[Final Audit Report Management of Real Property, Government of the Virgin Islands (No. V-IN-VIS-0002-2005)]
[From the U.S. Government Printing Office, www.gpo.gov]

Title: ï¿½ï¿½ï¿½



Date:  May 18,2007


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United States Department of the Interior
Office of Inspector General
Western Region
Federal Building
2800 Cottage Way, Suite E-2712
Sacramento, California 95825



Honorable John P. de Jongh, Jr. 
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, VI  00802


Re:  Final Audit Report Management of Real Property, Government of the Virgin Islands
     (No. V-IN-VIS-0002-2005)


Dear Governor de Jongh: 


The enclosed report presents the results of our audit of the management of Government-owned real property by the Virgin Islands Department of Property and Procurement (DP&P).  The objective of our audit was to determine whether the Government (1) maintained adequate inventory control over real property; (2) maximized the leasing out of excess government-owned property, including timely collection of rental income; and (3)ï¿½minimized the leasing of private property for government use.

We were encouraged to find up-to-date property inventory records and a system of formal procedures to administer leases.  However, we also found that DP&P has not used these procedures to maximize leases of Government-owned property and minimize the need for the Government to lease privately owned property.  In effect, both as landlord and procurer of private space for Government agencies, DP&P has not acted in the best interest of the Government of the Virgin Islands.  The financial impact of this failure is substantial, with nearly $1 million in rental revenues that can no longer be collected, over $2 million in rental revenues that remain uncollected, and nearly $6ï¿½million in revenues that could have been saved or spent more wisely (see Appendix 1).  


In one instance, for example, the Government, through DP&P, did not pursue an opportunity to purchase privately owned space being rented to house Government agencies.  As a result, the Government, as of September 30, 2005, had paid more than $3ï¿½million in lease payments that could have been applied towards the $4.2ï¿½million asking price for the property.  Although other instances were not as dramatic, such as the failure to encourage payment agreements for seriously delinquent tenants or file proof of Government claims in bankruptcy cases, they collectively point to the need for DP&P to aggressively use and tighten existing lease administration procedures.  We also noted that the Department of Public Works (DPW), despite repeated overtures from DP&P, has not met the mandate of the Legislature (Act No. 6289) to develop cost estimates for repairing and reclaiming abandoned Government property, an essential step in reducing the amount of annual rent paid for Government office space.  We made six recommendations, which, if implemented, should significantly improve DP&Pï¿½s ability to manage real property to the financial benefit of the Government.

In his March 1, 2007 response to our draft report (Appendix 2), the Acting Governor of the Virgin Islands, through the management of DP&P, concurred with all of our recommendations and provided action plans to address each recommendation.  As such, we consider Recommendations 1, 2, 3, 4, and 5 to be resolved and implemented and Recommendation 6 to be resolved, but not implemented.  The status of the recommendations is shown in Appendix 3.  

The legislation, as amended, creating the Office of Inspector General (OIG) requires that we report to the U.S. Congress semiannually on all audit reports issued, the monetary effect of audit findings (Appendix 1), actions taken to implement our audit recommendations, and recommendations that have not been implemented.  

Please provide a response to this report by June 22, 2007.  The response should provide the information requested in Appendix 3 and be addressed to Mr. Hannibal M. Ware, Field Office Supervisor, Office of Inspector General, Caribbean Field Office, Ron deLugo Federal Building, Room 207, Charlotte Amalie, Virgin Islands  00802.  We appreciate the cooperation shown by DP&P staff during our review.  If you have any questions regarding the report, you may contact me at (916) 978-5653 or Mr. Ware at (340) 774-8300.
         
