[Final Audit Report on Management of Public Land, Commonwealth of the Northern Mariana Islands ]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-596

Title: Final Audit Report on Management of Public Land, Commonwealth
       of the Northern Mariana Islands 

Date: March 20, 1996

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United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

TO:            The Secretary

FROM:          Wilma A. Lewis
               Inspector General

SUBJECT SUMMARY: Final Audit Report for Your Information -
"Management of Public Land, Commonwealth of the
 Northern Mariana Islands" (No. 96-I-596)

Attached for your information is a copy of the subject final audit report.

We concluded that the Marianas Public Land Corporation, now the Division of
Public Lands, Department of Lands and Natural Resources, did not effectively
develop management policies, procedures, and controls related to public land. As
a result, the Commonwealth lost $118.4 million on completed exchanges of public
land, could lose $70.1 million on pending exchanges, and lost revenues of $25.1
million on exchanged public land that was leased to a developer by landowners. In
addition, lease revenues of $565,000 were lost, and the Government may lose
additional lease revenues of $469.2 million over the unexpired period of the leases;
homestead recipients improperly received $7 million from the unauthorized sale or
lease of the lots; and homestead lots were awarded to applicants who were ineligible
or who did not have the greatest need.

We made seven recommendations to the Governor to correct the deficiencies noted.
However, since the Governor did not provide a response to the draft report,. the
recommendations are unresolved.

If you have any questions concerning this matter, please contact me or Ms. Judy
Harrison, Assistant Inspector General for Audits, at (202) 208-5745.

Attachment


N-IN-NMI-003-94        

United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

The Honorable Froilan C. Tenorio
Governor of the Commonwealth of the
Northern Mariana Islands
Office of the Governor
Saipan, MP 96950

Dear Governor Tenorio:

Subject:  Final Audit Report on Management of Public Land, Commonwealth of
the Northern  Mariana Islands   (No. 96-I-596)

This final report presents the results of our audit of the Commonwealth of the
Northern Mariana Islands management of public land. The objective of our audit
was to determine whether the Commonwealth was effective in: (1) developing
management policies, procedures, and controls related to the purchase, lease, use,
and disposal of public land; (2) controlling and utilizing U.S. Government land
transferred to the Commonwealth; and (3) preventing encroachment on or adverse
possession of public land. We also evaluated the Commonwealth's efforts to identify,
survey, and register public land and to record and maintain a current inventory of
all government real property.
Based on our review, we found that the Marianas Public Land Corporation, now the
Division of Public Lands, Department of Lands and Natural Resources, did not
effectively develop management policies, procedures, and controls related to public
land. Specifically, the Corporation did not: (1) exchange public land for private land
of comparable value; (2) use current land valuations in land exchanges; (3) utilize
public land in an efficient manner; (4) receive rental income based on fair market
value in return for leasing public land; (5) assess all rental amounts payable under
the lease agreements; and (6) adequately pursue the collection of all lease amounts
payable.  In addition, the Corporation: (1) permitted homestead recipients to
improperly transfer their interest in homestead lots and/or commercial structures to
be built on these lots; and (2) awarded homestead lots to applicants who were
ineligible or who did not have the greatest need.
These conditions occurred because the Corporation did not have written policies and
procedures to ensure that: (1) land exchanges were for comparable values based on
current land appraisals and served a public purpose; (2) lease agreements based
minimum rentals on the appraised fair market value; (3) required financial
documents were provided and lessee rental calculations were accurate; (4) lease
rental payments were collected or default provisions of the lease agreements were
pursued in a timely manner; (5) deeded homestead lots were inspected periodically
and were used in accordance with laws, regulations, and deed restrictions; and (6)
homestead permits were awarded to applicants who were eligible or who had the
greatest need in accordance with regulations.

As a result, the Commonwealth lost $118.4 million on completed exchanges of public
land; could lose $70.1 million on pending exchanges; and lost revenues of $25.1
million on exchanged public land that was leased to a developer by landowners. In
addition, lease revenues of $565,000 were lost, and the Government may lose
additional lease revenues of $469.2 million over the unexpired period of the leases;
homestead recipients improperly received $7 million from the unauthorized sale or
lease of the lots; and homestead lots were awarded to applicants who were ineligible
or who did not have the greatest need.

To correct the conditions noted, we recommended that the Governor ensure that the
Secretary, Department of Lands and Natural Resources, develops and implements
written policies and procedures which require that: (1) land exchanges be of
comparable value based on current appraisals and that land exchanges be made only
when they serve a public purpose; and (2) all pending land exchanges be suspended
until implementation. We also recommended that the Governor ensure that the
Secretary develops and implements policies and procedures which require that: (1)
lease agreements base minimum rentals on the appraised fair market value; (2)
financial documents required in lease agreements be provided and lessee rental
calculations be accurate; and (3) lease rental payments be collected or default
provisions of the lease agreements be pursued in a timely manner.

We further recommended that the Governor ensure that the Secretary, Department
of Lands and Natural Resources, takes the following actions: (1) develops and
implements policies and procedures which require that deeded homestead lots be
inspected periodically and be used in accordance with laws, regulations, and deed
restrictions and that homestead permits be awarded to applicants who, in accordance
with the regulations, are eligible and who have the greatest need; (2) reviews all
previously issued homestead deeds and permits and performs on-site inspections to
ensure that deeded homestead lots are being used properly; (3) initiates action to
reacquire those homestead lots which the recipients improperly used or subleased,
which the recipients sold in violation of the 10-year Constitutional requirement, and
which were issued to ineligible applicants; and (4) requests an Attorney General's
opinion on seeking the recovery of illegal and/or improper monetary gains resulting
from the sale and/or lease of village homestead lots and initiates action to recover
such funds if appropriate.

