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Monday, December 20, 2010

Auditor Balderas Releases State Land Office Special Examination Report: $15M in State Land Proceeds Given to Developers, Private Business

Hector-Balderas-07 Today, State Auditor Hector Balderas released the long-awaited State Land Office (SLO) Special Examination report. The Office of the State Auditor’s (OSA) examination scope included a population of a sample of more than 100 state trust land transaction samples (sales, land exchanges and planning and development leases) for the time period from January 1, 2002 through March 11, 2010. These land transactions occurred between the Land Commissioner and various other parties, including private individuals, businesses and governmental entities.

The OSA uncovered numerous troubling financial, operational and contractual practices that require reform, according to the report (see 71-page pdf).  

The report has been referred for action to a number of agencies, including the New Mexico Legislative Finance Committee and the New Mexico Attorney General, as well as to the U.S. Attorney General’s office and the Attorney General’s office.

“The questionable practices of the State Land Office were brought to my attention by concerned legislators two years ago,” Balderas said in a statement released today with the report. “After nearly two years of careful review, we found a complex financial operation that didn’t have adequate documentation to substantiate major financial transactions and arbitrary appraisal and improvement value credits. This speculative practice has led to New Mexicans losing millions of dollars of valuable land that was benefiting the trust.”

Duties of Office of Land Commissioner
The Commissioner is the trustee of New Mexico trust lands and has numerous statutory duties under federal and state law. Under the federal Enabling Act, passed by the United States Congress prior to New Mexico gaining statehood, the federal government granted certain lands to New Mexico to be held in trust by the state “for the support of common schools.” The Act placed certain restrictions on the disposition of trust lands. Among other restrictions, the Act requires that trust lands cannot “be sold or leased ... except to the highest and best bidder at a public auction,” except that trust lands may be leased for a term of five years or less without public auction. The Act also requires that trust lands be “appraised” and disposed of “at their true value,” and mandates that legal title to trust lands cannot be conveyed until consideration is paid.

The Enabling Act also provides that the proceeds from the disposition of the trust lands or its “natural products” only be used in accordance with the provisions of the Act: “Every sale, lease, conveyance or contract of or concerning any of the lands hereby granted or confirmed ... not made in substantial conformity with the provisions of this act shall be null and void.” New Mexico consented to the provisions of the Enabling Act pursuant to Article XXI, Section 9, of the Constitution of New Mexico.

KEY FINDINGS OF THE EXAMINATION
Statement Accompanying Release of Report

Business Lease IVCs: The examination of SLO files resulted in numerous key findings. During the test work of business leases, the OSA noted all planning and development lease contracts require the SLO to pay an improvement value credit (IVC) to the private developer upon the subsequent sale, lease or exchange of the land. The IVC split ratios between the SLO and the developers vary significantly between each business lease. The SLO has no formal policies or procedures that are used to determine the IVC split between the SLO and each developer.

Per SLO records, from November 2006 through July 2010, payments to developers from IVCs are $15,495,148 of the total sales proceeds of $25,063,637. This amounts to a total developer split of total proceeds of approximately 62%. One business lease included a developer IVC split as high as 86% for a total of $8,457,055 that the developer received of a total sales amount of $10,130,000. We also noted other lease IVCs varying by the following percentages to developers; 40%, 50%, 66.67%. There is no documentation within the business lease contracts containing an IVC that indicates how the SLO determined the IVC ratio.

Campaign Contributions: Furthermore, the OSA noted a large number of certain sampled items in which the applicant, who was subsequently awarded the exchange, sale or lease, made campaign contributions to the Commissioner in close temporal proximity to the awards. In certain cases, the OSA noted that an exchange party or a purchaser of trust land made significant contributions that occurred near the date of application or closing of the agreement.

“Currently, state law does not provide for contribution disclosure requirements relating to trust land transactions or prohibit contributions during the Commissioner’s negotiation process for the exchange or lease trust lands,” Balderas added. “The legislature should strongly consider disclosures for the State Land Commissioner.”

Beneficiary Notification: Another key finding in the report included the SLO’s failure to notify beneficiaries during the sales process and several instances where they were not notified in a timely manner during certain exchange transactions. The SLO’s failure to promptly notify beneficiaries forecloses their participation in the process and it is not transparent to those who are required to benefit from the trust.

The additional key findings for single transactions listed in the report include the following deficiencies:

Bowlin Travel Center Land Exchange
The Commissioner executed a land exchange agreement with Bowlin Travel Center on August 29, 2008. The Commissioner conveyed 30.07 acres of state trust land to Bowlin in exchange for 1 acre of Bowlin land. The state trust land of 30.07 acres was valued at $225,600 and the 1-acre of Bowlin land was valued at $240,000. Therefore, the exchange resulted in a net gain of $14,400 in value of land exchanged. However, the SLO relinquished six leases on the trust land, which brought in $14,644 in annual revenue, because of the exchange.

