Should Expand the Leasing of Right-of-Way and
Other Real Estate Assets to Private Enterprise
Background
Right-of-way refers to land acquired for highway construction, including the space above and below the land, sometimes including mineral rights. In 1987, the State Department of Highways and Public Transportation (SDHPT) was granted the authority to lease right-of-way and to determine the terms and duration of the lease. All leases are subject to statutory restrictions prohibiting property usage which interferes with the function and safety of state roadways. Right-of-way acquired for highway construction is most often leased when construction is temporarily delayed due to budget constraints or shifting priorities. Also, property recently purchased from a business for highway expansion is leased to that business to allow for continuing operations until such time as construction is ready to begin.
Currently, right-of-way leasing activities include leases for the use of highway property for mineral exploration, restaurants and warehouses. Leases for pedestrian bridges, recreational vehicle parks, office space and parking space are planned for the near future. Real estate leases generated approximately $133,000 in revenue for fiscal year 1990.[1] Income from mineral leasing totaled almost $300,000 in fiscal year 1990.[2]
Proposed federal legislation could expand leasing opportunities beyond those normally associated with right-of-way. Proposed amendments to the Federal Aid Surface Transportation Act would authorize the operation of businesses on interstate highway rest areas, transferring substantial costs for maintaining the rest area to the private sector. Privatization of highway right-of-way is being advocated by the American Association of State Highway and Transportation Officials in light of the increasing demands being placed on states' annual budgets for transportation systems.[3] The Center for Transportation Research at the University of Texas is currently studying the feasibility and financial impact of privatizing rest areas in Texas under a contract with SDHPT.
Another issue related to the use of state right-of-way for business purposes concerns the unauthorized and uncompensated use of state land by roadside vendors, which has become a costly problem for SDHPT. These vendors sell items such as used cars, velvet paintings, flags, and various agricultural and handmade items. Problems caused by these businesses and their customers include litter, vegetation and soil damage, pavement and shoulder damage, and safety. In addition, local merchants are concerned with having to compete with roadside vendors who operate on state property rent free.
Interstate Comparisons. The SDHPT is not generating right-of-way leasing income of the same magnitude generated by other states of comparable size. Other states commonly lease right-of-way to private corporations for enterprises similar to those previously cited. Out of five large states surveyed, three generated about $1 million annually from leasing such property, while New York and California generated $7 million and $26 million respectively.[4] Personnel from these states reported that the bulk of their rental income stems from leasing right-of-way purchased for construction that has been canceled or delayed for several years due to budget constraints or shifting priorities.
The variance between revenue generated from leasing highway property in Texas as opposed to California or New York may be partially explained by marketing strategy. California expends significant efforts to advertise property available for lease by placing advertisements in regional newspapers or national business publications, while New York uses aggressive advertising techniques for properties in New York City.[5] Although SDHPT was granted the authority for leasing right-of-way in 1987, and developed rules for such leases in 1988, the department has not developed a similar system for promoting the availability of right-of-way property. Currently, SDHPT advertising only involves placing bidding notices in local papers.[6]
Mineral Leasing. The state is restrained from fully exercising opportunities for leasing minerals drained from right-of-way. The School Land Board of the General Land Office (GLO), which approves mineral leases for most state agencies, leases the minerals from highway right-of-way. Such leases involve the state being paid royalties for mineral resources drawn from right-of-way located within acreage which constitutes a pooling unit of an adjoining landowner's well.
However, in 1981, the 67th Legislature amended the Natural Resources Code to prohibit the leasing of state-owned oil and gas resources on highway right-of-way.[7] In 1985, the Natural Resources code was further amended to reauthorize the leasing of oil and gas under right-of-way, except within 2,500 feet of a well capable of producing as of January 1985.[8] Subsequently, the 72nd Legislature passed Senate Bill 1106 which allows the leasing of state-owned oil and gas on right-of-way within 2,500 feet of a well capable of producing, but only if minerals are captured through horizontal drilling. Thus, the Natural Resources Code still prohibits the leasing of state-owned oil and gas within 2,500 feet of a vertical well capable of production. This constraint allows the opportunity for adjacent oil and gas producers to drain mineral resources from state-owned land without compensation to the state.
Privatized Rest Areas. In the event federal statutory prohibitions against privatizing rest areas on interstates are repealed, state statutes may prevent Texas from capitalizing on potential revenue from rest area privatization. In support of the federal Randolph-Sheppard Act prohibiting the operation of rest area vending machines by other than blind or handicapped persons, state statutes were adopted which mirror the federal act. Chapter 94 of the Texas Human Resources Code prohibits the operation of a vending facility on state property unless the person is licensed by the Texas Commission for the Blind. This statute could require modification if SDHPT is authorized to privatize rest areas with restaurant or other business enterprises.
Roadside Vendors. The SDHPT absorbs the costs of highway damage caused by unauthorized roadside vendors. The department estimates that it spends more than 53,000 man-hours per year repairing damage at sites where unauthorized roadside vendors have opened for business on the right-of-way.[9] SDHPT's total annual expenditures for this repair work is estimated to exceed $1.2 million annually.[10] These estimates do not include hours spent in litter clean up at these sites. Current statutes permit the installation of "No Parking" signs in areas prone to use by vendors. However, the vendors simply find a new location outside the no-parking zone and resume operations. There are no provisions in statute for SDHPT to be reimbursed for their increased maintenance costs or to regulate roadside vendors on state highways for safety.