                                       Sincerely,

				       /signed/

                                       Michael P. Colombo
                                       Regional Audit Manager

Enclosure

cc:	Commissioner, Department of Property and Procurement
	Commissioner, Department of Public Works



CONTENTS

Background							1
Objective and Scope						1
Prior Audit Coverage						2


Overview							3
DP&P Deficiencies in Leasing Out Government-Owned
  Property							3
DP&P Deficiencies in Leasing Privately Owned Space
  for Government Use						8
Failure of DPW to Estimate Costs to Repair
  Abandoned Government Properties				10

To the Governor of the Virgin Islands				12

Government of the Virgin Islandsï¿½ Response and OIG 
  Reply								13

Monetary Impact							14
Government of the Virgin Islandsï¿½ Response 			15
Status of Audit Recommendations					25

Acronyms
DP&P	Department of Property and Procurement
DPW	Department of Public Works
OIG	Office of Inspector General
VIC	Virgin Islands Code

  

INTRODUCTION

Background - DP&P is authorized by the Virgin Islands Code (VIC)1 to manage and control all real and personal property owned by the Government of the Virgin Islands, including acquisitions, dispositions, commercial leasing, and property distribution.  Through its Property Division, DP&P manages Government leasehold contracts and agency requests for office space and is responsible for related real estate management activities, including negotiation; contract preparation; and property inspection, appraisal, and survey.  

Recognizing operational problems within DP&Pï¿½s Property Division on St.ï¿½Thomas, the Commissioner of Property and Procurement established a property task force in January 2005.  The task force was charged with reviewing all of DP&Pï¿½s business and commercial accounts to ensure that delinquent tenants became current in the rental and legal obligations under their leases.  The task force began meeting with tenants to (1)ï¿½execute payment agreements to liquidate any outstanding balances, (2) renew expired leases, and (3) ensure compliance with requirements for business licenses and liability insurance.  These efforts, which were underway when our audit began in May 2005, are still ongoing.  At the time of our audit, DP&Pï¿½s Property Division managed 149ï¿½business and commercial leases of Government-owned property to private businesses and 129ï¿½active leases of private property for use by Government agencies.


Objective and Scope - The objective of our audit was to determine whether the Government (1)ï¿½maintained adequate inventory control over real property; (2)ï¿½maximized leasing of excess Government-owned property, including timely collection of rental income; and (3)ï¿½minimized leasing of private property for Government use.  We judgmentally selected and reviewed 39ï¿½business and commercial lease agreements and 28ï¿½leases for Government office space in effect during fiscal years 2000 through 2005.  Our sample was selected based on the length of time contracts and permits were in effect for business and commercial lease agreements, and the dollar amount of Government leases for office space. 

Audit work was performed from May 2005 to October 2006. To accomplish our objective, we interviewed officials and reviewed lease agreements, payment records, and related correspondence at DP&P offices on St. Thomas and St. Croix.  We also reviewed related information at the Tax Assessorï¿½s Office and the Department of Finance on St.ï¿½Thomas.  In addition, we performed site visits and inspections of businesses leasing property from DP&P and abandoned Government-owned property.  

Our audit was conducted in accordance with the Government Auditing Standards, issued by the Comptroller General of the United States.  Accordingly, we included such tests of records and other auditing procedures that we considered necessary under the circumstances.  As part of our audit, we evaluated the internal controls related to the management of real property, including leasing, monitoring, and rent collection, to the extent we considered necessary to accomplish the audit objective.  Internal control weaknesses identified as a result of our audit are discussed in the Results of Audit section of this report.  The recommendations, if implemented, should improve the internal controls in property management.


Prior Audit Coverage - During the past 5 years, we have not issued any audit reports on real property management by the Government of the Virgin Islands.  We did note, however, that the two most recent reports, one issued in October 1986 (No.ï¿½V-TG-VIS-13-85) and the second in July 1991 (No. 91-I-1056), both identified the collection of delinquent rental receivables as a problem.



RESULTS OF AUDIT

OVERVIEW
We found that property inventory records were up-to-date and formal lease administration procedures have been established.  However, DP&P has not maximized leases of Government-owned property or minimized leases of private property for Government use.  In renting space for Government agencies, DP&P spent nearly $6 million that could have been saved or used more wisely.  Deficiencies included leasing privately owned space when suitable Government-owned space was available, failing to follow up on opportunities to purchase privately owned space being rented by Government agencies, and approving leases that exceeded established rental rate limits and included renovation costs for private buildings.  We also found that DPW was not compliant with the mandate of the Virgin Islands Legislature in estimating the cost of repairing and renovating abandoned Government properties.


