New Jersey Panel Announces Recommendations on Valuing State Leases

Concerns following lease negotiations between the State of New Jersey and Tennessee Gas Company in 2010 prompted the New Jersey Department of Environmental Protection to create an inter-agency panel, comprised of ten separate entities, tasked with evaluating the State’s leasing programs. On August 18, 2011, the panel released its report detailing new policy recommendations for valuing leases of State lands. The term “lease” in the report includes various rights in, on and under State lands, such as easements, rights of way, and licenses. Discussed in the report are key principles applicable to all leases; specific recommendations by lease-type; guidance on appraisals; and direction about developing recommendations for mitigation and inter-agency cooperation. The report declares that these new policies will provide much needed uniformity and predictability in valuing leases that will benefit businesses and ensure fair compensation for the taxpayers. To achieve those goals, the report identifies certain key principles applicable to all leases of State lands. It is generally recommended that the State adopt a predictable and consistent cost structure for leases; ensure taxpayers receive fair compensation; recognize the additional value of certain State lands; collect rent for even temporary uses; require application fees, where appropriate; and direct revenue generated from leases to the managing agencies. Regarding the lease itself, the report recommends provisions that establish finite terms; set schedules for payments that adjust for inflation over time; and clearly define the authority to sublease. These key principles are supplemented by specific recommendations that pertain to six major types of leases. The report addresses linear corridor leases, which may be used for pipelines and power lines, in the tidelands. The report recommends calculating payments on a $0.10 per square foot per year basis (discounted for public projects to $0.03) and including an annual 2.5% adjustment for inflation. The report also recommends eliminating one-fee lump sum payments; discounts for projects greater than 3,000 feet; ancillary fees for extra cables or wires; and fee calculations that include buffer areas. Umbrella leases are recommended as cost saving measures. Although revenue generated by these leases is constitutionally dedicated for the Fund for Support of Free Public Schools, the report recommends using a portion of the revenue to offset administrative costs. Many of these recommendations for tidelands have been implemented. The report also discusses upland linear corridor leases. The report recommends a rate of $0.15 per square foot per year (discounted to $0.05 for public projects) with the option for an agency to conduct an appraisal, if the recommended rate is too low for a particular parcel. In addition, an appraisal would be automatically triggered if the value of the parcel is greater than $65,000 per acre. The report supports including a minimum $700 lease fee per year; an annual 2.5% inflation adjustment; and a $ 0.15 per square foot rental fee for temporary work space or access areas (discounted to $0.05 for public projects). Umbrella leases to entities with multiple leases are recommended. The report again advocates allocating revenue from linear corridor leases to offset the cost of managing these leases. On the issue of management of linear corridor leases, the report notes that many utility company leases on State lands have not been cataloged. The report recommends developing and maintaining an inventory of utility company leases so that back rent may be collected and renewal opportunities will not be missed. An automated billing system or a contract with a property management company is also recommended. The report’s focus on utility company leases continues into the discussion of leases with the Department of Transportation. The report recommends statutory changes that would allow the Department of Transportation to set occupancy lease rates for private utility use of its right-of-ways. It is recommended that those occupancy leases follow the key principles and include finite terms and per-unit measures. The report recommends a minimum annual occupancy fee of $1.20 per linear foot for fiber optics in an existing conduit and $0.15 per square foot for all other leases of transportation corridors. Shifting its focus away from linear corridor leases, the recommendations for nominal fee and publicly bid leases are aimed at updating the inventory of leases, seeking new leasing opportunities, and directing revenues from these leases back to the managing agencies. The report advocates the continuation of nominal fee and publicly bid leases that are consistent with the mission of the managing agency. Properties managed by the Economic Development Authority and State Agriculture Development Committee are referenced without the need for change. The report’s recommendations for these leases focus on ensuring adequate funding to offset the administrative cost of the program.   For telecommunications towers and antennae, the report advocates the adoption of a consistent pricing methodology. Other agencies are urged to adopt the guidelines established by the Department of Treasury. The report recommends that approach should be updated based on periodic review of market conditions and at the renewal of each lease. The report also advocates exploring ways to maximize the value of current and future leases of this type. With regard to leases for shellfish growing and harvesting, the report recommends an economic and environmental cost/benefit analysis of the industry in New Jersey. At a minimum, the report recommends increasing lease rates and directing the revenue back to the managing agency. The report indicates that current rates are not sufficient to support the program. In addition, the report provides guidance on appraisals. The report recommends an adjustment for the intended private use of the public land, rather than valuing the land based upon its public use. The report also favorably notes the training available for appraisers working in the area of preserved farmland and advocates similar training for corridor valuation as well as preserved State parkland and wildlife areas. This guidance is intended to ensure fair compensation for the taxpayers. The report concludes with reference to general guiding principles regarding additional mitigation for environmental damage and inter-agency coordination, which will be the subject of a separate report that discusses those principles more completely at a later date. The foregoing discussion represents the policy recommendations of the inter-agency panel convened for the purpose of evaluating the State’s leasing programs. Some of these policies have been implemented already. Implementation of other policies will require agency action or legislation. The report includes an appendix listing the legislative, regulatory, and policy actions necessary to implement the recommendations. For more information on this topic, please contact Cynthia L.M. Holland, Esq. at (973) 230-2009 or cholland@genovaburns.com.