underlying assumption that all of the incentives in Maready involved interstate competition.71

In subsequent cases before the North Carolina Court of Appeals, the court has refused to strike down incentives that are “parallel” to those approved in Maready.72 The determination of whether an incentive is “parallel” to Maready cannot be reduced to a simple formula, but in general, there are two basic components that should be examined.

First, the consideration (or value) that the local government receives in exchange for an incentive must result in a net public benefit, primarily from job creation and capital investment, that “might otherwise be lost to other states.”73 Every incentive approved by Maready involved both substantial job creation and new tax revenue that paid back the incentives within three to seven years.

Second, the Maready court described the typical procedures employed by a local government in approving the incentives before the court. Local governments aiming to make their incentive approval process “parallel” to Maready should adhere to the following procedures:

  • An initial “but for” or necessity determination is made, typically in a competitive situation, that the incentive is required in order for a project to go forward in the community.

  • A written guideline or policy is applied to determine the maximum amount of incentive that can be given to the receiving company.

  • Expenditures take the form of reimbursements, not unrestricted cash payments.

  • Final approval is made at a public meeting, properly noticed.

  • A written agreement governs implementation.

These criteria are not difficult to achieve in the typical economic development incentive scenario, that is, one in which a local government is engaged in competition with other jurisdictions to win a sizable facility with a significant number of permanent jobs. However, not all CED projects provide the requisite job creation and meet the other criteria listed above. That should not be surprising; “CED is broader than economic development because it includes community building and the improvement of community life beyond the purely economic.”74 When a project does not involve competing for job creation and capital investment, it may nonetheless be possible to participate in a development project, provided the participation does not entail a gift to private enterprise. The next section examines statutory authority for participating in private CED activities apart from economic development.

Community Development and Revitalization

Local governments have considerable statutory authority to engage in community development activities for the benefit of low-income persons and in revitalization activities to reduce or eliminate blight. Because the pertinent statutes were enacted at different times and in response to different programmatic needs, a local government’s authority to undertake community development and revitalization activities is not neatly laid out in one place.

The General Assembly passed the Housing Authorities Law in 1935 to enable communities to take advantage of federal grants for public housing. This law, as amended, appears as Article 1 of G.S. Chapter 157. In 1951, responding to the broader purposes of blight eradication in the federal Housing Act of 1949, the General Assembly passed the Urban Redevelopment Law, which, as amended, appears as G.S. Chapter 160A, Article 22. Finally, in response to the Housing and Community Development Act of 1974, the General Assembly enacted G.S. 160D-1311 and -131275 to enable local governments to engage in Community Development Block Grant (CDBG) activities authorized by the federal act. These statutes, among others, authorize all counties and municipalities to assist persons of low and moderate incomes using either federal and state grants or local funds. Additional detail on the relevant statutes is provided below.

Urban Redevelopment

Lower-income communities, in particular, are often characterized by distressed or blighted built environments, so revitalization and redevelopment of those areas is a natural focus of CED efforts. North Carolina’s Urban Redevelopment Law76 grants authority to both municipalities and counties77 to engage in programs of blight eradication and redevelopment through the acquisition, clearance, rehabilitation, or rebuilding of areas for residential, commercial, or other purposes. Local governments are authorized to levy taxes and issue and sell bonds for this purpose.78

A redevelopment commission must be formed to exercise the powers granted by the Urban Redevelopment Law.79 The governing board of a local government may serve in this role.80 Once a commission is formed, its first order of business is to create a redevelopment plan.81 The redevelopment plan must be approved by the local governing board. Until the redevelopment plan is approved, the commission cannot exercise most of its important development powers.82

Once a redevelopment plan has been approved, the redevelopment commission may exercise extensive powers within its area of operation to undertake redevelopment projects directly and to enter into public-private partnerships, “including the making of loans,” for the rehabilitation or construction of residential and commercial buildings in the designated area.83 A unique and useful procedure for property conveyance is also authorized, as discussed in the section titled “Contributing Real Property in a Public-Private Partnership,” below.

The exercise of statutory powers within a formally designated redevelopment area by a redevelopment commission has been upheld by the North Carolina Supreme Court as serving a public purpose.84 This does not mean that government funds or property may be gifted to private enterprise. To the contrary, even the sale of property to charitable nonprofit entities requires payment of full consideration. The statute authorizes sale of property to a charitable entity, but the sale price must be no less than the “fair value of the property agreed upon by a committee of three professional real estate appraisers.”85

Community Development and Affordable Housing

CED efforts typically focus on low-income communities in which markets are perceived to work poorly or inefficiently. In the American Community Survey, hundreds of thousands of households in North Carolina were reported to suffer from some kind of housing problem, whether physical inadequacy, overcrowding, or cost burden.86 This suggests that private enterprise is unable to respond to consumer demand for safe, decent, and affordable housing. The General Assembly therefore attempted to address these problems by granting housing-development powers to cities and counties.