DP&p DEFICIENCIES LEASING OUT GOVERNMENT-OWNED PROPERTY
Of the 149 active business and commercial accounts, 96, or 64ï¿½percent, were delinquent by more than $1.2 million as of Augustï¿½31, 2005.  Our review of 39 accounts disclosed that DP&P neglected to notify tenants of their delinquent status or evict delinquent tenants.  DP&Pï¿½s Property Manual requires notices be sent to delinquent tenants on the following schedule (Figure 1):

Figure 1:  DP&P Did not Collect Over $1.2 Million in Delinquent Rental Payments
(page 3, see table in PDF version)


Of the 39ï¿½accounts reviewed, 22 had no documented evidence of any attempts by DP&P to collect balances that had been outstanding and delinquent for periods of up to 12ï¿½years.  For example:

> DP&P allowed Family Broadcasting, Inc., to occupy Government property without paying rent for more than 12ï¿½years and accumulate an outstanding balance of $94,700 before DP&P sent a letter detailing the history of nonpayment.  The tenant signed a payment agreement2 for $73,508, but then filed for bankruptcy protection.  The U.S. District Court for the Virgin Islands notified DP&P that it must file proof of claim by August 11, 2005, to recoup any delinquent rent.  DP&P failed to file, and the Government of the Virgin Islands is at risk of not being able to collect any of the money it is owed. 

> DP&P allowed Wings Auto Parts to occupy Government-owned property without making rental payments for up to 3ï¿½ï¿½years and to accumulate an outstanding balance of $35,175.  When the tenant filed for bankruptcy protection, the District Court discharged all claims against the owner as of the date of the action.  DP&P was unable to recoup any of the outstanding balance, but continued to allow the tenant to occupy the property without paying rent for 3ï¿½more years and accumulate $13,180 in additional unpaid rent.  DP&P eventually issued a Notice to Vacate, but had not taken any serious eviction action as of the end of our audit.


At the close of our audit, DP&P was in the process of preparing eviction notices for 11 other delinquent tenants.

DP&P Did not Collect Nearly $1.9 Million in Additional Rental Income and Related Fees-
DP&P also failed to collect nearly $1.9ï¿½million in additional rental income and related fees because it did not (1)ï¿½monitor or bill for tenant sublease activity, (2) use correct rental receivable calculations when entering into payment agreements, (3)ï¿½implement rental rate increases stipulated by lease agreements, and (4) accurately assess or record late fees (see Figureï¿½2). 

Figure 2:  Uncollected Rent and Fees Totaled Nearly $1.9 Million
(page 5, see pie chart in PDF version)


Uncollected Sublease Fees Totaled $1,006,106 -
DP&P did not adequately monitor or bill for tenant subleasing.  With one exception, every lease agreement executed by DP&P allowed tenants to sublease with the understanding that they would pay DP&P a specified percentage of sublease income.  We conducted physical inspections of 10ï¿½tenants leasing space in the Crown Bay area of St.ï¿½Thomas, where DP&P is located, and found that 5ï¿½tenants were subleasing.  We identified $1,006,106 in outstanding sublease fees, with three tenants responsible for the majority of this amount (Figure 3).  

Figure 3:  Sublease Fee Payments Owed as of September 30, 2005
(page 5, see table in PDF version)


Incorrect Calculations Resulted in Lost Rental Revenues of $344,384 -
DP&P did not adequately review the terms of lease agreements and coordinate with its Fiscal Division before executing payment agreements with delinquent tenants, resulting in significantly understated tenant delinquencies and the loss of $344,384 in rental income in 5ï¿½of the 39 cases reviewed.  The most extreme example was the American Furniture account, which comprised $199,697 of the uncollected amount.  American Furniture was chronically delinquent with its lease payments, with lapses of up to 19ï¿½consecutive months.  DP&P made many attempts to collect the outstanding balances and signed two payment agreements; however, both payment agreements had significant computational errors (Figureï¿½4). 

Figure 4:  American Furniture Payment Agreements
(page 6, see table in PDF version)


Uncollected Rental Increases Resulted in Lost Revenues of $309,143 -
DP&P did not monitor the terms of each agreement and therefore either did not implement rental increases stipulated in lease agreements or implemented the increases up to 8 years after they were due.  As a result, about $309,143 in rental revenue was lost for 9 of the 39 accounts reviewed.  Two examples demonstrate: 

> DP&P lost rental income of $110,325 on a lease with MDM Enterprises.  The March 1991, 20-year lease agreement called for rental increases every 5ï¿½years, but DP&P did not notify MDM of the first increase until more than 4ï¿½years after it became effective and never notified MDM of the second increase.  Although the Fiscal Division added $110,325 to MDMï¿½s outstanding balance, DP&Pï¿½s attorney reversed the entry based on an opinion by the Virgin Islands Attorney General that tenants could not be required to pay retroactive rental increases that they were not told about.

