AUDIT OF REAL ESTATE OPERATIONS

AUDIT OF REAL ESTATE OPERATIONS

THE UNIVERSITY OF NEW MEXICO

Report 2010-08 October 11, 2011

Audit Committee Members J.E. "Gene" Gallegos, Chair Lt. Gen. Bradley Hosmer, Vice Chair

James Koch

Manu Patel, Audit Director Avedona Lucero, Senior Auditor

Audit Staff

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CONTENTS

EXECUTIVE SUMMARY .......................................................................................................... 1

SUMMARY OF FINDINGS ........................................................................................................... 1 CONCLUSION................................................................................................................................ 3

INTRODUCTION......................................................................................................................... 4

BACKGROUND ............................................................................................................................. 4 PURPOSE ........................................................................................................................................ 5 SCOPE ............................................................................................................................................. 5 AUDIT PROCEDURES .................................................................................................................. 5

OBSERVATIONS, RECOMMENDATIONS AND RESPONSES ? REAL ESTATE DEPARTMENT ............................................................................................................................ 6

RED DEPARTMENT PROCEDURES MANUAL ........................................................................ 6 CONTRACTED ATTORNEY FEES..............................................................................................7 SPACE ALLOCATION COMMITTEE REQUIREMENT............................................................9 RED MISSION STATEMENT AND STRATEGIC FRAMEWORK..........................................10 LEASE MONITORING PROCESS .............................................................................................. 11

Timely Deposits ................................................................................................................ 11 Billing and Reconciliation of Accounts Receivable ......................................................... 12 ACC (LOBO VILLAGE) LEASE ? LESSOR FEES AND REIMBURSEMENT ....................... 14 MIND RESEARCH NETWORK EXPIRED LEASE...................................................................16

OBSERVATIONS, RECOMMENDATIONS AND RESPONSES ? OTHER UNIVERSITY DEPARTMENTS ........................................................................................................................ 17

ANNUAL LEASE REVENUE FROM ACC (LOBO VILLAGE) LEASE..................................17 REQUIRED CONTRACT SIGNATURES...................................................................................19 CONTRACT LATE LEASE PAYMENT CLAUSE .................................................................... 20 LEASE MONITORING PROCESS .............................................................................................. 21

Timely Deposits ................................................................................................................ 21 Billing and Reconciliation of Accounts Receivable ......................................................... 22 MISSING/UNDOCUMENTED LEASE PAYMENTS ................................................................ 23

____________________________________________________________________________________________________________________ INTRODUCTION

MIND RESEARCH NETWORK LEASE PAYMENTS .............................................................. 25 LEASE EXPENSE ACCOUNT CODE ........................................................................................ 26 OIL AND GAS ROYALTY REVENUE ...................................................................................... 28

APPROVALS .............................................................................................................................. 29

ABBREVIATIONS

ACC ATM Banner FY HED HSC ISS LDC ML MRN PPD RED RFP SBOF SUB UBP UBPP University UNM

American Campus Communities Automated Teller Machine Internet Native Banner Fiscal Year Higher Education Department Health Sciences Center Institutional Support Services Lobo Development Corporation Money Lists Mind Research Network Physical Plant Department Real Estate Department Request for Production State Board of Finance Student Union Building University Business Policies University Business Policies and Procedures The University of New Mexico The University of New Mexico

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EXECUTIVE SUMMARY

As part of the fiscal year 2010 audit plan, the Internal Audit Department conducted an audit of The University of New Mexico (UNM) Real Estate Department (RED) operations. The purpose of the audit was to review the functions performed by RED. The audit focused on review of how the University acquires real property and how the University enters into and manages leases. The audit procedures required review of real property purchase documentation and lease agreements for compliance with University Business Policy and Procedures (UBPP), State Statutes, and for comparison to best business practices such as levying penalties for late lease payments. Internal Audit reviewed lease agreements for compliance with lease terms and compliance with UBP. Based on our audit procedures it appears that RED consistently complies with UBP and state requirements with regard to acquisitions; however, its standard operating procedures are not documented. The following summary provides management with an overview of our recommendations to address areas for improvement discovered during the audit.

