Administrative Rules of the State of Montana

BEFORE THE BOARD OF LAND COMMISSIONERS AND

THE Department of NATURAL RESOURCES

AND CONSERVATION OF THE STATE OF MONTANA

In the matter of the adoption of New Rules I through VIII, the amendment of ARM 36.25.128, and the repeal of 36.25.131 regarding cabinsite lease site sales

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NOTICE OF ADOPTION, AMENDMENT, AND REPEAL

To: All Concerned Persons

1. On October 17, 2013, the Department of Natural Resources and Conservation published MAR Notice No. 36-22-173 pertaining to the public hearing on the proposed adoption, amendment, and repeal of the above-stated rules at page 1783 of the 2013 Montana Administrative Register, Issue Number 19.

2. The department has adopted the above-stated rules as proposed: New Rule I (36.25.701), II (36.25.702), III (36.25.703), IV (36.25.704), V (36.25.705), VI (36.25.706), VII (36.25.707), VIII (36.25.708).

3. The department has amended ARM 36.25.128 as proposed.

4. The department has repealed ARM 36.25.131 as proposed.

5. The department has thoroughly considered the comments and testimony received. A summary of the comments received and the department's responses are as follows:

COMMENT 1:

Commenter supports the rules as proposed and feels they implement the legislation as it was written. Commenter also supports the sale program because it is voluntary and not mandatory.

RESPONSE 1:

DNRC agrees the rules as proposed implement the intent of the statute enacted by Chapter 422 of the 2013 Montana Session Laws.

COMMENT 2:

DNRC may wish to consider notification or provisions related to living with wildlife, weed management, and fuels reduction.

RESPONSE 2:

DNRC will include living with wildlife, weed management, and fuels reduction information in its General Terms and Conditions of Sale information for cabin and home site sales.

COMMENT 3:

Existing DNRC rules require notifying potential buyers that a property is within a designated floodplain or floodway.

RESPONSE 3:

DNRC will notify all potential buyers if a property, or portion of it, is within a designated floodplain or floodway.

COMMENT 4:

DNRC should notify potential buyers that a lakefront property may be subject to Missoula County Shoreline Regulations.

RESPONSE 4:

DNRC will notify all potential buyers of a lakefront property in Missoula County that the property may be subject to Missoula County Shoreline Regulations.

COMMENT 5:

Commenter expressed concern over clarifying access issues, access agreements and maintenance, and maintaining access to other public or state lands, or public waters.

RESPONSE 5:

DNRC will convey access it can legally convey to purchasers of cabin and home sites. DNRC will also reserve access to other cabin and home sites or public lands when necessary.

COMMENT 6:

Commenter expressed concern regarding the water quality in the Seeley Lake area. Some existing septic systems may not meet current regulations or adequately protect water quality. The quicker the state sells these leases, the better for the water quality in the area.

RESPONSE 6:

DNRC will process and sell cabin and home sites as quickly as available funding allows.

COMMENT 7:

Several potential properties for sale are within Missoula County Zoning Districts.

RESPONSE 7:

DNRC will inform all potential buyers when it is aware of properties within zoning districts.

COMMENT 8:

Selling the cabin and home sites is not the highest and best use of the state land. Setting a reasonable market lease rate that keeps most of the cabin and home site lots continuously leased is a better option.

RESPONSE 8:

Cabin and home site lease rates are outside of the scope of this rulemaking.

COMMENT 9:

The proposed pilot sale program should focus on selling vacant, previously leased lots. These lots are currently not generating any revenue for trust beneficiaries.

RESPONSE 9:

Active leases make up 89 percent of all cabin and home sites. The DNRC feels that active lessees should be prioritized in the pilot program. When sufficient funding is received to process more cabin and home site sales, vacant previously leased lots may be included.

COMMENT 10:

The interest earned on sale proceeds will not replace income generated by annual lease fees.

RESPONSE 10:

Sale proceeds will be placed in the land banking trust fund (ARM 36.25.811) and used to purchase replacement lands that generate equal or greater net revenue for trust beneficiaries.

COMMENT 11:

The $100 nomination fee should be refundable; it is unfair to those whose lots are not selected to make multiple $100 nonrefundable payments.

RESPONSE 11:

The sale nomination fee is nonrefundable. If a lot is not selected in a given year, the nominator will not have to pay an additional nomination fee in subsequent years to have the lot considered as a potential sale parcel.