> DP&P lost rental income of $71,618 on a lease with Victorï¿½s New Hide Out.  The August 1994 lease agreement called for a fixed rate increase in March 1996, along with increases every 5ï¿½years, based on changes in the Consumer Price Index starting in September 1999.  However, the tenant continued to pay the original monthly lease amount until notified by the Fiscal Division 4 years after the increase was due.  The Fiscal Division again added these delinquent amounts to the tenantï¿½s outstanding balance, which were also reversed based on the same opinion by the Virgin Islands Attorney General.

Uncollected Late Payment Penalty Fees Resulted in Losses Totaling $175,822 -
Of the 39 accounts reviewed, 32 had instances where late fees were either not assessed or were incorrectly assessed, resulting in the loss of at least $175,822.  Lease agreements generally included provisions for late fees of either 10ï¿½percent of any monthly amount more than 10 days late or 1ï¿½percent compounded monthly of any amount more than 60ï¿½days late.  For example, a lease agreement with the V.I. Metal Shop required a 1ï¿½percent fee compounded monthly for delinquencies of more than 60 days.  Although V.I. Metal Shop was never current on lease payments from October 1984 to September 1989, DP&P did not assess any late fees.  After September 1989, DP&P recorded late fees, but did so at 10ï¿½percent of the monthly balance, rather than at the specified 1ï¿½percent compounded rate.  Over the life of this lease, DP&P failed to assess or collect a total of $32,336 in late fees.

DP&P Did Not Renew Expired Leases or Monitor Compliance With Other Requirements -
DP&P did not renew expired lease agreements.  Of the 39ï¿½accounts reviewed, 23 had expired leases that had not been renewed for periods ranging from 1ï¿½ï¿½to 23ï¿½years.  As a result, DP&P did not adjust rental rates to reflect increases in fair market value or in the Consumer Price Index, resulting in additional, undeterminable lost revenues.  Although we could not determine the overall lost revenues because of the lack of historical information, we did identify $18,793 in additional rental income that should have been collected for Haulover Marine Inc.  The 1-year lease with Haulover Marine, which began on October 1, 1992, continued for 12ï¿½years, although the lease was never renewed.  On four occasions, Haulover Marine requested approval to enter into a long-term lease agreement, stating that it was willing to negotiate a reasonable rent increase and spend about $40,000 in capital improvements.  However, DP&P did not respond, even though a January 1997 property appraisal estimated a fair market monthly rental 
value of $182 more than Haulover Marine was paying.  Had the lease been renewed in 1997 at the recommended rate, DP&P could have realized at least $18,793 in additional income.

DP&P also failed to ensure that tenants maintained current business licenses and liability insurance policies.  Of the 39ï¿½accounts reviewed, 30ï¿½account files did not have evidence of valid business licenses, and 32 did not have evidence of liability insurance.  As a result, DP&P could not be certain that its tenants were in good standing in terms of taxes and other business licensing requirements or that it would be held harmless regarding any actions by its tenants.

DP&P Issued Letters of Good Standing and Lease Renewals to Delinquent Tenants -
In addition to its difficulties in lease and associated revenue collection, DP&P issued letters to other Government agencies certifying that some delinquent tenants were actually in good standing regarding their rental payments.  In one case, DP&P issued a letter of good standing for a tenant that had not paid rent for 6 years.  DP&P also entered into new, long-term lease agreements with delinquent tenants without requiring them to pay past due amounts.  For example, DP&P allowed Bakale, Inc., to renegotiate a 20-year lease under a new name of Kent Corporation after Bakaleï¿½s lease expired in 2003, even though Bakale had a delinquent balance of more than $12,000.  DP&P then transferred the balance to Kent Corporationï¿½s account, rather than ensuring that the delinquent amount was paid.

