BEFORE THE BOARD OF LAND COMMISSIONERS AND
THE DEPARTMENT OF NATURAL RESOURCES
AND CONSERVATION OF THE STATE OF MONTANA
In the matter of the repeal of ARM 36.25.137, amendment of ARM 36.25.106, 36.25.110, 36.25.111, 36.25.112, 36.25.115, 36.25.117, and 36.25.125, and the adoption of New Rules I through XIII regarding surface leasing and cabinsite leasing rules
NOTICE OF REPEAL, AMENDMENT, AND ADOPTION
To: All Concerned Persons
1. On January 14, 2010, the Department of Natural Resources and Conservation published MAR Notice No. 36-22-143 regarding a notice of public hearing on the proposed repeal, amendment, and adoption of the above-stated rules at page 25 of the 2010 Montana Administrative Register, Issue No. 1.
2. The department has repealed ARM 36.25.137 as proposed.
3. The department has amended ARM 36.25.106, 36.25.110, 36.25.111, 36.25.112, 36.25.115, 36.25.117, and 36.25.125 as proposed. The department has adopted New Rules VII (36.25.1007), XI (36.25.1011), XII (36.25.1012), and XIII (36.25.1013) as proposed.
4. The department has adopted New Rules I (36.25.1001), II (36.25.1002), III (36.25.1003), IV (36.25.1004), V (36.25.2005), VI (36.25.1006), VIII (36.25.1008), and X (36.25.1010) as proposed, but with the following changes from the original proposal, new matter underlined, deleted matter interlined:
NEW RULE I (36.25.1001) CABINSITE DEFINITIONS
(1) remains as proposed.
(2) "Adjusted 2009 appraised value" means an amount equal to the 2003 Montana Department of Revenue (DOR) appraised value for a state parcel increased
by at a rate of 6.53 percent compounded annually to 2009.
(3) and (4) remain as proposed.
(5) "Base rent" means the lower of five percent of the adjusted 2009 appraised value of the state trust land under lease or an amount equal to five percent of the actual 2009 reappraisal of market value by the DOR.
(6) through (11) remain as proposed.
(12) "Lease" means a contract by which the board conveys state trust land for a term of years for a specified rental, and for the use for which the land is classified (77-1-401, MCA).
(13) remains as proposed.
(14) "Lease fee adjustment process" means the annual process by which the department applies the Lease Fee Indicator to the adjusted 2009 appraised value of the leased premises, or by which the department applies the rental rate contracted in the lease to the actual 2009 reappraisal of market value by the DOR, and subsequent reappraisals, to determine if it is necessary to alter the annual rental payment. Future lease fee adjustments will occur at the review period defined in the lease, or at any time that it is considered necessary to protect the interests of the
state trusts, as determined at the sole discretion of the director of the department.
(15) through (18) remain as proposed.
(19) "Trust(s)" means any one, or collectively all of the trusts, that receive income derived from department management of state trust lands.
NEW RULE II (36.25.1002) CABINSITE LEASES
(1) through (3) remain as proposed.
The issuance of any cabinsite leases after January 16, 1987, shall require reclassification of the land as provided by ARM 36.25.109. Cabinsite leases shall be classified as per ARM 36.25.108, or if necessary, reclassified as per ARM 36.25.109.
(5) A cabinsite lease grants the lessee the right of access and the right to place necessary utility facilities within the cabinsite lease premises
, and across specified adjacent state trust lands from the main utility to the cabinsite lease premises during the term of the lease, with the prior written approval of the department. For any such rights outside of state trust land the cabinsite premises, the lessee will be responsible for obtaining any necessary easements from must acquire an easement with the appropriate landowner(s).
NEW RULE III (36.25.1003) CABINSITE MINIMUM RENTAL (1) Effective January 1, 2010, and for those cabinsite leases due for the lease fee adjustment process in calendar year 2008 and 2009, and except as provided in (1)(a) and (1)(b), the minimum rental for a cabinsite lease is the greater of five percent of the 2009 appraised market value of the land, excluding improvements, as determined by the Montana Department of Revenue (DOR) pursuant to 77-1-208, MCA, or $250, or a competitive bid amount as described in ARM 36.25.1009. As required by 77-1-106, MCA, this rental rate reflects the expenses commonly incurred by lessees in leasing state trust land. A cabinsite lessee may:
(a) remains as proposed.
