Can Idaho exempt cottage-site leases on state endowment land from the public auction requirement of Article IX, § 8?

Plain-English summary

Idaho's Constitution, in Article IX, § 8, says state endowment land grants from the federal government must be held in trust for the schools and other endowed institutions, and that those lands are "subject to disposal at public auction" for the benefit of the trust beneficiaries. The Land Board has long leased a few hundred lakefront cottage sites at Priest Lake and Payette Lake under that scheme, with most leases held by the same families for decades.

In 1990 the Idaho Legislature enacted Idaho Code § 58-310A, which exempted those single-family recreational cottage-site leases from the conflict-auction process and instead required the Land Board to charge "market rent." The legislative findings openly stated the change was meant to spare longtime lessees the "considerable consternation and dismay" of losing a lease at conflict auction.

Lawrence Wasden's office concluded that a reviewing court would likely strike that statute down on two grounds. First, intervening Idaho Supreme Court decisions, especially the IWP I, II, and III line, made clear that Article IX, § 8 mandates public auction for leases of endowment land, not just sales, and that legislation enacted to benefit lessees rather than the trust beneficiaries violates the Land Board's duty of undivided loyalty. Second, the Board's own cottage-site leasing rules let "leasehold value" accrue when contract rent stayed below market rent, then let lessees keep 90 percent of that value when they assigned the lease. Department of Lands data showed lessees collected over $21 million from 79 lease transfers between 2003 and 2009 that should have flowed to the trust beneficiaries.

Currency note

This opinion was issued in 2009. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is Article IX, § 8 of the Idaho Constitution?

It is the constitutional provision that governs the state's federally granted endowment lands, the lands set aside at statehood to fund Idaho's public schools and a handful of other endowed institutions. Among other things, it directs that the lands be "judiciously located and carefully preserved and held in trust, subject to disposal at public auction for the use and benefit of the respective object for which said grants of land were made." The language about "disposal at public auction" was the centerpiece of this opinion's analysis.

What are these cottage-site leases?

The Land Board began leasing endowment land lots at Priest Lake and Payette Lake for residential cottages in 1924. By 2009 the trust held 354 lots at Priest Lake and 168 at Payette Lake. Each lot stayed in state ownership; the lessee built a cabin and paid annual rent. Most leases had been held by the same family for decades, sometimes 50 years or more.

What did Idaho Code § 58-310A do?

It declared, starting in 1990, that single-family recreational cottage-site and homesite leases were no longer subject to the conflict-application and public-auction provisions of Idaho Code §§ 58-307 and 58-310. Instead, the Land Board was directed to "ensure that each lot generates market rent throughout the duration of the lease." The legislative history made clear the goal was to protect existing lessees from losing their leases at auction.

What were the IWP cases?

A series of Idaho Supreme Court decisions involving the Idaho Watersheds Project. IWP I (1996) held the Board lacked discretion to grant a lease to an applicant who had not bid at auction. IWP II (1999) struck down a constitutional amendment effort on procedural grounds. IWP III (1999) struck down Idaho Code § 58-310B, which had directed the Board to weigh tax and economic-development benefits in awarding grazing leases, holding that only the maximum long-term financial return to the endowed institutions can guide leasing decisions. The opinion read those cases together as making it very difficult to defend § 58-310A.

What is "leasehold value" and why did it matter?

The Board's rules at IDAPA 20.03.13.010.06 defined leasehold value as the value that accrues to a lease when contract rent stays below market rent. With contract rent frozen at 2.5 percent of fee-simple value while appraisals consistently recommended 3.5 to 6 percent, a private market developed for the leases themselves. Buyers paid the spread between contract and market rent, discounted to present value, and 90 percent of that money went to the assigning lessee. The opinion treated that as money that should have flowed to schools.

Did the Land Board take the AG's view?

The opinion made recommendations only; it did not change the rules itself. Whether and how the Board responded over time, and whether the legislature later amended § 58-310A or the implementing rules, would need to be checked against current Idaho law and Land Board records.

