• The Public Utilities Commission loses at least $150,000 annually in rental revenues by failing to adjust property rents under the terms of existing leases, conduct appraisals, and collect taxes. For example, the Public Utilities Commission loses an estimated $100,000 annually under the lease agreement with All Auto Dismantlers because the Public Utilities Commission has failed to adjust the monthly rent to fair market value under the terms of the lease. The Public Utilities Commission, which obtained jurisdiction over the subject property in 1997, when the Clean Water Enterprise was transferred from the Department of Public Works to the Public Utilities Commission, has lost an estimated $630,000 in rental revenues from 1998 through 2004.
  
  
• The Public Utilities Commission also faces significant environmental risks and hazardous waste clean up costs under the lease with All Auto Dismantlers. Although the current lease agreement with All Auto Dismantlers, implemented in 1989, requires that All Auto Dismantlers (a) indemnify the City against losses from environmental hazards and (b) maintain insurance of $1 million, the estimated cost for clean up of existing oil contamination on the leased property in 1990 was more than $500,000, and could now exceed the $1 million insurance requirement. Further, the $1 million policy is for general liability and does not cover environmental clean up costs.
  
  
• Although the Commercial Land Management Operating Manual, adopted by the Public Utilities Commission in 1999, requires the Real Estate Services Bureau to maintain an inventory of all available Public Utilities Commission property considered to be suitable for leasing, the Real Estate Services Bureau does not have a complete inventory. Therefore, the Real Estate Services Bureau is unable to (a) determine if all real properties that are currently leased are leased for the optimal use, and (b) identify properties currently not rented with leasing or permit potential. Consequently, the Public Utilities Commission cannot determine if it receives maximum lease revenues for all properties that could be leased.
  
  
• The Public Utilities Commission loses an unknown amount of rental revenue by failing to enter into competitive bids for the lease of various properties. Public Utilities Commission policies require competitive bids if there is more than one potential user. However, a review of eight lease files, which were not competitively bid, found that none of the files contained documentation on why the leases were not competitively bid nor on how the lease rates were set. For example, the Real Estate Services Bureau is negotiating a new lease agreement with Decorative Plant Services, Inc, for a 4.39 acre parcel with improvements including a greenhouse, offices and parking located near the Southeast Treatment Facility at 1150 Phelps in the Bayview neighborhood, which has not been competitively bid, although the property most likely has more than one potential user.
  
  
• The Real Estate Services Bureau has not consistently enforced and implemented the Public Utilities Commission's policies in the Commercial Land Management Operating Manual, including ensuring competitive bids for properties where possible, maintaining current rental property inventories, and obtaining Public Utilities Commission approval prior to leasing properties that could be declared surplus to the Public Utilities Commission's needs. The Assistant General Manager, External Affairs, should ensure that the Real Estate Services Bureau consistently complies with the Public Utilities Commission's policies.

Functions and Activities of the Real Estate Services Bureau

The Public Utilities Commission owns approximately 85,165 acres of land: 1,003 acres in the City and County of San Francisco and approximately 84,162 acres outside of San Francisco. The potential for development of a majority of these properties is severely limited; watershed lands must not be polluted or eroded, and water pipeline right-of-way holdings cannot have any structures or trees that would damage or prevent access to the water transmission pipelines. Additionally, many of the Public Utilities Commission property holdings have limited use potential because of the size, shape and surrounding land uses, and consequently the adjacent properties are often the only potential users. Nevertheless, there are various compatible uses for these properties that are consistent with water policy priorities and are revenue generating.

The Real Estate Services Bureau primarily performs a leasing and permitting function for Public Utilities Commission property. The Real Estate Services Bureau issues permits and leases, subject to use restrictions, for land both inside and outside of the City.

According to its mission statement, the Real Estate Services Bureau is responsible for:

• Managing the Public Utilities Commission's commercial interest in lands and properties owned and occupied by Public Utilities Commission divisions and bureaus.
• Negotiating and managing permits and leases.
• Working with the Public Utilities Commission to develop commercially valuable uses of Public Utilities Commission properties consistent with its utility needs.
• Recommending policies and implementing procedures related to the use, rental, management, and disposal of such property.

