Audit: Lack of oversight in Board of Regents real estate dealings puts public resources at risk of misuse

PHOENIX — The Arizona Board of Regents is leasing out property for commercial use without proper oversight and with only limited transparency, creating a “risk of inappropriate use of public resources” according to a new audit.

The sometimes blistering report by the Auditor General’s Office found a lack of written guidance for real estate policies, “increasing the risk of not ensuring that use of its property benefits Arizona and the universities.”

That includes any guidance on how universities should document the economic and tax impacts of their policies.

That means the board “risks approving commercial lease agreements that allow a public resource to be used primarily for private benefit,” the audit says.

The report also found what auditors concluded was the possible misspending of millions of dollars by the University of Arizona in its three lease agreements with Campus Research Corporation, or CRC, a nonprofit, nongovermental organization affiliated with the UA to operate, manage and sublease properties.

“Contrary to public records laws, UA failed to retain records of its public activities related to overseeing ABOR’s master lease agreements with the CRC,” wrote Auditor General Lindsey Perry.

She specifically said the university could not demonstrate that the UA president had provided the required written approval of CRC’s budget. Instead, the university relied on the CRC’s board to approve its own budget.

“As a result, the CRC spent an estimated $38.1 million without written approval,” the report states, spending that was “shielded from the public” because the university did not consider these to be public records. This was not in compliance with public records laws, Perry said.

“Additionally, contrary to the master lease agreements, the CRC inappropriately advanced $3.9 million generated at one property to another property, including approximately $1 million that the CRC advanced to the other property in fiscal years 2017 and 2018 instead of paying rent to UA,” she wrote.

John Arnold, the regents’ executive director, responded that the findings are old news, He said new policies became effective last December — three months after a legislative panel voted to have Perry’s agency review the lease practice. The new policy now spells out the factors the board will consider in making future lease decisions and provide “flexibility” for the universities, Arnold said.

But Perry said her staff found those new policies wanting.

For example, she said, the policy requires lease rental rates to reflect fair market value. But there is no written guidance on how to determine that, she said.

Perry also found similar flaws in how universities document the economic and tax impacts or even specifying the documentation required.

“Without that written guidance, she said, the regents could receive “inconsistent information” from the universities “to evaluate whether a proposed commercial lease agreement provides the maximum benefit for the university and the state and does not use a public resource primarily for private benefit.”

Arnold also took issue with the recommendations by auditors about how the universities should make decisions about the benefits of leasing out their properties, including economic development. He called those “inappropriate” for a university system.

In fact, Arnold said even comparisons with other university systems is inappropriate, saying even the auditors could not identify any other state with what he called a “well-defined policy structure.”

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“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.”

But Attorney General Mark Brnovich, who is engaged in his own legal fight with the regents over some of their commercial leases, called the findings “troubling.”

“What other public entity or oversight board gets to basically treat taxpayer money like it’s Monopoly money?” he asked. It is the lack of proper oversight — and the lack of records detailing the alleged benefits to the university — that have allowed schools to enter into leases with for-profit private companies, the very kind of leases that Arizona State University has entered into in Tempe and that he is challenging in court, Brnovich said.

Underlying the whole audit is that state laws authorize the regents to own and lease property on behalf of the universities. There also are provisions for the universities themselves to enter into some real estate transactions without ABOR’s approval.

Much of what is leased out is for research parks. But there also are commercial developments, like the Marina Heights office complex, the Mirabella senior living community and the Omni Hotel, all in Tempe.

There also is The Village, a 175-acre parcel on Rita Road in Tucson planned for residential, retail, commercial and hotel uses, and the UA Tech Park at the Bridges near 36th Street and Kino Parkway with plans for commercial office and laboratory space, a hotel and conference center, and potential classroom, office or recreational facilities for university use.

Perry said these were entered into with no public review of economic benefits, how the projects got special tax treatment and even the tax impact of these commercial leases.

For example, ASU claimed that the Marina Heights development would provide revenue to the state and local government as well as employment opportunities for students.

“It could not provide an economic benefit analysis to support this statement,” Perry said. Nor were she and her staff convinced that the change in policy, implemented after the audit was ordered, would ensure only “appropriate use of public resources leased to private parties.”

Brnovich focused in particular on the auditor’s conclusions that not all records are being kept and made public, a problem he said is reflected in his own pending lawsuit.

“If the universities won’t provide us the documents, how is the public able to determine if these are ‘good’ or ‘bad’ deals,” he said.

“They’re allowing the universities to basically skirt public records laws,” Brnovich said. “And there’s a lack of oversight and accountability.”

In a lawsuit filing earlier this year, Brnovich argued that the practice of the regents in removing property from the tax rolls and leasing to for private development is not only unfair to other taxpayers but also unconstitutional. He said the net result is that everyone else in the taxing district, whether city, county, school or community college, has to pay more to make up for what is avoided by the businesses that benefit.

In July a trial judge threw out part of the lawsuit, saying state law gives ABOR the power to lease the land it owns. But Tax Court Judge Christopher Whitten left intact Brnovich’s claim that these deals violate the gift clause of the Arizona Constitution.

The outcome of the lawsuit has statewide implications. If Brnovich wins, it would undermine other deals where universities lease out their tax-exempt property for commercial development.