(b) sign and execute a 2010 supplemental lease agreement (SLA), which will direct that the minimum rental shall be calculated as follows:
(i) an amount equal to the 2003 appraised parcel value determined by the DOR,
shall be increased at an annual rate of 6.53 percent, compounded annually for six years to obtain the adjusted 2009 appraised value. [Example: 2003 appraised value x multiplied by (1.0653)6 = equals adjusted 2009 appraised value];
(ii) remains as proposed.
(iii) the lower of either an amount equal to five percent of the adjusted 2009 appraised value or five percent of the 2009 appraised parcel value shall be the base rent applicable to the lease in the year 2010;
(iv) the annual rental due for years 2011 and thereafter shall be calculated by applying the LFI to the previous year's lease fee. Any lease renewed, reviewed, or subject to lease fee adjustment, shall pay an annual rental equal to that calculated under (b)(i) through (iv), above. In year 2010, the LFI will not be used. [Example: 2010 base rent
x multiplied by (1 + LFI) = equals 2011 rent] . ; and
(v) lessees may opt to sign an SLA at any time before lease renewal.
(2) through (7) remain as proposed.
NEW RULE IV (36.25.1004) CABINSITE PAYMENT DUE DATE
(1) The department shall bill for cabinsite leases using the schedule outlined in (1)(a) through (c).
(a) Written notice of the amount of rental due for 2010 will be sent to each cabinsite lessee's address of record following adoption of these rules on May 28, 2010. In this instance, the specific dates for payment notification, when payments are due, and when late charges and lease cancellation may occur will be approved by the Land Board.
1b) Beginning in January 2011 and each January thereafter of each year, the department will send written notice of the amount of rental due to each cabinsite lessee's address of record. written notice of the amount of rental due. Notices shall be sent to the lessee's address of record.
(i) The notice shall
also state that the payment is due by March 1, and if payment is not received or postmarked not paid by April 1, that the lease will be is cancelled.
(A) In mid-March, prior to April 1, the department shall send a reminder letter by certified mail to each lessee who has not made payment, notifying the lessee that the lease is cancelled if payment is not received or postmarked on or before April 1. If payment is not received or postmarked by April 1, the entire lease is cancelled.
Payments An additional $25 late fee will be charged for payments made after March 1, but before April 1. will be charged an additional $25 late fee. In mid-March, prior to April 1, the department shall send a letter by certified mail to each lessee who has not made payment, notifying the lessee that the lease is cancelled if payment is not received or postmarked on or before April 1. If payment is not received or postmarked by April 1, the entire lease is cancelled.
2c) If the lessee elects to make semi-annual payments, the department will send written notices in January and July of each year, except as described in (1) to the address of record, per ARM 36.25.104(3), stating the amount of semi-annual rental due.
(i) The notice shall
also state that the first-half payment is due by March 1, and if not paid by April 1, the lease is cancelled. The notice shall also state that the second-half payment is due by September 1, and if not paid by October 1, the lease is cancelled.
(A) In mid-March, prior to April 1; and mid-September, prior to October 1, the department shall send a reminder letter by certified mail to each lessee who has not made payment a letter notifying the lessee that the lease is cancelled if payment is not received or postmarked on or before April 1 or October 1. If payment is not received and postmarked by April 1 or October 1, the entire lease is cancelled.
Likewise An additional $25 late fee will be charged for payments made after March 1 but before April 1; and payments made after September 1 but before October 1. will be charged an additional $25 late fee. In mid-March, prior to April 1, and mid-September, prior to October 1, the department shall send by certified mail to each lessee who has not made payment a letter notifying the lessee that the lease is cancelled if payment is not received or postmarked on or before April 1 or October 1. If payment is not received and postmarked by April 1 or October 1, the entire lease is cancelled.
(d) In special circumstances, as determined by, and at the direction of the board, the department may send notices of payment to lessees at times other than those described in (1)(a) and (b). The specific dates for payment notification, when payments are due, and when late charges and lease cancellation may occur will be approved by the Land Board.
