By Jay Root - Star-Telegram staff writer - Sun, Sep. 16, 2007
AUSTIN -- San Marcos' leaders weren't surprised to learn last year that a commercial real estate developer planned to pump $50 million into a shopping mall project along Interstate 35 south of Austin. It was going to be built near the city's booming factory outlet centers, the third most-visited site in Texas, so the profit potential was obvious.
What was a shock, city officials said, was the identity of the developer: the Texas General Land Office. The agency, flush with cash from oil royalty income, has been on a real estate buying binge since 2001, snapping up more than a half-billion dollars in property and entering into numerous deals with private developers -- some of them controversial.
Although many of the transactions are shrouded in state-sanctioned secrecy, available records show that the investments range from a $100 million Wal-Mart distribution center near Baytown, one of the world's largest warehouses, to a Bryan-area prison farm bought from clothing magnate Carlo Benetton for $15 million.
The land office, citing ongoing negotiations, has declined to release detailed records about its Tarrant County holdings, but Tarrant Appraisal District data show that the agency has acquired property worth more than $31 million in the last two years. Its use hasn't yet been determined.
But as San Marcos authorities found, the state does not have to adhere to the local requirements imposed on private developers, and any land it owns is exempt from property taxes used to fund schools and local services.
On the other hand, profits generated by the real estate holdings are injected into the $24 billion Permanent School Fund, which produces about $800 million a year for public education in Texas. And taxing jurisdictions can still impose levies on lease values and equipment even if the state-owned property is exempt.
Competition
For the fund's land managers, the growing real estate portfolio keeps the educational endowment -- the nation's second-largest -- diversified and modern. But some lawmakers are seeking to curb the state's appetite for real estate and return the school fund to safer, more traditional investments.
"I don't really believe that government, no matter whether it's local or state government, should be in the business of competing against private interests," said state Rep. Rob Orr, R-Burleson, who oversees the land office as chairman of the House Land and Resources Management Committee. "I think they should be into more-conservative investments."
Orr said he is drawing up plans to look into the state land deals in a formal legislative study, with an eye toward possible overhauls during the 2009 session of the Legislature. In the meantime, Land Commissioner Jerry Patterson, who leads the land investment team, says he'll continue to pursue sensible real estate deals. But there's already a shift in investment strategy at the land office -- away from direct purchases of real estate and toward institutional funds favored by other large endowments and pension funds.
Patterson said that over the last 18 months, the land office has injected $842 million into externally managed funds, more than it has spent on all direct real estate purchases in the last six years. But the active land deals have generated the most controversy. This week, the land office is expected to receive bids for the sale of a 9,269-acre tract containing the Christmas Mountains in far West Texas. Environmentalists have protested, saying the land -- given to the state by a conservation group -- should stay in state hands.
Likewise, the Great Plains Restoration Council, a Tarrant County environmentalist group, wanted to preserve a 1,983-acre undeveloped swath off Old Granbury Road near Crowley. Patterson has agreed to give Great Plains more time to come up with the money to buy the tract. But Patterson makes it clear that the price will be considerably higher than the $21 million the state paid in 2005.
"I'm not in the park business. I'm in the moneymaking business," Patterson said. "If somebody that's in the park business wishes to buy it, then that's fine." Given the hefty price, though, Patterson said it is more likely that only a portion will remain undeveloped.
A tough politician
Blunt talk like that is a Patterson trademark. A Marine and Vietnam War veteran, the Republican has never lost his taste for combat, even if the battlefield has shifted from Southeast Asia to the rough-and-tumble world of Texas politics. When allies of Democratic presidential contender John Kerry went to Crawford to raise a stink about 2004 ads critical of the Massachusetts senator's war record, President Bush dispatched Patterson to greet them outside his ranch.
Patterson's attachment to the land office's mission is well-documented. When he first ran for the office, in 2002, Patterson promised to seek re-election in 2006 to stress that, unlike his predecessors, he wasn't using the post as a steppingstone to higher office. Patterson has since taken to the school fund's profit-making mission with a Southern preacher's zeal.
For San Marcos officials, the sudden appearance of a tax-exempt real estate speculator was unwelcome. Already, 25 percent of the property in the city is tax-exempt, they said, and here was a new tax-exempt parcel in the middle of one of Texas' hottest real estate markets.
Alarmed at the prospect of losing more property tax revenues and power to oversee and approve the mall development, estimated at $50 million in local media accounts, city officials went to see Patterson and the real estate portfolio managers at the land office about a year ago. City Manager Dan O'Leary describes the meeting as "an ambush." He said officials told him bluntly that profiting from state exemptions on taxes and regulations was "exactly what they intended to do."
"The reaction was basically, 'Well, yeah, we're the state,'" O'Leary recalled. "'Why would we want to take away our competitive advantage?'"
Limiting access
The land office has since begun to pull out of the mall deal and is selling the 113-acre tract to Direct Development, the private developer that was supposed to join the state as a partner in the project, officials said. The land office won't say how much it's selling the land for, but O'Leary said it is at a "highly inflated price." Calls to Direct Development were not returned.
