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Review of Department of Natural Resources’ Leasing of State-Owned Aquatic Lands

This report provides an overview of the leasing process for state-owned aquatic lands, including the classification of leases, methods for setting lease rates, and alternative leasing approaches. It also presents the results of a ranking of various methods for setting water-dependent leases. Contact information for the relevant staff is provided.

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Review of Department of Natural Resources’ Leasing of State-Owned Aquatic Lands

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  1. Review of Department of Natural Resources’ Leasing of State-Owned Aquatic Lands Proposed Final Report Joint Legislative Audit & Review Committee June 18, 2008 Joy Adams, Ruth White, John Woolley JLARC Staff

  2. Review Directed by 2007-09 Operating Budget Proviso • Directed to include: • Basics of leasing: How are aquatic lands classified for leasing? What is the lease base? How are lease rates determined? How much money is generated? • Alternative methods: What alternatives have been explored? What are the advantages and disadvantages of various alternatives? Overview Review of Lease Rates for State-Owned Aquatic Lands Report page 3

  3. Statute Defines Lease Categories and Preferred Uses • Four main use classifications for leases: • Water-dependent uses (e.g., marinas) • Nonwater-dependent uses (e.g., hotel) • Multiple uses (e.g., marina with a restaurant) • Aquaculture (e.g., shellfish production) • Statute directs method used to set rate for each type of lease. • Statute states that water-dependent uses are favored. Leasing Basics Review of Lease Rates for State-Owned Aquatic Lands Report page 7

  4. Type (Nov 2007) # Water-dependent 1,284 Water-dependent Nonwater-dependent Nonwater-dependent 159 $5.5m $2.3m 66% 28% Aquaculture 142 6% TOTAL 1,585 Aquaculture, $0.5M Water-Dependent Leases a Revenue Driver • $8.3 million in total lease revenues in Fiscal Year 2007 Leasing Basics Review of Lease Rates for State-Owned Aquatic Lands Report page 9

  5. Primary Question: How to Set Value and Rate for Water-Dependent Leases? Per Acre Assessed Value of Upland Parcel $100,000 x x 30% 30% x x 1.5 acres Area of Lease Leasing Alternatives $45,000 Aquatic Land Value x x 5% Real Return Rate $2,250 Annual Lease Rate Review of Lease Rates for State-Owned Aquatic Lands Report pages 11-16

  6. Developed Ranking Criteria and Reviewed 11 Methods for Setting Water-Dependent Leases • Worked with real estate valuation expert to develop criteria for ranking methods. • Payment of Market Rent - Rent is fair compensation for use: fairness means comes close to what “market” would charge. • Equitable Treatment - Identical parcels pay same rent. • Administrative Burden - How many hours (or other unit of work) to determine rent. Leasing Alternatives Review of Lease Rates for State-Owned Aquatic Lands Report pages 11-16

  7. Ranking Results: No One Method Ranks Best for All Criteria Examples of Methods and Rank: • Negotiated Fair Market Value(based on negotiation and appraisal) ranked best at Payment of Market Rent and Equitable Treatment, but next to last in Administrative Burden. • Zone Model (establish rents by zone) ranked third from last in Payment of Market Rent, but third best in Equitable Treatment, and best at Administrative Burden. Leasing Alternatives (Ranking of all 11 methods found on page 15 of report.) Review of Lease Rates for State-Owned Aquatic Lands Report pages 11-16

  8. Other Criteria May be Important • In 2003, Legislature changed lease formula for marinas. Criteria: Maintain revenues and be based on a % of income, provided certain data was collected. Repealed before implemented. • Asked real estate valuation expert what the most likely private sector approach would be: Negotiated Fair Market Value. • Expert acknowledges formula-based approaches have lower administrative burden. Leasing Alternatives Review of Lease Rates for State-Owned Aquatic Lands Report pages 11-16

  9. Conclusion: Most Important Criteria Ultimately a Policy Choice • If Payment ofMarket Rent and Equitable Treatment are most important, choice is Negotiated Fair Market Value. • If low Administrative Burden is most important, choice is current method or some other formula-based approach. • If closely resembling private sector is most important, choice is Negotiated Fair Market Value. Conclusion Review of Lease Rates for State-Owned Aquatic Lands Report page 17

  10. Contact Information Joy Adams (360) 786-5297 Adams.Joy@leg.wa.gov Ruth White (360) 786-5182 White.Ruth@leg.wa.gov John Woolley (360) 786-5184 Woolley.John@leg.wa.gov www.jlarc.leg.wa.gov Review of Lease Rates for State-Owned Aquatic Lands

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