In FY 2004-2005, the Real Estate Services Bureau managed 406 separate leases and permits of Public Utilities Commission property totaling approximately 34,690 acres. Therefore, 40.7 percent of the total 85,165 acres of land owned by the Public Utilities Commission is leased or under fee permit for use by private or other governmental entities. Notably, twenty-one agricultural leases, covering 28,759 acres, do not generate significant revenues, but provide watershed protection and fire suppression services. The remaining 5,931 acres of land leased or under fee permit represent 7 percent of all land owned by the Public Utilities Commission.

In FY 2003-2004, leases and permits yielded $9,164,426 in revenues, as summarized in Table 12.1 below. Projected revenues for FY 2004-2005 are anticipated to increase by approximately $500,000.

Table 12.1
Summary of FY 2003-2004 Lease and Permit Revenue Activity

Source: Real Estate Services Bureau

Nearly 48 percent of the total revenue from leases and permits comes from 7 lessees, totaling $4,390,004 in rent during FY 2003-2004. The major lessees include two rock quarry operations and two golf courses, listed in Table 12.2 below.

Table 12.2
Highest Revenue Producing Leases, FY 2003-2004

Source: Real Estate Services Bureau

The 1994 Budget Analyst management audit of the Water Department found substantial weakness in the Real Estate Services Bureau², including a lack of documentation about active leases and permits, limited lease and permit agreements which did not provide adequate insurance and environmental protections, and inadequate inspections of lease and permit uses.

The Real Estate Services Bureau has partially implemented four of the Budget Analyst 1994 Management Audit 11 recommendations. Specifically, the Real Estate Services Bureau has (1) created and maintained a listing of all leases and permits, (2) developed the Commercial Land Management Operating Manual, which includes policies for standard leasing rates, property monitoring, removal of encroachments, and environmental protections, (3) converted some permits to leases and increased rental revenues, and (4) improved the reporting and recovery for delinquent accounts. However, despite these significant improvements, there are still a number of ways the Real Estate Services Bureau and the Public Utilities Commission could improve its real estate practices.

The Public Utilities Commission adopted the Commercial Land Management Operating Manual in October of 1999 and includes all of the Public Utilities Commission policies discussed in this report.

Inventorying, Marketing, and Leasing Properties

According to the Commercial Land Management Operating Manual, the General Manager executes all leases and permits on behalf of the Public Utilities Commission. In five situations, the General Manager is authorized to execute permits and leases without first obtaining Public Utilities Commission's approval:

• All cottage leases, for employees' use of cottages at Moccasin, Crystal Springs Reservoir and in other locations,
• Leases and permits limited to 90 days in duration,
• "Nominal Value Rentals" not exceeding $100 per month in value or one year in duration,
• $2,500 one time fee permits (one year in duration), and
• All leases and permits that traverse utility crossings and use the Public Utilities Commission standard formula for calculating rent.

All other permits and leases, assignments, and subleases are to be submitted to the Commission for approval.

Further, according to the Commercial Land Management Operating Manual, the General Manager can implement leases and permits in addition to the leases and permits noted above at her discretion rather than submitting the leases or permits to the Public Utilities Commission for approval. Although the management audit did not find evidence of abuses of this policy, the policy provides an unnecessary level of discretion to the General Manager. Government agencies should provide an opportunity for public oversight in significant land and property transaction decisions. The policy for lease and permit approval should take into account the potential for abuses under non-ideal circumstances.

The Public Utilities Commission should delete the final sentence from Section 4.020 of the Commercial Land Management Operating Manual, deleting the provision authorizing the General Manager to implement leases and permits, except for specific leases and permits authorized under Section 4.020, at her discretion without Public Utilities Commission approval.

Inventory of Property Available for Lease

According to the Commercial Land Management Operating Manual, the Real Estate Services Bureau should establish and maintain an inventory of all available Public Utilities Commission property considered to be suitable for leasing. The Real Estate Services Bureau has identified 21 properties, totaling 387 acres, that are available for lease. According to staff, this list is not a complete or updated list. As described in detail in Section 11 of this report, the Department does not have an adequate property inventory. As a consequence, the Real Estate Service Bureau is unable to (1) determine if all real properties rented are in optimal use and (2) identify properties currently not rented with leasing or permit potential. Therefore, the Public Utilities Commission does not generate the highest possible rental revenue for all properties with leasing or permit potential.

