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The recreational real estate market is down, and one small group of waterfront leaseholders is quietly pushing the Legislature to bail them out using benefits that belong to Montana’s Education Trust. This bailout is expected to cost the Trust $3 million to $4 million over a three-year period.

When Montana became a state in 1889, Congress set aside 5 million acres of land in trust to be held forever for the benefit of Montana’s common schools and certain university campuses. The Montana Constitution reaffirmed that trust and the state’s commitment to the purposes of the trust. As trustee, the state may not dispose of or lease the lands except for “full market value.” The earnings go to support the beneficiaries of the trust, our schools and university campuses.

Most of the land is agricultural and leased to farmers and ranchers for raising grain and livestock. However, 802 of the lots are waterfront property on lakes, rivers and streams and constitute some of the most prized and valuable recreational land that is Montana’s heritage. Those lots are leased, 90 percent of them for use as second homes.

Undervalued property

Recreational land on Montana’s waterfronts is a luxury few of us can afford. Yet, the leases on these recreational lands have been notoriously undervalued by the state of Montana to the point that the state was sued in 1999. As a result, the Montana Supreme Court struck down 11 statutes favoring lessees and found legislatively-set lease rates of 3.5 percent of appraised value to be unconstitutionally low. The lessees thereafter agreed, through a formal negotiated rule-making process, to pay 5 percent of appraised value.

Land values climbed from 2000 to 2009 when the latest state appraisals came out, and, following an outcry from waterfront lessees that they couldn’t afford the 2009 rates, the state reduced their lease rates in 2010 such that they now pay about 3.5 percent of the 2009 Department of Revenue appraised value. This puts them in a better position on their second homes than hundreds of Montanans who are struggling or facing foreclosure on their primary homes. Furthermore, the proposal allows state lessees to break their leases at any time and force the state to bid out their property on the lessees’ terms with no penalty for breaking the lease and with favorable conditions to the lessees in the competitive bidding process.

It gets even better: These lessees have the right to rent the sites for more than what they are charged, thereby allowing them to make money off this trust. In bull real estate markets, cabin leaseholders can “assign” (sell) their leases to others and collect not only the value of their buildings, but the money others are willing to pay to assume a waterfront lease invariably valued below market. In such situations, lessees have pocketed as much as $150,000 over the price of their improvements because the leases are set so low. If the leases were set at full value, no one would pay for the right to assume the payments.

Cost shift to students

This group of recreational leaseholders has prevailed on Sen. Bruce Tutvedt to introduce Senate Bill 409 to give the recreational leaseholders all kinds of preferences that will make it impossible for the state to ever get full market value for the leases or to get the leases out of the hands of those who don’t want to pay a fair price. The bill is a package of special privileges that benefit the leaseholders at the expense of the Education Trust.

Every dollar lost to the Education Trust must, in the case of the common schools, be paid by taxpayers, and in the case of college students, be made up as additional fees and charges. Chancellor Frank Gilmore of Montana Tech in Butte testified that each of his students will pay an estimated $230 per year in new building fees and auxiliary charges to make up for this bailout.

If the Montana Legislature wants to help that tiny proportion of state lessees who have their primary homes on Trust sites and who are struggling to pay their lease fees, it can set up a program similar to other government programs which subsidize low-income renters. (These lessees may in fact already receive or be eligible for rent subsidies.) Senate Bill 409 is wrong in two ways: It violates the terms of the Education Trust and it helps lessees who don’t need subsidies to maintain their second homes.

Contact your legislators and tell them to stop the bailout for recreational leaseholders from Montana’s Education Trusts and to vote no on SB409.

Greg Munro, a Professor at the University of Montana School of Law, represents the Montana University System on trust land issues.