State auditor calls for reforms to Montana’s cabin site sale program

State Auditor Troy Downing is pushing for reforms to Montana’s sale of state land cabin sites, speaking out and voting out against those sales during the last year of the Montana State Board of Land Commissioners.

Downing has been the lone public dissenter among Montana’s top statewide elected officials. The Land Board is made up of Gov. Greg Gianforte, Attorney General Austin Knudsen, Secretary of State Christi Jacobsen, Superintendent of Public Instruction Elsie Arntzen and Downing, all Republicans.

The board is constitutionally charged with overseeing revenue-generating programs on more than 5.5 million acres of state trust lands. The lands are managed primarily for the benefit of funding education including public schools, universities and the Montana School for the Deaf and Blind. Last year state land programs including timber, mining and real estate topped $107 million in revenue.

Although some high-profile issues do come before the board, many of the votes are relatively routine, such as selling easements for utilities or roads and approving Department of Natural Resources and Conservation timber sales.

The program drawing Downing’s apprehensions is the state’s sale of cabin sites under DNRC’s real estate program. Certain state lands may be leased with the lessee able to construct “improvements,” ranging from roads and utilities to cabins and other structures. Under a 2013 law, the lessees may petition the state to purchase the land — a process that includes appraisals, competitive bidding and approval from the Land Board.

Once sold, the proceeds go into the state’s Land Banking program. Along with cabin sites, sales of other state lands go into the Land Banking account. The board may then approve purchases of replacement trust lands with those funds to again produce revenue.

Downing said in a recent interview he does not oppose the program but believes it needs several reforms and has encouraged other Land Board members to pause the sales in the interim. He also unsuccessfully brought legislation during that last Legislature and plans to do so again in the next session.

“I’m not opposed to trading land, I’m not opposed to the state selling something or purchasing something else, it just has to make sense,” he said.

Cabin site program

DNRC’s Trust Land Division administrator Shawn Thomas detailed the cabin site sale process in a recent interview. Every two years the agency solicits interest from lessees and then prioritizes about 100 of them based on factors such as legal access and whether the property has been surveyed. The Land Board takes up the sale three times including at the final point of sale, he continued, and the board “has the right to say no.”

State law creates a split estate between the lessee and the state. The state owns the land but the lessee owns any improvements up to and including a cabin or other structures. In order to buy the property an appraisal of the land at the state’s expense and appraisal of the improvements at the owner’s expense must occur. That appraisal generally sets the minimum bid for the property to go into a competitive bidding process, Thomas said.

Most often the lessee is successful in purchasing the cabin site property and often without another bidder. Cabin prices can range widely based on where the property is in the state, its size and other factors. In a December meeting, for example, the Land Board sold 17 cabin sites ranging in appraisal value from $55,000 to $475,000. All went for the minimum bid price with only one bidder.

The sales are complex real estate transactions due to the split estate, Thomas said. If another bidder does purchase the property, the law dictates the successful bidder must negotiate the purchase of the improvements with the lessee.

In addition to deciding whether to apply for purchase in the first place, lessees have the ability to pull the property from the sale process. That may come after receiving the appraisal, but also the lessees are notified if another bidder will enter the process, he said.

“In most cases it works through the process for the lessee,” to purchase the property, Thomas said. “… If there is another bid many times the lessees don’t want to risk the bids getting driven up or losing the property or their improvements.”

The Legislature set the cabin site sale revenue to go into Land Banking for purchasing replacement property. But the sites are not the only trust property the state sometimes sells for Land Banking. While the rate of return from a leased cabin site can be 3% or higher, returns for isolated tracts of grazing land can be well below 1%.

Under state law, Land Banking sales may total up to 250,000 acres and 75% must be isolated parcels. Sales are limited to 20,000 acres until replacement property is purchased. Since 2006, about 87,000 acres of state land has been sold and 98,000 acres purchased under the program. The program has a history of purchasing lands that both block up the state’s property and allow for better public access.

Cabin sales by county.Montana DNRC

Proceeds from all state land sales are pooled into the Land Banking account. The more than 20 properties purchased as replacement lands do produce an overall average higher rate of return, Thomas said.

After 10 years, the proceeds move out of the Land Banking account and into a permanent account that is invested with proceeds again going to fund education.

Downing’s concerns

Downing pointed to cabin site sales that came before the board in the last year. When comparing the rate of return from the lease to that of historic rates of return for land purchased through Land Banking, several leased parcels outperformed Land Banking.

“My biggest issue is when we sell something it’s forever and if we’re not maximizing that sale price, that’s a mistake, and if we’re selling it with an expectation of having less income in the future than we have now, then I don’t agree it’s in the best interest of Montana,” he said.

Downing, who has worked in commercial real estate development, feels the current program contains several flaws. The state could be seeing bigger returns on the sales or the best deal could be sticking with a lease, he believes, with a few changes to current law.

The first is the valuation process for the land. The state’s appraisal assesses the property using comparable sales, a common practice in residential real estate. Downing believes the assessment should focus on revenue production through a capitalization report.

“It’s not residential real estate, to the state it’s income property,” he said. “This is commercial real estate and it should be appraised, dealt with and transacted with as if it were commercial real estate. Getting comps is not the best indication of value to the state. The best indication to the value is how much income it’s producing.”