Local governments possess broad powers to rehabilitate or construct publicly owned affordable housing, including the use of eminent domain to take property in furtherance of that purpose.87 These powers are derived primarily from North Carolina’s sweeping Housing Authorities Law.88 Regardless of whether or not a formal housing authority has been established by a local government, its governing board may exercise the powers of a housing authority directly.89

In addition to constructing publicly owned housing, the Housing Authorities Law empowers a housing authority (or local government exercising the powers of a housing authority) to enter into public-private partnerships by offering grants, loans, and other programs of financial assistance to public or private developers of housing for persons of low and moderate incomes, so long as any government subsidy flows to the eligible low- and moderate-income households.90 When financial assistance is provided to a multi-family rental housing project, at least 20 percent of the units must be set aside for low-income persons (defined as those earning no more than 60 percent of the area median income) for at least fifteen years.91 Several local governments in North Carolina have offered financial assistance to private developers in exchange for promises to produce affordable housing as part of larger market-rate residential developments, sometimes in conjunction with land use regulations known as inclusionary zoning or inclusionary housing programs.92

Community development efforts are not limited to housing. Local governments are authorized to offer grants or loans for rehabilitation of private buildings as part of “community development programs and activities,”93 which refer to programs for the benefit of low- and moderate-income persons pursuant to the federal CDBG program (described above in the “Federal Programs” section).94 Although the statutory authority was enacted to enable local governments to participate in the CDBG program, the statute is written broadly enough that a local government can use the authority provided in the statute to undertake community-development activities outside of the CDBG program that would otherwise meet CDBG requirements. Municipalities are permitted to use property tax revenues for such purposes;95 counties, however, are limited in that local and state funds may be used only for enumerated housing and housing rehabilitation activities, unless pursuant to referendum.96 The mention of “grants” in the statute does not suggest that the statute can override constitutional prohibitions against aid to private enterprise; indeed, the conveyance powers included with the statute require any conveyance of property to be made in exchange for no less than “appraised value.”97 Payments may be made to a private enterprise only as part of a contract for public services of equivalent value.

Downtown Revitalization and Business Improvement Districts (BIDs)

When the focus of CED efforts is a central business district (or other qualifying urban area in a municipality), municipalities (but not counties) may support development through a municipal service district—also known as a business improvement district or BID—in which additional property taxes are levied on property in the district for the purpose of engaging in “downtown revitalization projects” or “urban area revitalization” in certain areas outside of downtowns.98 In addition to the service-district levy, a municipality may allocate other revenues to the service district.99 Once the area is properly designated as a municipal service district for downtown or urban area revitalization, permissible revitalization activities in the area include making infrastructure improvements, marketing the area, sponsoring festivals, and providing supplemental cleaning and security services, among others. In particular, the proceeds from the additional tax levy may be expended for “promotion and developmental activities,” such as “promoting business investment” in the district.100 Several local governments have used this authority as the basis for creating building-façade improvement programs to induce private owners to enhance the safety and appearance of public spaces within the district.101

The broad statutory language quoted above does not mean that government funds or property can be gifted to private enterprise. The statute’s current language was enacted prior to the Maready case previously described—at a time when incentives were not permissible in any form—and therefore the original language did not contemplate incentives to private entities.102 Even if the language is interpreted broadly today, it is nevertheless subject to the constitutional limitations imposed by Maready.

Contributing Real Property in a Public-Private Partnership

Local governments occasionally participate in development by contributing real property to a public-private partnership. Authority for local governments to contribute property to private development projects—particularly at a subsidized price—is quite limited under North Carolina law.

As a general rule, local governments are always required, unless an exception applies, to convey real property by following competitive bidding procedures: sealed bid, upset bid, or public auction.103 The price reached through competitive bidding is presumed by the courts to be the fair market value of the property.104 However, a drawback of competitive sale procedures is that they do not permit the local government to impose restrictions on the use of the property or to select the buyer for reasons other than bid amount.105 As a result, competitive bidding procedures may not work well for CED purposes where the normal market is presumed to function poorly or inefficiently. It is often necessary for a local government to impose conditions and requirements on a buyer of real property for a CED project, and to select the buyer that is capable of meeting the requirements, in order to ensure that the property is developed in accordance with local priorities.

The statutes contemplate this necessity and offer limited exceptions to the competitive sale rule. Local governments are, in certain situations for CED purposes, authorized to place conditions on the sale of government property, either by selecting a specific buyer through “private sale” or by imposing restrictions on how the property is to be used. It should be noted that the authority to convey property by private sale does not mean that the property can be given away for less than its fair value.

The North Carolina Supreme Court expounded on the exclusive emoluments clause in the context of property conveyance in Brumley v. Baxter,106 with two important conclusions. First, if a jurisdiction’s conveyance of property occurs without full monetary consideration (meaning, payment is less than fair market value), then there must be consideration in the form of an enforceable promise to provide public services for the jurisdiction. Second, if the consideration is in the form of public services, the conveyance must be conditioned on the property’s continued use for that purpose by the recipient, and the property must revert back to the local government in the event the recipient ceases to use it for that purpose. This rule applies even if statutes fail to impose an explicit requirement regarding sale price, such as “appraised value.”

How or why a property was first acquired may constrain how it can later be conveyed to a private entity. Specified acquisition procedures must be followed for a local government to be able to take advantage of some of the more flexible conveyance statutes when the property is eventually sold.107 A comprehensive examination of property acquisition and conveyance laws is beyond the scope of this chapter,108 but the following discussion focuses on the key statutes which authorize a local government to deviate from competitive bidding procedures for CED purposes.

