STATE OF WEST VIRGINIA
PRELIMINARY PERFORMANCE REVIEW OF THE
STATE BUILDING COMMISSION
State Building Commission Function should be Limited or Terminated
Property Management is Inadequate
OFFICE OF LEGISLATIVE AUDITOR
Performance Evaluation and Research Division
Building 1, Room W-314
State Capitol Complex
CHARLESTON, WEST VIRGINIA 25305
|Table 1: State Building Commission Property|
|Grounds & Crafts||$380,628||$494,159||-113,531|
|Table 2: Meetings of State Building Commission|
|Number of Vacancies||0||0||1 at 1||1 at 1||0||2 at 2||2 at all||1 at all||0|
|Quorum||All||All||All||All||All||2 of 3||All||All||All|
The State Building Commission (SBC) is required by WV Code §5-6 to construct, purchase, lease, or lease-purchase buildings in the name of the SBC for the purpose of providing office space to state agencies. The SBC is required to maintain and operate its facilities, and to charge rent. The Commission collected about $8.5 million in rent from the tenants occupying SBC properties (see Background section). The SBC has 27 properties located in various parts of the state, including Beckley, Charleston, Clarksburg, Fairmont, Huntington, and Parkersburg. See Appendix A for tenants and annual rent paid for FY 1997. The SBC also has authority to issue revenue bonds. Currently, there are two outstanding revenue bonds issued by the Commission totaling over $191 million.
State Property Transactions Do Not Have Adequate Oversight
The SBC has engaged in transactions that typically involve several million dollars. Table 3 provides a list of several property transactions. Due to the size of these transactions, some oversight is needed to reduce the risk of substantial monetary consequences. The report concludes that the SBC has not provided effective oversight of property transactions and should be terminated, or its non-bonding functions should be eliminated. However, it is recommended that the Legislature oversee selected transactions depending on the monetary value, or other specific criteria.
Properties have been bought or sold sometimes with no Commission participation, or at other times simply giving its approval after the fact. Below are statements made by members:
"Keeping the Commission up to date monthly on the status of projects or proposed
plans of agencies would be appreciated because I feel there have been occasions
when I have not been fully appraised....the Commission is approving what has
already been decided either by another body or by Commission staff. There have
been issues that seem to be settled in between meetings without Commission
discussion." [June 1998 interview]
"...the Commission needs to be in on property transactions a little earlier."
[February 1995 minutes]
|Table 3: SBC Property Transactions|
Property Site (Year)
(Principal & Interest)
Term (in years)
|Thomas Jefferson School, Charleston (1998)||$310,000|
|2019 Washington St.|
|Morris Street Building, Charleston (1988)|
Below is a brief description of transactions that illustrate the lack of oversight by the Commission.
1998 - Sale of Thomas Jefferson School Building
During the 1998 Legislative session, Senate Bill 661 was passed authorizing the sale of the Thomas Jefferson Junior High School in Charleston, a SBC property. The legislation required the sale to be awarded by bids, and the sale price could not be below the appraised value. In May 1998, the school was sold to a sole bidder for an updated appraised value of $310,000. It was only after the property was sold that it was discussed by the Commission in its May 1998 meeting. Curiously, the Commission "approved" the transaction even though it could not be reversed. Prior to the May meeting, Commission minutes indicate there was no discussion that the executive director was planning the sale of this property. However, eight months prior to public solicitation for bids, the sole bidder requested information from the executive director pertaining to environmental studies and mechanical upgrades performed on the property.
It is possible that if the Commission was informed of the particulars of the transaction, it may not have approved it. The minutes do not indicate that members were informed that one of the members who was not present at the May meeting was a partner in the firm that bid on the property. This is in clear violation of the Commission's procedural rules which state:
The Commission shall maintain constant vigilance against conflicts of interest, or the mere appearance of conflicts of interest. No officer, member or employee of the Commission shall be financially interested, directly or indirectly, in any contract of any person with the Commission, or in any sale of any property, real or personal, to or from the Commission.... [§159-1-5.5]
In response to questions asked by the Legislative Auditor concerning this transaction, the Executive Director indicated that the intent of Senate Bill 661 was to have him sell the Thomas Jefferson school "without regard" to the State Building Commission. Although the Executive Director brought the transaction before the Commission for its approval, he indicated that SB 661 did not require the transaction to be reviewed by the Commission. He also stated that the Commission's vote was not only redundant, but the Commission could not have disapproved the transaction. Also, the Executive Director stated that since SB 661 intended the sale to be outside the Commission's review, there was no need to inform members of the relationship that existed between a Commission member and the purchaser of the property.