32) A lease may be reinstated for an additional reinstatement fee, which will be a minimum of $500, or as much as three times the annual rental amount of the lease. The decision whether or not to offer a lessee the ability to reinstate the lease by paying a reinstatement fee, as well as the amount to charge for the reinstatement fee, are both at the discretion of the department.
(4) When a lease term begins on or between March 1 and August 31 during the first year of the lease, the lessee shall pay a rental price equal to the rental price for an entire year. When the lease term begins on or between September 1 and February 28 of the next year, the lessee shall pay a rental price equal to half of the annual rental. Prorated or partial-year payments shall be made in amounts equal to either the full annual rental or half the annual rental.
(3) The rental price for the first year of a new lease shall be prorated by dividing the full amount of the rental for the first year by 365 then multiplying the result by the number of days between the lease start date and the last day of the upcoming February.
NEW RULE V (36.25.1005) CABINSITE IMPROVEMENTS (1) A cabinsite lessee may place improvements on state trust land which are necessary for the conservation or utilization of that state trust land and associated structures such as outbuildings, utilities, and sleeping cabins, with the approval of the department; however, only one single-family residence will be permitted on each cabinsite lease, and the lessee is responsible to
iensure all such installations and improvements meet all applicable rules, codes, and regulations.
(2) The lessee shall apply for permission prior to placing any improvements on state trust land and shall use the form prescribed by the department.
(3) A lessee will not be entitled to compensation by a subsequent lessee for improvements
which are placed on the land after May 10, 1979, unless those improvements have been were previously approved by the department in writing prior to their placement upon the land. Proof of the date of placement of improvements may be required by the department. Any improvements or fixtures paid for by state or federal monies shall not be compensable to the former lessee.
It shall be the responsibility of the lessee to The lessee shall be responsible for notifying the department of the value of the improvements. The asking price of the improvements shall be the higher of either the most recent DOR assessment of the improvements, or of an appraisal of the improvements, though the lessee retains the right to lower the asking price of the improvements. Settlement for the improvements shall be determined pursuant to 77-1-208(3), MCA, and the procedures set out in ARM 36.25.125. All settlement for improvements must occur within 120 days of the issuance of the lease.
(a) remains as proposed.
(b) Determination of compensation for improvements shall utilize standard appraisal procedures, giving full consideration to the improvement's condition, its contribution to the value of the property for residential purposes, and remaining economic life. Compensation shall be the estimated cost to construct, at current prices, a building with equivalent utility as of the date of the lease or license's expiration.
(5) At the time of assignment or other transfer of interest in the leasehold, the department must be notified of the sale price of the improvements and be provided copies of any agreements reflecting the transfer of both the lease and improvements, such as, but not limited to a realty transfer certificate.
(5) remains as proposed but is renumbered (6).
NEW RULE VI (36.25.1006) REMOVAL OF CABINSITE IMPROVEMENTS AND COMPENSATION (1) At cancellation, termination, or abandonment of the cabinsite lease, the lessee will be notified of their right to be compensated for their improvements by a new lessee, or their right to remove those improvements.
(2) and (3) remain as proposed.
(4) The beginning of the three year time period shall be either:
(a) the effective date of an abandonment form executed by the lessee and accepted by the department; or
(b) the date rent is due, if the rent is not paid as per ARM 36.25.1004 or no abandonment form is submitted.
(5) If the lessee abandons the improvements there shall be no obligation by the department or other party for compensation for all improvements on the property, including movable and nonmovable improvements, as well as personal property.
(4) remains as proposed but is renumbered (6).
57) If three years after the cancellation, termination, or abandonment of the cabinsite lease no new lessee has been found, the department shall provide written notice to the former lessee that unless the improvements are removed within 60 days, the improvements will become the property of the state trust. This condition and limitation applies to all improvements on the property, including movable and nonmovable improvements, as well as personal property.
(6) and (7) remain as proposed but are renumbered (8) and (9).
NEW RULE VIII (36.25.1008) CANCELLATION AND ABANDONMENT OF CABINSITE LEASES AND SECURITY INTERESTS
(1) through (6) remain as proposed.
(7) The former lessee may or may not choose to market the improvements for sale. In no case will the department pay any realtor fees or commissions for the marketing of former lessee improvements when such marketing services are contracted by the lessee.
