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From Deficit To Surplus

A Cash Strapped, Tax-Hungry Government Sits On More Than $7 Billion Of Idle Real Estate That Could Make Budget Deficits Disappear Overnight


June 6, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

For sale by owner: The government of Puerto Rico doesn’t know how much real estate it owns and risks losing federal money unless it gets its act together.
University of Puerto Rico benefits from unclaimed inheritances

Do you know who gets your property if you die interstate in Puerto Rico?

In Puerto Rico, if a person dies without testamentary inheritors, his or her real estate and chattel (furniture or equipment) will be transferred to the Commonwealth of Puerto Rico. In turn, the government cedes the property in favor of the University of Puerto Rico (UPR), which has resulted in the university owning an undisclosed number of properties and land, as well as unusual objects such as furniture, guitars, coins, and stamp collections.

In 1999, the Governmental Accounting Standards Board (GASB) issued Statement 34 requiring state and local government agencies to change from cash to accrual basis accounting and that all capital assets be depreciated. GASB Statement 35 requires the same accounting procedure from all educational institutions. (See related story.)

"While the university usually inherits property under more normal circumstances such as donations, the island’s inheritance law does grant us properties that come to make up part of the educational system’s assets," said Alma Rosa Catarich, planning specialist in charge of the UPR’s property. "Stemming from this new directive, the UPR is in the process of switching its accounting system according to GASB’s new guidelines."

Until last year, the UPR system (while it considers itself an autonomous entity from the government) implemented local government acquisition assessments accounting methods. Assets were entered in the books by their property value, whether it was $1 (in the case of a donation) or $100,000.

"The UPR has put together a team of consultants and university professors who will help to transfer its financial statements from one accounting system to the other. Obviously, we recognize that our financial reports give the UPR an economic capacity and solidity to issue bonds and obtain funds to make capital improvements," said Catarich.

While the UPR did not disclose the totality of its inherited real estate assets, Catarich said that several sites within the educational system had been donated by different entities. For example, the Rio Piedras campus as well as the Agricultural Experimental Station and Botanical Gardens were established on approximately 400 cuerdas (388 acres) originally donated by the Sugarcane Producers Association.

As elsewhere in the U.S. mainland, both private and public educational institutions also have preferential access to federal government property when it is vacated. As such, in Puerto Rico the UPR operates university programs in Aguadilla Croem and UPR Regional College (both at former Ramey Air Force Base); La Montaña Farm Livestock Program; Cayey (part of UPR Regional College in the former Henry Barracks military reservation), and Sabana Seca (a primate facility located next to the existing military base).–M.M.

New accounting regs could cost Puerto Rico government millions

A new accounting standard applicable throughout the U.S., including Puerto Rico, will now require that state and local governments, among other things, update their inventory of property–or come up with one. Failure to comply could hinder local government agencies’ ability to receive federal grant money or raise capital in the stateside bond market.

In June 1999, the Governmental Accounting Standards Board (GASB), a U.S.-wide organization that regulates the government accounting profession, issued Statement 34 (GASB 34), requiring that state and local government agencies change from cash to accrual basis accounting and that all capital assets be depreciated.

GASB 34 requires local and state governments to change to accrual accounting for all governmental activities, a substantial change from the cash basis reports previously accepted. It also requires supplementary information, such as the Management’s Discussion and Analysis.

In addition, GASB 34 requires that all capital assets must be depreciated, including infrastructure assets and historical treasures in the government-wide statement of net assets and generally should report depreciation expense in the statement of activities. Records must include acquisition date and cost, asset lives, and depreciation method for all capital asset depreciation. Capital asset depreciation must also include detailed fixed asset reports.

It is this last requirement of GASB 34 that has forced Puerto Rico government agencies to update their inventory of property or, as in the case of the Highway and Transportation Authority, come up with one for the first time.

Established in 1984 by the Financial Accounting Foundation, GASB issues standards of financial accounting and reporting for state and local government entities known as Generally Accepted Accounting Principles, or GAAP. It is the sister of the Financial Accounting Standards Board (FASB), which creates the accounting rules for business.

