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Analysis of the 2004-05 Budget BillLegislative Analyst's Office
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The Department of the Youth Authority has closed, or is planning to close, several correctional facilities due to its declining ward population. In addition, the 2004-05 Governor's Budget indicates a closure commission will be formed to examine potential additional youth and adult correctional facility closures. Given the current budget situation, there has already been interest expressed in the possible sale of surplus property following such facility closures.
In this piece, we describe the state's process of identifying and disposing of unneeded state land, and acknowledge some of the limitations in the revenue generating ability of the surplus property program.
The surplus property program authorizes the Department of General Services (DGS) to dispose of land that the state no longer needs. Within DGS, the Real Estate Services Division (RESD) is responsible for the surplus property program and two branches within RESD are involved in the disposition of surplus state property.
Inventory of State-Owned Property. The Government Code requires that every state agency, by July 1 of each year, provide DGS with a record of each parcel of real property in its possession, and it further requires DGS to maintain a complete and accurate statewide inventory of all real property held by the state. State agencies are required to report the following information to DGS:
Surplus State Property. In order to determine which properties are no longer needed, the Government Code requires that on or before December 31 of each year, each state agency will: (1) review all proprietary lands under its jurisdiction to determine what, if any, is in excess of its foreseeable needs and (2) report these properties to DGS. Upon request by DGS, the jurisdiction of any land reported as surplus is then transferred to DGS for sale or disposition. Agency identified surplus land is to include the following:
Do All State Agencies Have to Report Surplus Property to DGS? Only the Department of Transportation (highway property), the State Lands Commission, and the State Coastal Conservancy are statutorily exempt from having to identify surplus property. (In the case of highway property, however, the Department of Transportation has its own program to identify and dispose of surplus property.) All other state agencies are required to comply with Government Code requirements to annually identify and report surplus property.
However, while statutorily required to comply, some agencies do not generally participate in the surplus property inventory, because the properties acquired by these agencies are unlikely to ever be declared as surplus. We understand that the following agencies are not regular participants in the surplus property program:
In the case of the various conservancies, the Department of Parks and Recreation, and the Department of Fish and Game, these agencies have historically acquired property for the purposes of providing recreational opportunities, preserving historical sites and landmarks, and for the preservation of open space, wildlife habitat, and ecological preserves. Such properties are generally intended to remain in state ownership in perpetuity.
In the case of the Department of Housing and Community Development (HCD), it owns a number of residences statewide that consist of affordable housing units that have been taken back by the state through loan defaults. Instead of declaring these properties surplus, HCD sells the properties in order to place them back in private ownership as soon as possible.
Annual Surplus Property Report. The Government Code requires DGS to prepare a report, by January 1 of each year, of all properties declared surplus or which have no identified current or projected use. The DGS is further required to report these properties to the Legislature and request authorization to dispose of these lands by sale or other means.
In response, DGS prepares an annual report on surplus property. This report provides information on (1) surplus property sold in the past year, (2) disposition authority for specified properties rescinded by the Legislature, (3) surplus lands pending disposition, and (4) newly identified surplus lands.
Annual Surplus Property Legislation. Based on properties identified in the surplus property report, DGS annually prepares proposed legislation to obtain approval to dispose of specified surplus state properties. Often, this legislation also seeks to rescind previous authority to dispose of specific properties because the state has identified a new use, or need, for that property.
Before requesting legislative authority to sell surplus state property, DGS must go through a series of steps involving alternative ways of disposing the property. It must first determine whether the Tahoe Conservancy or Coastal Conservancy want any of the identified surplus properties to use in trade for desirable privately held property that would advance the programmatic efforts of either conservancy. If so, the property is transferred to them.
If neither conservancy needs any of the identified surplus properties, then DGS must determine if any of the properties are needed by another state agency. If DGS determines that any property is needed by any other state agency, it can transfer the jurisdiction of that property to the other state agency upon terms and conditions that DGS deems to be in the best interests of the state.
If the surplus property is not needed by any state agency, including the two conservancies, DGS can seek legislative authorization to sell or dispose of excess land upon terms and conditions that DGS deems to be in the best interests of the state. Furthermore, once the land is declared surplus and authorized for sale by the Legislature, DGS must first offer the property to local governments at fair market value. To the extent that no local government wishes to purchase the property, then DGS may sell the property to private buyers.
