I agree, except with the method. An auction would generate fair value, the system they are proposing means the city gets to decide who gets it.
The advantage to the city’s method - whether you or I may agree with it - is that the lots are going to an already-established local interest with presumably a history of maintaining the property they already have.
An auction would likely result in absentee ownership.
What fair value? $500? It would cost more to set up an auction.