Conveyance of Real Property for Economic Development

Pursuant to the Local Development Act of 1925,109 property acquired by a local government for economic development may later be conveyed “by private negotiation [subject to] such covenants, conditions, and restrictions as the county or city deems to be in the public interest.”110 The consideration “may not be less than” the “fair market value of the interest,” and the sale must be preceded by a properly noticed public hearing (G.S. 158-7.1(d)). The conveyance may be subsidized (e.g., a discount from the fair value may be offered) only if certain statutory requirements are met: the buyer must be contractually bound to construct improvements that will generate new tax revenue over ten years that will repay the subsidy, and the buyer must promise to create a substantial number of jobs paying at or above the average wage in the county.111 A subsidized transaction (or incentive) is also subject to the Maready requirements discussed earlier in this chapter, such as creation of substantial jobs and tax base that “might otherwise be lost to other states.”112 These requirements apply equally to conveyances of property to nonprofit economic development organizations that work with local governments; that is, a nonprofit economic development organization must pay fair market value for any property it acquires from a local government if later it intends to sell that property to private businesses.113

A unit that wants to take advantage of the flexible conveyance procedures for economic development available under the Local Development Act typically must first acquire the property pursuant to the act. This requires strict adherence to the notice and hearing requirements of G.S. 158-7.1(c).114 A unit that fails to adhere to these procedures has, by default, probably acquired the property for redevelopment, which is governed by a statute that imposes no acquisition procedures. However, although there are no set procedures to follow when property is acquired for redevelopment, the trade-off is that redevelopment offers less flexibility upon conveyance, as described in the next section.

Conveyance of Real Property for Redevelopment

When local governments acquire property for redevelopment, the applicable statutory authority for the acquisition is G.S. 160D-1312. No special acquisition procedures must be followed.115 Property so acquired “shall be [disposed of] in accordance with the procedures of Article 12” of G.S. Chapter 160A.116 In other words, competitive bidding must be employed and no conditions may be placed on the buyer, except in the case of a sale to a nonprofit organization pursuant to G.S. 160A-279 (discussed at the end of this chapter).

An exception to this general rule is provided for property “in a community development project area.”117 Such property may be conveyed “to any redeveloper at private sale” for the appraised value “in accordance with the community development plan.”118 The reference to a community development plan, as previously noted in the discussion of community development, signifies that the activity should be undertaken primarily for the benefit of low- and moderate-income persons and otherwise meet CDBG requirements.119 Examples of a “community development project area” include a Neighborhood Revitalization Strategy Area, which is an area designated by an entitlement community for targeted CDBG programs,120 and Community Revitalization Strategies created through the CDBG Small Cities Program.121 In such cases, the sale may be “subject to such covenants, conditions, and restrictions as may be deemed to be in the public interest.” These community development sales must be preceded by a properly noticed public hearing.

Conveyance of Real Property Pursuant to the Urban Redevelopment Law

Under G.S. 160A-514, a redevelopment commission, or a local unit’s governing board exercising the powers of a redevelopment commission, may convey property owned by the commission in a designated redevelopment area. Conveyance is permitted only for purposes that accord with the unit’s redevelopment plan, and the governing board must approve any sale. Competitive bidding procedures must be employed, but unlike other conveyance statutes, this one authorizes the sale to be subject to covenants and conditions to ensure that any redevelopment complies with the redevelopment plan. Typically, a competitive bidding process may not be encumbered by such restrictions on the buyer.122 The Urban Redevelopment Law, however, uniquely combines competitive bidding procedures with the ability to place restrictions on the buyer. Only a housing authority, which is entirely exempt from typical conveyance procedures as described below, can dispose of property in a similar manner.

Conveyance of Real Property for Housing for Persons of Low and Moderate Income

A housing authority, or a unit’s governing board exercising the powers of a housing authority, may convey property for purposes of constructing or preserving affordable housing for persons of low and moderate income.123 It is important to point out that statutory disposition requirements that apply to other public bodies are not applicable to conveyances under the Housing Authorities Law.124 This means that a local government may impose restrictions and covenants on a conveyance of property to ensure that a buyer will use the property for affordable housing. The lack of procedural requirements in the statute does not override the state constitution’s prohibition against making gifts to private entities.

In the context of affordable housing, this means that any conveyance of property to a private provider of affordable housing for less than fair market value must be subject to covenants and conditions to ensure that the property is used for housing for eligible households in perpetuity (or sold to eligible households). Although such transactions are exempt from typical conveyance procedures, as a matter of practice, many local governments exercising the powers of a housing authority voluntarily follow the statutory procedures for conveyance by private sale.125

Local governments may convey property outside of the Housing Authorities Law using a narrower grant of authority found in G.S. 160D-1316. The statute authorizes a local government to convey property by private sale directly to low- and moderate-income (LMI) persons or to a private entity to be “developed” into LMI housing. The entire development must be reserved for LMI persons. The statute does not authorize subsidies for developers; such authority is still found only in the Housing Authorities Law.

Although G.S. 160D-1316 does not authorize a local government to sell property at a price below fair market value, this statute can still be very helpful to a private developer of affordable housing. The statute requires the local government to impose “covenants or conditions” on the conveyance to ensure that the property will be developed for sale or lease only to LMI persons. A requirement to use the property only for LMI persons in perpetuity could reduce the revenue potential of the property, which would inherently lower the fair market value of the property under the income approach of property appraisal. The resultant (lower) fair market value, pursuant to an appraisal that accounts for the covenants and conditions, may be used as the fair market price for conveyance to any buyer, whether for-profit or nonprofit.