On November 13, 1995, we transmitted a draft of this report to you, as Governor of
the Commonwealth of the Northern Mariana Islands, requesting your comments by
December 15, 1995. At the request of your Legal Counsel, the response date was
extended to December 22, 1995. However, no further requests for extensions were
received, and a response to the draft report has not been provided. Accordingly, this
final report is being issued without the benefit of your response, and all of the
recommendations are deemed unresolved (see Appendix 4).
The Inspector General Act, Public Law 95-452, Section 5(a)(3), as amended, requires
semiannual reporting to the U.S. Congress on all audit reports issued, the monetary
impact of audit findings (Appendix 1), actions taken to implement audit
recommendations, and identification of each significant recommendation on which
corrective action has not been taken.
In view of the above, please provide a response to this report, as required by Public
Law 97-357, by May 31, 1996.  The response should provide the information
requested in Appendix 4 and be sent to the attention of Mr. Peter J. Scharwark,
U.S. Department of the Interior, Office of Inspector General, North Pacific Region,
238 Archbishop F.C. Flores Street, Suite 807, Pacific News Building, Agana, Guam
96910.


cc: Secretary, Department of Lands and NaturalResources


Sincerely,

Wilma A. Lewis 
Inspector General

CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...2
PRIOR AUDIT COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . ...3

FINDINGS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . ...5

A. LAND EXCHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...5
B. LEASE MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...9
C. HOMESTEAD ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . 13

APPENDIX

1. CLASSIFICATION OF MONETARY AMOUNTS . . . . . . . . . . . 17
2. SUMMARY OF LOSSES FROM LAND EXCHANGES . . . . . . . 18
3. SUMMARY OF LEASE REVENUES LOST, UNCOLLECTED,
OR AT RISK OF LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . 20

INTRODUCTION

BACKGROUND

The Marianas Public Land Corporation was established on January 9, 1978, by
Article XI of the Constitution of the Commonwealth of the Northern Mariana
Islands. The Corporation was designated to receive and was given responsibility for
managing and disposing of public land from the former Trust Territory of the Pacific
Islands Government on behalf of the Commonwealth through: (1) Secretarial
Orders 2969 and 2989 and (2) Article VIII of the Covenant to Establish a
Commonwealth of the Northern Mariana Islands in Political Union With the United
States of America (U.S. Public Law 94-241). The Corporation's primary functions
included: (1) managing public land in accordance with a comprehensive land use
plan; (2) coordinating land exchanges for public purposes; (3) controlling the use of
public land through leases and permits; and (4) developing and administering
homestead programs.

The Corporation was governed by a five-member Board of Directors, appointed by
the Governor with the advice and consent of the Senate.l  The Corporation
completed its Public Land Use Plan during December 1989. Based on the Land Use
Plan, the total acreage of public land available and usable by island was as follows:

Saipan   Rota    Tinian   Total
      (In Acres)

Total Public Land    17,380   18,500   23,060   58,940
Less:
Leased/Committed   6,948    7,225   21,298   35,471
Too Steep/Not Usable  1,780    2.495   923    5,198
Available/Usable     8,652    8,780         

1 On August 24, 1994, Commonwealth Executive Order 94-3 dissolved the Corporation and
transferred its functions to the newly established Department of Lands and Natural Resources,
Division of Public Lands.

 
As of January 23, 1995, the Corporation's latest update to the 1989 Public Land Use
Plan for Saipan was through December 31, 1992, and it indicated that the acreage
of available/usable public land on Saipan had decreased to 4,380 acres.2

Because of incomplete and inaccurate records, we were unable to verify the accuracy
of the land transaction records maintained by the Corporation and its successor, the
Division of Public Lands.  However, based on our compilation of available
Corporation files, we found that a total of 5,072 village and agricultural homesteads
had been awarded and agreements on 790 land exchange transactions had been
completed since 1978.  From October 1, 1989, through June 30, 1994, the
Corporation awarded 2,563 homesteads and completed agreements on 317 land
exchange transactions. As of June 30, 1994, the Corporation had 4,197 homestead
applications on file, 250 pending land exchange transactions, and 157 active leases
and permits. Audited financial statements for fiscal years 1991 and 1992 indicated
that lease and permit income totaled about $4.1 million and $4.4 million,
respectively.

OBJECTIVE AND SCOPE

The objective of our audit was to determine whether the Commonwealth was
effective in: (1) developing management policies, procedures, and controls related
to the purchase, lease, use, and disposal of public land; (2) controlling and utilizing
U.S. Government land transferred to the Commonwealth; and (3) preventing
encroachment on, or adverse possession of, public land. We also evaluated the
Commonwealth's efforts to: (1) identify, survey, and register public land; and (2)
record and maintain a current inventory of all government real property.

This audit was conducted at the offices of the Corporation/Division of Public Lands.
In addition, we met with Commonwealth officials from: (1) the Departments of
Lands and Natural Resources, Finance, and Public Health and Environmental
Services; (2) the Offices of the Attorney General, Coastal Resources Management,
and Recorder; (3) the Land Commission; and (4) the Legislature. We also met with
officials of the U.S. Department of Agriculture and the U.S. Geological Survey. To
accomplish our objective, we reviewed, for the period October 1, 1989, to September
30, 1994, and other periods as appropriate, selected applications, deeds, leases,
permits, contracts, and appraisals. We also reviewed, for the same period, applicable
laws, regulations, and operating procedures related to administering land exchanges,
public land leases, homesteads, and transfers to other governmental departments and
agencies. However, our audit scope was limited because the Commonwealth's land
transaction records were incomplete and inaccurate.

