Audit: Studio complex property overvalued

‘Obviously public funds are involved, and we don’t want to shortchange the taxpayers of this city. The city is the owner, the developer, the landlord and also the tax collector. And that raises the perception of a bias on the behalf of the city.’
— Paula Grivins
Allen Park City Assessor

Sunday Times Newspapers

ALLEN PARK – Property purchased by the city for the controversial studio center project was overvalued by more than $4 million, a recent audit says, but officials are working to correct the situation.

To cover the loss, the city borrowed $1.4 million from the general fund, according to an audited report of city finances the fiscal year ending June 30, 2010, that presented at Tuesday’s City Council meeting. That leaves the city with $1 million surplus in its 2010-11 budget of $22.12 million.

The auditor’s report shows the city took a $4 million impairment loss on the lease for the 104-acre Southfield Road property to reduce the studio project’s overstated book value to fair value.

An impairment loss is a special, nonrecurring accounting charge used to write down an asset with an overstated book value. An asset is considered to be value-impaired when its book value exceeds future net cash flows that the asset can be expected to generate.

The city acquired the site in November 2009 for $25.28 million using bond proceeds to purchase the land and buildings. Additional bonds valued at $2.725 million were used to fund needed infrastructure improvements.

Randall Darnell of the certified public accounting firm Darnell and Meyering of Taylor, which performed the audit, said Monday that city officials have said they intend to lease the two buildings on the site and sell or ground lease the remaining vacant land. The latter term means the city would own the land but lease the right to build on it.

The audit also showed a $1.7 million operating loss for the Southfield Road lease property fund and a nonoperating loss of $4.9 million. It also showed that the fund is the only one in the city’s budget that has not maintained a positive balance.

Bond interest expense of $1.3 million and the $4 million capital asset impairment were the two largest nonoperating revenue expenses. The site’s $1.37 million operating revenues were offset by $1.7 million worth of operating losses.

The report also says that Allen Park increased its overall investment in capital assets more than 15 percent during the fiscal year primarily as a result of the Southfield Road property acquisition.

The report says the city’s capital assets were acquired to provide services to the public. That means the resources to pay for assets must come from another source, since capital assets themselves cannot be used to satisfy the debt or liability used to acquire the capital asset.

The report also notes that the city’s major sources of revenue are property taxes and state shared revenue. It notes that property value decrease has occurred throughout the state while expenses continue to increase.

The city’s five-phase revitalization plan, implemented in 2007, will pursue economic development and reinvestment during the current fiscal year.The goal of the reinvestment phase, the report says, was to have the city invest in “a strategic area designed to result in job creation, commercial growth and business diversification.”

Darnell said the city’s unrestricted general fund balance going into the current year was approximately $1 million, but he cautioned that state revenue is always decreasing.

City Administrator Eric Waidelich cautioned that the $1 million unrestricted fund balance would be maintained only if the city stays on budget through the end of the current budget year.

“Every penny that we are under budget, every dollar under budget is another dollar that we can set aside for next year,” he said.

New appraisal will help
City Assessor Paula Grivins said outside appraisal of the Southfield Road complex properties would keep potential buyers or lessees from thinking the city inflated the property’s value in order to collect more taxes.

She received approval from the council to hire an outside consultant to conduct the appraisal before any sales or leases take place.

“Obviously public funds are involved, and we don’t want to shortchange the taxpayers of this city,” Grivins said. “The city is the owner, the developer, the landlord and also the tax collector. And that raises the perception of a bias on the behalf of the city.”

Grivins suggested following Darnell’s recommendation to hire professional appraiser David Heinowski. An initial appraisal, of the buildings that house the Stautzenberger Institute and that formerly housed Unity Studios and the Lifton Institute for Media Skills, is expected to be completed by Feb. 1 and would cost $6,500.

Consulting services for the remainder of the property would be on an hourly basis, with certain caps that would require additional client oversight or approval if they are reached.

Grivins emphasized that the property is not exempt from taxation, and that the city collects taxes for itself and other taxing authorities.

“The city leases the property to tenants and passes those taxes on to the tenants,” Grivins said. “The city sets the value of the property for tax purposes. So I’m proposing you hire an independent fee appraiser to do the appraisal for the 2011 assessed value.”

However, Finance Director Timothy McCurley said he is not sure whether the consultant fee could be paid out of the bond funding for the project; he said he will ask city attorneys for an answer. Grivins said the city will benefit from the appraisal because of lower costs by avoiding property tax appeals, retaining existing tenants and hopefully attracting new ones who will know they are going to be treated fairly. She said it also will lower costs for the other taxing authorities by avoiding any tax appeals.

Because the property is in the Downtown Development Authority area, Grivins said the reappraisal will positively impact the authority’s revenue stream, but acknowledged that the economy and the declining market add complexity to the current property development.

“In this atmosphere you may have investors who want to pay the lowest price possible,” Grivins said. “I don’t want that to happen in this city.”