Are Private Companies Getting Sweetheart Deals on Arizona Trust Land? 80% of Auctions Won by a Single Bidder Article originally posted on AZ Central on June 24, 2024 Arizona’s State Land Department has come into the spotlight after officials canceled a planned auction for about 100 acres of prime real estate in north Phoenix that the Arizona Coyotes had wanted for a new arena. The State Land Department’s decision to first require a special use permit incensed the Coyotes, with the team saying it would explore legal options to counter the “shortsighted decision.” But if the June 27 auction for the property at Loop 101 and Scottsdale Road had gone forward as planned — and if history is any indicator — team owner Alex Meruelo likely would have been the only bidder. Since January 1987, 80% of the State Land Department’s auctions have attracted only one bidder. That’s more than 600 auctions over nearly 40 years where the buyer won with their opening bid. If the auction does eventually happen, there’s a chance that another developer could show up and outbid the Coyotes — and build something entirely different on the site. “That’s a hot piece of property, and the Land Department expects there to be more than one bidder,” said Grady Gammage Jr., a Phoenix real estate attorney, in an interview prior to the cancelation. Gammage has represented more transactions with the State Land Department than any other lawyer in Arizona. “But there’s also a dynamic where a potential buyer wouldn’t want to look like a spoiler to all the hockey fans.” If the auction does happen, “other bidders may be discouraged,” Gammage said. “They may think this is a done deal.” State Land Department auctions were not supposed to work like this. More than 100 years ago, the state’s founders envisioned public auctions as the best way to protect the State Land Department from getting swindled by unscrupulous real estate investors and corrupt state officials. Combined with mandatory market appraisals that set a minimum price, competitive bidding was meant to help maximize revenues for the benefit of public schools and 12 other entities — universities, prisons and hospitals — that the State Land Department was set up to serve. But any structure can be played, according to Rusty Bowers, the former speaker of Arizona’s House of Representatives, and savvy real estate developers have figured out how to limit competitive bidding by building costs into their proposals — costs they think other bidders won’t want to pay. “When people walk into that auction room, they have to be ready to buy the whole enchilada and you’re betting they won’t — and most don’t,” Bowers said. “That there’s a single bid tells the whole story.” Over the years, plenty of critics have complained about the system and at least a dozen attempts at reform were made since the 1990s. But the State Land Department still hasn’t generated much competition at auctions. Only in the hottest of real estate markets have multiple bidders consistently shown up to drive opening bids higher. Single bids vs. multiple bids in Arizona State Land Department auctions The number of Arizona State Land Department auctions that have involved single bidders compared with the number of auctions that involved multiple bidders each year since 1987. The biggest problem, according to real estate experts and former land commissioners contacted by The Arizona Republic, is that the State Land Department does not have the resources to maximize value, and changing the laws so it can raise more money has proven impossible. “Changing the rules is exceedingly difficult because the rules are set in both the Arizona Constitution and the Enabling Act that created the state of Arizona,” said Dan Hunting, the director of research at Arizona State University’s Center for an Independent and Sustainable Democracy. “Changing the state Constitution requires either an act of the Legislature or a citizen initiative and a vote of the people. Changing the Enabling Act requires approval by both houses of Congress and the president’s signature. “There have been one or two minor reforms to the State Land Department that the voters have approved,” Hunting continued, “but comprehensive reforms have been repeatedly shot down at the ballot box. When you add the additional difficulty of getting congressional approval on top of all this, you can see why it’s so difficult to change the system.” For its part, the State Land Department says it has adhered to its mission of managing the State’s Land Trust and generating maximum revenues, “through prudent planning decisions for the beneficiaries.” To ensure it gets a fair price, the State Land Department has an independent appraiser value each parcel before sale, and the appraisals are submitted to its Board of Appeals for review and approval. Just because there’s only one bidder may not mean the process is flawed or buyers are getting sweetheart deals. “The primary reason that many auctions only have one bidder is that the appraisal price is correct and no other bidder is willing to pay more than the appraisal (fair market) price,” the State Land Department said in a written response to questions. Gammage agreed. One way to look at it, he said, is that an auction is a test of whether an appraisal is a roughly accurate snapshot of fair market value. “If it is roughly accurate, then