SUMMARY OF FINDINGS

OBSERVATIONS, RECOMMENDATIONS AND RESPONSES ? Real Estate Department

RED DEPARTMENT PROCEDURES MANUAL

RED does not have documented department procedures and RED acquisition files did not always contain required documentation (survey, title insurance, warranty deed, Tax and Revenue appraisal review, purchase agreement, contracted attorney approval, documentation of Higher Education Department (HED) and State Board of Finance (SBOF) approval, and documentation of accordance with the Master Plan) to support execution of acquisition duties. Although RED discovered and provided much of the documentation prior to completion of the audit, the process is inefficient and there may be no assurance that the items would be located if not for historical knowledge of staff.

RED administration should develop and implement a comprehensive procedures manual. The procedures manual should include a process to ensure that required documents, (survey, title insurance, warranty deed, Tax and Revenue appraisal review, purchase agreement, contracted attorney approval, documentation of HED and SBOF approval, and documentation of accordance with the Master Plan) are included in RED files.

CONTRACTED ATTORNEY FEES

RED acquisition files did not contain documentation of attorney approvals. RED often contracts with outside legal counsel when completing University real property acquisitions. Internal Audit reviewed six acquisitions and one disposition transaction of real property; the total amount the University paid to outside counselors for those transactions is $120,521.99. Review of selected files indicates that the same attorney is contracted with regularly. The attorney is on the list of approved attorneys.

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RED files should contain all required supporting documentation, including support for contracted services obtained to complete real property transactions. As noted in the recommendation addressing the RED procedures manual, RED should include documentation of contracted services as a step in the procedures.

SPACE ALLOCATION COMMITTEE REQUIREMENT

RED does not regularly attend monthly Space Allocation Committee Meetings. According to UBP 5200, Allocation and Assignment of Space, the University Space Allocation Committee is a committee appointed by the President with the purpose to "...oversee assignment to and utilization by the various organizational units of all facilitates and spaces owned or leased by the University." The policy specifically states that the University Director of Real Estate is part of the committee membership.

To facilitate compliance with UBP 5200, the RED Director should attend all Space Allocation Committee meetings. This will help ensure that RED has a comprehensive catalogue of all University leases.

OBSERVATIONS, RECOMMENDATIONS AND RESPONSES ? Other University Departments

LEASE REVENUE FROM AMERICAN CAMPUS COMMUNITIES' (ACC) (LOBO VILLAGE) LEASE

The University has not determined how it will distribute lease revenue from Lobo Village annual lease payments. This lease is a source of considerable revenue to the University and should be diligently monitored for accurate and timely receipt.

The Executive Vice President for Administration should determine who (what department) in the University is charged with processing revenue associated with the lease, as well as any potential distribution amongst campus departments and organizations. The Executive Vice President for Administration should present this determination to the Board of Regents for review and approval.

CONTRACT LATE LEASE PAYMENT CLAUSE

Lease contracts do not consistently address penalties/sanctions for late payments. Some older contracts do not address late payment penalty sanctions, while newer contracts contain a standard clause. The University may stand to benefit from imposing and collecting late fees for late lease payments to encourage receipt of timely lease payments.

The Executive Vice President for Administration should work with University Counsel to review lease terms and consider including sanctions for late payments received by a lessor.

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OIL AND GAS ROYALTY REVENUE

RED is receiving oil and gas royalty revenue from various University donors. RED's sole responsibility in these transactions is to process the royalty payments when they are received. According to information provided by the Controllers Division, RED received and posted over $200,000 in royalty revenue to five endowment indexes in Fiscal Year (FY) 2010. The University Foundation would more appropriately account for oil and gas royalty revenue received from University donors.

The Executive Vice President for Administration should consider processing all future gifts of mineral rights through the University Foundation so that royalty payments are properly acknowledged.

CONCLUSION

Real Property acquisitions are negotiated and completed by RED. Based on our audit procedures it appears that RED consistently complies with UBP and state requirements with regard to acquisitions; however, its standard operating procedures are not documented. Various University departments enter into university leases and each department is charged with monitoring lease compliance. RED is by definition the central repository for all University leases and houses all original leases.