There is separate statutory authority for leasing local government property for affordable housing. G.S. 160A-278 authorizes municipalities (and counties through the operation of G.S. 153A-176) to lease property by private negotiation to any entity that will use the property to construct affordable housing for LMI persons. This statutory authority may be employed without requiring the county or municipality to exercise the powers of a housing authority. The statute requires 20 percent of the housing units to be set aside for the “exclusive use” of persons of low income when the property contains housing for “persons of other than low or moderate income.”

Conveyance of Real Property in Public-Private Partnership Construction Contracts

Local governments are authorized by statute to contribute property when entering into public-private partnerships for construction of downtown development projects (G.S. 160D-1315)126 and as part of public-private partnership construction contracts (G.S. 143-128.1C).127 The projects authorized under these statutes include joint developments with private developers in which public capital facilities are constructed as part of a larger private development project. Real property may be contributed by a local government to the larger development project. The statutes do not authorize the local government to subsidize the conveyance of property (and, as previously noted, the state constitution prohibits making gifts to private developers), so it is presumed that any property contributed by the local government will be valued at fair market value and that development costs paid by the local government for public facilities will be reasonable. The local government and the developer may enter into agreements governing the development project, thereby offering the local government some control over the development process and its outcomes.

Other Purposes for Conveyance of Real Property

Local governments also may convey property for other purposes, such as conveyances to historic preservation organizations or to entities carrying out a public purpose. In the case of conveyances to historic preservation organizations, the statute does not authorize any subsidy as part of such conveyance—the benefit conferred by statute is the authority to deviate from competitive bidding procedures in order to select the buyer and convey by private sale.128 In the case of conveyances to entities carrying out a public purpose, a local government may accept non-monetary consideration (meaning the conveyance may be subsidized by accepting less than fair market value), but the “city or county shall attach to any such conveyance covenants or conditions which assure that the property will be put to a public use by the recipient entity.”129 Thus, the conveyance must be conditioned on the continued use for that purpose by the recipient, and the property must revert back to the local government in the event the recipient ceases to use it for that purpose.130

Conclusion

Although broad statutory authority is available for public participation in private CED projects, local governments should carefully structure partnerships with private entities to comply with constitutional and statutory requirements. Furthermore, local governments should carefully evaluate whether fair market value transactions accomplish the public goals prior to considering subsidies of any kind. How to structure these transactions in order to maximize public benefit goes well beyond the scope of this chapter, but local governments should consider developing internal capacity or seek expert assistance to understand the financial and legal aspects of public-private partnerships.131

Chapter Endnotes

  1. “The premise is that the markets in low-income communities do not work well; accordingly, the remedy is to stimulate them.” Roger A. Clay Jr. and Susan R. Jones, eds., Building Healthy Communities: A Guide to Community Economic Development for Advocates, Lawyers, and Policy-Makers (Chicago: ABA Publishing, 2009), 11. See also William H. Simon, The Community Economic Development Movement: Law, Business, and the New Social Policy (Durham, N.C.: Duke University Press, 2001).

  2. See, e.g., 24 C.F.R. § 570.201 (basic eligible activities for Community Development Block Grants).

  3. Jonathan Q. Morgan, “Economic Development,” in Budgeting in North Carolina Local Governments, 2nd ed., ed. Whitney Afonso (Chapel Hill, N.C.: UNC School of Government, 2021), 253–75. Jonathan Q. Morgan and C. Tyler Mulligan, “Economic Development,” in County and Municipal Government in North Carolina, 2nd ed., ed. Frayda S. Bluestein (Chapel Hill, N.C.: UNC School of Government, 2014).

  4. C. Tyler Mulligan, “Community Development and Affordable Housing,” in County and Municipal Government in North Carolina, 2nd ed., ed. Frayda S. Bluestein (Chapel Hill, N.C.: UNC School of Government, 2014), 461–69.

  5. Faqir S. Bagi, “Economic Impact of Water/Sewer Facilities on Rural and Urban Communities,” Rural America 17 (Winter 2002): 44, 45–46.

  6. Peter Stenberg and Sarah A. Low, “Rural Broadband at a Glance, 2009 Edition,” Economic Information Bulletin No. 47 (Washington, D.C.: Economic Research Service, U.S. Department of Agriculture, Feb. 2009); Peter Stenberg, Mitch Morehart, Stephen Vogel, John Cromartie, Vince Breneman, and Dennis Brown, “Broadband Internet’s Value for Rural America,” Economic Research Report No. 78 (Washington, D.C.: Economic Research Service, U.S. Department of Agriculture, Aug. 2009). The importance of broadband for access to markets, education, and tele-health was punctuated during the COVID-19 pandemic. Elizabeth A. Dobis et al., “Rural America at a Glance: 2021 Edition,” Economic Information Bulletin No. 230 (Washington, D.C.: Economic Research Service, U.S. Department of Agriculture, Nov. 2021). North Carolina’s efforts are led by the Division of Broadband and Digital Equity in the North Carolina Department of Information Technology. See About Us, on the Division’s webpage.

  7. Dagney Faulk, “The Process and Practice of Downtown Revitalization,” Review of Policy Research 23 (March 2006): 625, 629.

