Southern NM developer stands to make millions from controversial lease

La Cienega, also known as Section 16, which is up for sale in Las Cruces, by the State Land Office.

You know those controversial leases the State Land Office has been routinely entering into over the past few years? The ones that garnered an Attorney General opinion back in February saying that the profit sharing arrangements under the leases aren't allowed under state law?

Well, planning work under one was recently completed by Las Cruces developer Philip Philippou and the land is now up for sale. You can go to the state land office's website and have a look at the bid packet yourself. Philippou also has the information posted on his website, where interested parties can review the plans for the parcels as well as a variety of maps, photos, and conceptual designs.

When you crunch the numbers based on the minimum acceptable bids for the parcels, Philippou stands to make several million dollars.

The original appraised value of the land was $8,000 per acre, or $1,968,000 given the total of 246 acres up for sale. If the land office receives bids for each of the 13 parcels offered that Philippou did work on, the minimum required bid amounts will total $17,180,000, or $15.2 million over the original appraisal.

Under the profit-sharing arrangement of this particular lease, Philippou would receive $9,127,000, or 60 percent of the increase in value, plus "reasonable project costs." Deputy State Land Commissioner Dennis Garcia told the Independent that deciding what project costs are reasonable is up to the land office, but generally they would be normal out of pocket planning costs.

The land office would receive the original value of the land plus the remainder of the proceeds.

Garcia says the lease arrangement is worth it because of the value added by the developer and the state will make a lot more on the land than it otherwise would have. Garcia adds:

The public probably doesn't really understand how much goes into one of these projects. I didn't either before, but now I do. The value to the land is greatly enhanced, to the benefit of the public. We make a lot more money in the end.

But not everyone agrees. Former land commissioner Jim Baca worries about these leasing arrangements, telling the Independent that he doesn't understand why the land office is "leaving so much on the table," something that makes the entire process "highly questionable."

The lack of oversight given the large sums of money being made by private developers is also troubling, says Baca, who ran unsuccessfully against Lyons in 2006. Baca recalls the lack of oversight when he was the land commissioner and it still amazes him:

There’s no watch dog. When I was land commissioner, I was astounded. No one was looking over my shoulder. There needs to be someone watching, which will require constitutional changes. Every other form of government has a back stop on it. Mayors have city councils, governors have legislatures, the President has Congress, for instance. But here’s the land commissioner with incredible constitutional power controlling vast state trust land holdings giving out highly lucrative no-bid leases to private developers.

Since the land office is undertaking urban development to the degree that it is, Baca told the Independent, it should get its own development arm or hire a consultant to do the planning for a set fee.

A little background:

New Mexico's land office is charged with making the most money possible from its enormous state trust land holdings. But because it's barred from making tangible improvements itself to trust land, it's historically either sold the land outright or leased it for things such as resource extraction or cattle grazing. The land office is allowed to lease land for up to five years without undertaking a public bidding process. But if it wants to enter into longer term leases, or simply sell the land, it has to take sealed bids in a public auction.

A new model of making money on the land has popped up over the last decade, one that was developed initially for Mesa del Sol in Albuquerque during Ray Powell's tenure as land commissioner. The land is disposed of in two stages. First, a master planning process happens. For instance, planning activities such as annexation and zoning, platting, project design, engineering studies, etc., can be undertaken without violating state law against tangible improvements to the land. Then, the land office sells the land for development for a much higher profit.

Under the administration of the current land commissioner, Pat Lyons, these sorts of land deals have become almost routine, reflecting a major move by the land office into urban development in and around New Mexico's population centers.

But rather than undertaking the planning work itself, the land office has been handing over the work in the first stage to private developers instead, under no-bid short term planning leases.

The pay-off for the planning work done by the developer comes upon sale of the land, through a profit-sharing arrangement with the land office. And as the land currently up for sale shows, the profit potential for the planning work is pretty big.

Here's how it works: An initial appraisal is undertaken of the vacant land. After the planning work has been completed, another appraisal occurs. The developer then gets a percentage of the change in appraised value, which the land office says reflects the value added to the land by the developer. In some cases, the lease also calls for the developer to be reimbursed for "reasonable project costs." It's the payment for intangible improvements, plus the payment based on appreciation in land value that the Attorney General says isn't allowed under state law.

Planning for Profit

According to Garcia, the land currently up for auction in Las Cruces is the first of the business leases in that area to be completed. From the bid packet, one can get a sense of the scope of work and the value of the land reflected in the minimum bid amounts. The packet describes the project as such:

The parcels are located within the East 1/2, Section 16...also referred to as La Cienega at Sierra Norte. ...

The land is undeveloped and was used for grazing in the past. It has been under Business Lease (Planning) BL-1700 since September 15, 2005 for the purpose of planning development of the land. BL-1710 will be relinquished at the closing of a sale or exchange of an individual parcel as to that parcel.

BL-1710 refers to a planning lease held by Philippou.

In Las Cruces, these arrangements became highly controversial when the land office opened a bidding process for a short term lease, even though it was under no obligation to do so, and then cut it short in favor of Philippou. What were once quasi-obscure deals burst into the public eye, especially given the way extensive development of state trust land is changing the face of Las Cruces. Not to mention, the profit potential of these no-bid leases hasn't escaped the notice of many. 

Under the lease agreement, at final sale of the property Philippou will receive "reasonable project costs" as well as 60 percent of the proceeds over and above the original appraised value of the land. The land office will receive the remainder. The deadline for submitting bids is August 14, and Garcia says the land office expects bids to be higher than the minimum bid requirements.

Materials provided in the bid packet include, among other things, a project overview of the entire Sierra Norte development within which the 13 parcels for sale are located, the annexation ordinance and plat, the Sierra Norte Master Plan, the wastewater description and collection rate summary and wastewater impact fee summary. Also in the packet are the solid waste description and City of Las Cruces solid waste services summary, the preliminary traffic impact study, topographic maps of the East 1/2, Section 16 and Sierra Norte, City of Las Cruces fire protection summary, Sierra Norte major thoroughfare map, and Sierra Norte master drainage report.

Under state law the land commissioner has almost unchecked power to dispose of state trust land. The land commissioner has disputed the finding of the attorney general and so far no action in court has been undertaken to stop these sorts of arrangements.

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