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INTRODUCTION

BACKGROUND

Real Estate Department (RED) mission statement reads as follows:

The Real Estate Department at the University of New Mexico is responsible for all of the real property holdings, both in selling and acquiring real property for the benefit of the institution. As well as all leasing for the University, both of leasing university facilities to outside entities and of leasing off-campus space for University departments and/or activities. The Real Estate Department manages the property held by the University to maximize the benefit it will bring to the University for long-term growth and development.

The operating budget of RED is comprised of two administrative units, Main Campus administration and Science and Technology Park administration. The following is a budget summary of the combined RED administration:

Fiscal Year 2007-08 2008-09 2009-10

Budgeted FTEs 10 11 11

Approved Budget $587,464 $735,375 $770,420

Actuals $615,531 $672,651 $678,971

According to RED's FY2010 budget overview, their core work load (transactions and leasing) has increased approximately two and one-half times in the past 18 years. In addition RED has worked on new initiatives such as the Science & Technology Park, UNM West Campus (Rio Rancho), Health Sciences Center (HSC) Development, Commercial Development Request for Proposal (RFP), Housing RFP and LOBO Development Corporation without any increase in existing staff and resources. During fiscal years 2007 through 2010, RED acquired twelve properties with a value of $30,330,468 and sold one property at a value of $7,665. RED supplied a list of current leases as of FY2010. The list contained 55 leases, and the reported total annual lease receipts for FY2010 were $ 5,157,412. A summary of lease receipts (University as Lessor) and net operating lease payments (University as Lessee) is summarized below:

Summary of Lease Receipts and Payments

FY 2008 FY 2009 FY 2010

Collections (Revenues) $ 5,781,907 $ 5,983,042 $ 5,157,412

Payments (Expenditures) $ 6,646,047 $ 6,062,864 $ 5,890,976

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University Master Plan

A Master Plan serves as a blueprint and guide for the vision of the University's physical growth. The University Of New Mexico Board Of Regents adopted and formalized the University Master Plan at the September 13, 2011 meeting. A draft version of the Master Plan existed that clearly indicated the boundaries of the University and laid out the future vision of the various campuses. The draft was first presented to the Board of Regents in August 2009. At that time, the Regents requested additional input from various constituents. The purpose of consulting the Master Plan when making acquisitions is to assure that real property purchases are made in accordance with that plan and support the mission and vision of the University's future development. The University receives Legislative funding; as part of general proposals for future growth, the Legislature requests and requires support for requested real property and capital project funding. The support includes confirmation that the proposed purchase is supported by the Master Plan.

PURPOSE

The purpose of the audit is to review the functions performed by RED. More specifically, to:

Determine if the University is acquiring properties in accordance with UBP, State Board of Finance (SBOF) and Higher Education Department (HED) requirements;

Review property lease agreements for compliance with lease terms; and Review the contracted legal services process.

SCOPE

The audit focused on the review of the documentation for the University's property acquisitions obtained over the fiscal years FY2007-FY2010, and various types of property Lease Agreements that were current as of FY2010.

AUDIT PROCEDURES

The audit analyzed the acquisitions of real property for compliance with applicable UBP and state statutes, as well as how the acquisitions support the overall University purpose and mission. The audit reviewed compliance with existing UBP and verified receipt of contracted lease revenue. Audit procedures included various University personnel interviews, review of applicable UBP and state statutes, and research of standard real estate business practices.

We selected a judgmental sample of seven of the real property acquisition transactions for review to determine compliance with UBP, state statutes that govern the Higher Education Department (HED), and State Board of Finance (SBOF) requirements. We selected eighteen leases from the list provided for review with compliance with UBP, timely receipt of all lease revenue, and compatibility with standard real estate business practices. Internal Audit also reviewed the ACC (Lobo Village) lease agreement. In total, Internal Audit reviewed nineteen lease agreements. The audit also reviewed the Request for Proposal process for contracted attorney services for real estate transactions.

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