This transaction is a clear example of how the SBC is not always used in reviewing and approving property transactions. Despite this property being in the SBC's name and under its authority, the staff arranged for its sale without SBC knowledge.
1997 - Purchase of the P & G Building
In the September 1997 Commission meeting, the staff informed members of a lease-purchase of the P&G building, located on 2019 Washington street in Charleston. Currently, this building houses certain divisions of the Department of Administration. Members were told that the purchase price was $1,000,000 over seven years. However, the actual lease-purchase was for twelve years, resulting in higher interest costs by over $112,000. Nowhere in subsequent meetings does the staff inform the Commission of the change of the terms from the original terms discussed in the previous meeting. Also, the Supreme Court of Appeals expressed an interest in moving into the building because of a need for additional space. The Supreme Court offered to pay $28,000 more in annual rent than what is currently being paid. The Supreme Court's request was denied. The Commission was informed that "Most of the administrative staff in the Department of Administration located in the East Wing of the Capitol Building will be moved to the P&G Building, in deference to the Supreme Court needing extra space." [September 1997 minutes] Again, the Commission was not involved in this decision and it was informed after the fact.
1988 - Morris Street Building
In August 1988, the 601 Morris Street building in Charleston was lease-purchased for around $19 million. Although the Commission would become the owner of the building according to the agreement, this purchase was not reviewed by the Commission. In 1988 the Commission met only once and in 1987 it met twice. In each of those meetings, there was no mention of the staff's plan to lease-purchase the Morris Street building. Furthermore, the purchase was not mentioned in subsequent meetings.
The agreement was entered into before an appraisal was done. The property was appraised at around $9.1 million, however, only two years earlier the property was sold for only $2.5 million. The tenants of the building moved out in 1995 because of its deplorable conditions, including an asbestos problem, inadequate wiring and fire code violations, and because the building was designed as a warehouse not for office space. The property was clearly not worth $19 million. The lease-purchase was considered so unfavorable to the state, that consideration was given to terminating the agreement. Instead, the state agreed to honor the agreement by borrowing $12 million from the State's consolidated fund to purchase the building and what was anticipated to renovate the building. This transaction has resulted in a substantial financial burden to the state because it is paying $80,000 a month to repay the loan for a building that has been vacant for three years.
The State Building Commission was not consulted during the debate over the Morris Street property. In fact, it was not until after legislation passed to pay the remaining payments on the building that the Commission was informed. In that meeting members asked questions on what options the State had, the 30 day cancellation clause, and if a compromise could be reached with the bond holders. All of which were moot questions because the purchase was required by law. Nevertheless, the Commission voted on the issue as though its approval was needed.
Leases with Tenants Do Not Receive Commission Approval
It is a common practice that leases for tenants in SBC properties are not reviewed or approved by the Commission. Instead, leases for tenants generally are approved by the Commission Chair without a vote by the Commission. Consequently, the issue of how much rent to charge tenants is not reviewed by the Commission. Yet, charging and collecting rent is an important operational function. The Commission's budget is always under pressure, and the lack of available funds for capital improvements is a frequent concern. For example, building three on the State Capitol Complex is in need of substantial improvements.
As issue two below indicates, the amount of rent charged tenants is inconsistent, and in many cases insufficient to cover expenses for the buildings. Leasing policies should be reviewed by the Commission since it is responsible for property operation and maintenance, and collecting sufficient funds is important to accomplish this function. As an example of a lease that may be found objectionable by the Commission is a sublease in the Cultural Center. For several years the Commission has struggled with the issue of tenants in the Cultural Center not paying rent. This has lead to heated discussions because other agencies are paying rent, the rent is needed and required by law to be collected. Nevertheless, a sub-lease was approved without Commission review between the Division of Culture and History and West Virginia Public Radio for performing Mountain Stage programs. The Division of Culture and History receives $18,000 a year from the sub-lease, yet it pays no rent to the State Building Commission.