The Real Estate Services Bureau Director should develop procedures to routinely update the inventory of property for lease and should document the Real Estate Services Bureau's marketing and leasing activities for properties available for lease, including providing a monthly report to the General Manager on the Real Estate Services Bureau's marketing and leasing activities.

Leasing Surplus Property

Although the Commercial Land Management Operating Manual requires that the Public Utilities Commission approve lease agreements for real property or land that may be declared surplus, the Real Estate Services Bureau does not consistently obtain approval from the Public Utilities Commission before entering into lease agreements for surplus land or land that may be declared surplus. Specifically, based on a review of 25 leases, three leases were entered into after 1999, when the policy manual was adopted, and appear on the Surplus Under-Entitled Properties Preliminary List: McCleanhan Horse Stables in San Mateo County, Treasure Island Trailer Court in South San Francisco, and the California Book Store with San Francisco City College.

The Assistant General Manager, External Relations should ensure that the Public Utilities Commission approves all lease agreements for real property that is surplus or may be declared surplus prior to the Real Estate Services Bureau executing a lease agreement.

Competitive Selection of Leases and Permits

The 1994 Management Audit found that most leases were entered into without exposing the properties to the market. Consequently, the 1994 Management Audit recommended that the Real Estate Services Bureau:

1. Accept lease bids in all cases where more than one interested party can be identified.

2. Expose all available property to the market by (i) providing copies of the inventory, as well as notice of specific leases up for renewal, to local real estate brokers and county planning officials, (ii) maintain lists of all property inquiries, and inform interested parties that outside bids will be accepted prior to renewal of an existing lease, (iii) purchase occasional newspaper advertisements to list properties with greatest lease potential.

To date, none of these recommendations has been fully implemented. Of the 109 active leases, only three, Crystal Springs Golf Course, Sunol Valley Golf Course, and Santa Clara Sand and Gravel, selected tenants through a competitive process. Additionally, the inventory of properties available for lease is not routinely provided to real estate brokers and county planning officials, and the Real Estate Services Bureau does not maintain a list of all property inquiries, and has never purchased a newspaper advertisement to list properties with the greatest lease potential. This continued failure to expose the majority of properties to market is likely resulting in a reduction in revenues.

According to the Commercial Land Management Operating Manual, the Real Estate Services Bureau should utilize a public bidding process if the Real Estate Services Bureau Director determines that there is more than one potential user and the bidding process may result in increased rent.

In the file review of 25 leases, eight leases were entered into or renewed after October of 1999, and in these eight instances, none were the result of a competitive process. Notably, these files did not include documentation stating that these lessees were selected without a competitive process because only one potential bidder was available or the bidding process would not have resulted in increased rent.

According to the Real Estate Services Bureau Director, in most lease agreements, no bid is warranted because the Public Utilities Commission's leases are the result of a direct negotiation with neighbors adjacent to the pipeline right-of-way. While this statement is accurate, the Real Estate Services Bureau should not negotiate a lease with the first potential lessee to inquire about a parcel, often the adjacent neighbor, without first analyzing and documenting whether there may be more than one potential user.

Of the file review's eight leases that were negotiated or implemented after 1999, two cellular telephone communication tower leases could have potentially been competitively bid: Metro PCS San Francisco and Metro PCS Burlingame. The lease files contained no documentation on why these properties were not competitively bid or on how lease rates were set.

Additionally, the Real Estate Services Bureau is in the process of negotiating a new lease agreement with Decorative Plant Services, Inc, for a 4.39 acre parcel with improvements including a greenhouse, offices and parking located near the Southeast Treatment Facility at 1150 Phelps in the Bayview neighborhood. The Decorative Plant Services lease expired in March of 2002, and the tenant has continued to lease the property on a month-to-month basis since that date. Although the property likely has more than one potential user, the new lease agreement, which is now under negotiation, is not the result of a competitive process.

