2011-2012 Santa Clara County Civil Grand Jury Report How Santa Clara County Decides to Lease Property at Below Fair

Conclusions 4

• CL1 Page 15
  The historic method of awarding public property in BFM rents and ground leases did not require that transmittals include complete financial analysis and corresponding service summaries to communicate the full value (or benefit) to the County of granting BFM rent or ground leases.
• CL2 Page 15
  Fair market value was calculated inconsistently and not in accordance with established appraisal methods.
• CL3 Page 15
  No single County department is acting as the point of expertise and control of the County owned real estate subject to BFM rent or ground leases or agreements.
• CL4 Page 13
  The County strives to meet its social and human services needs by providing County services directly and/or by contracting with community-based organizations (CBOs) and charities. Often CBOs and charities cannot afford fair market prices for real property needed to perform contracted duties. In some cases, these organizations ask the County for BFM rents and ground leases to facilitate their service to the County. Although awarding BFM rents and ground leases are financial transactions, historically the BOS does not treat them as financial matters. Transmittals do not consistently include the type of information that would justify an essentially financial commitment. Sometimes the BFM agreements are an add-on to a service agreement. Long-term leases do not always include provision, allowing the Board to conduct periodic reviews to ensure that the intent behind granting a BFM rent or ground lease continues to be fulfilled. 3 As valued in the Audit. 13 As reported in the Audit, the BOS approved a number of BFM agreements from the 1950s to 2009. From 1972 to 2009, the transmittals included increasingly more robust analyses, but there is room for improvement. As noted in the Audit and confirmed by the Grand Jury, related transmittals to the BOS did not include financial analyses to support discounted rents or leases. The Grand Jury’s investigation also found that the transmittals requesting the BOS to approve BFM rent or ground leases did not include the market value of the property being leased, the cost incurred by the County (if any), or, where there was a corresponding service agreement, service descriptions that would justify the BFM awards. Further the transmittals do not consistently convey the benefit to the public of making these discounted financial decisions, which may ultimately be a cost to the County. If this information was provided in another venue, it was not summarized in the BOS transmittals. Such omissions of information are problematic in two ways. First, it misses the opportunity to convey the cost-benefit information that pairs the expense of these facilities to the County with the public benefit of these agreements. From housing to parks to a warm water therapy facility, these entities serve the public interest in important ways that the public should be made aware of. Second, consolidating the cost and benefit considerations in the transmittal to the BOS would ensure that consistent, complete information is presented for decision making—including the decision to enter into very long-term leases. This is particularly important for long-term agreements, since the BOS that made the award may have different members from the BOS that considers renewals. So the completeness of the transmittal can better ensure continuity of decision making. There is no clear responsibility for oversight of the initiation and development of these agreements. FAF Property Management does not become directly involved with the external service provider. This leaves the sponsoring department, such as Mental Health, with the primary role in what is a real estate matter. Neither the BOS nor the department presenting the request required a periodic lease review to be incorporated into the lease agreement to ensure the continued fulfillment of the agreement. These agreements are reviewed solely upon the termination of the lease, which in many cases expire 25 years or more from execution. In most cases, the County does not perform periodic oversight of BFM rent and ground leases, particularly when the leases are not tied to a service agreement. This is largely because the County does not have the authority to do so if such a review is not included in the terms of the agreement. As appropriate to the purpose of the lease, it would be important to add a provision to new leases that allows the BOS to periodically review whether the entity is still performing a benefit to the public as assumed when the lease was approved. This is particularly important for long-term leases that are not tied to service agreements because the lessee’s role and the need may change over time. Periodic reviews and more robust transmittal information can provide necessary transparency to the public and help to ensure that the value that existed with the original approval of a BFM rent or ground lease is still occurring. 