you’re only going to have one bidder,” Gammage said. “But if the appraisal is unusually low or behind the curve in terms of where the market is, then you’re likely to have a lot of offers — and there have been a lot of auctions where there have been a lot of bidders.” Thanks to hundreds of sales over the years and prudent investments by the state treasurer, the State Land Department’s Permanent Land Endowment Trust Fund has grown from nearly $800 million in 1996 to more than $8.6 billion. Permanent land endowment trust fund The Arizona State Land Department’s Permanent Endowment Trust Fund has grown from just under $1 billion to $7.3 billion during the past 23 years. As of March, the endowment registered $8.6 billion. Last year, it distributed more than $400 million in investment income to Arizona’s public schools — representing about 3.5% of the Arizona Department of Education’s budget. The State Land Department still has nearly 9.2 million acres left to sell, an area larger than the states of New Jersey and Connecticut combined. About 190,000 acres of that are in the Phoenix and Tucson areas — enough to fuel the growth of those two cities for the next 60 years, assuming they keep growing at the same pace. Still, critics and others believe the system could be managed better. The best possible scenario, Gammage believes, would move away from auctions. Instead, he suggests hiring sophisticated real estate professionals to run the State Land Department like a private trust and fund the department with a portion of the revenues from state land sales. Contracting directly with private developers to develop state land in return for a share of the profits from the sale of homes, retail or office space, or whatever is built on the property, could generate more revenue, he said. “But I don’t think we’ll ever do that,” Gammage said. Land rich and cash poor The history of Arizona’s State Land Department dates to 1910. That’s when the federal government required the territory — which would achieve statehood two years later — to set aside 10.9 million acres in a trust for K-12 schools and other beneficiaries. For the next 70 years, the State Land Department acted primarily as a natural resources manager — leasing land to ranchers, farmers and mining companies. By the 1980s, however, the growth of Phoenix and Tucson began bumping up against state land and then-Gov. Bruce Babbitt recognized that laws needed to be changed so the state could better manage selling urban property. With input from Gammage and other lawyers, Babbitt’s administration drafted the Urban Lands Act, which passed the state Legislature in 1981. “The Urban Lands Act was about planning,” Gammage said. “The idea was that, rather than just auctioning parcels of unzoned land near cities, the Land Department would make more money if it planned the property — if it figured out what its uses could be.” That meant getting regulatory approvals for zoning changes and adding infrastructure. But that work was expensive and the State Land Department never had the budget to complete costly studies, let alone build roads or lay sewer and water lines. “It was land rich and cash poor,” Gammage said, “and it will always be land rich and cash poor.” So, the department turned the development work over to private companies looking to purchase the land. Those entities apply for permits to develop the land. They pay for environmental studies, site surveys and title reports. State Land Department officials then work with local governments to make sure zonings are applicable. Once satisfied, the state puts the land up for auction — advertising for 10 weeks before sales. The result is the entities that first applied to develop the land — or their clients and associates — prevailed at auction more than 80% of the time, usually after just one bid. Minimum bid vs. winning bid Competitive bidding drives the price of properties above the minimum set by the fair market appraisal. Competitive bidding was strongest during the real estate boom from 2003 through 2007 and most recently from 2020 through 2023. Potential competitors often hold back, observers say, because the applicants already have invested in the properties and hold a knowledge advantage. “If you were the one who was involved in the planning, you would know everything about this property,” Gammage said. “You would design the plan for what you wanted your uses to be. And if I wanted to do something different, I would have to pay you back for your plan that I wanted to change.” Some observers say applicants also structure deals in ways that prevent competitors from bidding. In the early 1990s, for example, the State Land Department auctioned off nearly 2,400 acres in Scottsdale — a development now known as Grayhawk. But instead of selling the land all at once, the State Land Department first auctioned the right to lease about 750 acres with serious drainage issues that would later convert into two golf courses. Core North Inc. was the only bidder. When the State Land Department posted notice two weeks later that the rest of the land was ready for auction, Maricopa County farmer and developer Arthur J. Martori protested. He complained that Core North was the only entity that could possibly bid, as other potential bidders would have no control over the design, quality or access to the golf course