  • Land valuation not determined according to true value requirements
    • Increase in acreage and value without support
  • Prior business lease income not considered during exchange (no financial analysis)
  • Misleading beneficiary notice language

Lea County Land Sale
The Commissioner sold state trust land to Lea County in February of 2008. The sale resulted in a conveyance of 26.33 acres of state trust land to Lea County for a sales price of $71,500 ($2,716/acre). In the sale, the County acquired a portion of state trust land (14.33 acres) it had leased from the SLO since 1993 under BL-629.

  1. Appraisal was over 5 years old at time of transaction, was not “caused by commissioner” and appraisal value per acre was more than the final transaction
  2. No support for increases in acreage and decrease in final price per acre 
  3. No financial analysis performed that would have analyzed prior business lease income and County sublease revenue 
  4. Allowing County to forgo past due payments and failure to charge penalties and interest 
  5. Beneficiary letter not transparent (omitted relinquished lease, sent late)

Rio Rancho/Lionsgate Land Sale
The SLO sold 40 acres of state trust land to Lions Gate (conjunctive agreement with The City of Rio Rancho) for $1,408,000 in November of 2006.

  1. Land to be sold not based on appraisal (negotiated between CPL and Lionsgate per many SLO documents) (rejected appraisal for 2nd round/sale) 
  2. Bid process circumvented (SLO documents indicate transaction with Lionsgate versus City of RR) 
  3. Incorrect calculation of IVC split to developer (derived from sales proceeds instead of second appraised value)
  4. No support for “reasonable project” costs 
  5. First round appraisal amount used for BAV was rejected, but still used – may have resulted in erroneous IVC split to developer
  6. Termination of agreement and failure by SLO to enforce Lionsgate’s contractual obligations. Loss of revenue in contractual/contingency penalties 
  7. Misleading beneficiary notice – stating increased perm fund by $1.408M and indicated “none” for prior business lease income

“The Land Commissioner has a fiduciary responsibility to the beneficiaries of state trust land,” Balderas continued. “The SLO should take the greatest of care when determining whether or not certain transactions are in the best interest of the trust and make every effort to maximize returns for New Mexicans.”

Obstructionist Tactics: The SLO interfered throughout the audit process, which had the effect of delaying the final completion of the report. The SLO employed obstructionist tactics to delay the audit, including withholding documents requested by OSA auditors. The SLO also redacted information from documents before providing them to OSA auditors.

Redactions: The Land Office blacked out SLO employee recommendations against executing certain land transactions. “The Land Office blacked out significant portions of documents, including documents that included critical statements from Land Office employees who reviewed proposed transactions,” Balderas said.

Report Referrals: The OSA has referred the report to various agencies, including the New Mexico Legislative Finance Committee and the New Mexico Attorney General. Also, due to concerns about the violations of the Enabling Act, the State Auditor has referred the report to the U.S. Attorney General’s office and the Attorney General’s office.

Click for the entire 71-page report (pdf).

December 20, 2010 at 04:29 PM in Government, Hector Balderas, Land Issues | Permalink

Comments

I, for one am glad this has come out on the present Land Commissioner. unfortunately, he has gone on to be elected to yet another position that could lend itself to pay to play under the table. I do also feel that it will take 4 years to do anything about it and by that time he will be elected to the PRC for a second term. I know it will sound like sour grapes on my part but I wish this had come out when i was running for the PRC. i have accepted my loss and moved on. trust he will take his lack of integrity to this position as well. I am truly sorry that if all these things that have come to light are true it is the People of New Mexico who have paid the price.

Posted by: Stephanie DuBois | Dec 20, 2010 5:07:06 PM

Why didn't this come out BEFORE the election? At least some of it could have been revealed. It doesn't help much now after Lyons won the election. He should be stopped from being on the PRC.

Posted by: Old Dem | Dec 20, 2010 5:25:21 PM

Scanning the report it's clear Lyons ran the office like a a little tyrant, overriding recommendations and doing as he pleased to make deals bad for the state with his campaign donors. I hope the legislature wakes up and passes laws to rein in the power of the land commissioner. It's way past due.

Posted by: Reader | Dec 20, 2010 6:16:48 PM

Agreed, this should have come before the election, but it is now out and I expect some charges. Mr Lyons, do the right thing and resign.

Posted by: Freddy Cyr | Dec 20, 2010 8:21:29 PM

Yeah, like resigning is something Lyons would even consider,NOT. Jerry King is Lyons assistant at the Land Commission. he is the AG's cousin and I believe Rep. King's brother. Would it seem likely that Lyons would be charged with anything and hey how much does Jerry King know about any shady dealings that went on under Lyons. just a question

Posted by: Stephanie DuBois | Dec 20, 2010 9:28:00 PM