14 Findings and Recommendations Finding 1: The historic method of awarding public property in BFM rents and ground leases did not require that transmittals include complete financial analysis and corresponding service summaries to communicate the full value (or benefit) to the County of granting BFM rent or ground leases. Recommendation 1: Before awarding a BFM rent or ground leases, the County should require that transmittals include financial analysis and corresponding service summaries to communicate the full value (or benefit) to the County. Specifically, the County should require the transmittals to include: a. A financial analysis—including the fair market value of the property being awarded and the County’s costs associated with the property—to show the value being received by the County in exchange for the BFMR or ground lease. b. A description of how oversight will occur, such as a tie to a service agreement c. A description of the services provided by the lessee and related costs or savings to the County Finding 2: Fair market value was calculated inconsistently and not in accordance with established appraisal methods. Recommendation 2: The County should develop and implement a process that establishes fair market value through more rigorous valuation, such as through a certified real estate appraiser. Finding 3: No single County department is acting as the point of expertise and control of the County owned real estate subject to BFM rent or ground leases or agreements. Recommendation 3: The County should identify one department responsible for County-owned real estate, including the responsibility to value and to recommend the award of BFM rent and ground leases to the BOS. 15 Appendix A: List of Documents Reviewed Document Document(s) Location Lessee Abilities United 2009 IRS Form 990 www.abilitiesunited.org/privacy Abilities United Abilities United Financial Statements for the year www.abilitiesunited.org/privacy Abilities United ended 6-30-2010 Board of Supervisors meeting minutes and Santa Clara County Clerk of the Board Abilities United related documents from 9-29-1980 Board Archive meeting Item #12 Board of Supervisors meeting Summary, www.sccgov.org Ali Baba Corporation Transmittal and related documents for Item #70 from the 9-15-2009 Board meeting Board of Supervisors meeting Summary, www.sccgov.org CIMR Transmittal and related documents for Item #25 from the 1-12-2010 Board meeting Board of Supervisors meeting minutes and Santa Clara County Clerk of the Board CIMR related documents for Item #17 from the 4-26- Archive 1988 Board meeting Board of Supervisors meeting agenda, www.sccgov.org Mayview Community Transmittal and related documents for Item #94 Health Centers from the 6-9-2009 Board meeting Board of Supervisors meeting Summary and Santa Clara County Clerk of the Board Mid-peninsula related documents for Item #26 from the 1-14- Archive Housing Coalition 1992 Board meeting Board of Supervisors meeting agenda, www.sccgov.org San Jose University transmittal and related documents for Item #65 Research Foundation from the 9-29-2009 Board meeting Board of Supervisors meeting agenda, www.sccgov.org San Jose University transmittal and related documents for item 22A Research Foundation from the 3-3-2009 Board meeting Board of Supervisors meeting agenda, www.sccgov.org City of Campbell transmittal, and related documents for item #72 from the 9-15-2009 Board meeting Custody Audit – Financial Report of the Facilities www.sccgov.org NA and Fleet Department dated 10-1-2010 Custody Audit - Internal Controls of the Facilities www.sccgov.org NA and Fleet Department dated 8-1-2011 16 Appendix B: California Government Code Section 26227 “The board of supervisors of any county may appropriate and expend money from the general fund of the county to establish county programs or to fund other programs deemed by the board of supervisors to be necessary to meet the social needs of the population of the county, including but not limited to, the areas of health, law enforcement, public safety, rehabilitation, welfare, education, and legal services, and the needs of physically, mentally and financially handicapped persons and aged persons. The board of supervisors may contract with other public agencies or private agencies or individuals to operate those programs which the board of supervisors determines will serve public purposes. In the furtherance of those programs, the board of supervisors may make available to a public agency, nonprofit corporation, or nonprofit association any real property of the county which is not and, during the time of possession, will not be needed for county purposes, to be used to carry out the programs, upon terms and conditions determined by the board of supervisors to be in the best interests of the county and the general public, and the board of supervisors may finance or assist in the financing of the acquisition or improvement of real property and furnishings to be owned or operated by any public agency, nonprofit corporation, or nonprofit association to carry out the programs, through a lease, installment sale, or other transaction, in either case without complying with any other provisions of this code relating to acquiring, improving, leasing, or granting the use of or otherwise disposing of county property.” 17 Appendix C: List of Properties Addressed in FAF Audit 18 Appendix C: List of Properties Addressed in FAF Audit - continued 19 This report was PASSED and ADOPTED with a concurrence of at least 12 grand jurors on this 29th day of May, 2012. Kathryn G. Janoff Foreperson Alfred P. Bicho Foreperson pro tem James T. Messano Secretary 20

No Responses Found 2

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