The GASB’s standards are used to publicly demonstrate financial accountability to the public and form the basis of investment, credit, and many legislative and regulatory decisions. While each state government adopts its own reporting standards, historically they have been consistent with the GAAP to provide standard reports for bondholders, rating agencies, and other agencies such as those that manage grants.

To date, GASB has issued 36 statements that governments must follow to receive an unqualified (clean) audit opinion on their audit reports. Not adopting GASB measures will hinder state agencies’ ability to provide the necessary financial information necessary to apply for grant money or raise capital in the bond markets.

Users of state and government financial reports include private citizens; legislative and oversight committees; entities that finance government such as taxpayers; other governments, including the federal government; investors; creditors; underwriters and analysts, and government administrators.

According to sources, local government agencies’ financial records in Puerto Rico have traditionally been kept according to cash basis standards. Several agencies are now in the process of complying with GASB 34.


Estimate explained

CARIBBEAN BUSINESS’ estimate of the value of idle land and property by the four government agencies covered in this story was done using the quantities and values detailed below. The estimate was done using the best information available given the lack of accurate inventories and the incomplete information reported by some of the agencies. Actual figures may vary.

When available, the actual inventories by municipalities provided by the agencies were used. Where no breakdown by municipality was available (e.g., the undeveloped land–ie., no buildings–owned by Pridco throughout Puerto Rico, unused public school properties), each total was evenly allocated among the 78 municipalities.

Since the estimate of the number of empty public schools varied greatly among sources (from 615 to 1,500) the most conservative estimate (615) was used. An average 2,000 square meters was used to calculate the size of each school property (according to sources they range between 1,000 m2 and 3,000 m2.) Because of incomplete information from sources, there was no reasonable way to calculate the average size of school buildings, so they were not counted.

Values used:

  • An average of $25 per square foot was used to calculate the value of empty Pridco buildings. The agency has a total of 3,670,007.6 square feet of property (includes 622,796.8 square feet of property that is unavailable due to environmental problems and pending litigation).
  • An average of $80.00 per square meter was used to calculate the value idle or empty land. Three agencies, Highway & Transportation Authority, Pridco and Land Administration, have a combined total of 87,758,376 square meters.

While a cash-strapped Puerto Rico government turns to increased taxes on alcoholic beverages, cigarettes, and sport utility vehicles (SUVs) among other measures, it sits on billions of dollars’ worth of unused real estate.

Scrambling to overcome a $542 million deficit in next fiscal year’s budget, the government has not looked at more than $7 billion in valuable but unused and mostly unneeded real estate it owns as a possible source of income.

Ownership of government property has been divided among several agencies since the 1950s. CARIBBEAN BUSINESS examined the Highway & Transportation Authority (HTA), the Puerto Rico Development Co. (Pridco), the Public Buildings Authority (PBA), and the Land Administration (LA), all of which own or have been named custodians of thousands of acres of these assets, controlling their availability for leasing or selling purposes.

By CB estimates, these government agencies own at least 88,088,676.6 square meters of idle or abandoned property across the island. At today’s market value, CB conservatively estimates the value at over $7 billion in real estate, and that’s only the properties the government knows about.

With more than 100 square miles of land and untold millions in square feet of structures, the government is by far the largest property owner in Puerto Rico. Yet even the amount of unused, underutilized, or abandoned real estate among the four largest real-estate holding agencies is in question.

For example, the Department of Transportation and Public Works’ Highway & Transportation Authority, one of the four mayor landholders, has no updated inventory of property it holds. Through the years, these deficiencies have made it practically impossible for remnants of unused government properties to be sold or leased. Furthermore, little effort has been made to maximize their use.

Where’s the inventory?

Pridco, the Public Buildings Authority, and the Land Administration each have property inventories. Each agency can provide some information about a property’s tenant or buyer, leasing rates or purchase prices, how many properties have been sold annually, and yearly revenue.

Surprisingly, the HTA admitted that it could not provide an inventory of its properties.

But it will soon be forced to generate one. A recently adopted federal Government Accounting Standards Board (GASB) rule known as GASB-34 now requires state, county, and local governments to change how they prepare their financial statements.

Among other things, GASB-34 modifies the way government agencies are required to prepare and depreciate their capital assets inventory. GASB-34’s significantly different reporting standards will, in turn, affect and influence government financial requirements needed to qualify for grants and loans and to issue long-term debt on the bond market.