The General Manager of the Public Utilities Commission should direct the Real Estate Bureau Director to document the analysis of whether there is more than one potential user and present this analysis to the Public Utilities Commission at the time the Public Utilities Commission considers approval of lease agreements. For permits and lease agreement where Public Utilities Commission approval is not required (in the circumstances outlined above), the Director of the Real Estate Services Bureau should maintain such analysis within the lease and permit file.

Lease and Permit Revenues

The Real Estate Services Bureau does not consistently apply rent increases, conduct appraisals, and collect taxes in accordance with lease provisions. In the review of 25 real estate lease files, the Budget Analyst found that Real Estate Services Bureau properly applied lease terms related to rental adjustments in the majority of cases. In a few instances the Bureau failed to apply the lease provisions related to adjusting the rental rate, reappraising the properties when given the opportunity, and collecting reimbursements for taxes paid by the Public Utilities Commission, resulting in foregone revenues.

All Auto Dismantlers (L3911)

In the lease agreement with All Auto Dismantlers, located at 39 Quint Street in San Francisco, the rent has not been increased in accordance with the lease terms nor has a timely appraisal been conducted. The Public Utilities Commission, which obtained jurisdiction over the subject property in 1997, when the Clean Water Enterprise was transferred from the Department of Public Works to the Public Utilities Commission, has lost an estimated $630,000 in rental revenues from 1998 through 2004. According to the terms of the current lease with All Auto Dismantlers, which commenced August 1, 1989, rent was to be increased annually through July 31, 1992, increasing from $3,400 per month on August 1, 1989 to $5,650 per month on August 1, 1991, and if the lease was still in effect August 1, 1992, the City was to establish a new monthly rent based on an independent appraisal. The All Auto Dismantlers rent was adjusted to $4,500 on August 1, 1991, one year after the rent adjustment date specified in the lease and has not been adjusted since that time. Further, the Department of Administrative Services Real Estate Division did not appraise the property until May, 2001. The 2001 appraisal found that fair market rent in for the property ranged from $12,361 to $16,206 per month, compared to the $4,500 per month currently paid by the tenant.

Bay Area Cellular Telephone (L3815)

The annual rent increases for this lease in 2004 and 2005 were 1 percent and 2 percent respectively, based on the percent increase in Consumer Price Index. The lease states, however, that the minimum rate increase is to be 3 percent. For 2004 and 2005, this oversight resulted in $1,277 in lost revenues over two years, or $639 annually.

Bianchi Joint Venture (L3836)

The annual rent increases for this lease in 2003 and 2004 were 1.4 percent and 1 percent respectively, based on the percent increase in Consumer Price Index. The lease states, however, that the minimum rate increase is to be 2 percent. For 2003 and 2004, therefore, this oversight resulted in $293 in lost revenues, or $147 annually.

KLA Instruments (L3554A)

According to the lease, every ten years the Public Utilities Commission can request a reappraisal of the leased property in order to raise the rent to fair market value. The request must be made in writing to the lessee 180 days prior to the ten-year anniversary of the lease commencement, which was July 1, 1985. In the spring of 1995, the Department performed an appraisal of the property leased to KLA Instruments and determined that the fair market rent should be $5,490 per month instead of the existing rental rate of $2,819 per month. The Real Estate Service Bureau failed, though, to submit its request for reappraisal in writing to the lessee, so it could not pursue the rent increase. Had it done so, the current rent would be approximately $85,959 per year instead of $44,240, which represents an annual loss of $41,719. Since 1996, the revenue loss totals approximately $367,330.

Mission Valley Rock Company (L3292, L2555A, L3821, and L3931)

In the Budget Analyst's 1994 Management Audit, a review of the leases revealed that the Mission Valley Rock Company lease did not require the company to reimburse the City for taxes and assessments, although another quarry lease with Santa Clara Sand & Gravel Company does require such reimbursement. Land assessments for the main Mission Valley Rock Company lease in FY 1992-1993 totaled $24,445. Although the lease is not scheduled to expire until the year 2012, the Management Audit recommended that the Public Utilities Commission require the Mission Valley Rock Company to reimburse taxes and assessments for the existing lease property as a condition of entering into a proposed lease agreement with the Public Utilities Commission for another 167-acre property. The Real Estate Services Bureau failed to implement this recommendation, and to date the main Mission Valley Rock Company lease does not require the company to reimburse the City for taxes and assessments for the main Mission Valley Rock lease, resulting in $11,222 annual costs to the Public Utilities Commission for taxes and assessments that should have been reimbursed by the Mission Valley Rock Company.