Background and statutory framework

The Land Board manages Idaho's endowment lands as a trustee. Article IX, §§ 7 and 8 of the Idaho Constitution set the framework. Section 7 vests "direction, control and disposition" of the public lands in the Board. Section 8 imposes both the rental directive (manage to "secure the maximum long-term financial return to the institution to which granted") and the directive that the lands be "subject to disposal at public auction for the use and benefit of the respective object for which said grants of land were made."

Idaho Code § 58-310 has long required a conflict auction whenever two or more applicants seek to lease the same parcel. Idaho Code § 58-308 governed reimbursement of lessee improvements upon a re-leasing. Idaho Code § 58-310A, enacted in 1990, carved cottage-site leases out of those auction provisions and substituted a market-rent directive without specifying how the Board was to determine market rent.

The Board's IDAPA 20.03.13 rules then implemented § 58-310A by allowing leasehold value to accrue when contract rent stayed below market rent, by determining leasehold value at the time of assignment by subtracting the value of improvements and personal property from the sales price, and by collecting 10 percent of that leasehold value as "premium rent" while leaving 90 percent with the assigning lessee.

The Idaho Supreme Court's IWP decisions, decided after § 58-310A was enacted, sharpened the constitutional analysis. The Court treated the trust terms in Article IX as imposing a duty of undivided loyalty to the beneficiaries, prohibiting the Legislature from directing the Board to act for the benefit of any party other than those beneficiaries. Combined with the "disposal at public auction" language and earlier cases like East Side Blaine County Live Stock Ass'n, the IWP line gave the AG's office strong textual and case-law grounds to predict that § 58-310A would not survive judicial review.

Citations

Idaho Constitution: art. IX, §§ 7, 8.

Idaho Code: §§ 58-308, 58-310, 58-310A, 58-310B.

Idaho Administrative Rules: IDAPA 20.03.13.010.06; IDAPA 20.03.13.025; IDAPA 20.03.13.027.

Cases: Idaho Watersheds Project, Inc. v. State Bd. of Land Comm'rs, 128 Idaho 761, 918 P.2d 1206 (1996); Idaho Watersheds Project v. State Bd. of Land Comm'rs, 133 Idaho 55, 982 P.2d 358 (1999); Idaho Watersheds Project v. State Bd. of Land Comm'rs, 133 Idaho 64, 982 P.2d 367 (1999); Moon v. State Bd. of Land Comm'rs, 111 Idaho 389, 724 P.2d 125 (1986); Rogers v. Hawley, 19 Idaho 751, 115 P. 687 (1911); State ex rel. Moon v. State Bd. of Examiners, 104 Idaho 640, 662 P.2d 221 (1983); Tobey v. Bridgewood, 22 Idaho 566, 127 P. 178 (1912); East Side Blaine County Live Stock Ass'n v. State Bd. of Land Commissioners, 34 Idaho 807, 198 P. 670 (1921); Idaho-Iowa Lateral & Reservoir Co. v. Fisher, 27 Idaho 695, 151 P. 998 (1915).

Source

• Landing page: https://www.ag.idaho.gov/office-resources/opinions/
• Original PDF: https://ag.idaho.gov/content/uploads/2018/04/Opinion09-01.pdf

Original opinion text

STATE OF IDAHO
OFFICE OF THE ATTORNEY GENERAL
LAWRENCE G. WASDEN

ATTORNEY GENERAL OPINION NO. 09-1

To:

George Bacon
Director. Idaho Department of Lands
STATEHOUSE MAIL
Per request for Attorney General's Opinion

You have requested an Attorney General's Opinion regarding the constitutionality of
those provisions in Idaho Code § 58-310A exempting single family cottage site leases from the
public auction requirements of Article IX, § 8, of the Idaho Constitution and substituting a
"market rent" requirement in lieu of public auctions.
QUESTIONS PRESENTED

1.

Can the Idaho Legislature, pursuant to Idaho Code § 58-310A, exempt leases of state
endowment lands for "single-family, recreational cottage sites and homesites" from the
public auction requirement of Article IX, § 8, of the Idaho Constitution?

2.