Vacant schools to 100-square-foot land remnants in limbo

Since its inception in 1965, the HTA has not kept an agency-wide record of its properties. Each highway construction project was assigned a project number and filed. Information on remnants, land left over when a road is designed and built, was kept in each project file, but no statistical reports on unused land were ever centralized.

The HTA is now forced to create an inventory of all its property, including highways built, additional property owned, and remnants, in order to comply with GASB-34’s accounting regulations and if it hopes to qualify for federal funds, grants, or loans.

The agency owns several types of properties, including remnants and public schools built before 1965 that are no longer in use. The HTA is also involved in the expropriation of a 500-square-meter area surrounding each Urban Train station. It has created a redevelopment plan to complement and encourage use of the train and to establish mixed-use urban center communities (including residential, commercial, and entertainment areas) surrounding the stations.

"Unfortunately, a complete list of all our properties does not exist," said HTA Executive Director Fernando Fagundo. "They are all for sale or lease, depending on the intended use. But probably the ones with the most restrictions are schools not in current use, since the Department of Education has to approve any transaction."

When the departments of Public Works and Transportation were merged in the ’60s, the deeds of public schools were transferred to the new Department of Transportation & Public Works. Since 1965, the HTA’s assets related to construction projects have been scattered among thousands of files.

It is exceedingly difficult to identify the HTA’s remnants or unused public schools. No records whatsoever are available for leasing or sale transactions, according to HTA Right of Way Area Director Paquito Rivera, who is responsible for property acquisitions.

"This may seem incredible, but we cannot tell the number of remnants the agency owns. My personal estimate is that there are 3,500 to 4,000 separate pieces of property. But they could range from a farm with many acres to a 100-square-foot corner somewhere on the island," said Rivera.

According to Rivera, the HTA does not know where 1,500 of the estimated 4,000 remnants are located. "But we will get to them eventually," he assured.

The HTA’s record of vacant and unused public schools is even more ambiguous. In fact, it depends on the Department of Education (DE) for the information that could allow it to sell or lease these properties.

The actual number of unused public schools in Puerto Rico is undetermined. Three government sources told CB that an interagency committee headed by the DE’s Public Schools Management Office identified and claimed ownership two months ago of more than 1,544 properties not in use (including structures and land). The DE currently operates approximately 1,550 public schools.

"According to our records, the total number of vacant properties is approximately 655," said Lillian Camacho, DE communications and press office director. "The department is currently analyzing each property to determine whether it can be rehabilitated for administrative purposes."

Camacho said that schools or parks had been planned for some of the vacant properties. While the department would not release the initial report to CB, Camacho did identify nine of 10 school regions where the properties are located: Arecibo, Bayamon, Caguas, Fajardo, Humacao, Morovis, Mayaguez, San German, and San Juan.

"The final report should be ready by September and will suggest what the final use of the properties will be. The department could decide to keep the property and create new district facilities, or the property could be leased or sold," explained Camacho.

"There is a joint effort underway by various agencies to identify empty schools, including the departments of Education, Transportation, and the HTA," said Miguel Idrach, HTA property management office special assistant. "Empty schools have already been identified, and it is the HTA’s responsibility to administrate them. Under GASB rules, they must also be accounted for."

Each property has to be measured, documented, and registered. At an average cost of $1,500 per property, it could cost nearly $6 million to prepare the inventory required by the GASB. According to HTA Property Inventory Supervisor Diana Ortiz, in the past year her division has managed to register properties acquired in 1965 and 1966.

The HTA’s finance division also registers leased properties by the name and mailing address of the tenant. The agency was available to supply information only on monthly rental fees paid; it could not readily identify the municipalities where the properties are located.

Records obtained for the past two years indicate there are approximately 100 leased properties registered by the HTA. In 2001, records show that $1.3 million was collected in leasing fees, an 18% increase compared to the $1.1 million collected in 2000.

The HTA recognizes the importance of identifying these properties and their potential value. In fact, the agency continues to buy land for future highway projects. It has budgeted $50 million for land purchases in fiscal year (FY) 2002.