DP&P DEFICIENCIES LEASING PRIVATELY OWNED SPACE FOR GOVERNMENT USE
In reviewing lease activity related to renting privately owned space for Government use, we identified nearly $6 million in funds that could have been saved or more wisely used.  Specifically, DP&P neglected to follow up on opportunities to purchase leased property when the purchase was advantageous to the Government.  DP&P also allowed other Government agencies to negotiate leases, some without competitive analysis; and agreed, without due consideration, to renovate space with improvements that would become the property of the lessor.  In addition, DP&P allowed other Government agencies to lease private space at rates in excess of limits specified in its own regulations.

DP&P Failed to Follow-Up on Opportunities to Purchase Privately Owned Space Being Leased by the Government -
DP&P Paid $2.1 Million to Rent Privately Owned Space When Government Space was Available-
As of September 30, 2005, DP&P had paid a private company more than $2.1ï¿½million for warehouse space for the Governmentï¿½s Central Stores Division, even though Government-owned space was available.  The Central Stores Division had vacated a Government-owned warehouse at Subbase, St. Thomas, in September 1995, when the warehouse was damaged by Hurricane Marilyn, and leased warehouse space owned by Cousins and Sons.  The initial rent of $12,000 per month ultimately increased to $24,000 a month.  Shortly afterwards, DP&P leased the former Central Stores Divisionï¿½s Subbase warehouse to American Furniture on a month-to-month basis.  In May 1997, DP&P tried to terminate the lease and move the Central Stores Division back to the Subbase warehouse.  However, when American Furniture would not vacate, DP&P did not pursue eviction action, but instead entered into a 20-year lease with American Furniture with payments of $3,750 per month.  As of January 2006, the Government has paid over $2.1ï¿½million to rent this facility, while its former facility is effectively used for warehousing and other purposes by American Furniture for lease payments of less than $500,000 for the same period.  Cousins and Sons offered to sell the warehouse to the Government for $1.7ï¿½million in September 1996, but we found no documented evidence that the Government pursued the offer.

DP&P Paid More Than $3 Million in Rent that Could Have Been Applied to a $4.2 Million Purchase Price -
Lost opportunities to purchase privately owned buildings also included the Vitraco Mall on St. Croix owned by Fast Foto, Inc.  Fast Foto offered to sell the Mall to the Government in June 1999 for $4.2ï¿½million.  The offer allowed the Government to purchase the Mall without any capital outlay, cash deposit, or down payment by applying all of the rental payments (except payments related to maintenance costs) as credit towards the purchase price.  The Government has seven leases with Fast Foto and as of Septemberï¿½30, 2005, has paid more than $3 million in lease payments, which could have been applied toward the $4.2 million asking price.  The Commissioner of Property and Procurement told us that the offer was not pursued because one of the Government agencies did not want to remain in the building because of poor infrastructure, environmental issues, and plans for a new Government complex that were ultimately tabled owing to funding constraints.  The Commissioner conceded that, in hindsight, DP&Pï¿½s failure to pursue the offer ï¿½looks bad.ï¿½

DP&P Did Not Ensure that Best Rental Rates and Agreed to Renovate Privately Owned Space -
In four leases, DP&P did not fulfill its role to procure rental space for Government agencies, instead limiting its responsibility to that of signing completed leases submitted by other Government agencies.  The VIC3 stipulates that only DP&P can procure rental space for the Government.  In addition, DP&Pï¿½s Property Manual requires that DP&P meet with any Government agency requesting office space to discuss specific needs and negotiate with potential landlords, based on a comparability study of space for three similar properties.  By approving these four leases after the fact, DP&P could not ensure that the Government received the best price or that proper negotiations were conducted prior to entering into the lease agreements.


Renovation Costs of Privately Owned Buildings Total $859,625 -
DP&P has committed to spending $859,625 to renovate privately owned buildings, with all improvements becoming the property of the facility owner.  This includes improvements to the Office of the Lieutenant Governor for bathroom facilities, flooring, and an elevator, costing $169,625, and to the Bureau of Internal Revenue for roof repairs, electrical work, and flooring, costing $690,000.  Both agencies were allowed to commit Government funds to improve privately owned property, although several Government-owned properties that could have been used for office space also needed renovations.


