Section 11-61-3 of the Illinois Municipal Code ("Code"), 111. Revised Statutes, Chapter 24, §11-61-3 (1989), authorizes the corporate authorities of municipalities of less than 1,000,000 inhabitants to purchase or lease either real or personal property through the use of installment contracts not exceeding 10 years in length. ¹ This Section provides a simple and straight forward method of financing the acquisition of property for municipal purposes without the complicated and time- consuming procedural requirements associated with bond financing and is versatile enough to be applied in a wide range of financing transactions.

The primary benefit of the 10-year installment contract is the simplicity of its implementation. Once the decision to purchase the property has been made, the corporate authorities of the municipality need only adopt an ordinance or resolution approving the installment contract. The ordinance or resolution is effective upon passage, and the agreement to acquire the property can be implemented immediately thereafter. Unlike other forms of municipal financing, 10-year installment contracts, are not subject to approval by a majority of the electors voting on the question,² do not require the publishing of notice ³ and are not subject to "backdoor" referendum procedures. ⁴

The structure of the installment contract depends on who is actually financing the transaction. In the majority of cases involving the acquisition of property for a purchase price in excess of $100,000, financing is provided by a third-party lending institution and not the seller of the property. To utilize the 10-year installment contract in financing situations involving third-party lending institutions, there must be a three-party transaction.

Ordinarily, in a three-party transaction, a municipality will negotiate financing with a lending institution in a form similar to an installment note, with the amount financed to be amortized over a period not to exceed 10 years. Once financing has been determined, an installment contract is prepared which contains the terms of the financing between the seller of the property and the municipality. This is required because Section 11-61-3 of the Code mandates that the consideration to be paid by the purchasing municipality to the seller be structured as installment payments over time. ⁵ Technically, the consideration cannot be paid as one lump sum directly to the seller.

Simultaneous with the execution of the installment contract between the municipality and the seller, the seller assigns its interest in the installment contract to the pre-chosen lending institution for the face amount of the contract. The lending institution then pays the seller and accedes to the rights of the installment contract, the substance of which having been previously negotiated with the municipality. As a result, the Seller is paid in full at the time of closing on the transaction, and the municipality has in place installment financing with the lending institution.

The 10-year installment contract may be used to finance the purchase of property ranging from photocopying machines and telephone equipment to water and sewer treatment facilities. In addition to purchasing existing property, the 10-year installment contract may also be used to finance the construction of new municipal facilities. When the 10-year installment contract is used to finance the construction of new municipal facilities, the entire proceeds of the financing are not ordinarily paid out at the commencement of construction. The proceeds of the financing may be placed in an interest-bearing account to be paid out as the project progresses. Various forms of construction escrow arrangements may be implemented to control the disbursement of funds from the interest-bearing account, the most common of which involves title companies. Further, as long as all of the funds are disbursed from the interest-bearing account within three years from the

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Ten-year installment contracts are considered general obligations of the municipality issuing them. The obligation evidenced by the installment contract is payable from any funds of the municipality legally available and annually appropriated for such purpose. Properly structured, interest paid under an installment contract is not includable in the gross income of the owners of the contract for Federal income tax purposes and will not be treated as an item of tax preference in computing the alternative minimum tax for individuals or corporations. In most transactions involving third- party lending institutions, the lender will require an opinion of independent bond counsel regarding the tax-exempt nature of the installment obligation. However, with respect to smaller issues, some lending institutions will accept the opinion of the municipality's counsel for Federal income tax purposes.

The most significant limitation upon the use of the 10-year installment contract is that the debt incurred under the contract is subject to the debt limits set forth in Section 8-5-1 of the Code. ⁷ Therefore, when a municipality is seeking to finance a large acquisition or a significant construction project, consideration must be given to other forms of financing which would not be included in the municipality's debt limit. As with other forms of municipal debt, interest payable under the installment contract is limited by the Public Corporation Interest Act, Ill.Rev.Stat., ch. 17, par. 6601, et seq. (1989), and the borrowing must be for public purposes. An installment contract may not be entered into unless there was a prior appropriation for the expenditure by the municipality. Further, a municipality must appropriate funds each year to pay the installments falling due within the fiscal year. Finally, the limitations contained in Section 11-61-3 of the Code do not apply to municipalities which are home-rule units. ⁸

A non-home rule municipality may not use a mortgage or trust deed to secure the payment of the installment obligation. ⁹ However, a real property acquisition structured in the form of articles of agreement for deed, with title passing only upon full payment of the purchase price, arguably is enforceable. While this issue has not been decided by our Courts, the theory underlying this later form of acquisition is based on the fact that the security interest associated with articles of agreement for deed is an interest in personal property and, therefore, within the municipality's power to grant. To the extent a security interest in the real estate is not available, lenders must rely on the full faith and credit of the municipality for repayment under the installment contract.

Section 11-61-3 of the Code is a valuable financing tool which fulfills an important need municipalities have with respect to the acquisition of property for public purposes. In the appropriate circumstances, installment-contract financing under Section 11-61-3 of the Code can provide an alternative to other more complicated and time-consuming methods of property financing. •

FOOTNOTES
1. Ill.Rev.Stat., ch. 24, par. 11-61-3 (1989).
2. e.g. Ill.Rev.Stat., ch. 24. par. 8-4-1 (1989).
3. e.g. Ill.Rev.Stat., ch. 24. par. 11-76.1-1 (1989).
4. e.g. Ill.Rev.Stat., ch. 24, par. 11-8-4.1-1, et seq. (1989).
5. Ill.Rev.Stat., ch. 24, par. 11-61-3 (1989).
6. I.R.C., §148(c)(2)(U); §148(f)(4)(B)(iv). The majority of the proceeds must be paid out of the fund within two years of the date of the installment contract. A five percent retainage for construction may be kept in the lund for up to three years.
7. Ill.Rev.Stat., ch. 24, par. 8-5-1 (1989).
8. Ill.Rev.Stat., ch. 24, par. 11-61-3 (1989).
9. Stripe v. City of Waukegan, 254 Ill.App. 74 (1929).

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