COMMENT 12:

The state should give leaseholders who have had leases in their family for 50 or more years the option to solely purchase their cabin and home site without having to bid at a public auction.

RESPONSE 12:

DNRC is required by the Enabling Act and the Montana Constitution to use a public sale process (auction) to sell fee title to any state trust lands. A closed sale process is not a lawful option and would not be in the best interests of affected trust beneficiaries. As a fiduciary, the DNRC must act with undivided loyalty to the best financial interests of the trust beneficiaries.

COMMENT 13:

Commenter expressed concern that the current auction process leaves the current leaseholder open to predatory speculation. The auction process may create hostile relationships in communities where cabin and home sites are sold. Current lessees should be given the ability to purchase the cabin and home site at the appraised price. The auction process may drive the price of the cabin and home site higher than the lessee's ability to pay.

RESPONSE 13:

See Response 12.

COMMENT 14:

Commenter expressed concern that the potential 20-year timeframe to offer all cabin and home sites for sale was extremely burdensome. Leaseholders should be given the option to pay processing costs to facilitate more cabin and home site sales. Once the pilot program is implemented and working, DNRC needs to sell off more than 40 sites per year. There should not be a cap on the amount of sites offered in a single year. This should be completely at the lessee's discretion.

RESPONSE 14:

The number of sites processed per year will be dependent on the funding DNRC receives to prepare and process cabin and home site sales and the number of sales that can be made within a given neighborhood without negatively impacting the market for cabin and home sites. The number of sales processed in any year will be under the Land Board's authority and direction. Sales will be consistent with the board's constitutional fiduciary duty of attaining full market value for lands sold.

COMMENT 15:

There is no opportunity to set a price higher than appraised value on the improvements.

RESPONSE 15:

Lessees have the opportunity for an informal administrative hearing before DNRC to provide evidence of a higher value for the improvements. DNRC will present its findings and conclusions along with the recommended value of the improvements to the Land Board.

COMMENT 16:

The state should split processing costs. It is unfair to place that burden entirely on the leaseholder.

RESPONSE 16:

DNRC will be paying for any needed surveys and the portion of the appraisal cost attributable to determining the market value of the cabin and home site. Under the existing Land Banking program rules (see ARM Title 36, chapter 25, subchapter 8), those fees are paid by the lessee who nominates the parcel for sale. DNRC also does not charge for administrative costs for work done by DNRC staff.

COMMENT 17:

As proposed, the sale program appears to be clumsy, slow, and difficult to navigate. It should be quick, simple, and easy to undertake.

RESPONSE 17:

The proposed sale program timeline accounts for: three approvals from the Land Board; an appraisal bidding and completion process; and advertising requirements in statute. DNRC will expedite the process whenever possible. Based on experience with land banking sales, the projected timeline for the cabin and home site sale process is reasonable and necessary to meet statutory and rule requirements.

COMMENT 18:

Commenter asked if the trial period will last through 2014 and gear up fully in 2015. Commenter asked if DNRC plans to fully implement the program in 2015 with a goal of 40 sale properties.

RESPONSE 18:

The number of sites processed per year for sale will be dependent on: funding DNRC receives to prepare and process cabin and home site sales; and the number of sales that can be made within a given neighborhood without negatively impacting the market for cabin and home sites. The number of sales processed in any year will be under Land Board authority and direction and will be consistent with the board's constitutional fiduciary duty of attaining full market value for lands sold.

COMMENT 19:

Commenter asked if the proposed Governor's Budget for the 2015 Legislative Session will include funding for these sales.

RESPONSE 19:

Details of the Governor's budgeting process are outside of the scope of this rulemaking.

COMMENT 20:

Once the pilot program is over, commenter asked if there will be prioritization or if there will be equal treatment for both current lessees and improvement owners who have nominated their properties. Commenter asked if DNRC intends to have any preference.

RESPONSE 20:

Once the pilot program is over, lessee and improvement owner nominations that meet preliminary criteria will be included for random selection in the sales program. The duration of the pilot program will be dependent on Land Board oversight and the funding DNRC receives to prepare and process cabin and home site sales.

COMMENT 21:

The treatment of owner improvements upon a cancelled lease (versus a current lessee) is unfair. Improvement owners should be given the same rights as any lessee in being able to match the highest bid for the cabin and home site.

RESPONSE 21:

The ability to match the high bid at an auction is only afforded to lessees, per 77-2-324, MCA.