Recommended Actions to Improve Lease Management

According to the documentation in the lease files, the Public Utilities Commission failed to increase the rent or make other lease adjustments due to the tenant's financial difficulties, as in the case of All Auto Dismantlers, or Real Estate Services Bureau staff error, resulting in lost revenues of approximately $153,737 annually.

The Assistant General Manager, External Affairs, should direct the Real Estate Services Bureau Director to (1) adjust rents and conduct appraisals in accordance with lease agreements, (2) charge tenants for taxes and assessments uniformly, and (3) provide monthly reports to the Assistant General Manager, External Affairs, on the status of all leases. Further, the Public Utilities Commission should adopt a policy, requiring Public Utilities Commission approval for all adjustments or other actions that are outside the terms of the existing lease or permit agreement.

Preferred Contractual Agreement Types: Leases or Permits

In the majority of cases, the Real Estate Services Bureau issues permits instead of negotiating leases. According to departmental staff, the primary use for permits is to provide a vehicle for an interim use of a piece of property, or to provide a simpler format for an arrangement that involves a small parcel and a minor financial consideration. Permits are open-ended in duration, and provide few rights to the permittee.

Although permits give the Department greater flexibility in managing its properties, permits have two major disadvantages:

1. Permits are less valuable to the user than leases, because they do not provide secure rights to use of the property for a defined period of time, and therefore leases often command higher payments than permits.

2. Permits do not allow the Public Utilities Commission to require as much of a permittee as a lessee in terms of improvements to or maintenance of the property.

The 1994 Management Audit found that the Real Estate Services Bureau had historically issued permits in many cases where leases were more appropriate, and as a result, recommended that the Real Estate Services Bureau:

1. Work with the City Attorney's office to draft a Public Utilities Commission resolution that would clearly define the conditions under which a permit in lieu of a lease should be issued.

2. Commence a process of converting permits to leases.

3. Reappraise properties being converted from permit to lease to take into account the greater value to the tenant of a lease over a permit.

The Real Estate Service Bureau has partially implemented the recommendations to commence a process of converting permits to leases and to reappraise properties being converted from permit to lease to take into account the greater value to the tenant. Several existing permits have high annual fees and are for uses and terms similar to many of the existing 109 leases, which suggests that these permits may more appropriately be leases. Table 12.3 summarizes five examples of permits that should potentially be leases.

Table 12.3
Permits That Are Potential Leases

Source: Real Estate Services Bureau

According to the Director of Real Estate Services, the City Attorney has recently advised that permits are better than leases because they give the tenant less control over the Public Utilities Commission properties and therefore has recommended that permits be the preferred agreement type. However, because the property holdings vary in terms of importance to the water, clean water, and power enterprises, the decision to enter into a lease or permit based on the property protections and revenue considerations would vary. The Real Estate Services Bureau should work with the City Attorney's office to draft a Public Utilities Commission policy that updates and clearly defines the conditions under which permits and leases should be issued for use of Public Utilities Commission property.

Administrative Costs

According to the Commercial Land Management Operating Manual, the costs of monitoring and maintaining a leased property should not exceed the potential rent revenue. The Public Utilities Commission incurs costs for property clean up but does not appropriately account for these costs by tenant. For example, the Water Supply and Treatment Division had to clean up property, including mitigating stone dust and other debris, after a tenant, Stone Creations, vacated its property, but did not appropriately account for these costs. Further, the Real Estate Division does not maintain an accounting of their costs by lease. Therefore, the Department does not have the necessary cost information to evaluate whether the costs to monitor or maintain a leased property do not outweigh the potential rent revenue.

The General Manager should direct the Finance Services Bureau to work jointly with the Water Supply and Treatment Division to develop a system to track time and material costs to specific tenants. The Real Estate Services Bureau should collect such cost information from the Water Supply and Treatment Division, compile the actual costs to monitor and maintain leased property compared to rent revenue, and present this report annually to the General Manager.