and its amenities, which included the clubhouse and restaurants. They also couldn’t manage drainage issues without cooperation from Core North. The state land commissioner, however, dismissed Martori’s concerns and went ahead with the auction. Once again, Core North was the only bidder. Martori appealed the decision, but the Arizona Court of Appeals sided with the department. The one dissenter, Judge Sarah Grant, agreed with Martori that “the auction was structured so that only one bidder could bid.” “There cannot be competitive bidding with only one bidder,” Grant wrote. While control over development planning is the main reason lone bidders have dominated State Land Department auctions over the past 40 years, it’s not the only one. The State Land Department also tends to sell a lot of large parcels. In November 2020, the department was criticized for its handling of an auction of nearly 2,800 acres in the Superstition Vistas just east of the Maricopa County line. The auction attracted four homebuilders. Bidding started at $68 million and ended at $245.5 million with D.R. Horton, a Texas-based homebuilder, coming out on top. But critics claimed the State Land Department could have made more money if the property was carved into smaller pieces and stringent bidding requirements were loosened to allow smaller homebuilders to participate. The auction was “rigged to benefit one particular company, or at least a very, very small subset of companies,” Bowers told The Republic at the time. Mark Winkleman, a real estate professional who served as land commissioner from 2003 through 2009, said he successfully generated competitive bidding at auctions during his tenure precisely because he insisted on taking smaller parcels to auction. “Ideally you never sell giant parcels because that’s not where you reap the value,” Winkleman said. “We tried to sell parcels that were sized to attract homebuilders.” Shackled by the rules In 1997, Arizona’s auditor general released a report criticizing the State Land Department for failing to maximize revenues from land sales. It said only a limited number of auctions involved competition between bidders, that parcels put up for sale were often too large to attract multiple bids and that land was sold without infrastructure, which resulted in much lower prices than if the State Land Department had installed roads or sewer lines. Average size of parcel sold at auction Experts say the Arizona State Land Department could attract more bidders if it sold smaller parcels. Since 1987, the average parcel size is 300 acres, but it has grown even larger in recent years, averaging more than 500 acres since 2010. The report also denounced the State Land Department for marketing properties and for relying too heavily on private developers to do the planning. The solution: Get laws changed so the department could use a portion of sales revenues to finance its activities. Increase the use of in-house staff to develop state land instead of relying on private developers. Install infrastructure — roads, sewer and water — on select parcels to increase the value of land. Reduce the size of parcels to attract more bidders. And step up marketing efforts by reaching out to the real estate community before auctions. The recommendations were taken seriously, but most proved impossible to enact. Arizona voters turned down a constitutional amendment in 2000 that would have allowed the department to fund specific operations with sales proceeds. Nine years later, the Legislature passed a bill authorizing an even larger diversion of sales proceeds. But the Arizona Center for Law in the Public Interest sued on behalf of two teachers and an elementary school. It successfully argued that the diversion of trust funds to pay for department operations violated the Arizona Constitution. The result is a State Land Department that remains at the mercy of the Legislature when it comes to funding, Winkleman said. It has to line up and beg with every other state agency. As to investing in infrastructure, the department hasn’t gained much traction either. That’s because the Enabling Act and the state Constitution prohibit it from taking out mortgages or issuing bonds to build roads or lay sewer and water lines. It also can’t transfer a strip of land to the Arizona Department of Transportation and get that agency to build an access road, according to Hunting, the director of the Center for an Independent and Sustainable Democracy. Such a road could open access to other state land and the value could skyrocket, Hunting said. But the department can’t pursue that option because all state land must go on the auction block. It costs money to get from the big piece to the small piece — something the department doesn’t have. That’s why it chose to sell nearly 2,800 acres in the Superstition Vistas in a single auction. The structure of the sale was worked out by the applicant (and D.R. Horton’s partner) Brookfield Residential Properties, said Professor Mark Stapp, director of Arizona State University’s Center for Real Estate Theory and Practice. “You really don’t have the competency and capacity within the department to do some of these things — and you have to have the cash to break up the land into smaller pieces,” Stapp said. “In this case, it’s a very big master-planned community to be built over a long