Time will tell if the Oregon Department of State Lands is like a shrewd operator who finds opportunity in a bad market or a babe in the financial woods. For now, the pioneer-era agency that manages 780,000 acres of state-owned timber and rangeland looks like a real estate wheeler dealer, dabbling in subdivision development and urban growth boundary expansion.



In one move, the department submitted the only auction bid and bought a former motor pool site in downtown Eugene, figuring eventual development of adjoining property will make its 1.6 acres more valuable. In a much larger 2009 deal, the department traded 621 acres of timber for 63 vacant residential lots in recession-hit Redmond, again counting that its value will greatly increase.



The aggressive new focus -- intended to increase money flowing to the Common School Fund -- is raising eyebrows.



"That timberland will go up (in value) less than a foreclosed subdivision in Redmond? That's a gutsy bet," says Mike Hollern, head of Brooks Resources, a Bend real estate development firm. "Is that the way we want our Common School Fund money invested? I don't know."



"We're being a little entrepreneurial here," says John Russell, the department's asset section manager. He acknowledges the change may make people uneasy.



"I expect it does," says Russell, who was Bend's economic development director before taking the state job 10 months ago. "It's non-traditional, and of course there's risk, but we're not being wild-eyed speculators."





The lands department is working from a 2006 asset management plan that calls for it to shed timber and rangeland that is difficult to manage or not producing enough money for the school fund -- the department's primary duty since statehood in 1859. The management plan recommended getting rid of about 12,000 acres of scattered forests and 12,000 acres of isolated and unleased rangeland



Among the expendable timber holdings was the 621-acre parcel up the McKenzie River east of Eugene, containing trees up to nearly 140 years old. It was a "16th" section, a holdover from statehood legislation that deeded the 16th and 36th sections of each 36-square-mile township to the state "for the use of schools."



The intent was to pay for public education with timber sales and grazing fees on state-owned land. It's almost a quaint notion 150 years later, because the cost of schools long since surpassed revenue from state lands. The department distributes splits $40 million to $55 million among dozens of school districts annually. School districts welcome any source of cash, but the Portland School District's general fund budget alone is $435 million.



The McKenzie River property, known as the South Fork Gate Creek parcel, was surrounded by timberland owned by Giustina Resources, a longtime Eugene company, and reachable only by a private road. In the state's eyes, it was an underachiever and a good candidate for sale.



But in a bad economy, with depressed timber prices, the state was in poor bargaining position with prospective buyers. The conundrum sent the state looking to trade instead, and it found the foreclosed, 39-acre Forked Horn Butte subdivision in Redmond. The property was one of the development graveyards left when Central Oregon's red-hot real estate market collapsed. It included 63 residential lots, with streets, curbs and utilities but not a whisper of a house.



The property was appraised in November 2009 at $5.9 million, according to Department of State Land records. Working with state lands staff, Giustina bought the subdivision for about $2.7 million and traded it for the state timberland, appraised at about $2.6 million. The state paid Giustina $151,000 to even the trade. The state land board, made up of the governor, secretary of state and treasurer, approved the deal in last December.



Russell, the state assets manager, believes it was a bargain.



"We picked up one of the better undeveloped subdivisions in Redmond," he says. "We expect that property to double or triple in value over the years."



Hollern, the Bend real estate developer, says the exchange is risky. Redmond and the rest of Central Oregon have an oversupply of vacant residential lots and it will take years for the market to improve enough to absorb them all. "When government gets involved in the land speculation business, it turns out badly," he says.





Time may be the chief ally. A lands department analysis predicts a "high probability for value appreciation" of the property. Lot sales will generate school fund revenue for eight to 12 years, according to the analysis. The state's holding costs are minimal because, as a government entity, it pays no property tax. The deal required no financing, so there are no payments or interest while the state waits out the market.



The exchange meets the department's mandate to obtain property with a higher income potential, Russell says. The asset management plan, written when Central Oregon was booming, identifies that part of the state as a target area and calls for increasing revenue by 5 to 7 percent annually.



The department's sharpened focus is evident in dealings with the federal government, which is settling an old land dispute by transferring ownership of some parcels to the state. Recent pickups from the U.S. Bureau of Land Management include 640 acres adjacent to Bend's urban growth boundary and 945 acres on the south edge of Redmond's. Over time, as those cities expand, the new state property could become "incredibly valuable" for mixed-use and industrial development, Russell says.



Still, critics are concerned. The log and lumber markets are improving, meaning the state's timber holdings are more valuable. The department's subdivision in Redmond, meanwhile, joins the backlog of more than 1,250 vacant residential lots in that city and more than 3,300 in Bend.



Also, Lane County commissioners say they weren't notified of the land exchange, as required by law. In a Nov. 15 letter to the state Land Board, the commissioners say they oppose all sales or exchanges of Common School Fund land in their county.



"There is too little Common School Fund forest land to finance schools now, not a surplus," says the letter signed by commission Chair Bill Fleenor. "We think this is a particularly bad time for the sale of public lands."



Public timber provides carbon sequestration, shelters wildlife and filters drinking water, the commissioners say.



Lane County Commissioner Bill Dwyer says timber transferred to a private company can be exported as raw logs instead of being processed in Oregon and providing jobs for state's millworkers.



"That whole deal fails the smell test," he says.



Russell says the department's action will pay off over time. The agency is mandated to consider future generations of school children "and not harm them in anything we do today."



"We understand selling public land is not considered good," Russell says. "That's a deeply felt issue to people."



There's probably more to come. The land board's Dec. 14 agenda includes a department request to initiate the sale or trade of 24 forest parcels in Jackson and Josephine counties, about 4,920 acres.



-- Eric Mortenson