Environmental Protection, Compliance and Property Inspections

Environmental Protection

The Public Utilities Commission currently includes provisions in property leases and permits to protect Public Utilities Commission property and reduce liability. Since 1999, the Real Estate Services Bureau has included provisions in all new lease and permit agreements, specifying insurance and indemnification requirements, environmental protection, and use restrictions.

However, the Public Utilities Commission faces significant risks or liability for lease and permit agreements entered into prior to 1999. For example, the Peninsula Sportsman's Club, a for profit organization, leased 17 acres of Bayside property from 1939 until 1994 to operate a trap and skeet range resulting in the accumulation of lead shot and clay pigeon debris. In 1996, the Department evicted the Peninsula Sportsman's Club from the property and shortly afterward, the Club declared bankruptcy, leaving no recoverable assets. The approximately $20 million cost to the Public Utilities Commission to cleanup this property is ongoing. The lease agreement between the Public Utilities Commission and the Peninsula Sportsman's Club lacked provisions to allow the Department to recover any of the abatement costs from the Peninsula Sportsman's Club's insurance carrier.

The file review found one example of a current lease agreement lacking insurance requirements, environmental protections, and use restrictions to adequately protect Public Utilities Commission property. All Auto Dismantlers leases the property at 3911 Quint Street in San Francisco, a 1.3 acre parcel in San Francisco's Bay View neighborhood. In 1990, a visual inspection that a consultant conducted at the City's request found evidence of soil contamination from oil leakage, and estimated that the cost of cleanup would be approximately $546,500. The City Attorney's Office advised the Clean Water Enterprise to establish the degree of soil contamination, and to seek legal redress for the clean up costs from the State, which transferred the property to the City in 1978. The City Attorney further advised that recovery of the clean up costs from the State would be unlikely. The current lease agreement, executed in 1989, includes indemnification for the lessor from lessee-caused contamination of property, and includes an insurance requirement of $1 million. However, the Public Utilities Commission does not have a current estimate of potential clean up costs, which may exceed the $1 million insurance coverage. Further, the tenant's insurance is a general liability policy and therefore does not cover environmental clean-up costs. The tenant continues to dismantle automobiles on the property. As previously discussed, the Public Utilities Commission has forgone approximately $630,000 in rent from this tenant for the period from 1997 through 2004.

The General Manager should direct the Real Estate Services Bureau, in coordination with the City Attorney's Office, to determine the extent and source of the contamination at 3911 Quint Street, and recover the costs attributable to All Auto Dismantler. Further, the Real Estate Services Bureau should terminate the lease agreement with All Auto Dismantlers and evaluate this property holding for its necessity for the Clean Water Enterprise, and its highest and best use, including declaring the property surplus to the clean water utility's requirements if appropriate.

The General Manager should also direct Real Estate to review all agreements entered into prior to 1999 to evaluate whether the insurance and indemnification requirements, environmental protection language, and use restrictions included in these contracts are adequate. The Real Estate Director should work with the City Attorney to include the necessary protections in these agreements at the earliest opportunity.

Compliance and Property Inspection

Contractual environmental protections and use restrictions can only be enforced if there is regular, on-site monitoring of property under lease or permit. In the 1994 Management Audit, the Budget Analyst found that the Bureau only inspected properties in response to complaints from the public or from operations staff who happen to observe a condition that appears to be a hazard. In response, the 1994 Management Audit recommended that the Bureau of Real Estate:

1. Identify high priority leases and permits for regular inspection regarding compliance with lease/permit terms.

2. Inspect directly or summarize contract terms and obtain cooperation from operations personnel to carry out inspections.

To date, none of the recommendations has been implemented. The Commercial Land Management Operating Manual requires that Real Estate Services Bureau staff thoroughly inspect all property under lease or having potential to be leased at least semi-annually in order to monitor compliance with lease terms. At the time of lease/permit commencement, a move-in form is to be completed and included in the lease or permit file.

Real Estate Services does not maintain a list of the inspections that have been done. Furthermore, in a review of 50 files, only 20 included inspection forms. There was never more than one inspection form found in any single file, and all inspection forms were filled out with minimal comments, providing little or no useful information. The most recent date of any inspection form was April 8, 1999. No move-in forms, as required by Public Utilities Commission policy, were in any of the reviewed files.