(8) The proposed buyer of a former lessee's improvements must still participate in, and be the successful bidder of the cabinsite lease, per ARM 36.25.1009.
(9) and (10) remain as proposed.
NEW RULE IX (36.25.1009) ISSUANCE OF CABINSITE LEASE ON UNLEASED AND RECLASSIFIED LAND (1) A person who desires to lease unleased state trust land for a cabinsite must apply on the standard application form prescribed by the department. The application form must be returned to the department and must be accompanied by a nonrefundable application fee. Such application shall be deemed an offer to lease land for a cabinsite as specified by the application, at a rental rate which reflects fair market value.
(2) remains as proposed.
(3) The department will advertise cabinsites for bid in one or more
any of the following ways , or any combination of the following:
(a) through (e) remain as proposed.
(4) Nothing in this rule shall preclude the department from generally making it known that a cabinsite is currently unleased and that the department is accepting applications to lease state trust land for a cabinsite.
(5) and (6) remain as proposed.
(7) The cabinsite will be leased to the highest qualified bidder, with the following qualifications:
(a) if the board determines that the bid is not in the best interests of the
state trust and the high bid is rejected, the board will issue its reason for the rejection in writing. The lease may then be issued, at a rental rate determined by the board, to the first bidder who is willing to pay the board-determined rental, whose name is selected through a random selection process from all bidders for the cabinsite lease; or
(b) if no bidder is selected, or if the highest qualified bidder declines the bid, the department may determine if and when to reopen a lease for bid, or offer the cabinsite lease to the next highest qualified bidder at that next bidder's bid amount.
(8) remains as proposed.
(9) The rental price for the first year of a new lease shall be prorated by dividing the full amount of the rental for the first year by 365 then multiplying the result by the number of days between the lease start date and the last day of the upcoming February.
When a lease term begins on or between March 1 and August 31 during the first year of the lease, the lessee shall pay a rental price equal to the rental price for an entire year. When the lease term begins on or between September 1 and February 28 of the next year, the lessee shall pay a rental price equal to half of the annual rental. Prorated or partial-year payments shall be made in amounts equal to either the full annual rental or half the annual rental.
(10) through (12) remain as proposed.
NEW RULE X (36.25.1010) TERM OF CABINSITE LEASE (1) A cabinsite lease will be issued for a period not to exceed 15 years unless the cabinsite lessee demonstrates a need for a longer period for loan security purposes, in which case the new lease may be issued in the discretion of the department for a period up to five years longer than the term
s of the loan up to a maximum lease period of 35 years.
(a) and (b) remain as proposed.
(c) Lease terms longer than 15 years are intended for loan security of dwelling improvements, not ancillary improvements such as septic tanks, wells, garages, and outbuildings.
(d) The loan amount shall be a minimum of 15 percent of the value of the dwelling improvements.
(e) The lender shall provide proof of the loan and the loan terms to the department.
5. The following comments were received and appear with the department's responses.
The five percent lease rate is too high and should be lowered.
Five percent of the appraised value is considered full market value, per the 1999 Supreme Court Case No. 98-535, Montrust v. State, 1999, MT 263, 296, Mont. 402, 989 P.2d 800, which determined that the state was not receiving full market value for cabinsite leases at 3.5 percent of the appraised value. The subsequent negotiated rulemaking done by the DNRC in 2000 was a result of the court case.
The proposed Real Estate Index (REI) and Consumer Price Index (CPI) have no reference to current market conditions and do not lower lease payments with decreases in the market value of the cabinsite.
The CPI is a moving, annual, criterion that can lower the lease fee indicator (LFI) in these rules. As an average, land values go up. The 25-year average for the REI will also capture actual movement in the real estate market. However, if the market goes down, that will also be reflected in the REI average.
The LFI, which is comprised of the CPI and the REI, is arbitrary and has no relationship whatsoever to the full market value of state cabin leases. Commenter said that LFI should be removed from New Rules I (ARM 36.25.1001) through III (ARM 36.25.1003).
See Response 2.
School trust land appraisals for cabinsites must not be conducted as though there is fee ownership of the property, but as though the property is being leased.