  8. The Prevention Institute has profiled eleven examples of predominantly low-income communities that have been transformed by changes in the built environment, particularly in terms of health outcomes. See Manal J. Aboelata, The Built Environment and Health: 11 Profiles of Neighborhood Transformation (Oakland, Cal.: Prevention Institute, July 2004).

  9. Tyler Mulligan, “When May NC Local Governments Pay an Economic Development Incentive?,” Coates’ Canons: NC Local Government Law blog (Dec. 17, 2013).

  10. Tyler Mulligan, “Local Government Support for Privately Owned Affordable Housing,” Coates’ Canons: NC Local Government Law blog (May 16, 2022).

  11. See, for example, Tyler Mulligan, “Legal and Business Reasons Why Downtown Development Programs Should Involve Secured Loans—Not Grants,” Coates’ Canons: NC Local Government Law blog (Sept. 19, 2017).

  12. The description of federal and state programs contained in this chapter draws heavily from similar descriptions contained in Mulligan, note 4 above, and Morgan and Mulligan, note 3 above.

  13. Low- and moderate-income person means a member of a family having an income equal to or less than the Section 8 low-income limit established by the U.S. Department of Housing and Urban Development (HUD). “Definitions,” 24 C.F.R. § 570.3.

  14. “Criteria for national objectives,” 24 C.F.R. § 570.208.

  15. See HUD, CPD APPROPRIATIONS BUDGET/ALLOCATIONS (current as of May 16, 2023).

  16. “General policies,” 24 C.F.R. § 570.200(a)(3); “Overall benefit to low and moderate income persons,” 24 C.F.R. § 570.484.

  17. “Guidelines and Objectives for Evaluating Project Costs and Financial Requirements,” 24 C.F.R. pt. 570, app. A (Community Development Block Grant underwriting guidelines to ensure public aid is necessary).

  18. The entitlement counties are Cumberland, Mecklenburg, Union, and Wake; the entitlement cities are Asheville, Burlington, Cary, Chapel Hill, Charlotte, Concord, Durham, Fayetteville, Gastonia, Goldsboro, Greensboro, Greenville, Hickory, High Point, Jacksonville, Kannapolis, Lenoir, Morganton, New Bern, Raleigh, Rocky Mount, Salisbury, Wilmington, and Winston-Salem.

  19. Hillary Sherman, “U.S. EDA Resources Help Communities Build the Local Ecosystem for Sustainable Economic Development,” Community and Economic Development in North Carolina and Beyond blog (Feb. 2, 2016).

  20. Federal Low-Income Housing Tax Credits (LIHTC) are awarded to affordable-housing developers in North Carolina through a competitive process administered by NCHFA. Each year, NCHFA promulgates the Qualified Allocation Plan, which explains how projects will be selected to receive an award of tax credits. A 2018 change in federal law allows for “income averaging” within LIHTC properties; that is, properties may accept residents with higher average median incomes as long as the overall average of tenants in the project does not exceed 60 percent of the area median income.

  21. A determination of necessity for public aid to private enterprise is legally significant. See C. Tyler Mulligan, “Economic Development Incentives Must Be ‘Necessary’: A Framework for Evaluating the Constitutionality of Public Aid for Private Development Projects,” 11 Harvard Law & Policy Review (2017): S13. See also Mulligan, note 11 above; Andrew Trump, “How a Local Government Loan Can Make a Revitalization Project Possible,” Community and Economic Development in North Carolina and Beyond blog (Sept. 4, 2015).

  22. An example of government-designated areas receiving special tax treatment is the federal Opportunity Zones program. See Tyler Mulligan, “Federal Opportunity Zones: What Local Governments Need to Know,” Community and Economic Development in North Carolina and Beyond blog (Sept. 21, 2018).

  23. Chapter 143B, Section 431.01 of the North Carolina General Statutes (hereinafter G.S.).

  24. G.S. 143B-472.126.

  25. G.S. 159C-4.

  26. G.S. 159C-7 and -8.

  27. G.S. 143B-437.52.

  28. G.S. 143B-437.71.

  29. Articles 3H and 3L of G.S. Chapter 105.

  30. See, for example, Article 3J of G.S. Chapter 105, which sunset in 2014. G.S. 105-129.82.

  31. G.S. 143B-437.08.

  32. See, for example, G.S. 105-129.71(a)(1)–(2) and 105-129.105(a)(1)–(2).

  33. G.S. 143B-437.01.

  34. The exclusive emoluments clause of the North Carolina Constitution, which prohibits government gifts to private entities, is consistent with gift clauses found in most state constitutions across the nation. See Mulligan, Economic Development Incentives Must Be “Necessary,” note 21 above.

  35. David E. Pinsky, “State Constitutional Limitations on Public Industrial Financing: An Historical and Economic Approach,” 111 University of Pennsylvania Law Review (1963): 265, 280 (“At the turn of the century, some form of public aid limitation had been incorporated in the constitutions of a large majority of the states.”). Most states have similar constitutional rules. In a recent example of gift clause enforcement, the Arizona Supreme Court, en banc in 2010, held that benefits provided to the developer of a mixed-use development were an unconstitutional gift because tax revenues alone were not valid consideration under that state’s gift clause. Turken v. Gordon, 224 P.3d 158 (Ariz. 2010).

  36. Frayda Bluestein, “Donating Property: Beware of Constitutional Constraints,” Coates’ Canons: NC Local Government Law blog (April 13, 2015).