In summary, SDHPT owns land and mineral resources which are not being adequately used, sold or leased. Portions of right-of-way acquired for highway construction are sitting idle due to budget constraints which have postponed construction. SDHPT is authorized to lease such properties but is not generating as much revenue from leasing endeavors as some states which widely advertise the availability of properties for lease. In addition, the state is restricted from leasing mineral rights on right-of-way within 2,500 feet of a vertical producing oil well, in effect restricting the state from receiving compensation for state-owned mineral resources that may be drained by adjoining landowners.
Furthermore, even if federal restrictions are repealed, Texas may be prohibited from earning revenue from privatizing rest areas due to state statutory restrictions. Finally, the use of highway property by unauthorized roadside vendors cost SDHPT an estimated $1.2 million in maintenance expenditures annually. SDHPT, however, has little control over the activity and cannot recover these costs from the vendor.
Recommended Policy
The General Land Office's authority to lease mineral rights for land held by state agencies should be expanded to include the authority to lease all state-owned minerals rights on highway right-of-way. SDHPT should also increase efforts to promote the leasing of right-of-way and other land assets. For example, properties which are available for lease can be advertised in regional newspapers and national business publications.
The statute requiring that vending facilities on state property be operated by blind or handicapped persons should be amended to allow other business operations at highway rest areas. SDHPT should also be directed in statute to develop rules for the leasing and operation of facilities in rest areas should federal law be changed to authorize this activity.
The State Department of Highways and Public Transportation should be required in statute to adopt a procedure to issue permits for roadside businesses to regulate these operations for safety and to produce revenue. Permits should be issued for a maximum term of one year, and should authorize the use of the highway right-of-way for a specific purpose. The specific location should be agreeable to both SDHPT and the Department of Public Safety (DPS) and should be confined to sites where safety problem and roadside damage can be minimized.
SDHPT should also be authorized to adopt rules for the issuance of permits to roadside vendors. The rules could address appropriate locations for such activities, safety factors, conditions for revocation of the permits and any other factors SDHPT determines are necessary for the protection of both the public and state property. For example, SDHPT could require vendors to place reflectorized safety markers at certain distances on either side of their location. SDHPT could also set certain conditions on the issuance of the permit which require the user to clean the area and assume responsibility for any damage to the right-of-way. A permit fee should be charged to recover both direct and indirect costs to SDHPT for operation of this program. Use of highway right-of-way for business purposes without a permit should be clearly prohibited, and violations should be considered class C misdemeanors. Any vendor found operating on highway right-of-way without a permit should also be required to pay the annual fee to SDHPT.
Implications
Authorizing SDHPT to lease all mineral assets and land assets not necessary for highway purposes will achieve a greater return on land investments through the full use of their resources. However, owners of oil and gas wells near highway right-of-way may not favor the leasing of oil and gas on right-of-way within 2,500 feet of a vertical well. An increase in advertising efforts will create a bigger market for land assets available for lease by SDHPT. An aggressive advertising effort would appear to have the support of the State Highway and Public Transportation Commission (SHPTC), which passed a resolution in March 1991 advocating a proactive philosophy for maximizing revenue enhancement from asset management.[11]
Provisions clearly authorizing commercialization of rest areas on interstate highways will prepare the SDHPT for opportunities regarding rest area privatization should federal regulations restricting such activities be repealed, as is expected in the reauthorization of the Federal Aid Surface Transportation Act. If business enterprises are authorized for rest areas, the state could generate significant revenue from leases and eliminate costs of rest area maintenance for those areas that are leased.
A roadside vendor permit would provide a clear basis for law enforcement officials and SDHPT personnel to remove unauthorized (unpermitted) vendors from the right-of-way. Authorized vendors would be required to locate in areas that would increase motorist safety. Revenue generated from the sale of permits could be used to repair pavement and shoulder damage caused by these vendors as well as paying for the costs of administering the permit program.
Fiscal Implications
Projected revenue from the currently prohibited leasing of mineral rights on highway right-of-way cannot be estimated with available data. Income from the privatization of interstate rest areas and from increasing advertising of real estate assets for lease cannot be estimated at this time. Other states, however, receive extensive revenue from leasing rest areas. Using SDHPT's estimate that approximately 2,300 unauthorized vendors are currently operating on state roads, and assuming 50 percent of the vendors will conform to the new regulations, a $250 yearly permit fee would generate annual revenue of $287,500, which would recover a portion of the estimated $1.2 million in expenditures for repairing roadway damage related to vendors.[12] While the $250 annual fee may be difficult for some vendors to pay, it is far less than annual costs to lease a permanent place of business. Although a higher fee could be considered, compliance with the permit program would likely decrease significantly.
Fiscal Gain/(Loss) Change
Year State Highway Fund in FTEs
1992 $265,000 +1.25
1993 265,000 +1.25
1994 265,000 +1.25
1995 265,000 +1.25
1996 265,000 +1.25
The recommended policies would have a positive effect on cash flow. Administrative costs for permitting roadside vendors include $22,756 per year for an additional 1.25 FTEs for processing the permits. Similar revenues will continue as long as the recommended changes remain in effect.
Endnotes