Is Surplus Property Always Sold at Fair Market Value? Generally, the state always attempts to receive fair market value for property it is selling. However, the Government Code provides that surplus property can be sold to local government for less than fair market value for the following purposes:
State law requires that the contract for any surplus land sold for less than fair market value must provide for the reversion of the land back to the state if the intended purpose for which the property was sold is not achieved. In addition to the purposes cited above, the Legislature can direct DGS to sell specified properties for less than fair market value in the annual surplus property legislation.
What Happens to the Proceeds of a Sale? Unless the surplus property legislation specifies otherwise, the net proceeds received from disposition of surplus property are paid to the General Fund. "Net proceeds" are gross proceeds less all costs directly related to the completion of the transaction including, but not limited to, selling costs, transfer fees, and commissions. It should be noted that selling costs include any costs incurred by DGS that are related to the property sale, including costs incurred to increase the value of the property being sold.
Revenue From Surplus Property Sales. Over the past ten years, the state has received a total of approximately $254 million from the sale of surplus state property. However, as can be seen in Figure 1, most of the proceeds occurred in just two years: (1) in 1996-97 when the state received $53 million for the Agnews Developmental Center East property and (2) in 2001-02 when the Agnews West property was sold for $149 million.
We would note that the Governor's budget anticipates two large property sales in 2003-04: (1) prison property at Chino (discussed further below) and (2) property on the University of California (UC) Riverside campus valued at $55 million (see the UC write-up later in this chapter).
Public agencies traditionally sell property in an "as-is" condition. However, the fair market value of as-is property is usually discounted because the property buyer is taking the risk of securing needed land use approvals. These properties often increase in value once a local jurisdiction changes the approved land uses from public to private use. Consequently, the buyer of the property ultimately enjoys a "windfall" because of the discounted price that was initially paid for the property.
The Asset Planning and Enhancement Branch (APE) within DGS is tasked with maximizing the value of surplus property prior to sale, so that the state shares in the windfall by not selling property at a discounted as-is price. The APE performs an initial assessment of surplus properties to determine which ones have the most potential value. (Many state properties are still sold as-is because the cost to enhance their value would exceed the potential sale price, or it is doubtful their value can be in creased.) The initial review by APE identifies the market, planning, economic, entitlement, and legal work that will be needed to enhance the value of the property.
If the APE assessment determines that a property has sufficient value potential, it will begin the necessary work to maximize the sale price for the state. Examples of this work include assessing the necessary remediation work needed for a property, working to get local jurisdictions to change zoning ordinances to allow future development, collaborating with local jurisdictions to include the property in a master use plan, and working with local opposition groups to find acceptable and/or compatible uses for the property.
The two most significant tasks undertaken by APE appear to be determining the best use for the property that will support the highest land value, and getting the necessary "entitlements" (such as zoning designations) from local jurisdictions. Once APE has performed these tasks, it solicits potential buyers for the property and begins to negotiate a purchase price. Because the buyer knows that the property can be developed for a specified purpose and that it has the necessary entitlements, his/her development risk is greatly diminished. As such, the state is able to demand a higher sales price.
Property Sales That Utilized APE. The APE performed value enhancement work on the Agnews Developmental Center East property, in which the state netted approximately $53 million, and on the Agnews West property, which sold for $149 million. We understand that the Agnews East Property had an as-is appraisal of $18 million to $30 million, and the Agnews West property had an as-is appraisal of roughly $50 million. Based on the as-is values of these two properties, it would appear that APE's efforts increased the sale price of these two properties.
It is our understanding that APE also conducted extensive value enhancement work on the sale of 470 acres located at the California Institution for Men in the City of Chino, San Bernardino County. The sale of this property is currently in escrow, and the Governor's budget anticipates receipt of over $100 million in the current year from the sale of this property.
As described above, the state's surplus property program does not annually produce major General Fund revenue. Surplus property sales exceeded $20 million in only two of the last ten fiscal years. This is because most surplus state property is not highly valued land. Generally, the state is attempting to sell unneeded field offices, laboratories, armories, fire stations, and small parcels adjacent to larger state facilities. That is, these are small, noncontiguous parcels that have little development potential or value.
The surplus property program's ability to generate significant General Fund revenue is limited to those infrequent occasions when a large campus-like facility near a major urban area is closed—like the Agnews Developmental Center. As noted earlier, the potential closure of various correctional facilities may provide further opportunities for significant General Fund revenue from the sale of such assets. As we describe above, however, even after facilities are closed and properties declared surplus, there is a long and involved process in disposing of surplus property. In other words, it takes time to actually realize General Fund revenues from the sale of such property.