Are the Idaho State Board of Land Commissioners ("Land Board" or "Board'') cottage
site leasing rules, which allow a lessee to retain a percentage of the leasehold value of a
lease upon transfer, consistent with the Board's constitutional duty to secure the
maximum long-term financial return for its beneficiaries?

CONCLUSIONS

1.

A reviewing court likely would conclude the Idaho Legislature does not have the
authority to exempt leases of state endowment lands for single-family recreational
cottage sites and homesites from the public auction requirement of Article IX, § 8, of the
Idaho Constitution.

2.

A reviewing court likely would conclude that the cottage site leasing rules, IDAPA
20.03.13, violate the constitutional mandate that endowment lands be managed solely for
the financial benefit of endowed institutions. The rates allow leasehold values to accrue
when contract rent is below market rent, then allow lessees to retain 90% of leasehold
values upon assignment of the leases. A reviewing court is likely to find that the leasing
rules impermissibly allowed lessees to receive over $21 million from the assignment of
leaseholds in the last six years that rightfully should have gone to the beneficiaries.

BACKGROUND

The Land Board began leasing state endowment lands for residential cottage sites in
1924. The majority of the cottage site leases were issued in the mid 1940s and early 1950s.
Trust assets include 354 cottage site lots on Priest Lake and 168 cottage site lots on Payette
Lake. Each cottage site is owned in fee simple by the State of Idaho as trustee for the
beneficiaries and is subject to the constitutional directive to provide the maximum long-term
financial return to endowment beneficiaries. Idaho Const., art. IX, § 8.

Rents for Priest Lake lots in 1945 were as low as $10 per year. From 1945 to 1988, rents
were established using a flat rate with sporadic adjustments. In 1981, as recreational homes
became more popular and accessible on a year-round basis, leasehold values began to increase.
The Board adopted the "premium rent" concept, whereby, upon assignment of a lease, the State
"would get 10% of the leasehold value after the improvements were subtracted." Rules for
payment of premium rent were adopted by the Board in 1987.

While cottage sites were subject to the public auction requirements of Idaho Code § 58-310,
expiring leases were not advertised for auction. Only four applications to conflict a lease were
ever received, and none resulted in an auction. Nonetheless, lessees remained concerned that
the increased demand for recreational properties would lead to conflict auctions upon expiration
of cottage site leases. Consequently, lessees sought, and the Idaho Legislature, in 1990,
enacted, Idaho Code § 58-310A, which abolished the use of public auctions as a means of
establishing market rents in lieu of a general requirement that the Land Board "ensure that each
lot generates market rent throughout the duration of the lease."

Following the enactment of Idaho Code § 58-310A, the Land Board hired an appraiser to
determine market rents for the cottage sites at Priest Lake and Payette Lake. The appraiser
recommended rents ranging from 4.5% to 5.5%, depending on lot value. The Board, however,
decided to maintain annual rents at 2.5% of fee simple value, a rate that was established in 1988.
The 2.5% annual rental rate has remained in place since 1988, despite several appraisals and
market rent studies concluding that the market rate is substantially above 2.5%.

ANALYSIS

1.

A reviewing court is likely to find that the prohibition of conflict auctions in Idaho
Code § 58-310A violates the requirement in Article IX, § 8, of the Idaho
Constitution that all disposals of endowment lands must occur by public auction.

Article IX, § 8, of the Idaho Constitution provides, in part:

The legislature shall, at the earliest practicable period, provide by law that the
general grants of land made by congress to the state shall be judiciously located
and carefully preserved and held in trust, subject to disposal at public auction for
the use and benefit of the respective object for which said grants of land were
made ... ,

(Emphasis added.) The first statutes defining the duties of the Land Board implemented the
public auction requirement, in part, by providing that, where two or more people apply to lease
the same land, the Board must auction off and lease the lands to the applicant who will pay the
highest annual rental. 1905 Idaho Sess. Laws 138, codified as amended, Idaho Code § 58-310.

