Business
Consultant: State Should Avoid Commercial Property
November 18, 2014 
Four years after the GUARDIAN revealed the Idaho Land Board was operating a commercial storage business, a consultant has concluded the state should stay out of commercial investments.
“It’s the concentration issue, the lack of diversity,” explained consultant Janet Becker-Wold of Callan and Associates. “If something happens to that property, then your whole portfolio can suffer.”
The Land Board and its director, George Bacon, claimed the Idaho Constitution mandated such investments. We were previously informed by spokesmen at both the Governor’s office and Attorney General that commercial property was a sound place to invest endowment money which funds education in Idaho.
We have been critical of the state owning more than 20 commercial rental properties in downtown boise–all are off the tax rolls. One of those investments is Ten Barrel Brewing which was recently purchased by the Belgian beer company, Anheuser Busch. The majority of the Land Board’s commercial rental property is in Boise and the tax-free status deprives the city, county, schools, and Ada County Highway District of local tax revenues.
The new spin will be interesting in light of the strident past defense.
Continue reading to see how the Director defended the purchases four years ago.
Here is Bacon’s previous justification:
There has been some concern expressed over the recent acquisition of a storage facility in Boise. The news stories and opinion pieces regarding that transaction provide an excellent opportunity for Idahoans to learn more about the purpose of “endowment lands” in Idaho.
The property, known as Affordable Self Storage in Boise, was purchased in the name of a trust that was established in 1890 to help support Idaho’s public schools. This property and millions of acres of other land in Idaho, called “endowment lands,” are held in trust for various state institutions. It is important for Idahoans to understand how the State Board of Land Commissioners (or Land Board) and the Department of Lands fit into the management of these trust properties for the “endowed” beneficiaries.
At statehood, most states west of the Mississippi River received land grants to help them support vital services. In Idaho, the grants delivered 3.6 million acres to nine separate trusts that support 14 specific beneficiaries. Beneficiaries include schools, universities, veterans’ homes, prisons and other institutions.
These trust lands are not “public” lands like federal lands. They are not like state parks or other properties owned by the government. Endowment lands belong to the beneficiaries and are held “in trust” for a specific purpose — to make money. Use of the land provides income for the beneficiaries and pays for the costs of management. No tax dollars are used. Just like any private enterprise, the trusts have to support themselves.
The trusts were established in 1890 to operate as a business. In fact, Idaho’s Constitution requires that the land be managed to maximize the long-term financial return to the owning beneficiaries. The constitution also names the Land Board to serve as trustees.
The Land Board consists of the governor, the secretary of state, the attorney general, the state controller and the superintendent of public instruction. Their responsibilities as trustees are totally separate from their other weighty duties of running state government. That is an important distinction. The Board must act with undivided loyalty to the trusts, in spite of what others might want.
Although the state protects the interests of the trusts, it is private business that operates on the land. Not only does endowment land earn income for state institutions, it creates jobs for private industry. That is a model that has worked pretty well over the last 120 years.
In fact, during that time the trusts have built a portfolio of about $3 billion in financial and land assets. Right now, those assets provide $46 million in distributions to schools and other institutions each and every year. That number will grow as investments grow. That’s $46 million produced by delivering goods and services in the open market. That’s $46 million earned through hard work and the wise management of property. That’s $46 million left in tax payers’ pockets.
When every Idahoan understands the nature of endowment land, they will agree that our founding fathers were pretty smart. We can say with them — that’s a good idea; that’s good stewardship; that’s good government. That’s keeping the trust!
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Comments & Discussion
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Nov 18, 2014, 5:15 pm
Guardian, this statement could use a little more work: One of those investments is Ten Barrel Brewing which was recently purchased by the Belgian beer company, Anheuser Busch.
Nov 18, 2014, 5:27 pm
“It’s the concentration issue, the lack of diversity,” explained consultant
I agree the state should not be owning commerical property. The explanation is not exactly a good reason however.
To the contrary.
By having some commercial property to go with desert, timber, and until recently lake front property, along with liquid investments it provides DIVERSITY.
To take away one of those choices eliminates, reduces the diversity.
Perhaps, the state could own commercial property in others states?
The Politicians, (the Gov) could help themselves in 2018 by promoting to the masses information about these public lands- starting now.
Nov 18, 2014, 8:50 pm
Members of the Land Board have done a 180 and are now trying to get in front of this issue. Time to divest all commercial propertys
Nov 19, 2014, 8:28 am
Easterner– I would agree that diversity of investments is good but there is a substantial difference between owning part of a REIT or other means of ownership in commercial real estate other than direct ownership which the Land Board has done with commercial property’s in Boise and Idaho Falls and attempted to do in Nampa.
The Land Board without a huge increase in civil servants does not have the expertise to manage these property’s. Perhaps the most damning however, is that no property taxes are paid to local schools, cities, or the highway department leaving you and me to provide these services to the Land Board property’s for free. Return on investment–most property’s return would look a lot better if they didn’t have to pay taxes. Saying that the money earned is for the schools comes with a hefty management fee and fewer local owners.
Nov 19, 2014, 11:16 am
C+S, so let’s apply that same principle to the rest of the State Lands.