FAILURE OF DPW TO ESTIMATE COSTS TO REPAIR ABANDONED GOVERNMENT PROPERTIES -
Recognizing the need to reduce the amount of annual rent paid for office space, the Virgin Islands Legislature passed Act No.ï¿½6289 in August 1999 requiring DP&P to present a list of abandoned Government properties to DPW so that DPW could estimate the cost of repairing and renovating the buildings.  DP&P submitted the list, which included 7 properties on St. Thomas and 16ï¿½properties on St.ï¿½Croix, to DPW in December 1999.

As of September 2000, DPW had not provided the required repair estimates.  After repeated requests for the estimates by the Commissioner of Property and Procurement, the Commissioner of Public Works stated that his staff did not have the time to assist in the matter.  As of January 2006, the Commissioner of Property and Procurement had received no further response from DPW, and there has not been any action toward fulfilling the requirement of Act No. 6289.  In the meantime, most of the Government properties in question remain abandoned and serve as targets for vandals and homes for squatters.  The building shown on the cover of this report and the one shown in Figure 5 are just two examples of abandoned Government property.


Figure 5:  Abandoned Government Building at Bonne Esperance, St. Croix.    
(page 11, see photo in PDF version)                                                                                  (OIGï¿½photo)


RECOMMENDATIONS

TO THE GOVERNOR OF THE VIRGIN ISLANDS
We recommend that the Governor of the Virgin Islands direct the Commissioner of Property and Procurement to: 

1.  Identify delinquent tenants and pursue collection efforts aggressively by:

a. Requiring all current lessees with delinquent accounts to make full payment or arrangements for monthly liquidation of delinquent accounts.  Tenants who fail to pay delinquent balances should be promptly evicted, with their accounts referred to the Attorney Generalï¿½s Office for collection.

b. Assessing and collecting subleasing fees for tenants subleasing Government-owed property.

c. Assessing and collecting late payment penalties on delinquent accounts.
    
2. Establish and implement a formal lease monitoring 
system to ensure that (a) expired leases are renewed to reflect current market rates, (b) rate increases specified by lease terms are timely implemented, (c) routine physical inspections of Government-owned lease property are performed and inspection reports prepared to confirm that only authorized tenants and subtenants are on the properties, and (d) liability insurance coverage and business licenses are obtained by lessees and kept current.
    
3. Require DP&Pï¿½s Fiscal Division to be notified of 
rental increases to ensure that official payment records reflect accurate tenant account balances.
    
4. Require, in accordance with their existing policy, DP&P to negotiate and execute all leases for Government agencies to obtain the most advantageous rental rates for Government office or warehouse space.

5. Contact private property owners who made sales 
proposals to determine if the offers are still valid and determine whether the Government should purchase the properties.


We also recommend that the Governor direct the Commissioner of Public Works to:

6. Develop, in accordance with Act No. 6289 and 
forward to DP&P, cost estimates for repairs needed to make abandoned Government-owned property identified by the Commissioner of Property and Procurement usable for Government office or warehouse space.

GOVERNMENT OF THE VIRGIN ISLANDS' RESPONSE AND OIG REPLY
In his March 1, 2007 response to our draft report (Appendix 2), the Acting Governor of the Virgin Islands, through the management of DP&P, concurred with all of our recommendations. 

As part of his response, the Acting Governor provided information showing that the DP&P had implemented plans of action to address each recommendation.  As such, we consider Recommendations 1, 2, 3, 4, and 5 to be resolved and implemented and Recommendation 6 resolved, but not implemented (Appendix 3).

APPENDIX 1 ï¿½ MONETARY IMPACT
(page 14, see Table in PDF version)


APPENDIX 2 ï¿½ GOVERNMENT OF THE VIRGIN ISLANDSï¿½ RESPONSE
(page 15-24, PDF version)


APPENDIX 3 ï¿½ STATUS OF AUDIT RECOMMENDATIONS

Finding/Recommendation Reference:  1 -5
Status:  Resolved and Implemented.
Action Required:  None.

Finding/Recommendation Reference:  6
Status:  Resolved, Not Implemented.
Action Required:  Provide cost estimates for repairs needed to make abandoned Government-owned property usable for Government office or warehouse space.


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