Prior to 1990, cottage site leases were subject to the conflict auction requirement of Idaho
Code § 58-310 when two or more people sought to lease the same parcel. In response to lessee
concerns that they might lose "any amount they spent to procure and maintain the leases except
the value of their improvements," the Idaho Legislature, in 1990, enacted Idaho Code § 58-310A,
which declares "that leases for single family, recreational cottage sites and homesites shall not
be subject to the conflict application and auction provisions of sections 58-307 and 58-310,
Idaho Code." The legislative findings contained in 58-310A expressly state:

(b) That single family, recreational cottage sites and homesites have typically
been held by the same family, sometimes for as long as fifty (50) years;

(e) That, in the case of single family, recreational cottage sites and homesite
leases, the conflict application and auction procedure have caused
considerable consternation and dismay to the existing lessee at the prospect of
losing a longtime lease ....

Idaho Code § 58-310A(1) (emphasis added).

Since the enactment of Idaho Code § 58-310A, however, a series of decisions has clarified
that the public auction requirement of Article IX, § 8, does apply to leases of state endowment
lands. The first case, Idaho Watersheds Project, Inc. v. State Bd. of Land Comm'rs, 128 Idaho
761, 918 P.2d 1206 (1996) (hereinafter IWP I), involved a conflict auction between IWP and a
rancher, who was a long-standing lessee of the property in question. The Board awarded the
lease to the rancher, despite his refusal to make a bid at the conflict auction. The court held that:

The Board does not have the discretion to grant a lease to an applicant who does
not place a bid at an auction, based upon Idaho's constitutional and statutory
mandate that the Board conduct an auction. Idaho Const. art. IX, § 8; I.C. § 58-310.

IWP I, 128 Idaho at 766, 918 P.2d at 1211. Thus, while the decision hinged on the auction
requirements of Idaho Code § 58-310, the court explicitly identified a "constitutional ...
mandate" that the Board conduct public auctions for leases.

The issue of whether the public auction language applies to leases was again addressed in
IWP III. There, the court held that language in Article IX, § 8, providing that endowment lands
are "subject to disposal at public auction for the use and benefit of the respective object for
which said grants of land were made" prohibited legislation requiring that grazing leases be
awarded based on both direct returns to beneficiaries and tax revenues to the State.

In sum, the IWP decisions establish two important precedents that likely would lead a
reviewing court to declare unconstitutional those provisions of Idaho Code § 58-310A
prohibiting public auctions for cottage site leases.

2.

A reviewing court likely would conclude the Land Board's cottage site leasing rules,
by allowing an impermissible shift of financial gains from beneficiaries to
leaseholders, are inconsistent with the Board's constitutional duty to obtain the
maximum long-term financial return for endowment beneficiaries.

In addition to the facial conflict between Idaho Code § 58-310A and the public auction
requirement of Article IX, § 8, a reviewing court likely would conclude that the Board's rules
implementing § 58-310A have provided lessees an impermissible privilege in the form of a
benefit from sales of leasehold value, which serves to the detriment of the state endowment trust
beneficiaries in direct contravention of Article IX, § 8.

The cottage site leasing rules expressly acknowledge that leasehold value "accrues to a
leasehold estate when the contract rent is below the market rent." IDAPA 20.03.13.010.06.
Because contract rents were allowed to fall below the price buyers were willing to pay in an open
market, buyers began buying leaseholds, paying the difference between contract rent and market
rent, discounted to present value. The amounts at issue are substantial. According to a recent
analysis by Idaho Department of Lands financial staff, 79 lease transfers occurred from 2003
through 2009, and the total value of leasehold interests for the 79 transfers was $23,594,664, of
which over $21,000,000 went to lessees. If contract rents had been equivalent to market rent,
this money would have gone to the trust beneficiaries.

The assignment of leaseholds for significant amounts of money demonstrates that Idaho
Code § 58-310A, as implemented by the Board, has inhibited, rather than promoted, the receipt
of market rent by the State. A reviewing court likely would conclude that the accrual and sale of
substantial leasehold values, with the majority of the sales price going to lessees, is a violation of
the Board's constitutional duty to secure the maximum long-term financial return to the
endowment beneficiaries.

DATED this 5th day of August, 2009.

LAWRENCE G. WASDEN
Attorney General

Analysis by:
STEVEN STRACK
ROBERT FOLLETT
Deputy Attorneys General