DNRC is the fee owner of the land and expects that the appraising agency, Department of Revenue (DOR), is complying with state statute and applicable administrative rules, and is following professional appraisal practices. A lower appraisal would require a higher lease rate to achieve full market value, which was part of the negotiated rules discussion from 2000.
Prior to implementing the new rules, DOR or an appraisal firm should perform another appraisal of the cabinsites using professional appraisal standards. The land should be appraised as a lease property, rather than as fee simple land.
See Response 4.
Leases should have competitive bids at renewals.
Most lessees indicated their strong desire to avoid competitive bidding at renewal during the 2000 negotiated rulemaking, leading to ARM 36.25.117(3)(a), which has been renumbered as ARM 36.25.1011(2) (New Rule XI(2)). Competitive bidding, if implemented, would still require a minimum or floor bid, which would be the minimum value as described in these rules.
The rules should include provisions for seniors and other people on fixed incomes to lease their cabinsites for static amounts.
A fixed rent amount does not achieve full market value as land values increase. New Rule XII (ARM 36.25.1012) provides for some consideration to low income lessees that use the cabinsite as their primary residence, but any deferred rent must be paid back.
The lease fee should be capped at a fixed amount. Lease fees should be equal to the property taxes that would be charged for a cabinsite if it were not tax exempt land.
A freeze on lease fees as land values increase would mean full market value is not being obtained for the trust, as required by statute and Montrust v. State. Property taxes are assessed to satisfy city and county government services and do not reflect a return to the trust beneficiaries for the use of the state trust land for cabinsite leasing.
Commenter suggests the rules should provide a discount to lessees that pay the annual lease cost in one payment, rather than in biannual payments.
A discount would be a reduction in lease payment, which would mean those discounted leases would not achieve full market value, as required by statute and Montrust v. State.
77-1-208, MCA, provides that an appeal of a cabinsite value as determined by the DOR appraisal must be conducted pursuant to tax appeal provisions. Commenter said that DNRC cannot deny an appeal of value.
Appraisal appeals must be filed with DOR, not DNRC, since DOR has the statutory authority in that matter. DNRC does not have the authority to provide for hearings upon assessed values determined by the DOR.
DNRC does not have the authority to use a value other than the DOR appraised value (2009 projected value).
DNRC's proposed rules utilize a base rent that is a full, phased-in lease payment projected forward by six years at 6.53 percent appreciation. If the proposed rules were not adopted, the only other option would be to use the 2009 DOR appraised value exclusively. For many lessees, using this method would result in a lease fee higher than that anticipated using the current base rent as the basis for valuation, as laid out in these rules.
The rules should use the term "the trust" instead of "the state".
DNRC agrees and references to "state" have been changed to "trust(s)" where applicable. A definition of "trust" has also been added to ARM 36.25.1001(New Rule I).
Commenter said that DNRC should require that, at the time of assignment or other transfer of interest in the leasehold, DNRC must be notified of the assignment price and be provided with copies of any agreements reflecting the transfer, thereby ensuring full disclosure of the consideration paid for such transfer.
DNRC agrees and has included language requiring DNRC notification in ARM 36.25.1005(5) (New Rule V(5)).
Lessees are stewards that care for the trust's property and maintain the land. Commenter stated that lessees should be compensated for that stewardship.
Stewardship, while appreciated, does not translate to a tangible monetary return to the trust beneficiaries. The lessee typically receives the greatest and most direct benefit from a well-maintained lease site. Stewardship cannot be leveraged to reduce lease fees. Also, see Response 9.
Commenter asked for clarification as to how large a loan is needed to qualify for a extended lease term? Commenter also said that DNRC should require proof of such a loan and clearly indicate that the 35-year term is one-time, or at least not ongoing at renewal.
DNRC agrees and has included language in New Rule X(1)(c) through (g) (ARM 36.25.1010(1)(c) through (g)) for clarification.
Commenter says that if the lessee expresses intent to abandon his lease it should not be construed as actual abandonment. The rules regarding notice of abandonment should remain unchanged.
The rules state that a lessee's notice to abandon must be on a form prescribed by DNRC and signed by the lessee (see ARM 36.25.1008(2) through (4)). Only such notice shall be considered as a true and unequivocal abandonment.
The rules do not provide a way for the 2003 DOR appraised value to be appealed.