Causes for the Lack of Oversight
A primary cause for the inadequate oversight is the Commission's function and authority is undefined. Neither the governing statute nor its procedural rules mention what requires Commission approval. The procedural rules simply indicate how meetings are to be conducted. Part of the Commission's powers include maintaining and operating its property. However, this is a broad function which could range from minimal oversight to micro-management. One member stated that "The depth of the Commission's responsibility is unclear."
Since the Commission meets about twice a year, serious management is impossible. However, given the substantial amount of money involved, minimal oversight is insufficient. The extent of its oversight is poorly defined in statute and in its procedural rules. There is nothing in the Commission's procedural rules that specify what types of management decisions need to be reviewed and approved, such as leases and lease-purchases, the amount of rent to be charged, appraisals of property, the amount to be offered for property, the allocation of available funds towards capitol improvements, etc. Essentially, the Commission often is not involved early in the process of property transactions, and it is not involved in important management decisions.
By statute (§5A-3, sections 38-42), the Secretary of the Department of Administration has power to authorize all leases. The result of this authority is leases and the rental rates of Commission properties have not come before the SBC. Traditionally, the Commission's Executive Director in his role as Cabinet Secretary of the Department of Administration has determined rates. The Governor, in his role as Chair of the Commission, was given authority by an approved Commission resolution in May of this year to enter into leases on behalf of the Commission without a Commission vote. Again, this is an important function that does not go through the Commission.
Another cause is that the Commission does not meet enough. Procedural rules require the Commission to meet at least once a year. For the past two years the Commission met twice each year. Two Commission members indicated that they would benefit from more frequent meetings because of the volume of material to review.
Finally, Commission staff do not provide a regular report to inform members between meetings on any plans, offers, and the status of projects. One member indicated that he would like to be updated monthly on the status of projects or proposed plans because on occasion he did not feel fully informed on issues.
It is clear that many decisions concerning state property transactions are being decided by staff, and the Commission is informed after the fact, or in some cases not informed at all. This places in question the need and function of the Commission. There is no need for a Commission that reviews decisions that have already been made. However, the Commission is authorized to issue revenue bonds, and currently there are outstanding bonds issued by the Commission. There also are lease-purchase agreements in the Commission's name. Any recommendation must take these into consideration.
The Executive Director of the SBC was asked to respond to three questions concerning the bonding function if the Commission were terminated. These questions were as follows: 1) How would the termination of the Commission impact the state's ability to issue revenue bonds when needed? 2) What are the legalities of outstanding bonds? and, 3) How would termination impact the state's bond rating? The Executive Director stated that termination of the Commission would have no effect on the legality of outstanding bonds, nor on the state's ability to issue revenue bonds when needed (see Appendix B for letters from the Executive Director and his General Counsel). The outstanding bonds would have to be transferred to a different state authority such as the West Virginia Economic Development Authority which would require legislation. The state's bond rating would not be impacted according to the Executive Director.
Therefore, the Legislative Auditor recommends that the Legislature consider either amending the State Building Commission's function to exclude all non-bonding responsibilities, or that it be terminated completely when outstanding bonds mature. The staff of the Department of Administration should continue making decisions on property transactions and exclude the redundant step of having the decision reviewed by the Commission, since in many cases that decision would be legally moot.
However, it is the Legislative Auditor's opinion that there is a need for overseeing property transactions, given the large monetary consequences. The current oversight structure of the SBC is impaired and exhibits a high risk of costly and improper transactions occurring. A lack of accountability exists and will continue unless a better defined oversight authority is established. Therefore, the Legislative Auditor recommends that the Legislature consider providing direct oversight over property sales and purchases, and lease-purchases of certain monetary value. This was recommended in a 1995 special report on the Morris Street building. Furthermore, the Legislature has a similar legislative oversight committee in statute (§31-20-26) over the Regional Jail Authority. This legislative oversight committee is charged to "regularly investigate all matters relating to integrity, probity and foresight in funding, operating and planning the correctional system...." A similar mechanism is needed for state property transactions.
The Legislature should consider the following options concerning the State Building Commission:
Reconstitute the Commission to consist of only the Governor and the Cabinet
Secretary of the Department of Administration.
Amend the Commission's statute to exclude all non-bonding functions.
Terminate the Commission completely after all outstanding bonds have matured.
The Legislature should consider amending state law to require direct legislative approval of all long-term and large sum lease-purchase agreements, and sales and purchases of real property. The amount and terms of an agreement which would require legislative approval should be clearly stated if the Legislature chooses to amend state law.
