The State of Idaho recently purchased a self-storage facility to operate as a state-owned business. In November, I blogged about this topic and outlined seven issues I have with this purchase. To recap, they are:
- Tax-Free Operation : No property taxes will be paid by this state-owned facility, period.
- Experience : The state has no experience in the self-storage industry.
- Lack of Accountability : The rest of us have to be accountable on an individual basis to investors or financial institutions. Whos held accountable for this facility and to whom?
- Competition: What will hold the state from limiting competition to its new self-storage facility?
- Bail Out: With the government as an investor, a bailout is always possible. No fear of the facility being disposed of through the market if it fails financially.
- Consumer Back Lash: How many people do you know who will not buy a GM vehicle because of government ownership?
- Innovation: The government has a horrible record when it comes to innovation.
Fast forward a month and we have some answers from the State of Idaho to an inquiry from the national Self Storage Association (SSA). The following are some of the questions from the SSA along with answers by the state, and my analysis the states responses:
SSA: Were private sector entities given the opportunity to make offers on the Affordable Self Storage property? If so, did the state outbid these private operators utilizing the considerable Idaho Endowment Trust Lands treasure chest?
State of Idaho: The property was marketed via an opening listing with an area broker, Thornton-Oliver-Keller. Any investor or interested buyer could have submitted an offer. The state followed a traditional investor path of inquiry and ownership by submitting a Letter of Intent, followed by a Purchase-Sale Agreement, the performance of due diligence, ratification by the trustee (Land Board Approval) and close of escrow. Like any investor, due diligence and limited funds determine what price the trust manager is willing to pay for an asset. There is no treasure chest of unlimited funds as implied by your writing. The only source of funds available for real property purchases is the proceeds from the sale of other trust lands.
My Analysis: OK, fair enough. The state says it went through the normal investment process. Anyone whos ever acquired commercial real estate is familiar with this process. The act of a state acquiring a controlling interest in part of an industry that it directly regulates, and now competes with, is extremely disturbing. The trust may not have unlimited funds, but Im sure the state could move funds in that direction if needed.
SSA: How will our new government-owned self-storage facility compensate municipal governments if you are not required to pay property taxes? (Local property taxes typically account for 30 percent to 35 percent of the operating expenses for a self-storage facility).
State of Idaho: Our founding fathers exempted endowment trust land from taxation because the entire benefit derived from trust assets goes to supporting state institutions. While the trusts do not pay taxes, in accordance with Article 7 Section 4 of the Idaho Constitution, the greater the earnings provided by the prudent management of the endowment land, the less tax that is paid by the citizens of Idaho. As stated previously, management of the trusts assets currently provide over $45 million in ever-increasing and sustainable annual distributions to beneficiaries. These dollars are in lieu of additional taxation. It may also be of interest to note that in the early years after statehood, 1 million acres of endowment land was sold into private ownership. Those assets can never be recouped by the trust and now represent additional lands subject to the general tax roll.
My Analysis: Wow lets review this carefully before we all get caught up in the euphoria of responsible government keeping taxes down. First, Im sure the founding fathers never had the intention for the state to acquire private businesses; if they did, then the state wouldnt have sold off the original endowment land. They would have kept the endowment land in state hands and started a number of businesses. The founding fathers knew, as we do, that the best way to develop land is to give it to people who know how to develop, and then tax them. Central planning doesnt work, has never worked, and certainly wasnt the intention of the founding fathers, hence the selloff of the original endowment land.
Im not saying the state shouldnt manage citizen-oriented lands, such as parks and museums where theres virtually no private competition, or that they shouldnt regulate and tax industries in the state. What Im saying, more than once, is that the state should by no means be simultaneously regulating and competing in any industry. You get to do one or the other. If not, the deck is stacked against the independent storage owner. In addition, for those of you who own or manage self-storage in Idaho, Im sorry youre getting hit with a nice property tax bill while your state-owned competitor down the street gets to keep that money.
SSA: How will the tax dollars lost to the local, county, city and school districts be replaced? (Conservatively, we estimate that property taxes remitted from our industry in your state exceed several million dollars). The government should not be in competition with its taxpayer base.
State of Idaho: Again, the constitutional mandate of the trust requires the trustee to administer duties with undivided loyalty to the beneficiaries. To that end, a diverse mix of assets judiciously located throughout the state, as envisioned by the founding fathers, allows the trust to operate without the support of tax dollars and to cover management costs and distributions that would otherwise require additional taxation upon the citizens in Idaho to meet the needs of beneficiaries.
It should also be noted that while the trust does not pay taxes, the citizens of Idaho enjoy incidental recreational uses of endowment trust lands, such as hunting, fishing, hiking, berry-picking, limited camping and motorized activity, all without compensation. As a matter of policy, the Land Board allows these incidental uses on endowment land as they do not detract from the primary earning activities. We estimate the endowment lands incur over $1 million in damage to the land each year due to this open-access practice. Private landowners generally close their lands to recreation uses or have begun to charge considerable fees for the privilege of such assess.
My Analysis: Lets try to answer this very important question. Im sure that the State of Idaho answered a question in their reply. It just wasnt an answer to the SSAs question. Not even close!
Typically, property taxes in any local area are used to fund city and county services such as police, fire, schools, and infrastructure improvements and repairs. The answer to this question is very simple: The tax dollars to the local municipality will not be replaced. This was one of my major concerns when I originally blogged on this acquisition. What will stop the local municipality from raising property taxes to replace the lost income? Do you think the local municipality will notice it just lost tens of thousands of dollars? Do you really think this will not affect the other privately owned self-storage facilities in the area?
Regardless of what area of the self-storage industry you work in, this issue affects you. I would like you to take a few minutes and really think about what a slippery slope this situation is and how we can avoid it in the future. Check this blog again at the end of the month for the final questions, answers and analysis on this serious situation.
Matthew Van Horn is vice president of Cutting Edge Self-Storage Management, a full-service management company specializing in management, feasibility studies, consulting and joint ventures within the self-storage industry.