Idaho expands plan to compete with private business
By JAY PATRICK
IdahoReporter.com
It just really rubs some people the wrong way: The idea of the state owning and operating businesses; the idea of tax-paying business owners squaring off against a competitor they help support.
For some — even before they hear details of the state’s plan to expand into the business world, owning businesses and developing commercial properties — the idea alone elicits a visceral reaction.
“It’s a direct affront to our understanding of the clear distinctions between private/public activities,” wrote Michael T. Scanlon Jr., president and chief executive officer of the Washington, D.C.-based Self Storage Association, in a letter to Idaho Department of Lands Director George Bacon.
State Rep. Grant Burgoyne, a Democrat from Boise, was just as forceful in an interview with IdahoReporter.com: “It’s socialism. That is a piece of socialism, when the government operates a for-profit business. That’s what socialism is.” He said: “I will just say I’m troubled by the endowment’s venturing into operating businesses” and “It’s something to be approached with great caution.”
Are they saying that the state owning businesses seems kinda un-American?
Whatever you want to call it, there’s due to be a whole lot more of it. The Idaho Department of Lands is aggressively looking to buy more businesses and participate in joint-venture development projects, like residential subdivisions. Plans also call for expansion of holdings in downtown Boise, where the state now owns 15 retail and office buildings, and parking lots. The idea is to diversify holdings and make more money for the nine beneficiaries of money made off state endowment lands.
“That is something that we are looking at (downtown expansion). We have a lot of vacant lots,” said Bacon, adding that the state has options to do more than just own central Boise properties. “We’ve had the opportunity to go vertical in the past. Folks coming to us wanting to establish condos downtown,” he said. “We’ve got a dirt parking lot that has potential to have a building.”
The state has owned buildings in downtown Boise since 1998. The state acquired the buildings from 1998-2001, through trades of residential land at Payette Lake. Besides that acquisition flurry a decade ago, all was quiet on the commercial front until the state land board bought a Boise self-storage business in August.
The state land board — Gov. Butch Otter, State Controller Donna Jones, Attorney General Lawrence Wasden, Secretary of State Ben Ysursa, and Superintendent of Schools Tom Luna — approved the Department of Lands buying the business with cash ($2.7 million) from the sales of other state lands, a practice made legal in 2000. Affordable Storage on Maple Grove Road is the first business the state has purchased, but the Department of Lands’ long-term strategy calls for expanded involvement owning businesses, buying buildings, and developing tracts of land, like those once in the middle of nowhere that now sit amid growing cities. They’re no longer good for grazing, so-called “transition lands,” defined as “parcels that may, within the next twenty years, be suitable for a higher and better use than the current asset classification,” properties that “exhibit high property values and low annual revenues (underperforming) and may be encroached upon by urban development.”
That empty field next to the grocery store, or one separating two housing developments, or those in the predictable path of urban expansion, could become, say, how about, Quail Ridge, or Coyote Acres, suburban housing projects co-developed by the state of Idaho? Or how about a state-owned water park, if that’s what the market says is needed? The way things are now, it’s all possible.
The purchase of Affordable Storage in August marked the culmination of a decade’s worth of calculated work to shift the Department of Lands’ focus from being a passive owner and landlord of remote lands to being a proactive developer of prime tracts in burgeoning metropolitan areas, and a business player with a portfolio of varied commercial concerns.
From 1890 until 2000, the Department of Lands and land board dealt primarily in leasing land for timber, grazing and mining. The sale of timber still accounts for about $45 million per year, or about 85 percent of total annual land endowment revenue, which goes to fund public education and eight other beneficiaries.
That ratio is not good, according to the land board.
“Over-dependence on one source of revenue, especially during changing market trends, is not prudent investment strategy. This does not mean the timber asset should be aggressively sold to rebalance the land assets. Rather, the IDL should pursue strategies that lift the performance of other assets,” reads the 2007 State Land Trust Asset Management Plan.
Upon statehood in 1890, the federal government granted Idaho 3.6 million acres of land to help pay for public education. Over the decades, the state has sold land, sold timber, and leased lands for timber harvesting, grazing and mining. Lands are also leased to energy producers, and, in fact, the state is looking to put more emphasis on leasing or selling land to wind power and geothermal power producers.
In 2000, the land board took authority over all endowment funds and holdings, and a change in the Idaho Constitution allowed creation of a land bank, where proceeds of sales of lands could accumulate, and be spent on buying other land, structures or businesses. In 2001, a “Citizen’s Evaluation Committee” adopted a Land Trust Investment Policy saying that the state constitution needed to change to give flexibility to maximize return on investments. In 2005, the Endowment Reform Review Task Force was formed to report on changes needed in the constitution and to land management strategy.