Real Estate Services Bureau professional staffing consists of one Director, one Senior Real Property Officer, four Real Property Officers, and one 1052 Information System Business Analyst position. According to the Real Estate Services Bureau staff, the four Real Property Officers visit and inspect leased and permitted properties, but the reporting component has been generally ignored unless a specific instance arises that requires documentation. Formal inspections still occur on a case-by-case basis, usually triggered when Public Utilities Commission staff from Real Estate Services Bureau or the Water Supply and Treatment Division find or are made aware of a use violation on a leased or permitted property. After the Water Supply and Treatment Division contacts Real Estate Services concerning the violation, Real Estate Services is responsible to remedy the situation.

The Real Estate Services Bureau should review its policies and procedures for inspecting properties and documenting inspections, including reviewing all leases and permits to identify those that are the highest priority for inspection, based on property use, location, or other considerations, and coordinate inspections with the Water Supply and Treatment Division staff who patrol rights-of-way and maintain watershed property.

Additionally, the Real Estate Services Bureau should review the inspection process and revise the inspection documentation form to address specific issues, including if the tenant is following use restrictions, and potential environmental degradation.

Lake Merced Properties

The Real Estate Services Bureau is responsible for managing the Public Utilities Commission's leases and permits, with the exception of the Lake Merced tract properties. The Recreation and Parks Department negotiates, manages and collects revenues for the Lake Merced tract. Lessees include the Harding Golf Course and the Pacific Rod and Gun Club. This arrangement dates back to a 1950 Resolution that provided the Recreation and Parks Department the right to occupy, use and improve, for park and recreational purposes, all of the area in the Lake Merced tract. The Pacific Rod and Gun Club's use of lead shot prior to 1994 has resulted in lead contamination of the surface soil around Lake Merced. The Public Utilities Commission faces legal costs, environmental risks and hazardous waste clean up costs associated with this tenant's use of the Lake Merced tract. The management audit did not review the Lake Merced Properties, which are currently managed by the Recreation and Parks Department, during the file review. Notably, however, the Public Utilities Commission and the Recreation and Parks Commission do not have a Memorandum of Understanding related to the use and maintenance of the Lake Merced tract.

The Public Utilities Commission and the Recreation and Parks Commission, in conjunction with the City Attorney's Office, should develop a Memorandum of Understanding for the Lake Merced tract properties which includes a joint protocol for management oversight and maintenance for the Lake Merced tract. A Memorandum of Understanding between the Public Utilities Commission and the Recreation and Parks Commission would be an initial step in identifying responsibility for and solutions to the Lake Merced land and property management, including potential environmental issues.

Conclusion

The Real Estate Services Bureau has implemented policies and practices to better manage Public Utilities Commission property, including (1) creating and maintaining a listing of all leases and permits, and (2) implementing the Commercial Land Management Operating Manual, which includes policies for standard leasing rates, property monitoring, removal of encroachments, and environmental protection. However, despite these policies and practices, the Real Estate Services Bureau and the Public Utilities Commission should improve real estate practices related to (1) executing leases and permits, (2) inventorying property available for lease, (3) leasing surplus property, (4) collecting lease and permit revenues, (5) negotiating leases instead of issuing permits, and (6) inspecting leased and permitted property for compliance with lease and permit terms.

Recommendations

The Public Utilities Commission should:

12.1 Delete the final sentence from Section 4.020 of the Commercial Land Management Operating Manual, removing the provision authorizing the General Manager to implement leases and permits, except for specific leases and permits authorized under Section 4.020, at her discretion without Public Utilities Commission approval.

12.2 Adopt a policy that defines the criteria that the Real Estate Services Bureau Director uses when determining if it is appropriate to put a property out to bid.

12.3 Adopt a policy that updates and clearly defines the criteria for issuing a permit or entering into a lease agreement for the use of Public Utilities Commission property.

12.4 Adopt a policy requiring Public Utilities Commission approval for all adjustments or other actions that are outside the terms of the existing lease or permit agreement.

