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Monday, March 10, 2008

Vanguard Investigation Part III: The Grande Property Agreement

The Vanguard continues its multipart series of former DJUSD Deputy Superintendent Tahir Ahad, Total School Solutions, and fiscal mismanagement of the Davis Joint Unified Business Office during Tahir Ahad’s tenure from 1999 to 2006 as CBO of DJUSD.

The first segment of this series which ran on Sunday, February 24, 2008 examined the inherent problems involved in a conflict of interest. The conflict of interest we examined involved a series of disturbing findings of how Mr. Ahad used his position as Chief Budget Officer (CBO) with the Davis Joint Unified School District as a means by which to start up his own private company for his own private gain. In short, he used public resources for private gain, a serious breach in the public trust.

The second portion of the series ran on March 3, 2008 and focused specifically upon the facilities planning and management beginning with the lost state matching funds for Montgomery Elementary, problems with Korematsu and eventually the King High debacle which led to the new school board finding out exactly what had been going on with the district’s facilities construction money. Basically money was shifted from later projects to make up for lost matching funds for Montgomery, lower than expected matching funds for Korematsu, and other cost overruns. Instead of acknowledging the depths of the problems, Mr. Ahad asked the school board in 2005 to pass a COP (Certificate of Participation), a form of debt financing, to pay for King High and some other projects. In 2006, the board learned that they only had half the money they needed to fund King High, and they realized that money had been shuffled, but only after an extensive investigation and the temporary halting of construction activities at King High.

This segment will continue to look at the facilities funding problems and other fiscal management issues. We examine the property exchange deal involving the Grande Property, which was a highly secretive and unusual process that we will argue violated a number of the California Education Code’s provisions for the sale of public surplus property.

Next week, we will also examine the FCMAT report and Consultant Terri Ryland’s findings. Future segments will include the efforts by the school district to rectify the problems that existed under Tahir Ahad and former DJUSD Superintendent David Murphy; some of which have already been discussed in previous issues. We are also following up on several different reports from other school districts about similar problems with Total School Solutions and Tahir Ahad. Last week in the Modesto Bee, a story was written about the Waterford School District. We will be looking further into that situation.

Grande Property

In 1971, the Davis Joint Unified School District purchased the Grande Property, which is located in North Davis, for the use of an elementary school in anticipation that Davis would continue to grow in a northern direction. They paid just under $60,000 at the time for that property; however, nothing was ever built and growth patterns in Davis have not continued north of the city.

With the growth in the real estate market during the past decades and inflation of housing and property values, the property is worth at least 100 times the value it was purchased, if not more.

The district realizing that it would likely not use the property for a future school began in the late 1990s to look into selling or exchanging the property. Those efforts moved into high gear in 2005.

Complicating any sale of school property is the Naylor Act or Education Code Section 17485 which governs the sale of certain land owned by a school district.

According to the City of Davis’ attorney, Harriet Steiner, the Naylor Act applies if the property meets three specific conditions. First the land must be used at least in part for “outdoor recreational purposes and is open space land particularly suited for recreational purposes.” Second, the land must have been used for those purposes for at least eight years. Third, there can be no other publicly owned land in the area of the site that is adequate for meeting “the existing or foreseeable needs of the community for recreational and open space purposes, as determined by the public agency proposing to purchase the land.”

If the Naylor Act applies:
Before selling or leasing the land, the district’s governing board must first offer it for sale or lease to the city within which the land is situated. § 17489. If offered for sale to the city, the city must notify the district of its intention to purchase the land within 60 days. § 17489. If the city chooses not to acquire the property, the district must then offer it to park districts, if any exist, and then to the county. Id. The selling price must be not less than 25% of the fair market value and not less than the school’s cost of acquisition, as adjusted for increase in the area cost of living3 and any improvements made by the school. § 17491.
There was a good deal of debate at that time and really even now as to whether or not the Naylor Act even applied given the third provision. There is also a good degree of speculation as to whether or not the city council at that time would have invoked the Naylor Act. Many claim that the city was not interested in the land, although those on the other side mention that at least one councilmember was interested in the use of the Naylor Act. However, the fear was that the school district could lose the property and gain just 25 percent of its worth should the city council choose to invoke the Naylor Act.

As a result, the school district went to great efforts under the leadership of Superintendent Murphy and Tahir Ahad to avoid an open sale that would risk a potential invocation of the Naylor Act. These tactics raise serious ethical and perhaps legal concerns.

From the start, the district met in closed door sessions and in secret during discussions involving the sale of the Grande Property. Instead of noticing the public via the public notice section of the newspaper as is generally required for such sales of public land, the notice was buried in the classified section of the Davis Enterprise where few would be looking for such a public notice.