If the Legislature chooses not to consider recommendations one or two, the following recommendations are made:
The Legislature should consider amending the Commission's statute, to explicitly state what types of property transactions need Commission approval, and that all property transactions must be approved by the Commission before they are completed.
The Legislature should consider amending West Virginia Code §5A-3, sections 38 through 42 to specify that leases or lease-purchases involving SBC property must be reviewed and approved by the Commission.
The Commission should create a second series of procedural rules to establish proper procedure for Commission staff to follow at various stages of property transactions.
The Commission should consider reversing the resolution giving blanket authority to the Commission Chair to approve all leases without a Commission vote.
The Commission's staff should provide a regular report to inform members between meetings on the status of projects and on current plans.
The Commission should consider amending its procedural rules to require more than a minimum of one meeting each year.
Issue Area 2: Management Decisions Are Arbitrary and
The Commission was examined in the areas of operating and maintaining state property as required by statute (§5-6-4). The Legislative Auditor found that management decisions are arbitrary and inconsistent. This has resulted in an unknown amount of unoccupied space in buildings, and some agencies being over billed. Rental rates vary within the same building for no apparent reason. Furthermore, rent escalation clauses are inconsistently applied and have never been exercised.
Inadequate Property Management
The Legislative Auditor found that tenant leases in various buildings specified square footage that did not add up to various measures of total square footage for the entire building. Calculations by the Legislative Auditor suggested that either agencies were being over billed for rent or the Commission was unaware of vacant space. The agency's response confirmed these assertions which are shown in Table 4.
|Total Sq. Feet||68,960||46,500||75,600||unknown|
|Measuring Standard||usable square feet||gross square feet||gross square feet||unknown|
When a building such as Fairmont was purchased with approximately 20% of its
building deemed "unusable" it shows management inadequately oversaw property
purchases. The principal amount on the Fairmont building was $2,700,000. Of that
amount $485,743 was spent purchasing the "unusable" space. Had management
assessed space prior to purchase it would have realized that 15,900 square feet could not
be used and could have saved money. Also, finding tenants to fill vacancies should have
higher priority. These vacancies represent lost revenue.
Inequitable Distribution of Rent
An inequitable distribution of funds exists between state agencies because agencies are paying different amounts for similar office space. Rent per square foot is not consistent within Commission properties. As Table 5 indicates, Fairmont, Clarksburg and Capitol Complex tenants have different rent rates while Beckley and Parkersburg tenants have uniform rates.
|Table 5: Commission Rent Rates|
|Tenant Rent Rates Per Square Foot||$5.66||$8.00||$10.50||$5.64||$13.50|
"...it was decided that the rental rates should be made more uniform for the
Capitol Complex. This was being done partially to appease the Federal Auditors
who continually questioned the reason for the differences in rates. As a result, I
prepared leases/addendums to raise the few remaining agencies up to the standard
$8.00 psf. However, for Building 4, for reasons beyond my comprehension, we
are only able to charge 'rent' based on actual operating expenses."
This document indicates that Commission staff will be unable to apply the universal rate to Building 4, which will continue to be charged $5.66 per square foot. According to calculations by the Legislative Auditor's Office, 43% of the rent paid by tenants in Building 4 goes to pay for utilities. This creates a situation where state agencies that are paying higher rent are subsidizing costs associated with maintaining Building 4. By statute (§5A-3, sections 38 through 42) the Cabinet Secretary has authority over leases. As a result, rental rates of a lease are not overseen by the Commission.
Furthermore, the amount of rent charged and collected from tenants in lease-purchase buildings is inconsistent in that two buildings do not collect enough rent to pay the monthly lease-purchase payments. This is illustrated in Table 6.
|Table 6: Annual Lease-Purchase|
|Lease- Purchase Payment|
Also, the tenants in building nine on the Capitol Complex have not paid rent in several years, and several agencies have had their rent deferred by the Department of Administration. The total rent deferred since 1992 is more than three million. One agency that has deferred rent of over one million dollars is allowed by the Executive Director to sublease its space and keep the rent of $18,000 a year.