COMMENT 22:

Real estate brokers in different counties could provide a great deal of assistance and marketing experience and may be an excellent way to eliminate funding issues associated with the selling of these parcels.

RESPONSE 22:

DNRC believes involving real estate brokers and paying real estate sales commissions would add additional, unnecessary cost associated with selling these parcels.

COMMENT 23:

Cabin and home site land would be better cared for environmentally if it was privately owned. "Owners would be able to rationalize and finance home and land improvements by being able to borrow from banks or in knowing that said improvements would be advantageous to them in future sales/or in keeping the values of their saleable property in good condition."

RESPONSE 23:

DNRC cannot speculate on how private ownership would affect the environmental care of cabin and home sites. DNRC assumes that current conditions and uses would continue and any change in use would require local regulatory approval, similar to current conditions.

COMMENT 24:

Commenter asked if the identity of other qualified bidders would be public knowledge.

RESPONSE 24:

After the deadline for submitting a bid deposit on a sale parcel, lessees or improvement owners may contact the DNRC and inquire about other submitted bid deposits. All bidders will have to attend—or be represented at—the auction. Only oral bids submitted by a qualified bidder will be accepted at the auction.

COMMENT 25:

Commenter asked if lessees will be responsible to "show" the cabin or home site and grant access for inspections and viewing appointments for prospective bidders.

RESPONSE 25:

DNRC will further develop sale procedures where there will be a requirement to allow prospective bidders to view the property without overly burdening the lessee.

COMMENT 26:

Commenter asked under what conditions the board or DNRC may nominate cabin and home sites for sale.

RESPONSE 26:

Pursuant to 77-2-318, MCA, sales of existing cabin or home sites could be initiated by the lessee with the approval of the board. Under the adopted rules, DNRC contemplates only nominating unleased cabin and home sites for sale. The Land Board retains the constitutional authority to determine whether any tract of trust land should be sold. The sale program under 77-2-318, MCA, is voluntary

COMMENT 27:

Selling cabin and home sites to lessees will improve the economy and tax base.

RESPONSE 27:

Cabin and home sites that are sold into private ownership will no longer be tax exempt. They will be taxed as assessed by the Montana Department of Revenue.

COMMENT 28:

Commenter asked why proceeds above minimum bid are not allocated pro rata between the land and the improvements. Commenter said it seemed unfair that all amounts over the appraised value are assigned to the land value.

RESPONSE 28:

DNRC only owns the cabin and home site and has authority to sell only the cabin and home site. DNRC will not be selling the improvements at the auction and bidding will be for the land only. However, it shall be a condition of any sale that the purchaser separately purchase the improvements at their appraised value. Any value received over the minimum bid is attributable to the land only.

COMMENT 29:

Commenter asked why bidding does not start at $10 per acre since the Enabling Act established that as a minimum value.

RESPONSE 29:

The Enabling Act states that any lands disposed of shall not be sold for a price less than ten dollars an acre. The Montana Constitution states: "No such land or any estate or interest therein shall ever be disposed of except in pursuance of general laws providing for such disposition, or until the full market value of the estate or interest disposed of, to be ascertained in such manner as may be provided by law, has been paid or safely secured to the state." The Land Board sets the minimum bid for a sale parcel after the market value has been established through an appraisal.

COMMENT 30:

There should be a way to allow lessees a limited window of opportunity to offer fair market value for their leases, after which it goes on the market for competitive bid.

RESPONSE 30:

See Response 12.

COMMENT 31:

Commenter asked if they have the ability to propose a land exchange for a cabin or home site.

RESPONSE 31:

Yes, the proposed land exchange would have to meet or exceed the land exchange criteria in the Land Board's Land Exchange Policy (revised December 2004). The Land Exchange Policy can be found on the DNRC web site at http://dnrc.mt.gov/Trust/REMB/Exchange/LandExchangePolicy.pdf.

COMMENT 32:

Commenter asked if the proposed rules allow those lessees whose leases have been abandoned or canceled to participate in the sale program.

RESPONSE 32:

77-2-318, MCA, states that at the request of a lessee or improvement owner the Land Board will make cabin and home sites available for sale, if the sale is consistent with the board's constitutional fiduciary duty of attaining full market value and the sale complies with the provisions of Title 77, chapter 2, part 3, MCA, and if the sale is approved by the board. This language would indicate that owners of improvements on cancelled or terminated lease sites may nominate those sites for sale.

