Ed Morse, Champion of the Insiders

“On every question of construction, let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or invented against it, conform to the probable one in which it was passed.”

— Thomas Jefferson, letter to William Johnson, June 12, 1823

The Founding Fathers of America knew what they were doing.  There was a core group of them that had studied all the failures of previous governments in human history.  They knew what to avoid.  But what they had set up had never been tried before.  It was a grand experiment they were embarking on.   And where we have shown fidelity to our Constitution, the Republic they launched has done well.  Yet were we have violated those principles of the Constitution and that of our Founding Fathers, we have gotten ourselves in trouble.

One such abuse of our State’s Constitution was the recent purchase of the DeArmond stud mill site just north of North Idaho College.   There are two issues that show a blatant disregard of Kootenai County tax payers and abuse of our Idaho Constitution, a document that all elected officials are sworn to uphold.

The first abuse was that the purchase price of this property was double what it should have been.  And most of that purchase price was funded by tax payer dollars.  Conventional wisdom was the transaction took place for only $10 million.  But there is credible speculation the actually purchase price was actually $14 million.  We actually don’t know what the purchase price was.  What we do know for certain was that our local district court shut down the discovery process when Kootenai County Citizens were suing NIC and trying to get answers.

Through sleight of hand, what was really a purchase of property using debt instruments was camouflaged as a lease agreement using creative legalize.  This was done to get around the Idaho Constitution’s prohibition against public indebtedness without two thirds of voter approval.  In other words. The NIC trustees and other insiders wanted to do the deal without input from the voters; all the while they use the voter’s money.

Courts are to look at the substance of a situation, not the form of it.  Clearly the “form” of this deal was to pretend that the college was leasing the property.  But there was a $4 million prepayment of the lease on day 2 of that lease.  Really?  This was a lease?  And then after only a year and a half of lease payment on a 5 year lease, there was another $4 million prepayment on the lease which had the effect of terminating that lease.  This was not a lease, it was a purchase.

Before we go any further we should quote another of Jefferson’s famous quotes, that being “It is every Americans’ right and obligation to read and interpret the Constitution for himself.”  The courts have said that the purchase of the 17 acre former stud mill just north of NIC was “OK”, but anyone with half a brain can future out that it wasn’t.

We should be grateful for the three Kootenai County Citizens who were willing to sue to defend our state Constitution, and their attorney who helped them fight that fight.  But were we failed as a community, was we needed to back them up by the 100’s or the 1,000’s of us who had also read the Idaho Constitution for ourselves and were willing to defend it.

It took the college only a year and a half payoff their $10 million 5 year lease on the property, at about $2 million a year, plus the 2 – $4 million prepayments.  It appears that the second $4 million prepayment was made for the purpose of shutting down the lawsuit which challenged the constitutionally of the deal.  And the court facilitated all of that instead of giving Kootenai County tax payers their day in court.

Why would anyone rent bare ground for 5 years, particularly an educational institution?  Educational institutions teach students.  And typically students are taught in buildings.  And most buildings are built with an expected lifespan of fifty years.  Yet this lease was for only 5 years.  Not long enough to design a building, get a permit, build the building and then what, teach a year’s course in the building before the lease is up? Why?

All you can really do with a 5 year lease on bare ground is use the ground for a parking lot.

To answer that question we need to look at the language of the Idaho Constitution.  Found at Article VIII, § 3: “Limitations on county and municipal indebtedness. No county, city, board of education, or school district, or other subdivision of the state, shall incur any indebtedness, or liability, in any manner, or for any purpose, exceeding in that year, the income and revenue provided for it for such year, without the assent of two-thirds of the qualified electors thereof voting at an election to be held for that purpose,…”

In structuring the DeArmond stud mill purchase “deal”, a five year time frame was needed to get the property paid for, i.e. to purchase the property.  But purchasing the property was illegal without approval of two thirds of the voters.  That would not have been the case if the property had been valued at what it was really worth at the time of the valuation, which was about half of the $10 million it sold for.  Or was it $14 million?  We really don’t know, because in the lawsuit brought to defend the tax payers of Kootenai County, the court covered for the college and would not allow discovery.  So we really don’t know what the purchase price was.

What we do know, is irregardless of whether the purchase price was $10 million or $14 million, at $15,000 to $20,000 per parking lot stall, the deal was grossly uneconomic.  Maybe the college should have just bought every student a car who lived more than a mile from the campus?

However, with the property appraised in an “as is” condition, instead of an “as if” condition, the appraisal value would have been half of what the appraiser claimed it was, and the deal could have been done in a single day without violating the Idaho Constitution.  But that would have not paid off the insiders.  Demands for a second appraisal fell on deaf ears.

Going to bat for the insiders, was real estate appraiser Ed Morse, currently a candidate for the legislature.  By using “extra-ordinary” assumptions, Morse jacked up the price of the deal with his valuation of $13,250,000 for the property at some point in the future.  The insiders needed a higher price, and Morse broke the rules of his profession to give them this number, and thereby bilk North Idaho tax payers out of millions of dollars.

Morse should have used as comparable properties nearby with similar industrial zoning of similar acreage.  There were such properties to use as comparables.  But instead Morse used as comparable properties zoned with the hypothetical C-17 zoning that Morse claimed the property would get in the future.

Morse’s valuation was based on an undefined time in the future when a series of “extra-ordinary” events would have needed to take place, if in fact they took place at all.  Yet the standard of care of Morse’s profession require that appraisals be based on a value at a fixed date, not a moving target date.  But in order to cheat the appraisal number higher, Morse had to base the valuation on a series of theoretical events.  Among these events was rezoning the property from industrial to commercial-17, the most valuable zoning classification.  Morse also had to assume there was no soil contamination, highly unlikely for a site used as a lumber mill for decades.  Yet on a $14 million deal (or was it $10 million?), one would be crazy not to spend a couple of thousand dollars to identify the presence and extent of any contaminated soils.

Morse also assumed the entire property was buildable, ignoring the Army Corps of Engineer’s required setback from the Spokane River and ignoring the fact that the levy protecting the property from flooding was damaged.   If you can’t build on portions of the property, you end up with less cash flow to support the price that the insiders needed to make them all happy.  Better to ignore this fact so that insiders can all get greased.

One could argue that at least one of the parties to the transaction was a government entity, that being North Idaho College, who was paying the lease.  And therefore, the likelihood of getting the property rezoned to that highest valued type of zoning was likely to happen.  But who should benefit from that likely event, real estate insiders? Or the tax payers?  Morse made sure it was the real estate insiders who benefited, and not the tax payers.

But then again, would the property command top dollar from the C-17 zoning assuming commercial clientele and luxury condominiums all immediately next door to a sewer plant?  Oh, according to Morse’s appraisal the sewer plant can be hidden by screening, yet Morse also recommended a high raise condo on the site.  Hummm, that screening could be seen from the Rathdrum Prairie!

And to top it all off, the real estate market peaked at about the time Morse was projecting the value of this dirt would grow like a tree that would grow to the moon.

If you can’t figure out how to make a silk purse out of a sow’s ear, just hire Ed Morse, and he’ll use “new math” and “extra-ordinary” assumptions to make it all happen for you.  We think as a legislator, the tax payers are sure to get the bilked Morse again.  Think about that when you go to the polls on November 6.