The arrangement that Superintendent David Murphy and Tahir Ahad had employed by October of 2005 was a land swap that involved a UC Davis property that was the home of Fairfield Elementary School. This piece of property that the university had not wanted was offered to Davis Joint Unified for at least three years prior to this land exchange. The university had been willing to simply give DJUSD the Fairfield School property at no cost.

Instead, the school district would enter into an agreement with BP Equities in which BP Equities would pay the school district $4.5 million in exchange for helping the school district to acquire the 10-acre site west of Davis. In essence, Davis Joint Unified would trade BP Equities the Grande Property in exchange for $4.5 million and the Fairfield School.

Coincidentally, this $4.5 million happened to be the same monetary amount that the district lost out on matching funds from the state when they missed the Montgomery Elementary school deadline. Questions have arisen as to whether the speed, urgency, and also secrecy of this deal had something to do with that lost funding.

The land exchange generated a large amount of controversy in the community. Under pressure for the seemingly sub-market value sale price, the offer was raised on November 22, 2005 to $5.5 million and the deal was locked in.

Nevertheless, controversy continued to rain down on this deal. First, even the revised sales figure seemed too low. According to the best information the Vanguard has uncovered, even given a semi-secretive, non-open process, there were at least three other offers that the district had at the time of the sale that were considerably higher. One of these was from a West Sacramento developer who eventually threatened to sue the district. Another was from John Whitcombe who had proposed a trade of 160 acres for Grande. A third proposal offered anywhere from $7.5 million to $10.5 million and offered to front the development costs.

The existence of these higher offers caused former Davis Mayor Maynard Skinner, who was in attendance at the November 22, 2005 meeting, to proclaim angrily that the district had just “kissed” away $2.5 million.

The problems with the Grande deal were not merely fiscal in nature. There were also severe procedural problems with the manner in which this deal came down. From all appearances the District simply did not follow the procedures that were outlined in the Education Code for the sale of surplus school property.

Education Code Section 17466 specifies that ordering the sale or lease of any property must be done in open session at a regular open meeting. However, this by all accounts did not occur.
“Before ordering the sale or lease of any property the governing board, in a regular open meeting, by a two-thirds vote of all its members, shall adopt a resolution, declaring its intention to sell or lease the property, as the case may be. The resolution shall describe the property proposed to be sold or leased in such manner as to identify it and shall specify the minimum price or rental and the terms upon which it will be sold or leased and the commission, or rate thereof, if any, which the board will pay to a licensed real estate broker out of the minimum price or rental. The resolution shall fix a time not less than three weeks thereafter for a public meeting of the governing board to be held at its regular place of meeting, at which sealed proposals to purchase or lease will be received and considered.”
Section 17232 requires that the process must be open and remain open for no less than 60 days. The provision includes for the transfer of property in addition to outright sale.
“A school district's offer to sell or transfer the land shall be made to all park districts, cities, and counties in which the school district is wholly or partially situated pursuant to this article and shall remain open for not less than 60 days. The sale or transfer shall be made to whichever public entity first accepts the offer, or whichever public entity can negotiate satisfactorily for the purchase or transfer of the surplus land.”
Furthermore, the education guidelines stipulate that “a request to waive the bidding process for a lease or sale of surplus real property” must assure a number of things including that “no other state code section or another agency’s jurisdiction will be nullified in order for the request to become effective.” Furthermore, “waiver requests generally indicate that districts have complied with the Education Code requirements but have been unsuccessful in selling or leasing the property…” Education Code Section 33050.

In fact, the district did not request any such waiver. It certainly did not go through the normal process and failed to get a viable offer. No effort was ever made to go through a public, open bid process as the stipulation for waiver would seemingly require.

Furthermore even if granted the waiver, the district still must go through an open public process at a “regular open meeting” and “the governing board will announce, at a public meeting, the applicants deemed to be qualified.”

Education Code Section 17387 specifies:
“It is the intent of the Legislature to have the community involved before decisions are made about school closure or the use of surplus space, thus avoiding community conflict and assuring building use that is compatible with the community's needs and desires.”
Furthermore per Education Code Section 17388:
“The governing board of any school district may, and the governing board of each school district, prior to the sale, lease, or rental of any excess real property, except rentals not exceeding 30 days, shall, appoint a district advisory committee to advise the governing board in the development of districtwide policies and procedures governing the use or disposition of school buildings or space in school buildings which is not needed for school purposes.”
One of the requirements per Education Code Section 17389 is the appointment of a “school district advisory committee made up of no less than seven members and no more than 11 members. The term that those who have followed this process the last few years might be familiar with is the 7/11 Committee—so-called for the membership requirement. But in 2005, this was body was not formed.

