The Beverly Hills City Council heard the findings of an audit of the City’s property management operations at its Sept. 1 Study Session. The audit offered a glimpse at the totality of the City’s commercial real estate portfolio and suggested improvements to the management thereof.
“The recommendations for improving internal controls provided in this report are vital to improving the City’s real estate operations,” City Auditor Eduardo Luna wrote in a letter presenting the audit to the Council.
The City of Beverly Hills owns an extensive portfolio of commercial real estate, which it leases for the public benefit and for investment purposes. This latest audit determined that the City owns approximately 57 leased properties, including parking locations, open space, and properties with big-named tenants like Ferragamo, Williams-Sonoma, Whole Foods and Google. Between the fiscal years of 2016/17 to 2018/19, the years assessed by the audit, the City generated approximately $17 million, $17.8 million, and $18.6 million in revenue respectively from its leases.
In 2016, the City restructured its real estate operations after it discovered improper activity by then-Real Estate and Property Manager Brenda Lavender, who served in that role from 2012 to 2015. In 2018, Lavender pled guilty to felony grand theft connected to an embezzlement investigation.
In a Jan. 18, 2018 press release, the Beverly Hills Police Department noted,” “From 2012 to 2015, Ms. Lavender, the former Real Estate and Property Manager for the City, failed to collect obligated lease payments from a tenant occupying a City-owned property. In addition, she intentionally failed to report to the City that the tenant was in arrears for these lease payments At the time of the crime, Ms. Lavender’s job responsibilities included the oversight and collection of monthly lease payments from City-owned properties. The aggregate uncollected lease payments over the three-year period exceed $800,000.”
The City overhauled the system as a result. “The investigation into the crimes pointed to a need for the property management operation to be reorganized in order to create the appropriate oversight and accountability,” the City said in the press release. To establish checks and balances, the City split the operations between three departments: Administrative Services, Policy and Management, and Public Works.
This correction, however, still left some issues unresolved. According to the audit, while the City properly assessed and increased rents over the audit period, it also relied on an overly segmented system without adequate staffing and consistent policies.
“The report found that generally rent is escalated and assessed as required,” the audit stated. “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.”
The audit noted that the City has not addressed the findings from an earlier audit in 2016. That audit found issues “with the collection of rent late fee payments and inconsistences [sic.] between lease inventory and lease documents.” According to the current audit, these issues persist because the City lacks “proper management oversight, adequate staffing , clear policies and procedures, and a strategic plan necessary for the management of the City’s commercial-leased properties.”
As an example, the City’s real estate inventory system contains eight leases without security deposit or line of credit information. The City’s record keeping system contains discrepancies with the actual lease documents, including 12 leases listed with the wrong start dates and eight with the wrong end dates. The audit also makes mention of missing records for a $22,000 security deposit.
The audit laid out 13 recommendations for the City going forward.
Among the suggestions, the audit recommended that the City designate a single person to lead oversight and management of its real estate operations. Additionally, the audit calls for the City to articulate and formalize policies for late fees and maintenance.
The audit also calls on Policy and Management to regularly review and update inventory and report to the City Council and applicable committees on its progress in updating the real estate management system to accurately report vacancy information.
In a memo appended to the audit, Policy & Management Analyst Logan Phillippo, Director of Public Works Shana Epstein, and Director of Finance Jeff Muir concurred with each of the audit’s recommendations. The group, collectively referred to as “Management,” laid out the City’s next steps in the memo, writing that “the City first should assess the appropriate support levels and organizational structure among the Policy and Management, Public Works and Finance Departments in order to ensure implementation of best practices, delivery of the highest-quality customer service to tenants, and the appropriate planning for future developments.”
As a cautionary tale for not following its recommendations, the audit cites the case of the Log Cabin, a Beverly Hills-owned property in West Hollywood. The City advised the tenants in early 2020 that their lease had expired in 1977, and the nominal rent had not been paid since that time.
For decades, the Log Cabin served as the site of some two-dozen addiction recovery group meetings, becoming a beloved rustic anomaly in the neighborhood.
The City made plans to tear down the building, which had structural issues as well, and find a new tenant. This came as a surprise to both the West Hollywood Lion’s Club–the tenant–and the City of West Hollywood.
“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 Lion’s Club sooner,” the audit said.
The two cities eventually reached a deal in the highly publicized matter, allowing West Hollywood to lease the property from Beverly Hills.
The audit report was originally scheduled for release in March 2020 but was delayed because of the novel coronavirus pandemic. Against the backdrop of COVID-19 and the economic blow to the City’s budget, the report makes clear the importance of making a full accounting of the City’s various revenue streams.
“Based on economic impact from the COVID-19 pandemic,” the staff report said, “the City needs to have a full and accurate accounting of these revenue-generating assets to aid in budgetary assessments.”