After the deal fell through, O'Leary and San Marcos Mayor Susan Narvaiz pressed the Legislature to enact changes that would give local governments a more powerful voice in land office deals. Instead, O'Leary said, he walked into another ambush.
Rather than giving cities more input, the Legislature passed new exemptions -- over vociferous objections from San Marcos officials -- that allow the land office to further limit public access to key land transaction records, such as appraisals, deeds and purchase orders. The law, which took effect in June, seals the records until all transactions -- such as development contracts and ongoing subdivisions sales -- are completed.
Testifying at a legislative hearing in February, Narvaiz said the date on which public access is granted "could effectively be 'never' under current development practices." State Rep. Patrick Rose, D-Dripping Springs, who represents San Marcos in the Legislature, called the new law a "bad idea on its face."
"The state's business is the people's business," Rose said. "To take this out of the sunshine of open records just doesn't make sense. It makes a problem that's bad, I think, worse."
Patterson calls the public access issue a "red herring." He said that in the San Marcos deal, the land office went out of its way to notify city officials in advance, and he described the mayor as a "hard-to-please lady." Patterson also said all the same documents that were available before the law took effect will still be made public -- just not as quickly. Meanwhile, the new law will ensure that potential buyers can't use government sunshine laws to get key cost and sales information, and gain a competitive advantage, in state deals.
A cash advantage
The Legislature created the school fund in 1854, endowing it with $2 million in cash and millions of acres of Texas land. Any income from oil and gas royalties were deposited into the endowment, and that money was generally used to buy stocks and bonds.
That all changed in 2001, when lawmakers passed a bill directing oil and gas royalties into an escrow account that can be tapped for real estate investments.
By 2007, with the price of oil more than triple the $22 it fetched in 2001, over $2 billion had flowed into the escrow account.
The elected State Board of Education manages the school fund's cash and traditional investments. The real estate holdings, by contrast, are overseen by the three-member School Land Board, made up of Patterson, who is the chairman, and two appointed members.
The land escrow account had about $372 million at the end of July, much of it committed to deals, but Patterson said he sends at least $6 million a month to the money managers at the education board.
Objections from local authorities about lost tax revenue have nixed some land deals, but the ever-replenishing fund and its ability to hold something tax-free forever make the school fund a unique and influential player in the state's commercial real estate market.
"The biggest advantage is, we have large amounts of cash," Patterson said. "And we can stay for the long haul."
By the numbers
$2 million: Permanent School Fund's starting balance, in 1854
$22.9 billion: School fund's balance as of August 2006
$2.03 billion: Oil and gas royalty money available for real estate buys since 2001
$532 million: Value of real estate acquired by school fund since 2001
768,012: Number of acres of Texas land owned by school fund
10.44: Percent increase in school fund's value from 2005 to 2006
Sources: Texas Education Agency, General Land Office
Property of the government
At $24 billion, the 153-year-old Permanent School Fund is the nation's second-largest educational endowment; it doles out some $800 million annually to Texas public schools. Fund managers invested almost exclusively in stocks and bonds until 2001, when the school fund began gobbling up commercial real estate. Since then, the General Land Office has acquired over $500 million of property and struck several deals, some of them controversial, with private developers.
A look at some of the largest:
Sugar Land mixed use, 2002
Price: $52.2 million
Acreage: 4,917
Description: In state hands for decades and home to a prison farm, most of this school fund property has been sold, generating profits of $41 million so far. Now the fund is working with Raleigh, N.C.-based Cherokee Investment Partners in a development that will include housing, retail and office space on about 900 remaining acres near the site of the old Imperial Sugar factory.
Buffalo Ranch Prison Farm, 2003
Price: $14.9 million
Acreage: 11,002
Description: In Burleson County near Bryan, this property is the site of a new state prison farm where inmates grow cotton for their own uniforms. It replaces a prison farm in Fort Bend County. The fund bought Buffalo Ranch from clothing magnate Carlo Benetton. The Texas Department of Criminal Justice leases the farm from the fund for $753,000 a year.
Austin Triangle, 2004
Price: $8.9 million
Acreage: 33
Description: Among the last large tracts of undeveloped land in central Austin, the Triangle project -- a residential and retail complex just north of the University of Texas at Austin -- was conceived in the 1990s as the land office's first and largest for-profit land and development venture in modern times. About 7.5 acres of it were sold, and lease payments totaling $4.7 million have been received so far.
Wal-Mart distribution center, 2005
Price: $100 million
Acreage: 474
Description: At 4 million square feet, enough to hold 70 football fields, it's said to be the largest U.S. distribution center dedicated to one company. The state owns the land and building, and the school fund stands to make at least $303 million from its 30-year lease. It's the largest land deal in the fund's history, and it reportedly gave Wal-Mart its largest tax break ever -- about $70 million -- though Wal-Mart still pays over $4 million annually in business property taxes.
Sources: Texas Education Agency, General Land Office
Read more in the Fort Worth Star Telegram and see Excel Spreadsheet of known acquisitions.