Pridco leads the way

Pridco’s detailed inventory provides a record of the land it owns in each municipality, including its size, availability, annual property sales, and leasing revenue. Pridco is a public company that’s responsible for providing economic development assistance, through support services and tax incentives, to businesses on the island.

"Pridco owns land because it generates revenue to pay bonds issued to buy buildings that promote job creation, establish new businesses with a subsidized rent, and further economic development. This is our bread and butter. With an 80% occupancy rate, at least 12% is used for new promotions," said Efrain Acosta, Pridco deputy executive director of finance.

Its computerized inventory accounts for nearly 24 million square feet of space for lease that’s scattered throughout the island on parcels of land totaling some 7,000 cuerdas, or 6,790 acres. In addition, Pridco owns another 2,000 cuerdas, or 1,940 acres, of still undeveloped land.

The agency averages 18 million square feet of property leased, 2.2 million square feet of property reserved or in negotiations, and 3.7 million square feet available for leasing. An additional 622,797 square feet is not on the market because of environmental concerns or pending litigation.

"For fiscal year 2002, Pridco’s property sales are expected to reach more than $15 million. Last year, fiscal 2001, sales revenue was $6.02 million, which included five buildings and three properties sold, which created 1,035 jobs," said Acosta.

In 1942, Pridco initiated the construction of industrial buildings and parks as part of its effort to encourage economic development in Puerto Rico.

"Back then, Pridco concentrated its efforts on developing industrial buildings for sale and lease to make our infrastructure more attractive to manufacturing industries. Part of the agency’s obligation was to buy and develop properties prior to demand in order to have an inventory of land and empty buildings available to accelerate the industrial development process," said Acosta.

The central government provided Pridco’s funding until 1958. In September of that year, the agency issued its first $15 million General Purpose Revenue Bond, with a 1- to 20-year due date. Pridco’s long- and short-term debt exceeds $200 million, $160 million of that in long-term bonds and the balance in a credit line with the Puerto Rico Government Development Bank (GDB).

"Ninety percent of Pridco’s revenues come from lease payments," Acosta explained. "To generate additional revenue, it sells assets such as buildings and builds special manufacturing facilities with other resources generated through private financing and a credit line with the GDB.

"Our property, whether it is land or an empty structure, guarantees Pridco’s debts. So every [leasing or sales] negotiation must consider what the maximum benefit the agency can get for the value of the property is so we can comply with our fiscal obligations," said Acosta.

Acosta explained that there are different lease rates because most multinational companies cannot use Pridco’s existing facilities. Such companies require made-to-order facilities which the agency builds using funds given by external financial sources at low interest rates. Currently, Pridco has more than $100 million destined for made-to-order buildings.

The island is divided into five zoning areas, according to the amount of manufacturing activity. Lease rates for buildings built to specifications are based on the property’s real estate value, cost of construction, and 1% over the primary interest loan Pridco took for the project.

Pridco hasn’t revised lease rates since 1992; they currently range from $1.75 to $5.25 per square foot. Although Puerto Rico’s lease rates are one of its best assets for attracting global manufacturing industries to the island, Pridco is conducting a study, scheduled to be completed by year’s end, that could establish new parameters that will increase lease rates.

"The island’s infrastructure in Puerto Rico has changed so much that once inaccessible geographical areas are now available. Expressways that didn’t exist 10 years ago now extend from PR-2 to municipalities such as Utuado, Lares, Ciales, Morovis, Corozal, and San Lorenzo," said Acosta.

Pridco is now focused on identifying new factors to determine lease rates. Among these are types of industry, location, and job creation. Another parameter that Pridco is considering is what impact lease payments would have on a company’s payroll; large industries can afford to pay higher lease rates than small and mediumsize companies.

The Public Buildings Authority (PBA) is responsible for managing the vacant public schools on the island. The agency develops, builds, leases, and maintains approximately 700 local government buildings, including 385 schools.

In 1965, the PBA was entrusted with the building of public schools. The agency issues tax free, government-guaranteed bonds to raise capital for construction for such government agencies as the Health, Police, Housing, Education, and Justice departments. In FY 2003, the $480,000 budgeted by the PBA for capital improvements will come from loans and bond issues.