2 This amount excludes land that was pending execution of a deed or lease as of December 31, 1992.

2

 
The audit was conducted, as applicable, 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
were considered necessary under the circumstances.

As part of our audit, we evaluated the Corporation's internal controls over: (1)
selecting and appraising public and private land used in land exchanges; (2)
establishing, assessing, and collecting rent on leased and permitted public land; and
(3) awarding and monitoring homesteads. We found major weaknesses in all of
these areas. Further, we found that the Corporation was identifying, surveying, and
registering public land only on an as-needed basis (for example, land exchanges,
public land leases, homestead subdivisions, and transfers to other governmental
agencies/departments) and did not maintain a current inventory of all government
real property. The internal control weaknesses are discussed in the Findings and
Recommendations section of this report. Our recommendations, if implemented,
should improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the General Accounting Office nor the Office of
Inspector General has audited the Commonwealth's land management practices.
However, the Commonwealth Public Auditor issued two reports that evaluated
Commonwealth land management practices. The first report, entitled "Marianas
Public Land Corporation, Commonwealth of the Northern Mariana Islands, Review
of Hotel Lease Payments, Lease Years 1988 and 1989," issued on June 17, 1991,
concluded that the Corporation did not collect rentals totaling at least $249,000. The
report stated that this occurred because: (1) lessees misinterpreted provisions of the
lease agreements and did not make required lease payments; and (2) the
Corporation had not monitored collections, billed past due amounts, and established
procedures to ensure that lease payments were made in accordance with the lease
agreements.

The second report, entitled "Marianas Public Land Corporation, Commonwealth of
the Northern Mariana Islands, Review of Rental Payments From Quarry and
Nonquarry Operations, Lease Years 1988 and 1989," issued on August 3, 1993,
concluded that the Corporation did not collect rentals totaling at least $244,000. The
report stated that this occurred because: (1) the lessees had not correctly computed
or made required lease payments; and (2) the Corporation had not verified the
lessees' computations or pursued the collection of lease payments.

In addition, an independent public accounting firm issued an audit report on the
Corporation for each of fiscal years 1989, 1990, 1991, and 1992. The reports stated
that the Corporation had internal control weaknesses that included the following: (1)
lease and permit revenues were not recorded or were recorded incorrectly; (2)

3

 
permit files did not have documentation indicating that the related premises were
vacated upon expiration of the permits; (3) lease receivables were not aged and a
reserve for doubtful accounts was not established; (4) lessees were not required to
provide financial statements, extraction reports of materials removed from quarries
on leased land, and/or applicable documents in support of their lease payments to
the Corporation; (5) lease and permit revenues were not deposited timely or intact
to the bank; and (6) action was not taken to collect past-due permit revenues.

 
FINDINGS AND RECOMMENDATIONS

A. LAND EXCHANGES

The Marianas Public Land Corporation did not effectively develop policies,
procedures, and controls related to land exchanges. Specifically, the Corporation did
not exchange public land for private land of comparable value, use current land
valuations in land exchanges, and utilize public land in an efficient manner. The
Commonwealth Code (Title 2, Division 4, Chapter 1, Section 4144) states that no
public land is to be exchanged for private land unless the exchange is accomplished
for a "public purpose" and the land to be exchanged is of comparable value based on
an independent appraisal made at approximately the same time for all land to be
exchanged. However, the Corporation did not have written policies and procedures
to ensure that land exchanges were for comparable values based on current land
appraisals and served a public purpose.  As summarized in Appendix 2, the
Corporation lost public land valued at $118.4 million on completed exchanges, and
if pending exchanges are completed, the Government could lose additional public
land valued at $70.1 million. Further, the Corporation lost revenues of $25.1 million
on exchanged public land that was leased to a developer by private landowners.

From October 1, 1989, through June 30, 1994, according to Corporation records, the
Corporation completed agreements on 317 land exchange transactions. By means
of these agreements, the Corporation gave up 3.1 million square meters of public
land and received 1.1 million square meters of private land. Corporation records
indicated at the time the Corporation was dissolved that 250 land exchange
transactions were pending. These pending exchanges were transferred to the
Department of Lands and Natural Resources, Division of Public Lands. According
to the Division Director, the exchanges would not be completed until our audit was
completed.

We reviewed five completed exchange agreements (Appendix 2) and found that the
Corporation exchanged public land for private land of lesser value in all five cases,
undervalued the public land it gave up in all five cases, and overvalued the private
land it received in four of the five cases. Corporation officials could not provide
adequate justification for these actions. For example, for two of the five agreements,
the Corporation used inappropriate appraisal values and, as a result, lost public land
valued at $1,301,388 as follows:

3 A policies and procedures manual was finalized in June 1994. The Director of Public Lands said,
however, that the manual was "outdated" and had not been implemented because the Corporation was
dissolved on August 24, 1994.

5

 
  - On July 12, 1991, the Corporation exchanged 5,804 square meters of public
land for 758 square meters of private land. Both parcels of land had been valued by
the Corporation at a total of $148,000. However, the Corporation had applied 1990
appraisals, which did not reflect fair market values. Based on a 1991 appraisal value
of $696,480 for the public land and the purchase price of $23,000 for the private
land, we determined that the Corporation lost public land valued at $673,480.

