Montanans with cabins or homes on state-leased land may receive some relief from steeply increasing fees under a bill working its way through the Legislature. Kalispell Republican Sen. Bruce Tutvedt’s SB 409 sailed out of committee and passed the House last week on a 75-25 vote, and is likely to head to the governor’s desk for signing.
The legislation was crafted by a group of leaseholders in Northwest Montana, who have been complaining that, under the 2009 property reappraisal, the state cabin site lease system would essentially collapse as middle class residents abandon the properties due to the high annual payments, while wealthy buyers who can afford the expense will simply opt for buying land outright.
“This is a serious problem,” Eugene Hutz, a member of the Montana State Leaseholders’ Association who lives on Echo Lake and helped write Tutvedt’s bill, said. “We really looked for a solution that is different, and this is what we came up with.”
Under the current system, according to Hutz and other supporters of SB 409, more and more of the 802 cabin and home sites will become vacant, thus generating less revenue for Montana schools and universities, which by law, are the beneficiaries of the funds generated by the program as part of Montana’s Education Trust.
In some areas lease fees have doubled or tripled over the last two years to $12,000 or more, resulting in 42 leases cancelled over the last 18 months, Hutz added. During committee hearings on the bill, leaseholders with homes on McGregor Lake described fees there increasing from $6,500 to $18,000 per year.
“Eventually everybody’s going to abandon these properties; that’s going to cost them money,” Hutz said.
Representatives of Montana’s schools and universities, however, disagree, and say the decrease in revenue to schools that would occur under Tutvedt’s bill will force tuition increases on students to make up the difference. The bill would cost Montana State University roughly $300,000 per year, and Montana Tech nearly $700,000 per year. The overall impact on Montana schools is estimated at $5.5 million less over three years.
“The problem with the bill, as it is, is it has a set of procedures that favor the leaseholders and there’s no corollary procedure for the Trust,” Greg Munro, a law professor at the University of Montana representing the university system on the bill, said. “It’s a direct correlation: If you don’t receive $1 million, the students will pay $1 million in student fees.”
Furthermore, according to Munro, despite the increases leaseholders are confronting, they still have a better deal than what it costs to buy these properties, much of which is waterfront land in Western Montana.
“It costs half as much as trying to own a piece of property like that,” Munro said. “The fact is there are a tremendous number of owners out there who aren’t saying anything because they know it’s a good deal.”
Some opponents of the bill take their criticism a step farther.
“This is a bailout bill for western Montana, bought and paid for by eastern Montana,” Rep. Virginia Court, D-Billings, said during the April 7 House floor debate on SB 409. “Can we afford a bailout on the backs of our students?”
Under the current system leaseholders pay a percentage of the land’s value, which is increasing yearly toward 5 percent, based on the 2009 appraisal. Though leaseholders pay rent, but no property taxes on the land, they are taxed on the homes and improvements they have built on the sites.
Under Tutvedt’s bill, the annual lease rate drops to a minimum of 2 percent, and then goes out for bid, either on the 76 current vacant lots or whenever a leaseholder wants to put their lease up for a bid. The leaseholder would have no preference in the bidding process. This system, supporters say, allows the market to determine the property’s worth through the bidding process, as opposed to an arbitrary percentage set by the Department of Natural Resources and Conservation.
“If you believe in the market, and it is the most efficient way to set value and to get the maximum both for the lessee and the lessor to be fair, that’s what we’re trying to do with Senate Bill 402,” Tutvedt said.
Initial bids on the currently vacant lots would be used to create an average rate for the area, which could then be applied to current leaseholders with similar properties – creating a system of “geographic averaging” that would likely result in the lowering of fees on neighboring properties.
Each lease would then increase annually based on the Consumer Price Index. An appraisal process would determine the value of the improvements to the land prior to the competitive open bid, and the leaseholder would retain ownership over those improvements. Provisions in the bill are aimed at helping the leaseholder realize the value of the improvements made on the cabin sites.
In Flathead County, which has a high inventory of unsold housing, as well as 45 vacant cabin sites, legislative fiscal analysts assume the lease rate will drop to the minimum 2 percent due to existing supply and demand for properties.
The leases would have a 15-year term, which Hutz said would allow leaseholders to get financing for improvements. But leaseholders would be able to put their lease up for bid whenever they want.
For Munro, this is part of the problem. He fears leaseholders will constantly put their leases up for bid every time the market declines to get a lower annual rate, since they have little to lose by doing so, causing a steady decline in funding to schools resulting in, “a one-sided deal, which is totally illegal and unconstitutional with the Trust.”
At this point, Tutvedt’s bill seems certain to pass the Legislature with bipartisan support. Hutz thinks it will be politically difficult for Gov. Brian Schweitzer to veto it, considering the support from members of his own party.
“We have some major, heavyweight Democratic support,” Hutz said. “They’re ready to walk that bill down to the governor’s office and tell him to sign it.”
But in 1999, the group Montanans for Responsible Use of the School Trust Land (MonTrust) successfully sued the state, arguing that the lease rate of 3.5 percent at the time for these cabin sites was too low, violating the requirement that full market value be obtained from the land to provide maximum funds for Montana’s educational institutions.
So it’s hard to imagine MonTrust, possibly along with the state’s university system, wouldn’t take legal action against a bill that could effectively set cabin site lease rates at 2 percent throughout much of the state.
Munro said it’s “highly likely” MonTrust will sue if Tutvedt’s bill becomes law, and the Board of Regents could join the suit as well.
“At some point I think the University is going to be looking at this and say that it’s not right,” Munro said.