Process is problem for trust lands

The state land department is taking some heat for how it is bringing trust lands to market, the proceeds from which benefits primarily K-12 education.

Some large, choice parcels have gone, or are expected to go, to a single bidder for what critics say is a below market price. The reports imply the possibility of sweetheart deals for politically connected developers.

That, however, isn’t the real problem. The real problem is the structure that the department was given to manage trust lands in or near the developed urban footprint.

That structure was established by the Urban Lands Act adopted in the early 1980s, which was the brainchild of then Gov. Bruce Babbitt.

Under the act, the state land department isn’t to be just a passive seller of raw land. Instead, it is supposed to proactively shape the urban form.

This involves the department, to a certain degree, getting into the development business, at a minimum by planning the land uses for parcels brought to market.

But often, much more than that. The department still sells land on which homes are to be built. But, after the act, it often leases the land on which businesses are to be located and takes a profit position in downstream development. Theoretically, it puts the department, and thus the trust’s beneficiaries, in a position to share in the larger profits from development, rather than just settling for the proceeds of raw land sales.

However, no one was interested in funding the department sufficiently to perform its new planning and development functions. So, a two-step process was set up.

In the first step, a private developer would do the work of planning the land uses for a particular parcel. When it was planned to the department’s satisfaction, the parcel would be put out for auction, as the state constitution requires. If the private developer who crafted the plan lost the bid, it would be compensated for its planning expenses.

This structure has numerous consequences that limit competition in the bidding process. There is a natural bias toward large master-planned, mixeduse communities. The land use plan obviously is likely to better suit whichever private developer crafted it. And that developer has a bidding advantage, since the bid doesn’t have to include reimbursement costs for the planning phase.

The only way to determine the market value of a parcel is through competitive bidding. An appraisal is just an opinion not subjected to a true market test. Without actual competitive bids, there’s no way of telling whether the trust’s beneficiaries are receiving fair value for their land.

In addition to drying up competitive bidding, the Urban Lands Act hasn’t really lived up to its promise. Desert Ridge, one of the first large projects approved using the structure, is an illustration.

There was just a single bidder for the master-planned contract for the area. That bidder ultimately went bankrupt, as did its successor. A third now is in place.

The project went to bid in 1993. It remains substantially underdeveloped for its location.

Nor has much been produced in the way of downstream profits from development participation. Last year, commercial leases produced just $26 million in revenue for trust beneficiaries. By way of contrast, since the Urban Lands Act was passed, the permanent trust fund has increased from a little over $100 million to $6.5 billion.

That’s been fueled by land sales and retained earnings.

The bias against competitive bids continues to produce large, questionable deals. The real estate arm of the Nationwide insurance company was the only bidder on a 134 acre parcel in north Scottsdale, after having done the planning for it – which was custom-designed for its regional headquarters and supporting mixed-use development.

And now there is a question of how much true competition there will be for a massive, nearly 2,800 acre parcel near Apache Junction known as Superstition Vistas.

I’d prefer that the land department get out of the development business and just passively sell raw land. That’s a cleaner role for government, and the track record of land sales is vastly better than the government-as-developer record.

But if that’s too radical a reform, at a minimum there needs to be competitive bidding. Otherwise, there is no way of telling whether a fair price has been obtained for the trust’s beneficiaries.

Any auction with fewer than, say, three bidders should be vacated. That would require the department to structure any offering in a way that would be attractive to more than just a single bidder.

That would offset the bias against competitive bidding that inheres in the Urban Lands Act.