In 2007, the land board approved the State Trust Land Asset Management Plan, which calls for more investment in businesses and commercial ventures. In 2009, the land board created the Endowment Land Transaction Advisory Committee (ELTAC), made up of a handful of local top flight property investment managers, commercial real estate brokers, bankers and an assistant attorney general. The group was charged with providing an “impartial review of the specific elements of Idaho Constitution and impediments to conducting real estate transactions in the 21st century.” (It identified several changes to the constitution necessary to let the state operate like any for-profit developer).
The department’s new-era mission is to manage assets “in such manner as will secure the maximum long term financial return to trust beneficiaries. Assets are to be managed to provide a perpetual stream of income & by maximizing returns at a prudent level of risk & and providing a relatively stable and predictable pay out,” according to the 2007 state trust lands plan. The plan is meant to “ensure nonreactive structured revisions to Land Board philosophy and policy in response to speculation or short-term market and value fluctuations. “
So the land board has certainly put some time and effort into orchestrating its commercial adventure, its transition from a static to a dynamic business entity.
But Burgoyne wonders, “Does the state have the expertise to operate a storage business? It’s one thing to be a landlord. The state has a history of being a landlord. To own a business ventures us out into territory where maybe we don’t have the expertise.”
Bacon readily says the state doesn’t have people who know how to run a business, and that’s why property managers and contractors are hired to lease space and to run businesses, which so far consists only of the storage business. The same woman who ran the place for the previous owners still runs the place for the state’s contracted property manager.
It’s the Department of Lands’ duty to make as much money as possible from state endowment lands. By dealing in commercial property and businesses, the department and land board are just doing their job, some say. But, fact is, the land board and the Department of Lands made the rules that they say they must follow.
According to those rules, the land board has a duty to invest and manage lands “as a prudent investor would. “ The body’s stated management goals are to:
• Maximize financial returns from land assets over time.
• Encourage a diversity of revenue-producing uses of land assets.
• Acquire/sell lands, structures and resources when the acquisition will add value or diversification to the overall trust portfolio.
Idaho has long leased land for commercial purposes, but only began acquiring commercial office and retail properties in 1998.
“On one hand there’s an interest in making sure we get as high of a return as possible. Sometimes that may lead you to private real estate areas,” said Sen. Chuck Winder, R-Boise, a longtime commercial real estate broker and a member of the endowment fund investment advisory board. “I hate to see government competing against the private sector in anything, but you look at their side and they have this responsibility. They’re required. It’s kinda a catch 22.”
Indeed, the land board is constitutionally required to operate in a bubble and look out for top dollar without thinking too hard about the consequences. It is “obligated to manage the assets of each trust with undivided loyalty to the beneficiaries of the trusts,” according to the state land plan and other sources.
No land board members would comment for this story, said Mike Tracy, a contracted public relations specialist hired to represent the board and the Department of Lands on commercial property issues.
After a land board meeting Nov. 23, IdahoReporter.com asked Gov. Otter if he thought the state dealing in business was good policy and if he favored more state-owned ventures in light of the dust-up over the storage facility. Otter listened to the question, but he chose to not answer, saying he had to catch a plane. He subsequently did not provide a response to the same questions, either in an interview or through a statement, posed via his spokesman, Jon Hanian. IdahoReporter.com contacted each land board member. Attorney General Lawrence Wasden’s office replied, but an interview with Wasden could not be conducted in time for this story.
When Otter did talk about the storage business, he did not seem concerned about a potential fundamental conflict between the government and private sector. According to the minutes of the Aug. 17 land board meeting, Otter asked if there was a possibility of expanding the storage facility property in the future. He was told no. He asked if the appraisal included information on “useful life.” He was told the useful life is 35 years. The governor noted that the annual maintenance expense of $7,600 would extend the facility’s life. The board then voted unanimously to buy Affordable Storage for $2.7 million on a motion from Attorney General Wasden.
So does the state have an edge on private enterprise?
When it comes to leasing office and retail space, the answer is absolutely yes, said Dave Wali, head of investment services at Colliers Boise, who has worked with the state on land exchanges.
It’s simple: no property tax means a lower operating expense, and the potential to charge less and make more. Wali said property tax typically represents about 10 percent of a landlord’s expenses, which is worth around $1.25-$1.60 per square foot in Boise, Wali said.
“In negotiations, they have a $1.60 advantage,” he said. “In that respect they have an advantage over the next guy.”
Sen. Winder, president of Lee and Associates, a commercial real estate brokerage in Boise, said the same.
“Everybody looks at what the bottom line costs are to operate. The landlord that provides the most service for the least price wins,” he said. “Property tax could be 5 to 10 percent of a rental rate. It could give them some advantages.”
The state, or at least its private-sector property manager, knows it has got something good with the property tax benefit: under the “Highlights” sections of fliers for state-owned buildings on the website of DK Commercial is listed: Great location, Priced right, Parking available, No property taxes in operating expense, Owner will configure to suit tenant.
