The real estate portfolio of the city of Beverly Hills includes the Wallis Annenberg Center for the Performing Arts. (photo courtesy of The Wallis)

The Beverly Hills City Council unanimously supported tightening control over the city’s commercial real estate portfolio at Tuesday’s study session. An accounting of all properties found that the city owned 57 commercially leased properties that generated approximately $18.6 million in revenue during fiscal year 2018-19.

The city owns an extensive portfolio of properties that it leases to commercial tenants for investment purposes and public benefit, including businesses Ferragamo, Williams-Sonoma and Google, in addition to recreational and theater spaces such as Beverly Hills Tennis and the Wallis Annenberg Center for the Performing Arts.

“I think this is probably one of the first audits that we’ve done just internally. It really makes some solid recommendations to improve the city’s real estate management practices,” City Auditor Eduardo Luna said.

In accordance with the fiscal year 2019-20 annual audit work plan, Luna’s office performed an audit of the policy and management department’s real estate and property management division. Objectives of the review included identifying city assets and determining if the city had mechanisms in place for managing its asset portfolio; determining the value of the city’s assets and any potential uncollected revenue from late, missing or unenforced escalation clauses; and assessing the city’s ability to manage its real estate portfolio.

“The findings and recommendations detailed in this report serve to improve real-estate operations, as well as facilitate emergency planning as it pertains to the city’s commercial-leased properties,” stated the Sept. 1 staff report authored by Luna. At its most positive, the report found that generally rent has continued to escalate and be assessed as required.

The report made 13 specific recommendations, which the City Council supported. The recommendations included designating one person to head real estate operations, developing a plan that clearly articulates the city’s strategic vision, strengthening internal controls, and reviewing and updating the city’s real estate inventory on a periodic basis. In fact, since Luna completed the audit in March, the city has acquired two additional commercial properties.

“The point is to improve operations … and I think this audit report does do that,” said Vice Mayor Bob Wunderlich, who served on the liaison committee focused on this item with Mayor Lester Friedman.

Following discovery of improper activity by the city’s former property manager who ultimately pleaded guilty to felony grand theft related to an embezzlement investigation, the city reorganized its real estate operations in 2016, including hiring new personnel and segregating key functions. Whereas the previous property manager directed and oversaw multiple aspects of real-estate operations, including day-to-day operations, lease negotiations, tenant relations, rent collection and property management, in reorganizing its real estate operations, the city opted to split responsibilities amongst three departments: Policy and Management, Public Works and Finance. Luna said that once again appointing one key person to oversee daily operations would greatly benefit the city.

“A lot of positive changes have been made and I think even more could be made to make the program even better,” he said.

Specifically, the report found that the city had not addressed findings and recommendations from a 2016 audit highlighting issues with the collection of rent late-fee payments and inconsistencies between lease inventory and lease documents. In addition, the report found that the city had not established performance metrics to articulate and monitor its progress towards attaining operational goals.

“Notwithstanding these positive changes, we found that the city needs to take additional steps to strengthen internal controls related to the management oversight, commercial lease oversight and reliability of lease-inventory information,” stated the report.

In addition, the report found that in the absence of established performance metrics, there were different service levels for maintenance at the city’s leased properties.

“It is imperative that the city establish service level expectations as it can impact customer service and lessee satisfaction, affect staffing capacity and resources, lead to duplication of efforts and damage the city’s reputation,” stated the staff report.

Luna emphasized the importance of creating an AMP that articulates a strategic vision and provides a comprehensive overview on the performance of leased properties. In addition to being useful in managing day-to-day activities and ensuring timely operational maintenance and repairs at municipal properties, according to the staff report, an AMP can assist local governments in making economically and socially-justified decisions on property reallocation, change of use and disposal.

For example, earlier this year, the Beverly Hills-owned Log Cabin property on North Robertson Boulevard in West Hollywood was at the center of a dispute between the city and the Lions Club of West Hollywood after the discovery that the lease had expired in 1977 and the Lions Club has not paid the yearly rent of $1 since then.

“If the city had appropriate internal controls over its inventory, it may have identified the lease-payment issue, appropriately strategized for the use of the site and communicated plans on the use of the Lions Club sooner,” noted the staff report.

Luna said that he was not aware of other city-owned properties that the city was not aware of, but couldn’t estimate how much revenue the city was letting slip away in the absence of a strategic plan and a clear understanding of the true value of the city’s inventory. For example, a review of the city’s lease terms and collections found that “to a great extent,” late fees on lease payments were not being collected.

“Absent management oversight, a clearly defined organization structure with clearly stated roles and responsibilities, policies and procedures and service level expectations, and a clearly defined strategy for the use of leased properties, the city cannot properly plan, execute, assess, monitor and communicate its progress towards attaining its real-estate goals,” stated the report. “Without improvements, the city risks blemishing its reputation with dissatisfied lessees and poorly maintained spaces.”