  - On May 11, 1994, the Corporation exchanged 2,843 square meters of public
land for 1,006 square meters of private land valued by the Corporation at $197,816
and $150,900, respectively. This exchange was not based on comparable value. In
addition, the Corporation applied a 1990 appraisal value to the public land rather
than an available 1992 appraisal value. Further, the Board had arbitrarily applied
an unsupported value to the private land rather than a 1992 appraisal value. Based
on the 1992 appraisals, we determined that the values of the public and private land
at the time of the exchange were $716,436 and $88,528, respectively. Therefore, the
Corporation lost public land valued at $627,908.

Further, for the three other exchanges we reviewed, the Corporation not only
exchanged land of unequal value and used inappropriate appraisal values but also
exchanged public land that private companies had indicated they wanted to develop
commercially. Therefore, the Corporation lost public land valued at $16,925,916
from exchanges that were not based on comparable value and lost $25,085,390 in
lease revenues when private owners leased former public land, obtained through
exchanges, to a developer as follows:

  - On April 11, 1990, the Corporation exchanged 8,000 square meters of
public land for 1,205 square meters of private land valued by the Corporation at
$200,000 and $168,700, respectively. However, while the 1990 appraisal value of the
private land was reasonable, the Corporation had arbitrarily applied an unsupported
value to the public land rather than the 1990 appraised value. Based on the 1990
appraised values, we determined that the values of the public and private land at the
time of the exchange were $556,640 and $168,700, respectively. Therefore, the
Corporation lost public land valued at $387,940. Further, the Corporation lost lease
revenues of $2,000,000 when the acquired land was leased to a private company for
use as part of a proposed resort project. In addition, the public purpose of the
exchange appears to be questionable.

  - On May 27 and 28, 1993, the Corporation made two exchanges. First,
17,246 square meters of public land were exchanged for 10,000 square meters of
private land valued by the Corporation at $1,199,977 and $840,000, respectively.
Second, 66,062 square meters of public land were exchanged for 54,652 square
meters of private land valued by the Corporation at $4,596,594 and $4,590,768,
respectively. However, for both exchanges, the Corporation had applied a 1990
appraisal value to the public land and arbitrarily applied an unsupported value to the

6

 
private land rather than using available 1992 appraisal values. Based on the 1992
appraisal values, we determined that the values of the public and private land at the
time of the exchange were $4,345,992 and $700,000, respectively, for the first
exchange and $16,647,624 and $3,755,640, respectively, for the second exchange.
Therefore, the Corporation lost public land valued at $16,537,976 on the exchanges
and lost lease revenues of $23,085,390 because the recipients of the now-former
public land leased part of it to a private company for use as part of a proposed
resort project. In addition, we believe that the public purpose of the exchanges is
questionable.

Based on our findings from the five cases in which the Corporation lost $18,227,304,
we expanded our review to completed and pending exchanges of similar public and
private properties in which the Corporation had used outdated appraisals for valuing
the properties (Appendix 2). We determined that the Corporation lost $100,210,237
on completed exchanges and that, if pending exchanges are executed, the
Government could lose additional public land valued at $70,063,566. For example:

  - The Corporation valued 904,873 square meters of public land at $47,411,184
($29,541,942 on completed exchanges and $17,869,232 on pending exchanges) using
1990 appraisal values. However, using the applicable 1992 appraisal values, we
determined that the value of the public land was $213,397,347 ($127,110,658 on
completed exchanges and $86,286,689 on pending exchanges). As a result of
undervaluing the public land, the Corporation lost public land valued at $97,568,706
on completed exchanges, and another $68,417,457 could be lost from pending
exchanges.

  - The Corporation valued 184,375 square meters of private land at
$17,930,334 ($13,948,284 on completed exchanges and $3,982,050 on pending
exchanges) using unsupported values. However, using the applicable 1992 appraisal
values, we determined that the value of the private land was $13,642,694 ($11,306,753
on completed exchanges and $2,335,941 on pending exchanges). As a result of
overvaluing private land, the Corporation lost public land valued at $2,641,531 on
completed exchanges, and another $1,646,109 could be lost from pending exchanges.

Subsequent Actions

During our audit, we discussed the land exchange issues cited above with
Commonwealth officials. To address these issues, the Governor issued a directive
on January 19, 1995, that requires his written approval on any land exchange
agreements entered into by the Department of Lands and Natural Resources.

 
Recommendations

We recommend that the Governor of the Commonwealth of the Northern Mariana
Islands ensure that the Secretary, Department of Lands and Natural Resources:

  1. Develops and implements written policies and procedures which require
that land exchanges are of comparable value based on current appraisals and that
land exchanges are made only when they serve a public purpose.

  2. Suspends all pending land exchange agreements until Recommendation 1
has been implemented.

Commonwealth of the Northern Mariana Islands Response and Office
of Inspector General Reply

The Governor of the Commonwealth of the Northern Mariana Islands did not
respond to the draft report; therefore, both recommendations are unresolved (see
Appendix 4).

 
B. LEASE MANAGEMENT

The Marianas Public Land Corporation did not receive rental income based on fair
market value in return for leasing public land; assess all rental amounts due under
the lease agreements; or adequately pursue the collection of all lease amounts
receivable. The Public Land Use Plan states that public land leases will be based on
fair market value. Lease provisions specify when payments are to be made, the
conditions of default, and subsequent actions to be taken by the Corporation. Lease
provisions also require the lessee to provide certain financial documents. However,
the Corporation did not have written policies and procedures to ensure that: (1)
lease agreements based minimum rentals on the appraised fair market value; (2)
required financial documents were provided and lessee rental calculations were
accurate; and (3) lease rental payments were collected or default provisions of the
lease agreements were pursued in a timely manner. As a result, the Corporation lost
$564,715 and may lose another $1,789,611 for fiscal years 1987 through 1994. Also,
the Government could lose an additional $467,434,436 over the unexpired period of
the 12 leases we reviewed.