Basically the Davis School District did not follow Education Code in the original Grande Property agreement with BP Equities. It was a secretive, closed door process that appears, to this non-lawyer, to have violated each of these provisions of Ed Code.

With a new board in place in the fall of 2005 and Board Members Gina Daleiden, Sheila Allen, and Tim Taylor on the board, the concerns of many in the community led the school board to re-examine the issue on March 16, 2006.

Davis City Manager Bill Emlen effectively took the Naylor Act option off the table during this meeting. According to the minutes from the meeting, “Mr. Emlen noted the city’s interest right now is on the best project for that neighborhood.”

Bill Emlen told the board, “The Naylor Act although relevant probably isn’t a defining factor in this case.”

Maynard Skinner speaking as a member of the public said, “In my opinion, the previous school board was in violation of the Brown Act, if not de jure, then de facto…”

Brian Purcell, the President of BP Equities was asked by then School Board Member Jim Provenza if there had been an appraisal on the Grande Property done prior to the agreement. Mr. Purcell told the board that there was not.

Jim Provenza would move to withdraw from the agreement. Tim Taylor seconded that motion.

School Board Member Keltie Jones told the board that she had serious concerns about withdrawing from the agreement.
“I have serious ethical concerns about withdrawing from this agreement; I think it was entered into in good faith. I think it was entered into with the understanding that this was an agreement that we would follow through with.”
She argued that she did not believe that property values in Davis were increasing and that the district could end up with less money.

Jim Provenza then issued forth a lengthy statement on the Grande Agreement from the dais.
“I have an ethical concern about going forward because I feel that the process from the beginning was flawed. And it’s not because of anything that Mr. Purcell did, he was negotiating with Tahir Ahad in good faith, but our process I believe was flawed from the beginning. To begin with it was not actively marketed. An ad was placed in the paper the Friday before the weekend with proposals due on Wednesday. A lot of people didn’t even hear about it until it was too late. Another ad was placed in a trade journal. I spoke to several realtors and developers who felt they were not wanted in the process. That a particular result or particular developer was desired from the beginning of the process. Whether that’s true or not that’s the perception that’s out there. But we did not have the type of active marketing to find everybody out there that might have been interested in the property, and getting bids.

Those bids that we did receive we received one as high as $9 million. We were told, well don’t pursue that one because we were told you have to exclusively negotiate. But we ended up negotiating with a single developer for what was initially a $4.5 million offer. There was no appraisal done before we entered into this agreement until the very day that we voted the first time. That was the first appraisal that we received that was done that week, although I had requested one several times. The response and I’m sure it was in good faith, was it doesn’t make sense to do appraisals, they always come out too low or they always come out lower than the amount being offered. On the night that we voted for $4.5 million, we had an appraisal that said it was worth $6.3 million. Remarkably, we went ahead anyway, but with an escape clause.

We sought two other appraisals. But prior to those two other appraisals we had a letter from the city making Naylor Act claims which was forwarded to those appraisers. I believe that that letter affected those appraisers and I think it affected the amounts of the appraisals. I can’t say for sure that’s it, but it makes me really question the process.

What I heard from one of the appraisers was that he was feeling pressured to come up with a lower amount. That made me question the process. We proceeded with an agreement that had various escape clauses. BP equity has the right to walk out of this deal for no money today—that’s what was written into the agreement. This district has the right to withdraw from the agreement.

If I felt that this process was fair and open to everyone, I would feel comfortable going forward. One of the things I found when looking for an example at one of the Public Record Act requests about documents concerning this, is that there was confusion even as to information as to how the deal was going to work. I don’t think it’s anyone’s fault, I don’t think it was intentional, but I think the process was flawed. I think that the prior board wanted to conclude this agreement before the new board was seated. I think that we were, as a board, giving away this property at a fire sale price. I can’t prove that, but that’s my impression. And I feel as if I have a fiduciary duty on behalf of the taxpayers and on behalf of the students of this district, to make sure that we are getting the most for this property.”
Jim Provenza’s statement confirms a number of aspects of this process that we have mentioned. To begin with the property was not actively marketed. That raises questions about the sale price that was obtained. There was a reluctance to get an appraisal for the property. When Mr. Provenza requested an appraisal, a number of excuses were furnished in an attempt to avoid such as appraisal that would show the reality of the deal that the district was getting.

