Audit finds city has ‘poor’ leasing practices

An analysis of the city’s leasing practices has called for widespread changes in coordination and oversight across city departments, after pointing out a number of inefficiencies and lost revenue that could cost $75 million over the next 30 years.

The city auditor’s office has found that the city “does not use a strategic approach to make decisions about City leases or meet department space needs” and in many cases the Office of Real Estate Services was not involved in the execution of current lease agreements.

The audit’s three main findings were that the city lacks central oversight of leasing processes and doesn’t have a strategic approach for meeting space needs; that the lack of process prevents leases from always meeting the city’s best interests; and that a lack of oversight on leases of city property to tenants likely results in financial loss for the city.

It recommended that the real estate office:

• take ownership of the leasing process
• create a comprehensive space inventory
• develop a long-term plan for space management with policies to guide its use
• define the roles involved in leasing processes
• create defined policies for the city to rent space to nonprofits at below-market rates
• ensure all leases are renewed in a timely fashion
• take a more active role in monitoring and ensuring lease compliance

The real estate office agreed to all recommendations in the audit, in some cases explaining that ongoing work could delay full implementation of some steps until the end of 2021.

The audit was one of the items discussed Wednesday by City Council’s Audit and Finance Committee, with Council Member Alison Alter questioning city staff on the ongoing deficiencies even after a $1.4 million audit conducted in 2012 recommended the city take steps to improve its leasing practices.

“I’m still concerned about the lack of controls for a department that is taking out a lease where they don’t have to actually talk to the real estate department before a lease comes to Council – as I understand that was one of the findings from the audit,” she said. “It seems to me that it would be pretty simple to have a check-off that you can’t come forward with an RCA for a lease without having connected with the leasing department. It’s challenging enough to find space in the city, but then to do it with no real estate expertise seems to me not a good recipe for coming up with leases that are good deals for the city.”

Alter also asked Alex Gale, assistant director of the real estate office, why more than a year will be needed to make some of the changes. She questioned the infrequent meetings and apparent ineffectiveness of the Strategic Facilities Governance Team that has been charged with finding ways to make improvements to leasing practices.

Gale said that group has taken to meeting monthly and is implementing some steps to improve oversight, and that the in-process creation of a system to inventory the city’s “fee simple” spaces will need to be completed before the real estate office, Building Services and other departments can merge their systems together.

Mayor Steve Adler asked city budget staff to work with the real estate office to identify the one-time and ongoing costs the city will incur to make the needed changes. He noted that an expected drop in city revenue as a result of coming state caps on property tax revenue could require the city to “keep a list to test what we can and can’t do.”

Adler also questioned the auditors’ claim that the city’s practice of letting leases to outside tenants expire but not reclaiming the property could create a legal exposure for the city. He said that practice in effect leaves the previous lease conditions in place while giving the city a measure of flexibility if it decides to pursue new uses or tenants for a space.

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Photo by John Flynn.

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