The Office of Management & Budget collects clients’ lease and maintenance fees. Recently, OMB has been crediting the total sum to the PBA for its projects. In the next four years, the PBA will spend $1.5 billion to construct 292 new projects, with an investment of $200 million to $300 million in annual construction.

The PBA has not revised its lease rates in 15 years. Rates today range from $4.75 per square foot to an average of $7 or $8 per square foot. Newly constructed government buildings, however, pay lease rates of up to $17.50 per square foot.

Most of the complaints about the agency come from government employees who work in overcrowded facilities that have been badly maintained because of labor regulations standards.

"For the past 12 years, government facilities built in the ’70s have been assigned no funds for structural rehabilitation. Now, we are talking about sick buildings not meeting the Americans With Disabilities Act (ADA) requirements and failing fire code regulations," said Lillian Rivera, PBA executive director and architect.

Rivera is concentrating not only on new structures but also on older buildings whose tropical architectural designs can be modified easily. Rivera said $28 million would be spent on ADA modifications alone. Other infrastructure and environmental improvements will be negotiated with mayors and government tenants, such as the Department of Education.

"I would also like to see government facilities that are not in use turned into social projects. This could include battered women’s shelters, homeless shelters, and elderly facilities. It makes no sense for the buildings to remain empty when they could be put to good use," said Rivera.

Land Administration acts as the go-between

Created in 1962, the Land Authority (LA) acts as a sort of go-between when the local government needs to reserve specific plots of land for future use. It is the only government agency with the ability to expropriate land for forthcoming projects. Once the land has been expropriated and the project is ready to be built, the LA transfers the land to the appropriate agency.

LA also leases land it has reserved. Some projects take longer to develop than others, such as the San Juan New Center that was developed in Hato Rey in the 1960s and the pending Old San Juan Frente Portuario and World Trade District.

In such cases, the agency usually leases the land for a short time for low intensity uses, such as a parking lot for containers. The agency’s leasing rates are 5% to 8% of the property’s market or commercial market value.

The LA has long-term leases on approximately 3,000 cuerdas, or 2,910 acres, throughout 43 municipalities in Puerto Rico. It has also reserved or negotiated short-term leases on another 15,000 cuerdas, or 14,550 acres, scattered among 52 municipalities.

In FY 2001, the LA reported $8 million in leasing revenue, a 23.1% increase compared to $6.5 million in FY 2000. Revenue from property sales was $15.4 million in FY 2001, compared to $11.4 million in FY 2000, a 35.1% increase.

"The LA acts as a common tool for all government agencies," said Deputy Executive Director Rafael Pumarada, an architect by profession. "We help in the development of all kinds of projects, especially in reserving them for future use."

The agency has also expropriated lands for agricultural and environmental purposes. These include the Camuy Caverns, Adjuntas Copper Mines, Cabo Rojo Belvedere Farm’s mangrove, and conservation projects in Lajas.

"We own about 20,000 <I>cuerdas<I> [19,400 acres] of land for both leased and reserved projects," said LA Office of Land Development & Usage Projects Director Victor Chaparro. "Some land must always be reserved for the government to develop in the future, and this is our function."

Where do we go from here?

According to Treasury Secretary Juan Flores Galarza, the government is facing a budget deficit in the current fiscal year, which ends June 30, 2002, of at least $175 million.

And in recent weeks, Gov. Calderon approved legislation raising excise taxes on multiple-use vehicles, alcoholic beverages, and cigarettes in order to bridge a shortfall of another $596 million in the proposed budget for FY 2003.

Yet here we have billions of dollars in capital assets not only lying idle but missing entirely from the government’s fiscal ledgers. Thanks to new government accounting standards, however, they will now have to be accounted for.

How these assets will be reinvested in the island’s economy remains an open question. Most sources interviewed agree that the best alternative would be to sell these assets to the private sector.

"If the government has not done anything with some of these buildings for years, it’s difficult to imagine they could turn them into a profitable venture. They should sell them to whoever can put them into productive use," suggested one source.

Most in the real estate industry believe an aggressive effort by the government to sell off these idle assets could generate a boom.

This Caribbean Business article appears courtesy of Casiano Communications.
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