The Corporation's latest audited financial statements indicate that lease income for
fiscal years 1991 and 1992 was $4.1 million and $4.4 million, respectively. As of June
30, 1994, Corporation records indicated that there were 101 commercial leases, 41
permits for 1 to 5 years, and 15 quarry permits for the use of public land. When the
Corporation was dissolved on August 24, 1994, responsibility for these leases and
permits was transferred to the Department of Lands and Natural Resources, Division
of Public Lands. In addition, the Division executed four new leases from August
1994 through January 1995.  For our review, we selected nine commercial
development leases that were executed by the Corporation before its dissolution and
three commercial development leases that were executed by the Division after the
dissolution (Appendix 3).  Minimum rental payments and public benefit
contributions on the 12 leases we reviewed totaled $67,254,772 over the terms of
the leases. In addition, each lease included a gross receipts rental provision that
required the lessee to pay additional rental when the lessee's annual gross receipts
attributable to lease site operations multiplied by a preset rate exceeded the annual
minimum lease payment.

Market Value

Our review of the 12 leases disclosed that neither the Corporation nor the Division
of Public Lands based the minimum lease payment amount on fair market value or
maintained records documenting the basis of rental computations. According to the

4 These contributions were additional payments required by the Legislature from developers as a
condition of approving two of the leases.

9

 
Director, and as indicated in the lease provisions, minimum annual rental payments
were to be based on 8 percent of the appraised fair market value. However, we
found that the Corporation did not have written policies and procedures to ensure
that lease agreements based minimum rentals on appraised fair market values.
Therefore, we determined that for the 12 leases reviewed, the Corporation lost rental
income totaling $564,715 on 2 leases and the Government could lose rental income
totaling another $465,785,468 over the remaining terms of 6 leases (see Appendix 3).

For example, the Corporation executed a 25-year lease on November 9, 1993, with
minimum rental payments of $152,035 to be paid over the life of the lease.
However, the Corporation did not have an appraisal or other documentation to
support the property value used or the determination of the minimum lease
payments. In addition, on November 16, 1993, only 7 days after obtaining the lease,
the lessee subleased the property to a third party for total rental payments of
$720,000 over a 25-year sublease.  Based on the value of the sublease, the
Corporation lost at least $28,249 for the 11 months ending September 30, 1994, and
the Government could lose another $539,716 over the balance of the 25-year lease.

In another example, the Division executed a 25-year lease on November 29, 1994,
with minimum rental payments of $18,739,442 to be paid over the life of the lease.
However, the Division was unable to support either the source of the property value
used or the basis used to support the calculation of the minimum lease payments.
Using 8 percent of a 1992 appraisal of adjacent public land (which the Corporation
had used for other valuations), we determined that the fair market value of the
minimum rental payments should have been $262,200,000 over the term of the lease.
As a result, the Government could lose $243,460,558 over the 25-year term of this
lease.

Assessment

Based on our review of the 12 leases, we determined that the Corporation did not
assess all rental amounts due for 5 of the 9 lease agreements subject to assessment.
Lease provisions required payment of a gross receipts rental and of interest on past-
due rental payments. In addition, to assist the Commonwealth in determining
potential gross receipts rentals that may be due, lease provisions required that lessees
submit: (1) annual certified financial statements, including schedules indicating
sources of and deductions from the lessee's gross receipts; (2) Commonwealth
business gross revenue quarterly tax returns; and (3) computations of quarterly gross
receipts rentals. However, the Corporation did not have written policies and
procedures to ensure that required financial documents were provided and that
lessee rental calculations were accurate. Therefore, we determined that of the nine
leases that were subject to assessment, the Corporation had not assessed five lessees
for $788,097 in delinquent lease payments and interest. Also, if current procedures

10

 
are not changed, we believe that the Government could lose another $1,648,968 in
lease revenues over the balance of the lease terms (Appendix 3).

For example, as of May 15, 1994, the Corporation had collected $41,546 in gross
receipts rentals from a lease that was executed on May 28, 1987. However, the
Corporation had not obtained financial documents necessary to confirm the accuracy
of the gross receipts rental payments. Without the required financial documents, the
Corporation's Compliance Accountant was limited to verifying the accuracy of the
lessee's calculation of quarterly gross receipts rentals. In addition, neither the
Compliance Accountant nor the Corporation's Land Enforcement Officer had made
any on-site inspections to familiarize themselves with the lessee's operations. Based
on our review, we determined that the lessee was incorrectly deducting off-premises
sales from gross receipts revenues which were attributable to the lease-site
operations. As a result, the lessee underpaid gross receipts rentals by $123,932 and
had accrued interest on the underpayment totaling $38,502. In addition, the
Corporation had not assessed the lessee for the delinquent lease payments and
accrued interest. If payment and assessment practices remain unchanged, we believe
that the Government could lose another $637,218 in lease revenue over the balance
of the lease term.