  37. Osborne M. Reynolds, Jr., Local Government Law, 4th ed. (St. Paul, Minn.: West Academic Publishing, 2015), 515 (“Gifts of property by local governments—at least to private individuals—are generally banned by statute or as a matter of common law; any transfer of municipal property must be supported by some reasonable compensation or benefit in return.”); John Martinez, 3 Local Government Law, 2nd ed. (Eagan, Minn.: Thomson Reuters, 2017), § 21:7, at 21–25 (“Local government property cannot be conveyed to a private party without adequate consideration, for to do so would constitute an improper gift of public property or the granting of a subsidy contrary to state constitutional constraints.”). See, for example, Schires v. Carlat, 480 P.3d 639, 646 (Ariz. 2021) (holding that incentive payment violated state’s gift clause because consideration was not proportional to fair market value of consideration received and fiscal impact from tax revenue calculated by expert was irrelevant).

  38. Maready v. City of Winston-Salem, 342 N.C. 708, 718 (1996).

  39. See Mitchell v. N.C. Indus. Dev. Fin. Auth., 273 N.C. 137, 156 (1968) (stating that “it is not the function of government to engage in private business”); Nash v. Town of Tarboro, 227 N.C. 283 (1947) (holding that it is not a public purpose for a town to own and operate a hotel).

  40. Even when private enterprises are offered financial assistance for disaster recovery to help them handle uncompensated losses, careful attention must be paid to legal requirements. Tyler Mulligan, “American Rescue Plan Act: Aid for Small Businesses and Nonprofits with ARP/CLFRF,” Coates’ Canons: NC Local Government Law blog (Oct. 4, 2021).

  41. N.C. Const. art. VII, § 1 (“The General Assembly . . . may give such powers and duties to counties, cities, and towns, and other governmental subdivisions as it may deem advisable.”).

  42. Comm’r of Ins. v. N.C. Fire Ins. Rating Bureau, 291 N.C. 55, 70 (1976) (citation, internal quotation marks omitted) (“When reasonably possible, a statute . . . should be construed so as to avoid serious doubt as to its constitutionality.”); In re Arcadia Dairy Farms, Inc., 289 N.C. 456, 465 (1976) (“The cardinal principle of statutory construction is to save and not to destroy. We have repeatedly held that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the act. Even to avoid a serious doubt the rule is the same.”).

  43. For example, the broad language of the Local Development Act of 1925, codified at G.S. Chapter 158, was enacted more than seventy years prior to the seminal economic development case, Maready v. City of Winston-Salem, cited in full at note 38 above. In the decades prior to Maready, there was no suggestion that the permissive language of G.S. 158-7.1(a) could be used to provide aid to private entities. Horner v. Chamber of Com. of City of Burlington, 235 N.C. 77, 81 (1952) (requiring the return of funds to a municipal treasury that had been appropriated to a Chamber of Commerce ostensibly for “publicity” about the municipality, pursuant to G.S. 158-7.1’s predecessor statute, G.S. 158-1, because the expenditures were controlled by the chamber rather than the city). Later, the courts would strike down loans to businesses despite clear statutory authority. Mitchell v. N.C. Indus. Dev. Fin. Auth., cited in full at note 39 above (industrial development bonds not a public purpose), and Stanley v. Dep’t of Conservation & Dev., 284 N.C. 15 (1973) (financing for pollution control not a public purpose).

  44. G.S. 105-277.13.

  45. G.S. 105-278.

  46. Tyler Mulligan, “Taxation of Affordable Housing in Community Land Trusts,” Community and Economic Development in North Carolina and Beyond blog (Dec. 23, 2009).

  47. For a full list of CED-related property tax exemptions, see Chris McLaughlin, “Property Tax Exemptions and Community Economic Development,” Community and Economic Development in North Carolina and Beyond blog (Nov. 10, 2014).

  48. G.S. 143-128.1C; 160D-1315.

  49. G.S. 160A-499; 153A-451. See also Adam Lovelady, “Reimbursement Agreements,” Coates’ Canons: NC Local Government Law blog (Jan. 19, 2016).

  50. See Mulligan, Legal and Business Reasons Why Downtown Development Programs Should Involve Secured Loans, note 11 above.

  51. For a discussion of equity investments by local governments, see David M. Lawrence, Economic Development Law for North Carolina Local Governments (Chapel Hill, N.C.: UNC School of Government, 2000), 50–51.

  52. G.S. 160D-942. See also Tyler Mulligan, “Downtown Facade Improvement Programs,” Coates’ Canons: NC Local Government Law. blog (Jan. 16, 2020).

  53. The Development Finance Initiative (DFI) at the School of Government was created for the purpose of serving local governments with public-private partnerships to accomplish public CED goals. See DFI’s webpage on the School of Government’s website at https://dfi.sog.unc.edu/.

  54. Maready v. City of Winston-Salem, cited in full at note 38 above, at 727.

  55. For further discussion of affordable housing, see Tyler Mulligan, “Local Government Support for Privately Owned Affordable Housing,” Coates’ Canons: NC Local Government Law blog (May 16, 2022).

  56. Reynolds, note 37 above, at 129 (“Although taxes may not be levied for private (as opposed to public) benefit, exemptions from property taxes may validly be authorized by state law except as such exemptions are prohibited by state constitutions.”).