Bacon doesn’t think the state has an edge.
“No, but the premise of the question suggests we are competitors,” he said. “I don’t think that’s strictly the case. We create business opportunities with our properties. Whether it’s jobs for loggers, ranchers, real estate brokers or property managers, we give many sectors of private industry opportunities to earn a living by helping us manage our land.”
IdahoReporter.com: “What about the advantage of not passing on property tax costs to tenants? That’s touted in fliers. Is that not an advantage? Seems like there could be some underselling of other landlords.”
Bacon: “I’m not sure what fliers you have seen, or the perceived advantage you talk about. Property taxes go to support governmental institutions to help meet the needs of society. All our rental income goes to support governmental institutions to help meet the needs of society. We are constitutionally-mandated to maximize financial returns to the trusts, and that can only be achieved by charging market rents.”
The state does not undersell the private sector, Bacon said. And indeed, the lease rates advertised for state buildings are comparable to privately held space, but Wendy Shoemaker, the agent with DK Commercial who handles the state’s properties, did not respond to a call for information about the lease rates, or what is actually being charged tenants.
Wali said the state may be not as nimble a landlord as the private sector, and perhaps not able to remodel to suit tenants as quickly; that might help level the playing field, he said. Approvals and appropriations may take longer, but the state still has recently spent a lot of money improving properties. (A retail building at 9th and Bannock, the Sherm Perry Building, got $97,000 in maintenance and repair work, and $48,000 for capital improvements, in 2009. The building posted the biggest loss — $123,971 — among the five state-owned, Boise-area commercial properties that posted losses in 2009, according to financial records.)
Wali said he’s OK with the state owning what it now does downtown, but that he would be wary of state ownership spreading. Bacon said that’s exactly what the department plans to do in coming years.
“Our first focus over the next years is to develop (downtown) properties we already own,” Bacon said.
Wali said trades here and there are one thing, but having a plan to buy buildings with cash and develop properties is another, he said.
“That’s different than, let’s say, we have five people in McCall, and they want to own lakeside cottages and they buy a building downtown to make a trade,” Wali said.
Does Affordable Storage have an edge? Rick Church, president of the Idaho Self Storage Association, thinks it does.
“They don’t have to pay any taxes, so they have a buffer to lower prices. It’s an unfair advantage for them for sure,” he said. “They seem to think since that a lot of it (endowment land revenues) goes to education that it’s no holds barred.”
Scanlon asked Bacon in a letter, “How will our government-owned self-storage facility compensate municipal governments if you are not required to pay property taxes? How will the tax dollars lost to the local, county, city and school districts be replaced?
The land board isn t too concerned on that point, saying that the local loss is a drop in the bucket. The report of the Endowment Lands Transactions Advisory Committee, adopted by the land board, concluded that the effect of adding or removing trust property from tax rolls across the state is immaterial compared to the universe of real estate and development transactions that occur each year.
In his reply to Scanlon, the self-storage association’s president, Bacon wrote: “The constitutional mandate of the trust requires the trustee to administer duties with undivided loyalty to the beneficiaries.”
The rents at Affordable Storage are comparable to competitors, and in fact they’ve gone up considerably since the state bought the business, said Jennifer Miller, the main employee at Affordable Storage. A woman working the desk at Republic Storage less than a block away would not say what Republic charges — it only gives out quotes for particular size units that potential clients are asking for. The owner of Republic Storage, which has locations across the valley, did not return a call seeking comment.
The pro tempore of the Senate, Sen. Brent Hill, R-Rexburg, said the commercial strategy still doesn’t sit well with him.
“I don’t want to be critical of the state land board. It’s very difficult,” he said. “They’re just doing their job. But I think we need to be very careful in the public sector to try not to compete with the private sector. The storage business is a symptom. They need to reset their own parameters. It’s somewhere in between nothing and the storage business and it’s hard to evaluate the thing, but I still think there needs to be a fundamental desire to try to avoid it.”
But Bacon said the Department of Lands is going after it, with private brokers out there looking for stuff to sell the state.
“They bring us properties. If one interests us, we’ll take a look at it,” he said.
That’s what happened with Affordable Storage, which a commercial real estate marketer brought to the state. There’s nothing special about the self-storage industry, Bacon said.
“It looked like a well-run business,” he told IdahoReporter.com, but he previously told the AP that the storage industry is a good investment because it is relatively stable.
What other kinds of businesses the might the state get into? Athletic clubs? Nail salons? How about Taco Bells? People love tacos.
Who knows? Bacon would only say the state would invest in “active and going concerns.
The state asset management plan says commercial real estate holdings could include “retail and light industrial businesses, public facilities, energy resources (wind, hydro, wave), communication sites, ski resorts, etc.”
