Auditor General finds deficiencies in ABOR real estate dealings

University of Arizona failed to properly oversee a commercial real estate project and allowed millions of dollars to be improperly spent, and there is a general lack of transparency and oversight at university real estate projects overseen across the state by the Arizona Board of Regents, state auditors concluded.

The report from the Arizona Auditor General comes as ABOR, Arizona State University and the City of Tempe have faced increased scrutiny from Attorney General Mark Brnovich and state lawmakers over claims that real estate deals involving ASU in Tempe may have violated the state’s constitution. 

The 80-page report looks into the commercial real estate dealings of the state’s three major universities, Arizona State University, University of Arizona and Northern Arizona University. 

Although ABOR adopted new rules late last year in an attempt to rein in real estate deals done by universities, auditors found that more needs to be done to ensure proper oversight and guidance. 

Additionally, auditors found problems with a UofA project where $3.9 million of rent income was unilaterally used to fund another project without approval from ABOR. Documentation on that particular project was not made available to auditors, seemingly in violation of public record law. 

“ABOR’s lack of written guidance for implementing its real estate policies and approving commercial subleases increases the risk of inappropriate use of public resources leased to private parties,” the report says in its opening remarks about its findings. “Also, the operation of some ABOR property lacked oversight and accountability, resulting in the inappropriate use of proceeds and limited transparency.”

ABOR agreed with some of the recommendations auditors made and disagreed with others. It also took issue with how parts of the audit were conducted. 

“Please note, the Auditor General found no examples of inappropriate use of public resources leased to private parties,” John Arnold, executive director for ABOR, said in a written response to the audit. “The report only suggests additional guidance will strengthen the already robust governance structure.”

The Auditor General did not agree. 

“It is misleading to state that we found no examples of inappropriate use of public resources leased to private parties,” auditors said in response. “[A]s of March 2019, none of the universities had presented a long-term, commercial lease agreement proposal to ABOR for its review and approval since it revised its leasing policy. Thus, there were no agreements executed under ABOR’s revised leasing policy for us to review.”

‘Inappropriate use of $3.9 million’

UofA’s Tech Park in Tucson was a major focus for auditors, who found that $3.9 million had been used inappropriately and records related to parts of the project were kept secret. 

Campus Research Corporation, referred to by auditors as the CRC, is a university-affiliated non-profit corporation that supports UofA and its research park. 

ABOR and CRC entered into three lease agreements for projects at the Tech Park. Auditors were told that UofA President Robert Robbins had approved budgets for CRC, but did not retain documentation of his approval. 

“Further, UA could not demonstrate that the UA president had approved the CRC’s budget for fiscal years 2017 and 2018 and reported that the UA president did not provide written consent for the CRC’s retention of proceeds during these 3 years,” auditors said. 

Additionally, instead of paying UofA rent, CRC “improperly” diverted $1 million that should have gone to UofA as rent for a development on Rita Road to pay for development at another university real estate project. 

Auditors also found that CRC took a total of $3.9 million in proceeds from the Rita Road property and used it to fund construction at a project known as Bridges, which violated ABOR policy and the two lease agreements for the Rita Road development. 

When auditors tried to get additional records related to the projects, they hit roadblocks. 

“When we requested the sublease agreements, UA reported that these agreements are private documents of the CRC and its tenants, and thus, UA did not consider them to be public records that needed to be retained,” the report states.

The auditor argued that the documents should be made public, since Robbins, the president of UofA was a signer on the agreements. 

However, UofA’s record keeping was not ABOR’s only issue with records. 

When auditors asked for a listing of all properties owned by ABOR, they were unable to get a full accounting. 

“[A]s of May 2019, ABOR did not maintain a list of properties that it owns (property listing), including land and improvements,” the report states. 

NAU and UofA both supplied a listing of their properties, even though auditors found these listings incomplete. ASU, on the other hand, only provided a listing of its commercial properties, stating that a listing of all its other properties would take “several months” to compile.  

“Additionally, the listings the universities provided did not include all property we identified from county assessors’ and treasurers’ records,” auditors said. “Specifically, our listing included 1,127 unique parcels, whereas the universities’ listings included 924 unique parcels. Therefore, absent additional information on these parcels, we were unable to review or assess more than 200 additional properties that ABOR may own.”

Lack of guidance and policy

In December 2018, ABOR revised its leasing policies that would make universities include economic impact information on projects they were involved in. 

These reports would include detailed tax information, including the impact on property taxes as well as details on how it would further the university’s goals. 

However, as of March 2019, none of the universities had submitted one of these reports. 

“For example, despite ASU stating that the Marina Heights development would provide revenue to the state and local municipalities and employment opportunities for students, it could not provide an economic benefits analysis to support this statement,” the report states. 

On top of this, auditors also found that despite the changes made late last year, there are still inadequacies that could cause issues down the road for future leases by ABOR. 

Auditors found that ABOR lacked written policies that would help guide universities during the leasing process. 

Additionally, auditors found that ABOR had not developed written guidance for how universities should determine the fair market rental value for their properties. 

Communication between ABOR and universities on compliance with the guidelines that are in place was found to be lacking, as well. 

“(ABOR) relies on informal communication between ABOR staff and the universities to ensure the universities comply with these requirements,” the report states.

ABOR responds

ABOR agreed with some of the report’s findings but offered caveats. 

Auditors suggested that ABOR should apply certain oversight regulations to itself that municipalities do when they are looking at using tax incentives. ABOR disagreed that this would apply to it. 

“The inappropriate application of the selected standard creates two main flaws in the report,” ABOR said in its response. “First, the report equates granting a tax benefit to private entities in exchange for an undefined benefit, such as economic development, with generating additional lease revenue by monetizing the university tax status.” 

ABOR argued that economic development outcomes are difficult to track and source, and that the tracking mechanisms auditors suggested ABOR use are designed for municipalities “engaged in economic development,” whereas ABOR “engages in no such programs.” 

“Thus, the recommendations do not directly apply to ABOR leases, which are simple to track and enforce,” the response says. 

ABOR also argued that the findings of the report are based on “speculation regarding how effectively ABOR will exercise its governance responsibilities in the future when implementing the recently revised policies,” adding that it has a robust set of standards already in place. 

ABOR also claimed that its commercial real estate practices may be the best in the country. 

“[T]he Auditor General was unable to identify any other state with a similarly well-defined policy structure, and it may be that ABOR’s commercial lease policy is the only one currently developed and in place, essentially making ABOR the model and best practice in the United States,” the response states. 

Sean McCarthy with the Arizona Tax Research Association said he was “pleased” to see ABOR working towards better oversight, but the “challenges of state universities providing permanent property tax breaks remains unsolved.” 

“We’re stunned to see ABOR pivot from justifying these deals as positive for the community because of their economic impact to now suggesting they don’t need to measure their impact because they are simply revenue generators and not at all like municipal economic development,” McCarthy told Arizona Mirror.