  57. See notes 42–45 and accompanying text above.

  58. Maready v. City of Winston-Salem, cited in full at note 38 above, at 727.

  59. See Blinson v. State, 186 N.C. App. 328, 335 (2007) (dismissing the plaintiff’s claim for lack of standing on the constitutional issue of uniformity of taxation).

  60. G.S. Chapter 158, Article 1.

  61. G.S. 158-7.1(a); 153A-149(c)(10b) (counties); 160A-209(c)(10b) (municipalities).

  62. G.S. 158-7.2. See also Kara Millonzi, “Local Government Appropriations/Grants to Private Entities,” Coates’ Canons: NC Local Government Law. blog (June 17, 2010; updated Aug. 2013).

  63. G.S. 158-7.1(h). All three recapture provisions are required. See C. Tyler Mulligan, “Economic Development Incentives and North Carolina Local Governments: A Framework for Analysis,” 91 North Carolina Law Review (2013): 2021, 2040–44.

  64. In Maready v. City of Winston-Salem, cited in full at note 38 above, at 724, the North Carolina Supreme Court approvingly noted the strict procedural requirements imposed by G.S. Chapter 158 and essentially assumed that cash payments to companies for the purchase or improvement of property were subject to the same procedural requirements as if the local government engaged in those activities directly. Mulligan, note 63 above, at 2062–67; Mulligan, note 10 above; Tyler Mulligan, “Notice and Hearing Requirements for Economic Development Appropriations,” Coates’ Canons: NC Local Government Law blog (Nov. 21, 2019).

  65. See Mitchell v. N.C. Indus. Dev. Fin. Auth., cited in full at note 39 above, and Stanley v. Dep’t of Conservation & Dev., cited in full at note 43 above.

  66. 342 N.C. 708 (1996).

  67. Haugh v. Cnty. of Durham, 208 N.C. App. 304 (2010); Blinson v. State, 186 N.C. App. 328 (2007).

  68. Maready, 342 N.C. at 724.

  69. Maready, 342 N.C. at 726.

  70. Maready, 342 N.C. at 725, 727.

  71. Haugh, 208 N.C. App. at 317.

  72. Haugh, 208 N.C. App. at 319.

  73. For more discussion of these forms of consideration and others, see Mulligan, note 63 above.

  74. Clay and Jones, note 1 above, at 3.

  75. Formerly G.S. 153A-376 and -377 (counties) and 160A-456 and -457 (municipalities).

  76. Article 22 of G.S. Chapter 160A (Urban Redevelopment Law). See also Tyler Mulligan, “Using a Redevelopment Area to Attract Private Investment,” Community and Economic Development in North Carolina and Beyond blog (Nov. 20, 2012).

  77. G.S. 160A-503(9) (defining “municipality” to include counties for purposes of Urban Redevelopment Law).

  78. G.S. 160A-520.

  79. G.S. 160A-504 through -507.1.

  80. G.S. 160D-1311(b).

  81. G.S. 160A-513.

  82. G.S. 160A-513(j).

  83. G.S. 160A-512; 160A-503(19).

  84. Redevelopment Comm’n of Greensboro v. Sec. Nat’l Bank, 252 N.C. 595 (1960).

  85. G.S. 160A-514(e)(4).

  86. Data on the extent of affordable-housing problems in North Carolina as reported in the American Community Survey can be reviewed through the CHAS (Comprehensive Housing Affordability Strategy) data query tool developed by the U.S. Department of Housing and Urban Development’s Office of Policy Development and Research, available at https://www.huduser.gov/portal/datasets/cp.html. The North Carolina Housing Finance Agency (NCHFA) also makes housing data available online. See NCHFA, NC Housing Snapshot (interactive map with current data), https://www.nchfa.com/about-us/policy-research/nc-housing-snapshot.

  87. In re Hous. Auth. of City of Charlotte, 233 N.C. 649 (1951) (holding that eminent domain may be exercised for the purpose of constructing “low-rent dwellings” despite the fact that the area to be condemned may not be a “slum area”).

  88. G.S. Chapter 157, Article 1. The Housing Authorities Law was enacted in 1935 to enable the creation of “dwelling accommodations for persons of low income.” Wells v. Hous. Auth. of City of Wilmington, 213 N.C. 744 (1938) (holding that the Housing Authorities Law serves a constitutional public purpose); Mallard v. E. Carolina Reg’l Hous. Auth., 221 N.C. 334 (1942) (holding that the Housing Authorities Law serves a public purpose in rural as well as urban areas).

  89. G.S. 160D-1311(b).

  90. G.S. 157-3(12) (defining a housing project) and 157-29 (rents for persons of low income must be set “at the lowest possible rates consistent with . . . providing decent, safe, and sanitary dwelling accommodations” and projects cannot “provide revenues for other activities of the city [or, by extension, developers or other entities]).” The North Carolina Supreme Court has found that benefits offered to low-income persons can be extended to moderate-income persons when offered “with the same public purpose in mind,” with the goal “to make available decent, safe and sanitary housing” to another group “who cannot otherwise obtain such housing accommodations.” In re Denial of Approval to Issue $30,000,000.00 of Single Family Hous. Bonds & $30,000,000.00 of Multi-Family Hous. Bonds for Persons of Moderate Income, 307 N.C. 52 (1982). See also Mulligan, note 63 above.