COMMENT 33:

If the state puts up an abandoned or cancelled lease property for sale, commenter asked if the buyer will have to accept "fair market value" for the improvements, or if those values are negotiable.

RESPONSE 33:

The buyer will have to accept "fair market value" for the improvements, as determined by appraisal and set by the Land Board on all sales of cabin and home sites. The improvement owner has the option of accepting less than the "fair market value" for the improvements set by the Land Board in order to facilitate a sale.

COMMENT 34:

High bidders for lucrative state leases on waterfront properties who outbid lessees can force lessees off the property then give them fair market value for their improvements. Commenter asked why lessees cannot secure more than fair market value for their improvements since the state can secure more than fair market value for its land.

RESPONSE 34:

See Response 12. If the full market value is more than the minimum bid set by the Land Board based on the appraisal, the value may be bid up. The purchaser (if not the lessee) will also have to pay the owner of the improvements the value of those improvements.

COMMENT 35:

The bid process may very well discourage lessees of lucrative properties who fear a competitive bid which they cannot afford to match. The rules thwart the intent of Chapter 422 of the 2013 Montana Session Laws which was to eventually get the state out of the cabin leasing business.

RESPONSE 35:

Purchasers must pay full market value set by the auction process. The purpose of Chapter 422 of the 2013 Montana Session Laws is to facilitate the sale of cabin site properties if it is consistent with the best interests of the affected trust beneficiaries.

COMMENT 36:

What is the environmental review referred to in the proposed rules since these sales are exempt from the Montana Environmental Policy Act (MEPA)?

RESPONSE 36:

This would be any other type of environmental review needed to allow the sale process to move forward (e.g., Phase 1 Environmental Site Assessment).

COMMENT 37:

New Rule V(2) states DNRC reserves the right to prioritize activities and determine the number of transactions processed related to the sale of cabin activities and determine the number of transaction processed related to the sale. Commenter asked what those transactions would be.

RESPONSE 37:

Prioritization of sale activities would be dependent on funding and available staff to process sales. Other trust land project staff may be allocated to work on the program and the number of sales that can be made within a given neighborhood without negatively impacting the market for cabin and home sites. The number of sales processed in any year will be under Land Board authority and direction; and, will be consistent with the board's constitutional fiduciary duty of attaining full market value for lands sold.

COMMENT 38:

DNRC should address the question of whether or not land developers and realtors can purchase leaseholds. Commenter believes these entities and their agents should be specifically prohibited from bidding on lucrative leaseholds.

RESPONSE 38:

The sale process required by law is an open public auction. Any person who timely submits an Offer to Purchase and Bid Deposit will be allowed to bid on the sale parcels.

COMMENT 39:

There appears to be no way a leaseholder can purchase his leasehold if it is valued beyond his financial means. Commenter asked if the state would be willing to "back" the leaseholder and offer security to a private lender so that a leaseholder could purchase his leasehold.

RESPONSE 39:

Chapter 422 of the 2013 Montana Session Laws does not require DNRC to offer financing for cabin and home site sales.

COMMENT 40:

Lease properties should be well-marked and advertised for sale so potential bidders can see and evaluate the properties.

RESPONSE 40:

DNRC will ensure sale property boundaries are well marked and will develop effective marketing materials to generate interest in cabin and home site sales.

COMMENT 41:

According to the proposed rules, preliminary sale criteria include "the extent of infrastructure." Commenter asked if DNRC and the Land Board will disapprove a sale if there is no infrastructure to the property (e.g., sewer, water, and power). The lack of infrastructure did not stop the state from leasing the property in the first place, so it should not stop it from selling the lease. Infrastructure criteria should be deleted. Including it as sale criteria discriminates against a class of leaseholders.

RESPONSE 41:

The extent and placement of infrastructure may require additional survey work or agreements between lessees on shared or encroaching infrastructure. Lack of infrastructure alone will not disqualify a parcel from being considered for sale.

COMMENT 42:

Commenter asked why "John Doe citizen" cannot petition to buy an abandoned or cancelled leasehold. As it appears now in the proposed rules, only DNRC or Land Board can nominate parcels for sale.

RESPONSE 42:

A citizen who is not a lessee or improvement owner may request that DNRC nominate unleased cabin and home sites.

/s/ John E. Tubbs /s/ Tommy Butler

JOHN E. TUBBS TOMMY BUTLER

Director Rule Reviewer

Natural Resources and Conservation

Certified to the Secretary of State December 16, 2013