The Public Utilities Commission and the Recreation and Parks Commission, in conjunction with the City Attorney's Office should:

12.5 Develop a Memorandum of Understanding for the Lake Merced tract that includes a joint protocol for management oversight and maintenance of the Lake Merced tract.

The General Manager of the Public Utilities Commission should:

12.6 Direct the Real Estate Services Bureau Director to document the analysis of whether there is more than one potential user and present this analysis to the Public Utilities Commission at the time the Public Utilities Commission considers approval of lease agreements.

12.7 Direct the Finance Services Bureau to work jointly with the Water Supply and Treatment Division to develop a system to track time and material costs for work performed for specific tenants.

12.8 Direct the Real Estate Services Bureau, in coordination with the City Attorney's Office, to determine the extent and source of the contamination at 3911 Quint Street, San Francisco, and recover the costs attributable to All Auto Dismantler.

12.9 Direct Real Estate Services Bureau to review all agreements entered into prior to 1999 to evaluate whether the insurance requirements, environmental protection language, and use restrictions included in these contracts are adequate.

The Assistant General Manager, External Affairs, should:

12.10 Ensure that the Public Utilities Commission approves all lease agreements for real property that is surplus or may be declared surplus prior to the Real Estate Services Bureau executing a lease agreement.

12.11 Direct the Real Estate Services Bureau Director to:

(1) adjust rents and conduct appraisals in accordance with lease agreements,

(2) charge tenants for taxes and assessments uniformly, and

(3) provide monthly reports to the Assistant General Manager, External Affairs, on the status of all leases.

The Real Estate Services Bureau Director should:

12.12 Develop procedures to routinely update the inventory of property for lease.

12.13 Document the Real Estate Services Bureau's marketing and leasing activities for properties available for lease, including providing a monthly report to the General Manager on the Real Estate Services Bureau's marketing and leasing activities.

12.14 Maintain documentation in the lease and permit files on the Real Estate Services Bureau's analysis regarding the number of potential users for specific properties for permits and leases not requiring Public Utilities Commission approval.

12.15 Direct staff to maintain file records of all inquiries regarding properties currently under lease, so that prior to renewing a lease, bids could be solicited from all interested parties.

12.16 In conjunction with the City Attorney's Office, draft a policy to be adopted by the Public Utilities Commission that updates and clearly defines the conditions under which permits and leases should be issued.

12.17 Collect property clean up and other cost information from the Water Supply and Treatment Division, compile the actual costs to monitor and maintain leased property compared to rent revenue, and present this report annually to the General Manager.

12.18 In conjunction with the City Attorney, identify existing leases and permits that do not contain the Public Utilities Commission's insurance, environmental protection, and use restriction provisions, and develop procedures to include the these provisions in these agreements at the earliest opportunity.

12.19 Consider termination of the lease agreement with All Auto Dismantlers, and evaluate this property to determine (1) cleanup requirements, and (2) if the property is surplus to the clean water utility's requirements.

12.20 Include provisions requiring reimbursement of taxes on the original Mission Valley Quarry Company lease into any new lease agreements with the company.

12.21 Adjust rents, conduct appraisals, and collect taxes in accordance with lease agreements.

12.22 Continue converting permits to leases, when appropriate, and applying the policy defining the conditions under which a permits and leases should be issued for use of Public Utilities Commission property, should the Commission adopt one, as recommended above.

12.23 Review Real Estate Services policies and procedures for inspecting properties and documenting inspections, including reviewing all leases and permits to identify those that are the highest priority for inspection, based on property use, location, or other considerations, and coordinate inspections with the Water Supply and Treatment Division staff who patrol rights-of-way and maintain watershed property.

12.24 Review the inspection process and revise the inspection documentation form to address specific issues, including if the tenant is following use restrictions, and potential environmental degradation.

Costs and Benefits

Implementation of the Budget Analyst's recommendations would increase annual rental revenues to the Public Utilities Commission by a minimum of $153,737, and would improve real estate management practices.

¹ This acreage total for permits does not include the permits for 25,399 linear feet in fiber optic cables that cross Public Utilities Commission rights-of-way.

² In 1994, the Real Estate Services Bureau was called the Commercial Land Management Bureau and was in the Water and Supply Treatment Division.