Sale of Municipal Property with a Purchase Money Mortgage is Not an Illegal Gift or Loan

The New York Court of Appeals held today that a municipality may sell municipal real property and take back a purchase money mortgage without violating the State Constitutional prohibition against municipalities making a gift or loan. In Matter of 10 E. Realty LLC v. Incorporated Village of Valley Stream, the court found that: “the Village made no loan of money or property to the purchaser. The fact that the consideration in this sale mentions an interest rate and a term of payment, or that a mortgage was taken as a security interest, does not make this transaction involving a deferred payment plan an unconstitutional loan.”

The Village had sold a parcel of municipal property for $275,000 with payment deferred over fifteen years, with interest at 5% and took back a mortgage to secure the payments. The Petitioners challenged the action claiming it violated Article VIII of the State Constitution which provides: ” “[n]o county, city, town, village or school district shall give or loan any money or property to or in aid of any individual, or private corporation or association, or private undertaking …” (NY Const art VIII, § 1).”

The Court disagreed finding that there was no violation of the Constitutional provision. Citing an earlier decision the Court noted:
“In Mandelino v Fribourg, this Court answered the question of “whether a purchase money mortgage is to be regarded in law as a loan” in the negative (23 NY2d 145, 147 [1968]). Although decided in the context of the usury laws, the rationale is equally applicable in this case. “A contract which provides for [payment of interest] … upon a deferred payment … constitutes the consideration for the sale … ” (id. at 151) and such a transaction is not the type contemplated by the Gift or Loan clause (see Sun Print & Publ Assn v Mayor of the City of New York, 152 NY 257, 268-269 [1897]).”