The department also wants to branch out further and participate in joint ventures with developers, “when that would be the best way to maximize revenue on a specific property,” Bacon said.
“Given the opportunities for developing in zones platted for commercial or residential you increase income three or four times and that’s a good raise,” he said.
He stressed that the state doesn’t want to be a developer but said, “We want to be able to work with developers to realize the highest and best use of specific properties under our care.”
To that end, the land board and Department of Lands is pushing several changes to the state constitution. The ELTAC group of local property mavens concluded that constitutional current procedures inhibit the agency s ability to be competitive in the real estate market.
Right now the state can t effectively participate in joint ventures because the state can only sell lands at public auction and can sell only limited amounts of acreage to single buyers. But in 2012, voters could be asked to allow the state to privately negotiate land sales, rather than being required to dispose of land at public auction. The board wants the Department of Lands to be able to “enter into non-binding and binding agreements to become competitive in the real estate market.”
“We need a constitutional amendment to be able to operate like anyone else would, or we’re never going to get top dollar,” Bacon said.
The proposed changes to the constitution are:
• Current: “subject to disposal at public auction.” Recommendation: change to, “to be managed and disposed of in any reasonable manner to secure the maximum long term financial return.”
• Current: “and to be sold in subdivisions of not exceed three hundred and twenty acres of land to any one individual, company or corporation.” Recommendation: remove language.
• Current: “in subdivisions not to exceed one hundred and sixty acres, to any one person, company or corporation.” Recommendation: remove language.
• Current: “all land granted under this Act for educational purposes shall be sold only at public sale.” Recommendation: change to, “be sold as provided by Idaho Law.”
The department planned to get the changes made in the 2010 legislative session but questions raised by the timber industry regarding the cost of buying or leasing tracts squelched progress.
On the existing constitutional limits on government involvement in business, Bacon said, “We saw that as a problem.”
Bacon said the department put together the ELTAC to get private-sector people in the know to tell the state what it needed to do to fully participate in the businesses world. PR man Tracy said the group was brought in to tell the state, “How does the real world do it and tell us how we differ.”
Idaho seems relatively aggressive in its business pursuits, but Utah has led the way. That state in the mid-1990s reformed its endowment land management, turning to a business model “with none of the undue restrictions and prescribed methods of disposal that hinder the goal of maximizing return,” according to the ELTAC report. Annual lands revenue in 1994 was $17 million, while in 2008, revenue had grown to $151 million with 16 percent coming from land development transactions. Utah’s trust assets have increased from $94.5 million to over $1 billion.
With that kind of money potentially out there for schools, frequent government basher Dave Frazier said he can understand the land board’s impulse stab at commercial enterprise.
“They may be well intentioned, but certainly ill-advised,” he said on his blog, BoiseGuardian.com. “Communist China, Vietnam, Cuba, and some Mideast sheikdoms are known to operate state-owned businesses,” he said. “Just can’t imagine such a thing in a place like Idaho.”
Department of Lands property analyst Jane Wright said movement into commercial concerns simply makes good business sense.
“We want to diversify, just like in any portfolio,” she said.
Boise properties made a half a million dollars for the state in 2009; however, several holdings lost money. Financial statements show seven of the state’s Boise-area properties ended 2009 in the red, but that overall the holdings brought in $532,071.
A retail building at 9th and Bannock, the Sherm Perry Building, posted the biggest loss among the properties in 2009: $123,971. According to a financial report for the property, the state shelled out $97,000 for maintenance and repairs and $48,000 for capital improvements to the building in 2009. The building also posted a loss in 2008: $131,330; the state that year spent $60,825 on preparation of vacant space and $90,365 on capital improvements, according to a financial statement. In 2007, the building turned a profit of $74,219.
On the other end of the spectrum is Central Washington Place, a state-owned office building at 472 W. Washington that generated $278,540 in 2009. However, the property could take a dive this year — the state is seeking bids for a remodeling job valued at $750,000.
Like the Sherm Perry Building, big expenses for repairs and improvements — together totaling $252,444 — resulted in the Garro Building, a 120-year-old office building at 816 W. Bannock St., finishing 2009 with a $37,976 loss.
Other properties that lost money in 2009:
• 417 W. Jefferson parking lot, $800. ( (- 512 W. Washington, small downtown office, $13,972.
• 512 W. Bannock parking lot, $413.
• Collins House (a large tract south of Gowen Field), $9,939.
• 11 vacant commercial lots, Meridian, $3,749.
Properties that came out ahead in 2009:
• Central Washington Place, $278,540
• Capital Park Plaza, $180,875
• Home Federal Building, $122,410
• Hoff parking lot, $88,345
• Garro parking lot, $27,572
• 4th and Bannock lot, $6,598
• 511 N. 5th St. lot, $2,986