period of time.” One bright spot, according to a former commissioner, is that the State Land Department has stepped up its marketing efforts and is getting the word out about auctions earlier than in the past. That helped to foster competition at unexpected moments, like when bidders drove up the price of 73 acres by more than $17 million in September 2020 that Taser manufacturer Axon Enterprise Inc. wanted for its Scottsdale headquarters. Or when HonorHealth surprisingly outbid Banner Health two years later for a 48-acre tract in north Scottsdale that Banner wanted for a 300-bed hospital and medical campus. The news that Taiwan Semiconductor Manufacturing Company and LG Energy Solution were building manufacturing plants in Phoenix and Queen Creek also triggered bidding wars for state-owned land between developers who wanted to build office warehouse space nearby. The competition drove up prices more than in any period since the real estate boom. But lone bidders still dominate State Land Department auctions, and some have raised eyebrows in recent years. Take Nationwide Mutual Insurance Co.’s purchase of 134 acres near Hayden Road and Loop 101 in Scottsdale for $83 million in September 2018. The Republic reported that land in that area had sold for more than $1.3 million an acre, but the giant insurance company was able to get its parcel appraised for less than half that. The appraiser hired by the department reasoned the land was worth less because the developer would have to pay a substantial amount for roads and drainage. But Scottsdale was providing Nationwide with nearly $22 million to cover those costs, something the department knew. “Nationwide got the trust land for much less than it was worth,’’ Ross Smith, a former senior State Land Department official, concluded at the time. Smith added that it was the most complex offering he had ever seen, a factor that discouraged competitive bidding. Other lone bidders that have purchased property from the department at auction include copper mining companies Freeport McMoRan and ASARCO Inc.; Robson Ranch, which paid $10,500 per acre — less than any other homebuilder in recent years — for land near its Quail Creek subdivision in Sahuarita; and Howard Buffet, the eldest son of one of the wealthiest men in America, who bought 321 acres on the Mexican border in 2019. Should state change how auctions are conducted? Unable to get what they think is needed to maximize revenues from land sales, critics have floated ideas aimed at reforming how auctions are conducted. Bob Robb, a Morrison Institute distinguished fellow and former Republic columnist, suggested vacating any auction that fails to attract at least three bidders. “That would require the department to structure any offering in a way that would be attractive to more than just a single bidder,” Robb said in an October 2020 column. Single bidders dominate Land Department auctions This chart shows the percentage of auctions that were won by single bidders since 1987. Over this period, 80% of all auctions were determined by lone bidders. Gammage, however, said getting state land developed under current laws and conditions is difficult enough. If auctions are vacated after applicants put a year or more into the process, few developers would show up and beneficiaries would get nothing. “The problem with the Land Department is that it’s hard to entice people to deal with it,” Gammage said. “You have to say: ‘We’ll file an application for a piece of property. … We’ll spend nine months getting it planned and zoned for your use. Then, you’ll have to go out and get an appraisal. The odds are it will be pretty high.” The State Land Department will run an advertisement for 10 weeks trying to get other people to bid on the property. “At the end of all that,” Gammage continued, “you’ve spent a year, you’ve spent $250,000 to $500,000, you’ve spent your time, which is worth far more — when you could have gone and looked at a different piece of property — and then you go to an auction and you might get outbid.” In the meantime, June is the State Land Department’s busiest month for auctions. Five were held since Memorial Day, and nearly 3,400 acres changed hands in four counties. The largest sale was a 2,340-acre tract on the northwest side of Loop 303 and Interstate 17 in Phoenix. More than 100 people — many of them commercial real estate brokers — packed the third floor of the State Land Department’s conference room on Washington Street in Phoenix to watch Craig Henig, managing director of Mack Real Estate Group, raise a paddle to purchase the land for the minimum price of $56.3 million. No other bidders were present. Henig’s company intends to build 28 million square feet of office warehouse and industrial space — along with restaurants, shops and nearly 9,000 apartments — in what will be a science and technology park. The $7 billion development will feed off the tens of thousands of new jobs that are expected over the next two decades because of the proximity to Taiwan Semiconductor’s chip plant. The other four auctions included land for a master-planned commercial and residential development in Flagstaff, a shopping center in Scottsdale, an expanded City Hall in San Luis, and a gypsum mine in rural Pinal County. Only one of the three auctions, the sale of 522 aces in Flagstaff, drew multiple bidders.