Collection

The Corporation did not initiate effective collection actions on the 6 leases (of the
12 reviewed) that had delinquent receivables. Lease provisions specify when lease
payments are to be made, when a default occurs, and what actions are available to
the Corporation if the lessee defaults. However, the Corporation did not have
policies and procedures to ensure that lease rental payments were collected or
default provisions of the lease agreements were pursued in a timely manner. As a
result, we determined that the Government may lose lease revenues of $1 million if
the six lessees are unable to pay the amounts past due (Appendix 3).

For example, on August 17, 1992, the Corporation issued a 5-year lease to a
company that had previously leased the same property for over 5 years using two
temporary permits.  When the Corporation issued the lease, the lessee owed
delinquent permit fees and accrued interest totaling $243,753. As of June 30, 1994,
the lessee's rental payments on the new lease had been delinquent since April 1993.
In addition, the Corporation had sent only one request for payment (in June 1993)
and had not made any attempt to collect the delinquent permit rentals. We
determined that as of June 30, 1994, the lessee owed rentals and accrued interest
totaling $43,700 on the current lease and $303,418 on the temporary permits.
Further, the Government may lose the $347,118 if the lessee is unable to pay the
past-due amounts.

11

 


Subsequent Actions

During our audit, we discussed the lease issues noted above with Commonwealth
officials. To address these issues, the Governor issued a directive on January 19,
1995, that requires his written approval on any lease agreements entered into by the
Department of Lands and Natural Resources.

Recommendation

We recommend that the Governor of the Commonwealth of the Northern Mariana
Islands ensure that the Secretary, Department of Lands and Natural Resources,
develops and implements policies and procedures which require that lease
agreements base minimum rentals on the appraised fair market value; financial
documents required in lease agreements are provided and lessee rental calculations
are accurate; and lease rental payments are collected or default provisions of the
lease agreements are pursued in a timely manner.

Commonwealth of the Northern Mariana Islands Response and Office
of Inspector General Reply

The Governor of the Commonwealth of the Northern Mariana Islands did not
respond to the draft report; therefore, the recommendation is unresolved (see
Appendix 4).

 
C. HOMESTEAD ADMINISTRATION

The Marianas Public Land Corporation permitted homestead recipients to
improperly transfer their interest in homestead lots and/or commercial structures to
be built on the lots and awarded homestead lots to applicants who were ineligible or
who did not have the greatest need.  These conditions occurred because the
Corporation did not have written policies and procedures to ensure that: (1) deeded
homestead lots were inspected periodically and were used in accordance with the
laws, regulations, and deed restrictions; and (2) homestead permits were awarded to
applicants who were eligible or who had the greatest need in accordance with
regulations. As a result, 208 recipients improperly received $7 million from the
unauthorized sale or lease of homestead lots, and 12 of the 23 permitted homestead
lots we reviewed were awarded to applicants who were ineligible or who did not have
the greatest need.

The Commonwealth Code (Title 2, Division 4, Chapter 3, Section 4332) authorizes
the Corporation to implement the Village Homestead Program and to issue
homestead lots to residents who do not have safe, decent, and sanitary dwellings for
themselves and their families and who do not have sufficient means to purchase
village lots. In addition, Section 4333 requires the Corporation to establish priorities
for the issuance of a village homestead permit and to establish inspection and
compliance procedures. Further, Section 4308 provides that the Corporation will
issue a deed on a homestead lot 3 years after the homestead permit has been
awarded. Finally, Section 4302 provides that the Corporation should determine and
establish standards and requirements for the use, occupation, and development of
the homestead tracts.

From October 1, 1989, through June 30, 1994, the Corporation awarded a total of
2,563 homesteads. As of June 30, 1994, the Corporation had 4,197 homestead
applications on file, which were transferred to the Department of Lands and Natural
Resources.

Use of Homesteads

The Corporation allowed homestead recipients to improperly transfer their interest
in homestead lots and/or commercial structures to be built on the lots. Article XI,
Section 5(a), of the Commonwealth Constitution prohibits the transfer of a freehold
interest5 in a homestead for 10 years after receipt. In addition, in December 1990,
the Corporation instituted more restrictive language in the village homestead deeds.
The deeds state: "Grantees may not transfer a freehold interest, or an option, or

5Freehold is a tenure of real property by which an estate of inheritance (such as fee simple absolute)
or an estate not of inheritance (such as estates for one's own life) is held.

13

 
leasehold interest of more than one year, for ten years after receipt of this deed."
However, the Corporation did not have written policies and procedures to ensure
that deeded homestead lots were inspected periodically and were used in accordance
with laws, regulations, and deed restrictions. As a result, from 1985 through 1994,
at least 67 homesteaders received $269,000 from improperly transferring freehold
interests on their homestead lots, and 141 homesteaders received $6.7 million from
improperly leasing their homestead lots. In our opinion, these funds should accrue
to the Commonwealth because the homesteaders did not use the property as
required and as agreed to or in accordance with the intent of the Program, which
was to provide a primary dwelling to the homesteader.

We reviewed land transactions for the period January 1985 through December 1994
that were on file at the Commonwealth recorder's office, and in May and December
1994, we also visited three village homestead subdivisions on Saipan and Rota.
During the site visits, we saw commercial development on homestead lots that
included a two-story 25-unit apartment building, two 3-story office buildings, a
restaurant, a grocery store, a video rental store, and a farm supply store. For
example, on December 27, 1990, the Corporation issued a quitclaim deed for a
village homestead lot on Saipan to an individual. However, on April 12, 1991, the
homesteader entered into a 55-year lease that provided for a total of $705,000 in
payments over the lease term.  In a similar case, on August 24, 1990, the
Corporation issued a quitclaim deed to an individual for a village homestead lot on
Saipan. However, 2 years later, on August 20, 1992, the homesteader entered into
a 55-year lease that provided for a total of $445,000 in payments over the lease term.