Some accounting is also needed for the loss of revenue between the time of sale and once newly purchased land starts producing, Downing believes. The sale may mean a short-term revenue bump, but that does not go to funding education until new land is purchased. And if the newly purchased land earns less revenue, that ultimately means less for education over the long term that must be made up for with property taxes, he said.

Downing did credit DNRC with working to produce more information on income generation but still feels a capitalization report should be required.

Downing further believes the process does not allow market forces to maximize sale prices for the benefit of the state as evidenced by a lack of competitive bidding. Once purchased, he points out that the lessee if free to sell the property for the highest offer.

History of cabin site program

Montana’s cabin site sale and leasing program has a complex history of multiple pieces of legislation and lawsuits. State trust lands by law are held to produce revenue, but the unique occupancy by private parties often means deep ties to the land and organized advocacy among the lease holders.

Pre-1981 lease rates were nominal at $5-$150 annually. That year the Land Board initiated competitive bidding in the program, recognizing the rates fell below its constitutional obligation of meeting fair market value, according to a DNRC timeline.

In response to pushback from lessees, legislation in the 1980s removed competitive bidding in favor of setting lease rates as a percentage of appraised value. In 1999 Montanans for Responsible Use of School Trust, or Montrust, successfully sued the Land Board and the state over the rates, alleging they fell below fair market values.

In 2011 the Legislature restored competitive bidding but Montrust sued again, this time joined by the Board of Regents, alleging that lease calculation methods produced rents below fair market values. The case was ultimately settled.

In 2013 the Legislature decided lessees should be able to nominate their leased lands for purchase in passing Senate Bill 369. The state has finalized about 200 sales since totaling more than $27 million.

About 500 sites remain under state lease, mainly in western Montana in areas such as Seeley and Placid lakes and the Flathead area. The primary beneficiaries are Montana State University and Montana Tech.

Legislation

Downing brought legislation during the session, admittedly at the “11th hour” before a transmittal deadline, proposing several changes to the cabin site sale program. Senate Bill 408 would have required DNRC to produce a capitalization report looking at average rates of return of replacement land. The bill also would restrict the lessee from pulling the property from the competitive bidding process after depositing a bid bond, meaning they could not pull the sale if another bidder comes forward. Finally, the bill would have stated that a lower rate of return could give cause to the Land Board to cancel the sale.

The bill was important, Downing told lawmakers, to meet the Land Board’s fiduciary duty under the state constitution.

Speaking against the bill was Margaret Morgan, noting she was testifying on her own behalf, and had worked as a lobbyist for cabin site lessees when the Legislature attempted to fix a program that was a “mess,” she said. By working with lessees, lawmakers passed a bipartisan bill setting up the sale program.

Morgan was critical of SB 408, saying that lessees were not involved and did not even know a bill that could make significant changes was introduced. A Senate committee quickly tabled the bill.

Jackie Jones, Downing’s Land Board advisor, said the process set up in 2013 is working as designed, to get the cabin sites sold to lessees as quickly as possible. With any legislation, “you don’t pass a bill and never look at it again,” she said, and Downing says he plans to bring SB 408 back next session because of his continued concerns over the current process.

During a legislative interim committee in September, DNRC provided its annual cabin site sale report and Jones testified about the need for SB 408.

Jim Keane, a longtime Democratic Butte lawmaker who worked on the 2013 legislation, rebutted the bill during the meeting, saying that the Legislature had carefully weighed the issues but that SB 408 risked pricing out Montanans from properties they had invested in.

“I take real consternation in the bill that was just brought up,” he said. “What happened here is somebody saying they shouldn’t be allowed to buy their property. They put the time and interest in that property. That bill is not just unfair, and what it’s actually saying is that if you can’t afford the place, let the other bidder take it away from you.”

Downing said in the interview that he has empathy and takes into account the strong ties many lease holders have to their cabin sites. He does not seek repeal of another provision of the law which allows current lease holders to match the highest bid – a provision that if repealed could result in more competitive bids. He also pointed out that not all leases are owned by Montanans now.

“I just want there to be market forces and I want it to be a conscious decision on whether it’s a straight across trade, or if it’s something we have an expectation that it’s going to make more money than it currently does, or an expectation that it’s going to make less,” he said. “I think that’s all germane to the decision we make.”

Land Board votes

During meetings of the Land Board throughout the last year, Downing has voted against cabin site sales, making similar arguments about the rates of return and concern over a lack of market forces in the program.

Downing questions whether the current process under the law essentially renders the Land Board’s vote as a ceremonial act rather than a decision. He believes the state constitution’s trumping of statute gives cause for voting against the sales, and has asked his fellow board members to in lieu of voting down sales, to delay them.

“(I want to) convey that I’m not trying to destroy this program I’m just trying to perfect it and I think it’s pretty clear that it’s got some pretty glaring issues and what I’d like to see happen is to delay this until we can really evaluate some solutions to these obvious problems,” he said.

The other Land Board members have not joined calls for reforms during the meetings.

“You’ve shared your views in the past and until the law changes, we’re going to follow the law,” Gianforte told Downing during the December Land Board meeting. “These cabin sales getting into the private sector will allow the free market to act.”

When asked about the governor’s position on the cabin site program and whether he would support reforms, a Gianforte spokesperson said the governor believes the Land Board must follow the law set by the Legislature. If reforms might be warranted, those should be brought before the Legislature for consideration, the spokesperson said.

Tom Kuglin is the deputy editor for the Lee Newspapers State Bureau. His coverage focuses on outdoors, recreation and natural resources.