BILL ANALYSIS

C.S.H.B. 2217

                                                                                                                                          By: McCall

Land & Resource Management

Committee Report (Substituted)

BACKGROUND AND PURPOSE

The Texas Legislature has charged the School Land Board (board) and the Commissioner of the Texas General Land Office (GLO) with the duty and authority to manage the state-owned real property dedicated to the Permanent School Fund (PSF) under Article VII, Sections 4 and 5, Texas Constitution.  The portfolio contains millions of acres, including ranching and grazing properties in West Texas, timberlands in East Texas, urban properties in a variety of locales, the Gulf Coast beaches and bays, and the "submerged" lands extending 10.3 miles out from the shoreline.  The GLO and the board lease state land for a variety of purposes, including oil and gas production, commercial development, and sustainable energy development.

In Section 51.052(d), Natural Resources Code, the board is authorized to sell PSF land at a price not less than market value as determined by an appraiser, per the definition found in Section 51.001(11).  This provision protects both the Commissioner and board by ensuring the PSF is properly compensated for any land it chooses to sell.  Consistent with the foregoing, Section 51.403(a) restricts the board from paying more than market value for real property interests acquired on behalf of the PSF.

However, situations often arise where a property may be subject to conditions or circumstances that affect its marketability in a way that is not reflected in the market value determined by an appraisal.  It could be of limited interest to the market because it is land-locked with no access via public roadways due to being surrounded on all sides by one property owner, or the cost to sell the property through sealed bid sale may be higher than the market value of the property.  On the other hand, a property could be of greater interest to a particular segment of the market because of its location, some unique attribute, or its proximity to another tract.  The board may have knowledge about a property or about the  market that indicates that it may be in the best interest of the PSF to pay more than market value or to sell for less than market value for a particular property after considering all relevant factors.

The board is without clear authority to expend funds to make improvements to PSF real property assets or to otherwise enhance the value thereof.  The potential return to the PSF can often be dramatically increased by basic improvements such as the installation of necessary infrastructure like water, electricity service, sewage, or roadways.  Presently, the board relies on the use of ground leases to get these improvements made, but must share the benefits thereof with its lessee.

The PSF real property portfolio includes numerous properties that are not suited to sale through a sealed bid process; however, the board cannot respond to serious inquiries from potential buyers until such sealed bid process is completed. This is particularly problematic with regard to commercial properties.  Presently if a sealed bid process does not result in a successful sale, the board can retain the services of a real estate broker to assist with disposition of a property.

CSHB 2217 modifies the Chapter 51 definition of “market value” so that the board may determine the market value of a particular property being bought or sold. The bill also clarifies the authority of the board to manage PSF lands and to expend funds to pay expenses related to PSF real property assets and to make improvements to and enhance the value of PSF real property assets. 

Further, the bill adopts by incorporation the “prudent investor” as the standard to be used by the board in making expenditures of PSF funds and provides clear authority to retain the services of a fund manager to assist with real PSF estate investments.

The bill eliminates the preferential right of an adjacent property owner to purchase PSF lands before it goes on the market because of the adverse impact such right has had on the ability of the board to realize the maximum return on some lands.

RULEMAKING AUTHORITY

SECTION 6.               Authorizes the school land board to adopt rules to implement the                                                    preference right found in Section 51.051, Natural Resources Code.

ANALYSIS

SECTION 1.               Amends Section 51.001(11), Natural Resources Code, as follows:

                                    Defines "market value" to mean the price at which a property would                                               transfer for cash or its equivalent under prevailing market conditions as                                           defined by the Tax Code.

SECTION 2.               Amends the heading to Subchapter B, Chapter 51, Natural Resources                                              Code, as follows:

                                    SUBCHAPTER B. PROVISIONS GENERALLY APPLICABLE TO                                         THE MANAGEMENT [SALE AND LEASE] OF PUBLIC SCHOOL                                         AND ASYLUM LAND  

SECTION 3.               Amends the heading to Section 51.011, Natural Resources Code, as                                                 follows:

                                    Sec. 51.011. MANAGEMENT [SALE AND LEASE] OF PUBLIC                                               SCHOOL LAND.