Effect of Inadequate Rent Collected
The most serious consequence of inadequate rent being collected is that funds are not being made available for maintenance and capitol improvements in the current period. The impact of this is to allow building improvements to be put off into the future. This will result in improvement costs accumulating over time to the extent that future Legislatures may find it difficult to make funds available to make necessary building improvements. An example of this is the Motor Vehicles building on the Capitol Complex. According to a recent analysis, the Motor Vehicles building needs about $23 million in improvements for inadequate wiring for heating/cooling, and the roof's life span has been reached, and requirements for Americans with Disabilities Act are not being met. The Director of General Services reported to the Commission in September 1997 that conditions in the building are deplorable.
Utility Payments are a High Percent of Rent for Some Buildings
In some buildings a large portion of rent is paying for utilities. Percentages of rent paying for utilities vary from 1% to 47% in Commission properties. The effect of this is that rent is insufficient to cover other costs of maintaining buildings. Several buildings incur costs that exceed the rent charged.
The Legislative Auditor requested a list of private vendor leases entered into by state agencies. According to the list, the state is paying over $13 million to private vendors for office space leases. A calculation was made to determine the average rent charged state agencies by private vendors with and without utilities. The Legislative Auditor also calculated the average SBC rental rate by county and for all SBC property statewide to see if the SBC is charging competitive rates compared to the private sector. These calculations are shown in Table 7.
|Table 7: Rent (per Square Foot) Comparison|
SBC Property vs. Private Sector
|Commission Rates Average||Private Vendor Rent Rate Averages|
|County||With Utilities||With Utilities||Without Utilities|
Table 7 illustrates that the Commission's rent per square foot is less than the statewide average and in most counties where it owns property. The difference is anywhere from $2 to $4 less per square foot. The buildings in Raleigh and Wood counties are relatively new which may explain why SBC rental rates are above the county averages. Overall, this result is expected because part of the advantage of the state owning its own buildings is to be able to charge rent that is below the private sector. However, it is also clear that the SBC's average rent with utilities charged in Kanawha, Cabell, and Harrison counties is below or near the average rent charge by private vendors without utilities. This suggests that SBC rent is too low for some tenants, which results in some costs not being covered. Ultimately, with inadequate cost recovery, maintenance of facilities will be insufficient.
Table 7 also shows that the statewide averages in the private sector for rent with
and without utilities has a ratio of 80% ($6.42/$8.02). This suggests that in the private
sector, utilities are approximately 20% of the rental rate. The Legislative Auditor found
that in SBC properties, utilities consisted of about 20% of rent overall. However, the
range of utilities to rent in SBC property is 1% to 47%. Tenants with lower rent per
square foot have higher percentages of their rent paying for utilities. Due to large rent
portions being spent on utilities, less is left for janitorial and maintenance. To make up
the shortfall, other Commission funds are drawn upon, further effecting maintenance of
Commission properties. In effect, some state agencies are subsidizing others. One cause
is that rent has not been escalated in buildings which have rent escalation provisions.
Another cause is that rent is too low for some tenants.
Rent Escalation Provisions Not Implemented
Rent escalation provisions allow for the state to raise rent in order to absorb rising utility and janitorial costs. The Legislative Auditor found that not all lease-purchase buildings have rent escalation provisions. As Table 8 indicates, even buildings with escalation provisions are not applied to all tenants in the building. Also, escalation provisions are based on different costs. One escalation provision provides for raising rent to cover utilities, maintenance and janitorial costs, while other escalation provisions would raise rent based only on utility increases. Moreover, those with escalation provisions have never had a rent increase as their leases allow, sometimes in more than nine years. According to the Executive Director, "the reason the escalation provisions have not previously been exercised is because the original leases were done for multiple years with no "flag" placed in the database for their annual review."
|Table 8: Rent Escalation Provision|
|Fairmont||Yes||1 of 9|
|Clarksburg||No||0 of 5|
|Parkersburg||Yes||3 of 4|
The Executive Director stated in a letter that all tenants of all lease-purchase buildings will eventually have provisions applied as current tenant leases expire. Consideration should be given to include rent escalation provisions in all leases, including leases on the capitol complex. Utilities and maintenance costs should be monitored annually to determine when rent needs to be increased.
Implementation of a uniform and consistent policy concerning determination of rent is advisable.
There needs to be greater diligence in monitoring the requirements of lease-agreements and available space. Rent escalations should be implemented to keep buildings properly maintained. Usable vacant space needs to be determined and a higher priority needs to be given to finding tenants to occupy vacant office space.
The Commission should consider raising rent where appropriate to make utility payments consistent with a determined standard percentage of rent.