By far the most important implication is that one of the appraisers was “feeling pressured to come up with a lower amount.” While the appraiser would not go on the record about this incident, he did confirm the accuracy of Jim Provenza’s public statement. It appears that the district, and specifically Superintendent Murphy, apparently in trying to justify the low price for Grande, is alleged to have attempted to obtain a lower assessed price for the property. That is the opposite of what one would expect from a district that was badly in need of funds.

To this day, there remains no good answer as to why the Superintendent and CBO did this. One can only speculate on the rationale.

Current Board President Sheila Allen told the Vanguard during our interview was asked about reversing the decision to sell Grande:
“My recollection of why we reversed the decision—I think it was in my first meeting—is because I didn’t think it was the best deal for the taxpayers and the students of the district. I thought that we could do much better financially with an open process for the community. I had a problem with the process and with the amount of money and so I wanted us to have an opportunity to come in and start over. I truly believe—we’ll have to see what get for the sale price of it and subtract off because we have had some consultant work on it—but I can’t to see exactly what it is in the end that will have done a better service for the students.”
Current Board Vice President Gina Daleiden:
“In all of my conversations, before I was elected and after I was elected, in reports to the board, so my conversations with people who talked to me individually and also who did reports to the board who were professionals in land use/design/development field, the consensus was that Grande would be much more valuable sold as entitled property instead of as raw land which was what the first sale/ exchange was to be. Particularly if the school district as a public entity could find a way to work cooperatively with the city as a public entity to help us along with the entitling of that property we would really increase the value to the developer who would eventually buy the entitled land.”
Why was this agreement rushed through? Was it an effort to cover up for the loss of Montgomery? Was there another financial relationship between members of the district and BP Equities? That is not clear. Jim Provenza would not speak on the record beyond what he said at the public meeting in March of 2006. And those currently seated on the board were not in a position to know.

The district working with the city and developers is working on an entitlement process at present that is likely to bring in a far more lucrative sale from the property.

Current Board Vice President Gina Daleiden would explain the current process.
“The board has had a subcommittee of me and Tim Taylor, along with two members of the city council Don Saylor and Steve Souza. Katherine Hess from planning is staff for the city and Tom Lombrazo, who is a professional in land use and design is our staff person on this. We’ve been meeting including the neighbors in public—they are public to the extent that anybody is welcome to come, often the Grande neighbors are the only ones who choose to come. Usually reporters come in and out and I think just one other community came, maybe we’ve had two.

We can work cooperatively with the neighborhood association and have an open process. We have an MOU/MOA signed by the full board and the full city council… It basically says we’re going to work cooperatively together and try to maximize the value for the school district as well as fit the existing neighborhood and be a positive project for the town. We’re actually getting pretty close to being able to go back to the full board to get a decision on something to take to the city to their planning department… We’re going to put a tentative map on the property that shows how many lots and then we will sell those. The board will decide when to sell those and how.”
In their November 18, 2007 Op-Ed in the Davis Enterprise, Marty West and Joan Sallee argued:
“When we left the school board in December 2005, the finances of the school district were in good shape. Any financial mismanagement that has occurred has been on the 2006 and 2007 school board's watch. In early 2006, the board majority rescinded the $5.5 million contract we had signed to sell the Grande Avenue site, thus jeopardizing funding for building a student commons at the high school and modernizing Emerson Junior High School.”
In fact, what more likely would have happened is that $5.5 million would have simply vanished into the facilities problems that we discussed last week. However, instead of taking out a COP to pay for King High in 2006, the sale of the Grande would have covered it. It seems fairly clear that the Superintendent and CBO would then have been able to have avoided the discovery of the missing King High money the following year.

Summary and conclusions:

The Davis Enterprise on January 10, 2008 reported that a consensus, at least a conceptual agreement between the School District, the Neighborhood Association, and the City.
“The new school board formed a 7/11 Surplus Property Committee — so named because state law specifies the committee should have between seven and 11 members — that recommended the district sell the property. The money from the sale be used only for school facilities, not salaries.

The committee, along with city and school staff, and members of the Grande Neighborhood Association, reached consensus on a plan that features 39 lots, a workable traffic pattern, and greenbelts flanking the west and north edges of the site.”
Several things have changed with the school district, including unprecedented cooperation between the city of Davis and Davis Joint Unified to ensure that the process benefits both the city and the schools.

One of the common denominators during both King High and Grande under Tahir Ahad and David Murphy, was the lack of communication and the almost combative and adversarial relationship with the city.

It is important to note that the sale of Grande will not alleviate the current fiscal crisis in the school district. The money from any sale could only go to facilities and not to the general fund.

However it is pretty clear from the public record and a cursory examination of the law, that the original Grande Property sale made little fiscal sense and it certainly pushed up against the laws of public meetings and the Education Code.

---Doug Paul Davis reporting