  91. G.S. 157-9.4.

  92. A detailed examination of inclusionary housing programs and associated incentive policies applicable to any local government affordable housing program is provided in C. Tyler Mulligan and James L. Joyce, Inclusionary Zoning: A Guide to Ordinances and the Law (Chapel Hill, N.C.: UNC School of Government, 2010).

  93. G.S. 160D-1311.

  94. North Carolina Legislation 1975, ed. Joan G. Brannon (Chapel Hill, N.C.: UNC Institute of Government, 1975), 51–52 (explaining that the predecessor to G.S. 160D-1311 was enacted in 1975 to eliminate questions about whether North Carolina communities were authorized “to participate fully” in the CDBG program authorized by the Housing and Community Development Act of 1974).

  95. G.S. 160D-1311; 160A-209(c)(9a), (15a), (31a).

  96. G.S. 160D-1311; 153A-149(c)(15a), (15b); 160D-1316.

  97. G.S. 160D-1312(4).

  98. G.S. 160A-536.

  99. G.S. 160A-542.

  100. A local government is permitted to allocate other funds to the district in addition to the funds collected through the municipal service-district levy. G.S. 160A-542.

  101. Mulligan, note 52 above.

  102. 1973 N.C. Sess. Laws ch. 655; 1977 N.C. Sess. Laws ch. 775.

  103. G.S. 160A-268, -269, -270. See also Chapter 11, “Procurement, Contracting, and Disposal of Property.”

  104. Redevelopment Comm’n of Greensboro v. Sec. Nat’l Bank of Greensboro, 252 N.C. 595, 612 (1960).

  105. Puett v. Gaston Cnty., 19 N.C. App. 231, 235 (1973).

  106. 251 N.C. 691 (1945). See also Bluestein, Donating Property, note 36 above.

  107. C. Tyler Mulligan, “Follow Procedures Prior to Acquiring Property for Redevelopment,” Community and Economic Development in North Carolina and Beyond blog (March 15, 2016).

  108. Procedures for conveyance of real property by local governments are discussed in detail in David Lawrence, Local Government Property Transactions in North Carolina, 2nd ed. (Chapel Hill, N.C.: UNC School of Government, 2000).

  109. G.S. Chapter 158, Article 1.

  110. G.S. 158-7.1(d).

  111. G.S. 158-7.1(d2).

  112. Maready v. City of Winston-Salem, cited in full at note 38 above, at 727.

  113. C. Tyler Mulligan, “Conveyance of Local Government Property to Nonprofit EDC for Industrial Park,” Coates’ Canons: NC Local Government Law blog (March 17, 2015).

  114. For an explanation of the acquisition procedures to follow in order to obtain greater flexibility later upon conveyance, see Mulligan, note 113 above.

  115. Mulligan, note 113 above.

  116. G.S. 160D-1312(3).

  117. G.S. 160D-1312(4). For a brief discussion of the history and evolution of G.S. 160D-1312 (formerly G.S. 160A-457), see C. Tyler Mulligan, “Conveyance of Property in a Public-Private Partnership for a ‘Downtown Development Project,’ ” Community and Economic Development in North Carolina and Beyond blog (June 22, 2017).

  118. G.S. 160D-1312(4).

  119. A CDBG grantee shall expend not less than 70 percent of its CDBG funds in the aggregate for activities that benefit low- and moderate-income (LMI) persons. This has also been referred to as the 70 percent (70%) test, LMI benefit test, or overall benefit requirement. 24 C.F.R. § 570.200(a)(3). Expenditures that count toward the benefit test include amenities that meet the “area benefit activity” test. An area benefit activity is an activity which is available to benefit all the residents of an area which is primarily residential, where at least 51 percent of the residents are LMI persons. 24 C.F.R. § 570.208. Examples of “area benefit activities” include acquisition of land to be used as a neighborhood park, construction of a health clinic, improvements to public infrastructure like the installation of gutters and sidewalks, and development of a community center.

  120. For an explanation of Neighborhood Revitalization Strategy Areas, see U.S. Department of Housing and Urban Development, HUD Exchange, Notice CPD-96-01 (Jan. 16, 1996).

  121. Community Revitalization Strategy areas through the Small Cities Program are described in U.S. Department of Housing and Urban Development, HUD Exchange, Notice CPD-97-1 (Feb. 4, 1997).

  122. Puett v. Gaston Cnty., cited in full at note 105 above, at 235.

  123. G.S. 157-9.

  124. “No provisions with respect to the acquisition, operation or disposition of property by other public bodies shall be applicable to an authority unless the legislature shall specifically so state.” G.S. 157-9(a).

  125. Private sale procedures are found in G.S. 160A-267.

  126. See also Mulligan, note 117 above.

  127. See also Norma Houston, “New Construction Delivery Methods—Public-Private Partnerships (P3),” Coates’ Canons: NC Local Government Law blog (March 5, 2014).

  128. G.S. 160A-266(b). See also Tyler Mulligan, “Sale of Historic Structures by NC Local Governments for Redevelopment,” Coates’ Canons: NC Local Government Law blog (Dec. 16, 2014).

  129. G.S. 160A-279 (emphasis added).

  130. Brumley v. Baxter, cited in full at note 106 above.

  131. The UNC School of Government provides specialized finance and development expertise to local government officials regarding CED projects. More information is available on the web page for the School’s Community and Economic Development in North Carolina and Beyond blog at https://ced.sog​.unc.edu/.

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Introduction to Local Government Finance

Introduction to Local Government Finance