SECTION 4.               Amends Section 51.011, Natural Resources Code, by amending Subsection                                     (a), and adding Subsection (a-1), as follows:

                                    Clarifies the complete authority of the board to manage PSF lands. 

SECTION 5.               Amends Section 51.051, Natural Resources Code, as follows:

                                    Makes conforming changes.

SECTION 6.               Amends Sections 51.052(d), (e), and (i), Natural Resources Code, as                                                follows:

                                    Authorizes the board to determine the market value of PSF lands that is in                                                 the best interest of the State after receipt of an appraisal. 

                                    Requires the board to find that allowing someone who has a preference to                                      buy a certain tract to be in the best interest of the state.

                                    Authorizes the board to retain the services of a real estate broker to assist                                       with a transaction involving commercial real estate without having first                                           held an unsuccessful sealed bid sale if it is determined to be in the best                                            interests of the PSF.

SECTION 7.               Amends Section 51.401(a) and (c), Natural Resources Code, as follows:

                                    Deletes language that is not needed when considering the more                                                       comprehensive list of purposes for which the special fund account may be                                      used contained in Section 51.402, Natural Resources Code, as amended.

SECTION 8.               Amends Section 51.402, Natural Resources Code, as follows:

                                    Clarifies the purposes related to PSF real estate investments for which the                                      board may use the special fund account, including the payment of certain                                       professional fees and expenses related to the maintenance and                                                         enhancement of the value of the PSF real property assets. 

SECTION 9.               Amends Subchapter I, Chapter 51, Natural Resources Code, by adding                                           Section 51.4021, as follows:

                                    Provides authority, requirements, and compensation for the retention of                                          the professional services of investment fund managers to assist the board                                        in the fulfillment of its responsibilities to maximize returns on PSF real                                         estate investments.

SECTION 10.                         Repeals Sections 32.254 and 51.403, Natural Resources Code. 

SECTION 11.                         Effective Date.

EFFECTIVE DATE

Effective date is September 1, 2005 or immediately if approved by two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution.

COMPARISON OF ORIGINAL TO SUBSTITUTE

SECTION 1.               The Original contains a provision that requires trades of PSF land must be                                      made on an equivalent market, while the Substitute changes the definition                                      of "market value" to mean the price at which a property would transfer for                                           cash or its equivalent under prevailing market conditions as defined by the                                    Tax Code.

SECTION 2.               The Original redefines "market value" to be the value determined by the                                         board, while the Substitute changes a heading in Chapter 51, Natural                                              Resources Code.

SECTION 3.               The Original is moved to SECTION 2 of the substitute, while the                                                   Substitute changes the heading to Section 51.011, Natural Resources                                              Code.

SECTION 4.               The Original is moved to SECTION 3 of the substitute, while the                                                   Substitute clarifies the complete authority of the board to manage PSF                                           lands. 

SECTION 5.               The Original is moved to SECTION 4 of the substitute, while the                                                   Substitute makes conforming changes.

SECTION 6.               The Original is moved to SECTION 5 of the substitute, while the                                                   Substitute includes the original SECTION 7 and a requirement that the                                          board to find that allowing someone who has a preference to buy a certain                                        tract to be in the best interest of the state.

SECTION 7.               The Original is moved to SECTION 6 of the substitute, while the                                                   Substitute includes the original SECTION 8.

SECTION 8.               The Original is moved to SECTION 7 of the substitute, while the                                                   Substitute includes the original SECTION 9.

SECTION 9.               The Original is moved to SECTION 8 of the substitute, while the                                                   Substitute includes the original SECTION 10 and language regarding                                             compensation.

SECTION 10.             The Original is moved to SECTION 9 of the substitute, while the                                                   Substitute repeals Sections 32.254 and 51.403, Natural Resources Code.

SECTION 11.             The Original contains the Repealer Clause, while the Substitute contains                                         the Effective Date Clause.

SECTION 12.             The Original contains the Effective Date Clause, while the Substitute has                                       no provision.