According to DOR, the 2003 DOR values may no longer be appealed. Changes to DOR rules and procedures are outside the scope and authority of the proposed DNRC rulemaking.
The DNRC has no right to establish rules over privately held improvements. Not only is the DNRC overstepping its governmental authority in this matter, but enforcing this rule would have the effect of automatically forcing the owner of those improvements (the leaseholder) to lose money due to having to pay real estate commission and taxes out of the sales price.
The proposed rules allow for the selling of improvements. Since the improvements belong to the lessee/seller, it is consistent that if a lessee/seller lists a property for sale with a realtor, the lessee/seller and any buyer would be responsible for realtor commissions and taxes due.
The state is unfairly manipulating the market for leaseholder improvements by setting unrealistic annual fees. These escalating fees will inevitably lead to leaseholders being unable to sell their property and being forced to relinquish it to the state for no compensation.
For most lessees, the lease fee anticipated under the proposed rules is lower than that anticipated under the current lease fee methodology. Additionally, the time period for the sale of improvements has been extended from two to three years.
Commenter stated that New Rule V(3) (ARM 36.25.1005(3)) is sufficient to limit the appraisal to only authorized improvements and that New Rule V(4)(a) (ARM 36.25.1005(4)(a)) should be stricken.
DNRC is seeking to ensure appraisals are conducted in compliance with state statutes, administrative rules, and within the regular scope of the Uniform Standards for Professional Appraisal Practice (USPAP) and the use that is appropriate to the residential lease site. The intent is to keep listing prices consistent with a third-party appraisal to keep the time on market as short as possible. Further, improvements sold in excess of appraised value demonstrate the sale of "leasehold", thereby indicating lease fees may be below market value.
Commenter stated that by contracting for appraisals of improvements, DNRC is restricting the rights of cabinsite improvement owners.
Each appraiser is an independent third party that is contracted by DNRC. Every appraiser contracted by DNRC is expected to comply with USPAP.
Commenter asked why for up to three years following abandonment of the lease, they should be responsible for paying the personal property tax on improvements that they can no longer use?
Personal property tax is an issue between the owner of improvements and the taxing authority, not the DNRC. The improvements continue to be owned by the former lessee, as indicated in New Rule VI (ARM 36.25.1006), until the time period in the rule elapses and the state takes ownership.
DNRC's proposed revision of the ARM covering state cabin leases does not address the material issues leaseholders raised in the public process DNRC ran, leading up to the Land Board recommendations and initial decision on these rules.
DNRC is uncertain as to what "material issues" commenter refers to. These rules account for many of the comments received from June 2009 to the present, such as lower payments, consistent payments, and more dynamic lease fee calculations that reflect changes in the real estate market.
The DNRC cannot adopt rules for which it has no legal authority. That power rests solely with the Legislature.
The proposal notice cites the statutory rulemaking authority DNRC has to make rules on each proposed amendment or adoption. Additionally, the Land Board has the statutory authority for management of school trust lands and has directed DNRC to initiate this rulemaking process.
DNRC is proposing to give its director sole discretion to make lease fee adjustments. Commenter said this provision should be stricken from these rules as there is no statutory authority for the director to have this authority.
The DNRC director has the authority to act on behalf of the Land Board to make management decisions on trust lands that protect the trust beneficiaries.
Commenter stated that the rules appear to be at odds with what they have always understood to be the relationship between land rents and land value: land value multiplied by a lease rate equals the lease payment.
The base rent under the new rules, as well as the lease fee calculations under the current method, are calculated by using the appraised land value multiplied by the lease rate to get the lease fee or lease payment.
Commenter said that since the 2003 DOR appraisal value may not be appealed, DOR would like to avoid using reference to the 2003 value.
DNRC agrees and has changed the definition of "Adjusted 2009 appraised value" in New Rule I(2) (ARM 36.25.1001(2)) and modified the language of New Rule III(1)(b)(i) (ARM 36.25.1003(1)(b)(i)).
DEPARTMENT OF NATURAL RESOURCES AND CONSERVATION
/s/ Mary Sexton /s/ Tommy Butler
MARY SEXTON TOMMY BUTLER
Director Rule Reviewer
Natural Resources and Conservation
Certified to the Secretary of State May 17, 2010.