In addition, none of the 25 files we reviewed of homesteaders that had deeded lots
contained documentation that the Corporation had monitored compliance with the
land use requirement (use as a primary residence). The Homestead Administrator
stated that between 1985 and 1994, he believed the Corporation had monitored
compliance with homestead lot deed restrictions on only two occasions. First, a 1991
Corporation study concluded that almost 90 percent of the homesteads in a
subdivision on Saipan had been either sold or leased. However, according to the
Administrator, the documentation for the sales or leases could not be located
because it had been given to a former Executive Director. Second, in July 1992, the
Corporation reviewed a second subdivision on Saipan and determined that 25
homestead lots awarded since 1987 had already been leased or had the freehold
interest transferred.  However, Corporation legal counsel stated that as of
October 1994, no action had been taken against any of the violators in either study.

Awards of Homesteads

The Corporation awarded homestead lots to applicants who were ineligible or who
did not have the greatest need.  The Commonwealth Code (Title 2, Division 4,
Chapter 3, Section 4333) specifies that in order to be eligible to receive a village

14

 
homestead lot, an applicant must be of Northern Marianas descent and be at least
18 years old. Also, the applicant and/or spouse must not own or have any interest
in a village lot or have been a recipient of a village homestead lot. Further, Section
4303 requires applicants to be residents of the same Senatorial District6 in which the
homestead is being applied for.  Finally, the Village Homestead Rules and
Regulations published in the Commonwealth  Register on June 15, 1990, established
maximum income levels and asset eligibility requirements and also stated that eligible
applicants had to be prioritized by class and category as follows: Class One - First
Priority, applicant has at least one child and has an immediate need; Class Two -
First Priority, applicant is without children but has an immediate need; Second
Priority, applicant has only a general need;7 and Third Priority, applicant is
temporarily residing outside the Commonwealth for the purposes of seeking health
care, education, job training, employment, or other job-related reasons. However,
the Corporation did not have written policies and procedures to ensure that
homestead permits were awarded to applicants who were eligible and who had the
greatest need in accordance with the regulations. As a result, 12 of 23 permitted
homestead lots we reviewed were awarded to applicants who were ineligible or who
did not have the greatest need.

For example, on March 25, 1992, a permit for a village homestead lot on Rota was
awarded to a recipient who had applied for a lot on January 3, 1989. The
application showed that the recipient was employed on Guam as a substitute teacher
with the Government of Guam. The Rota Administrative Officer stated that the
homestead lot was awarded in a public drawing based on priority in accordance with
the regulations. The Administrative Officer said, however, that because of his
personal knowledge of all the applicants, he did not require documentation to
support any applicant's eligibility or need requirements. We determined that since
the residency requirement was not met, the individual received the village homestead
lot improperly. The Administrative Officer indicated that he knew the recipient was
not a resident of Rota but that he issued the permit because the individual was
originally from Rota and had returned for a few months prior to the drawing. After
the drawing, the individual returned to Guam. However, we found that no action
had been taken to cancel the permit.

6The Commonwealth Code (Title 1, Division 1, Chapter 4, Section 1402) identifies three Senatorial
districts, and the islands of Saipan, Rota, and Tinian are each in different districts. Therefore,
applicants must be residents of the island in which they are applying for a homestead.

7 Priority 2 applicants are reclassified as Priority 1 after 3 years from the date of the application, in
accordance with Section 4333 of the Code.

15

 
Subsequent Actions

During our audit, we discussed the homestead issues noted above with
Commonwealth officials. To address these issues, the Governor issued a directive
on January 19, 1995, that requires his written approval on any homestead deed or
permit entered into by the Department of Lands and Natural Resources.

Recommendations

We recommend that the Governor of the Commonwealth of the Northern Mariana
Islands ensure that the Secretary, Department of Lands and Natural Resources:

  1. Develops and implements policies and procedures which require that
deeded homestead lots be inspected periodically and be used in accordance with
laws, regulations, and deed restrictions, and that homestead permits be awarded to
applicants who, in accordance with the regulations, are eligible and who have the
greatest need.

  2. Reviews all previously issued homestead deeds and permits and performs
on-site inspections so that assurance is provided that deeded homestead lots are
being used in accordance with applicable laws, regulations, and deed restrictions.

  3. Initiates administrative and/or legal action to reacquire those homestead
lots which the recipients used or subleased improperly, which the recipients sold in
violation of the 10-year Constitutional requirement for homestead ownership, and
which were issued to ineligible applicants.

  4. Requests an Attorney General's opinion on the possibility of seeking
recovery of illegal and/or improper monetary gains resulting from the sale and/or
lease of homestead lots and initiates action to recover such funds as appropriate.

Commonwealth of the Northern Mariana Islands Response and Office
of Inspector General Reply

The Governor of the Commonwealth of the Northern Mariana Islands did not
respond to the draft report; therefore, all of the recommendations are unresolved
(see Appendix 4).

16

 
APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

                      Potential
         Lost   Funds To Be Put Additional
Finding Areas    Revenues*  To Better Use*  Revenues*

Land Exchanges     $25,085,390   $118,437,541

Lease Management
Market Value       564,715
Assessment
Collection

Homestead
Sales/Leases

Total

$788,097
1,001,514

*Amounts represent local funds.