I can can go buy timberland and sell the rights to harvest the trees.
Isn’t the state competing with me in the timber industry?
My return on that land would be a lot better if I didn’t have to pay taxes on the timber sales.
Same for grazing land; mineral lands, etc. Really, it’s just a shell game.
EDITOR NOTE–The timber and grazing are both “renewable resources.” They have been PUBLIC land since statehood.
The practice of selling 640 acres or more for a 5,000 square foot brew pub that deprives local governments of
tax revenue while spending millions in tenant improvements is new.
Nov 19, 2014, 11:36 am
A good resource, including a pie chart showing types of assets in the trust funds http://www.idl.idaho.gov/land-board/lb/documents-long-term/olaughlin-endowment-lands-2011.pdf
Nov 19, 2014, 8:27 pm
Doesn’t the Land Board manage the timber sales and grazing fees on FEDERALLY and STATE owned land? issuing harvest and grazing and other “use fees” for specific time limited terms for specific monetary amounts? If so how does it manage other property types? Rental fees? Leases? How are these determined. How were the purchase prices determined, and by whom? Who paid the price – which agency and how did said agency acquire that money without specific Legislative? appropriation?
EDITOR NOTE–We will attempt to answer your questions.
–State manages only STATE lands. At statehood one, one square mile section per 36 square mile township of FEDERAL land was given to western states for school endowments. OVer the years the sections have been traded, sold, and combined–usually for ease of management.
–In the 1980s the legislature, with voter approval, passed a constitutional amendment which called for the Land Board to manage for “best long term return on investment.” At the time it was seen as investing in bonds and other instruments and not playing the stock market in short term risks.
–Recently the Board decided to get into “Business.” They sold the timber and grazing parcels to fund commercial rental property–all in Boise. The storage facility was the first attempt at OPERATING a business. Realities of rental property such as improvements, lack of tenants, management commissions, cut into the dream and increase the risk.
–Even though the funds are NOT tax money, the legislature has to appropriate the annual spending. That means $1 million spent on a brew pub shows up as a $1 million expense with only a (for example) $100,000 annual income. Not good business.
–So, the Board keeps two sets of books. They are fond of saying, “If we could amortize the $1 million over the 15 year life of the lease, we are rich. Our cost is only $66,000 a year and we bring in $100,000, hence a $34,000 ANNUAL profit. Problem is, the appropriation is only for a single year of CASH expense. The Board spends ENDOWMENT funds and there is no loan to repay. The lease payments take 10 years just to break even.
–In short, government is NOT a business and legal requirements like bids etc. make for a difficult analogy.
Nov 20, 2014, 11:43 am
Guardian, your Editor notes on mine above does not change the situation… the state is still competing with me and my privately owned timber. Whether it is renewable or not, or how long they have owned their land is irrelevant. If you disagree with the commercial properties based on “competition” and no taxes, then you ought to disagree with the ownership of the other assets as well.
And your description of 10 Barrel is misleading.
The state owns the building- period.
Just like ANY building owner they have to have tenants. Sometimes the tenant pays for the improvements and sometimes the building owner puts it in the deal.
Leaning on “depriving local governments of tax revenue” you are ignoring the bucket loads of sales tax, beer & wine taxes, and state income taxes run through that location. The OREGON company of 10 Barrel is presumably paying barrel loads of corporate tax INTO the Idaho system. While Idaho is not paying county property taxes, the value of the adjacent properties does go up and they end up paying more. The alternative was an empty building or “temporary” retailer.
A million dollars of dirt sold and used to buy a million dollars of commercial building is simply trading one asset for another. Compare the two cash flows, and you reveal the winner. Unless you have the contracts, (there’s a request), it’s just speculating.
In your example, I would generally rather own a commercial business with a LONG-term tenant than rangeland, timberland or any other rural dirt.
I am sure the numbers, $, and the math works in the favor of the state. But the principle of it does not, IMO.
Nov 20, 2014, 4:18 pm
The consultant gave a presentation to the land board in October where they recommended “Prudent disinvestment” from Idaho’s current commercial real estate holdings. But then went on to say that “no hurry to get out” as returns are “actually very good”.
Things that make you go hmmmmm.
http://www.spokesman.com/blogs/boise/2014/oct/28/consultants-timber-land-good-investment-idahos-endowment-not-idaho-commercial-real-estate/
Nov 21, 2014, 3:44 pm
No discussion of land board decisions concerning commercial property’s is complete without mentioning that the proposed Nampa deal was with a prominent Boise executive who had made political contributions to every member of the Land Board.
An independent appraisel of one of the Idaho Falls exchanges showed that the Land Board gave away an estimated $1.4 million of endowment money in the exchange. Do not forget one of the members of the land board is Gov. Otter who has made questionable decisions in a number of other high profile cases–State prison, Juvenile center at Nampa, Highway Dept settlement, broadband favoritism–how do you get a Grand Jury to investigate? More Attorney’s to defend these questionable transactions are not the answer.
Nov 24, 2014, 12:25 pm
Do you figure if we just asked the NSA for the tapes of everyone involved that we could get to the bottom of any possible/potential/suspected misdeed more quickly and accurately? Why not?