17

 
SUMMARY OF LOSSES FROM LAND
       Individual Exchanges*

         Value    Value

    APPENDIX 2

EXCHANGES

Value    Lease

Exchange   Date   Given UP  Received    Lost    Revenues
#1    7/12/91   $696,480   $23,000   $673,480 -
#2    5/11/94    716,436    88,528   627,908
#3    4/11/90    556,640   168,700   387,940  $2,000,000
#4    5/27/93   4,345,992   700,000   3,645,992   545,940
#5    5/28/93   16,647,624   3,755,640  12,891,984  22,539,450
Subtotal        $22,963,172  $4,735,868 $18,227,304  $25,085,390

    Additional Land Areas Used in Completed Exchanges
          Corporation   Audit    Value
           Value    Value    Lost
Public Land       $29,541,952  $127,110,658  $97,568,706
Private Land       13,948,284   11,306,753   2,641,531
Subtotal                   $100,210,237

Loss on
Completed Exchanges

$118,437,541

Additional Land Areas in Pending Exchanges

Public Land
Private Land
Potential Loss on
Pending Exchanges

Corporation   Audit    Value
Value    Value    Lost
$17,869,232 $86,286,689  $68,417,457
3,982,050   2,335,941   1,646,109

           $70,063.566

*Amounts determined by audit.

18

 
                       APPENDIX 3

SUMMARY OF LEASE REVENUES LOST, UNCOLLECTED,

          Lost
         Revenues
         Leased
         Below
Leases   Lease  Market
Reviewed  Date   Value
Leases Executed by Corporation

#1
#2
#3
#4
#5 #6
#7
#8
#9

5/28/87
5/17/88
12/10/91
11/9/93
2/22/89
8/17/92
3/15/88
10/28/89
10/13/89

Subtotal

Combined Totals

OR AT RISK OF LOSS


Uncollected Revenues Due

Revenues At Risk*

Assessments
Not Made


$637,218



1,011,750

$467,434,436

*Although not due, revenues may be lost under existing lease terms,

                  19

 
     STATUS OF AUDIT REPORT

Finding/Recommendation
  Reference       Status

                                                    

            APPENDIX 4
             Page 1 of 3
RECOMMENDATIONS


Action Required

A.2

B.1

A. 1      Unresolved  Provide a response to the
            recommendation  indicating
            concurrence or nonconcurrence.  If
            concurrence is indicated, provide an
            action plan that identifies the target
            date and the title of the official
            responsible for developing and
            implementing policies and procedures
            requiring that land exchanges be of
            comparable value based on current
            appraisals and serve a public purpose.
      Unresolved  Provide a response to the
            recommendation  indicating
            concurrence or nonconcurrence.  If
            concurrence is indicated, provide an
            action plan that identifies the target
            date and the title of the official
            responsible for suspending all pending
            land exchanges until Recommendation
            A. 1 has been implemented.
      Unresolved  Provide a response to the
            recommendation  indicating
            concurrence or nonconcurrence.  If
            concurrence is indicated, provide an
            action plan that identifies the target
            date and the title of the official
            responsible for developing and
            implementing policies and procedures
            requiring that lease agreements base
            minimum rentals on appraised value;
            lessee financial documents and rental
            calculations be provided and be
            accurate; and rental payments be
            collected or lease default provisions be
            pursued timely.

20

 
APPENDIX 4
Page 2 of 3

Finding/Recommendation
  Reference       Status       Action Required
    C.1      Unresolved  Provide a response to the
                recommendation  indicating
                concurrence or nonconcurrence.  If
                concurrence is indicated, provide an
                action plan that identifies the target
                date and the title of the official
                responsible for developing and
                implementing policies and procedures
                which require periodic inspections of
                deeded homestead lots and which
                require that deeded homestead lots be
                used in  accordance  with laws,
                regulations, and deed restrictions.

C.2

C.3

Unresolved  Provide a response to the
     recommendation  indicating
     concurrence or nonconcurrence.  If
     concurrence is indicated, provide an
     action plan that identifies the target
     date and the title of the official
     responsible for reviewing all previously
     issued homestead deeds and permits
     and for performing on-site inspections.

Unresolved  Provide a response to the
     recommendation  indicating
     concurrence or nonconcurrence.  If
     concurrence is indicated, provide an
     action plan that identifies the target
     date and the title of the official
     responsible for initiating administrative
      and/or legal action  to reacquire
      homestead lots that were used,
      subleased, or sold improperly, or that
      were issued to ineligible applicants.

21

 


APPENDIX 4
Page 3 of 3

Finding/Recommendation
  Reference       Status       Action Required
    C.4      Unresolved  Provide a response to the
                recommendation  indicating
                concurrence or nonconcurrence.  If
                concurrence is indicated, provide an
                action plan that identifies the target
                date and the title of the official
                responsible for requesting an Attorney
                General's opinion on the recovery of
                illegal and/or improper monetary gains
                from sale and/or lease of homestead
                lots and for initiating action to recover
                such funds as appropriate.

22

 
ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:            calling:

Within the Continental United States

U.S. Department of the Interior         Our 24-hour
Office of Inspector General           Telephone HOTLINE
1550 Wilson Boulevard            1-800-424-5081 or
Suite 402                 (703) 235-9399
Arlington, Virginia 22210

TDD for hearing impaired
(703) 235-9403 or
1-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior         (703) 235-9221
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana Guam 96910

(700) 550-7279 or
COMM 9-011-671-472-7279

 
FTS/Commercial Numbers:
(703) 235-9399
TDD (703) 235-9403

HOTLINE

1550 Wilson Boulevard
Suite 402