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The Institutional Real Estate Letter

Lost and Found

Taking Inventory of the Publicís Real Property Assets

Anthony Randazzo
September 2, 2010

Public-private partnerships (P3) and other types of public to private transactions have been highly touted models for developing and managing infrastructure in the United States. And in the midst of severe government budget constraints, teaming up with the private sector for infrastructure projects is gaining wider acceptance.

However, for a variety of reasons, these models have not been adopted as quickly as some had anticipated. One of the primary hurdles yet to be cleared is the seemingly routine exercise of taking an inventory. Without knowing what is on its balance sheet, a government is not in a position to procure P3 and other privatization transactions, but surprisingly, many governments have a long way to go in this respect.

In 2007, then-Ohio state treasurer Richard Cordray realized his state had no idea how much land it owned. After a brief survey of 20 counties, Cordray uncovered more than 7,000 parcels of land owned by Ohio but missing from any state record keeping. A full-blown study of state-owned property since then has turned up thousands more undocumented parcels. This irresponsible management of public lands happened because the state did not have the kind of basic property and asset data available that a well-run business or responsible family relies on to manage its finances.

The questions of how much land or how many buildings a state owns should be simple to answer, but they are not. In fact, most states do not have a complete inventory of their land and assets, nor a system for managing those resources. Many states have good, narrowly focused inventory systems, focusing specifically on mineral resources, vehicles or office furniture. But this is not enough.

Furthermore, most state governments that do have some kind of inventory of their real property, which comprises the land and everything on it, are not productively managing what they own, leading to frequent misuse and underutilization of land and assets. And states are not doing much to change this.

Ohio has realized its problem, and the value of an inventory. A 12.9-acre piece of land near Columbus was sold for nearly $200,000, generating cash for the state and potential tax revenues from the property usage. But Ohio is one of only a few. Roughly two-thirds of the states have little to no idea what they really own.

In 2005, Rhode Island embarrassingly realized it was renting office space near vacant state-owned properties. But five years later, there is no public, comprehensive, centralized, accurate, useful system for tracking and managing state-owned real property to be found. In fact, repeated calls to the governor's office and various state agencies found no one who could provide any knowledge of an inventory of state-owned property.

Rhode Island and other states could learn from Ohio. Very basic steps, such as using geographic information system (GIS) imaging to map all state property or requiring all state agencies to use uniform methods when reporting the status of their real property, would greatly aid the establishment of a real property inventory (RPI) that could assist government officials in saving money through divestment of surplus or underutilized property, cutting waste, managing facility operations more effectively, reducing maintenance costs, meeting compliance standards, and being better stewards of public property.

With 41 states facing a collective budget shortfall of $350 billion for 2010 and 2011, governors and legislatures (even mayors and county executives) will need to work hard to get government costs and waste under control. RPIs are a powerful tool to help in that process.

Real Property Inventories

A real property inventory is simply a written record of what land and assets you own. Real property assets are typically immovable property, such as office buildings, warehouses, heavy equipment or bridges. Governments also can track additional property, such as vehicles, in a comprehensive inventory.

Inventories can be built in many different ways, depending on the policy goals of the government developing the records. They can be put online for public access or kept confidential on state or municipal computers. But whatever the shape an RPI takes, the end product should be able to answer five questions: What do we, the governing entity, own? Where is what we own located? What is the condition of what we own? What is the value of what we own? What is the best use of what we own?

A good real property inventory also will include information on properties leased or otherwise managed by a governing entity. RPIs should include all available data about catalogued property, providing a comprehensive view of the resources available to a government, and how resources are being used to maintain and operate property.

Benefits of Real Property Inventories

Real property inventories have a wide range of applications and value. The first, and potentially the most lucrative, benefit of a comprehensive list of land and assets, up to date with their current use, is the ability for a government to assess what property it might be able to sell or lease in order to generate cash in times of economic crisis.

Divesting assets frequently provides upfront cash payments that can help to pay down current deficits. At the same time, the government can get rid of an unproductive or underproductive asset or piece of land that is sapping resources. This furthermore increases the tax base while also providing private sector investment opportunities that expand economic growth, which in turn brings in further tax revenue.

A second core benefit of RPIs is that the process of developing and maintaining an inventory allows government officials to assess their costs in managing property to find ways of being more efficient with taxpayer money. Inventory information helps state and local budget managers plan with more precision, efficiency and cost effectiveness.

Further benefits of inventories include helping growth managers understand real-time developments in the state, assisting in monitoring the effectiveness of spending projects, and even providing nonfinancial benefits, such as legal compliance and mapping systems for emergency response units.

To take full advantage of these benefits, states need to take a three-step approach. First, to know the full range of assets available to be sold or leased, states need to actually assemble a comprehensive and accurate real property inventory to review. Importantly, the RPI should be accessible, but also understandable. Alaska's online inventory of land serves is an example of how a comprehensive, detailed database can be hindered by a dense and difficult-to-navigate interface. This plus the pervasive use of impenetrable jargon makes Alaska's inventory system time-consuming for citizens. To be fair, though, Alaska is ahead of the curve in having an online RPI at all.

Second, the developed inventory must be consistently analyzed and mined for cost saving opportunities. A database that lists all land and assets owned by a governing entity, while also chronicling use or lack of use, gives officials information to assess the potential value of divesting an asset or piece of land. It also provides the private sector with knowledge of potential investment opportunities.

Third, state officials must act on their new knowledge. After developing an inventory, steps can be taken to divest surplus property, and managers can use space management systems to reallocate resources to their best possible use. Once Georgia developed its Building, Land & Lease Inventory of Property, it didn't sit idly by, but used it to find cost savings, including finding two state-owned properties in close proximity of each other that could be consolidated, saving Georgia $102 million in a 10-year timeframe. This "assemble, analyze, act" approach increases fiscal responsibility and can be a boon to budgets under pressure.

All three steps are necessary to get the full value from RPIs. For example, one of the best online inventories of surplus property is the California Statewide Property Inventory. The website, managed by the state Department of General Services, is easily searchable and uses language accessible to state officials, potential investors and citizens alike. However, while California has assembled a good inventory, it has failed to analyze and act on that information. The state, as well as local governments, has turned down a number of opportunities to divest unneeded property during the past years while struggling with a continual deficit problem. There is no fiscally responsible reason the state of California should still own the $11 million MTV beach house in Malibu.

Challenges to Real Property Inventories

There is an unfortunate trend in government practice to neglect the management of publicly owned or leased real property. The limited initiative is due partially to the fact that managing real property often can be considered a mundane chore for the public servant, lacking the headline-grabbing excitement of healthcare, energy policy or education. Because of this, resource management often lacks champions in legislative halls.

However, where there is perceived financial gain or a special interest lobby, there is typically government activity. Most states already have and manage inventories of land for wetland and forestry reserves, wildlife preservation and mineral resources. The capacity and technology is available. The obstacle to conducting an inventory is the politics of the matter and the political tendency to ignore property management. This is ironic considering there are many financial (and nonfinancial) benefits of an RPI. Governments at both the state and municipal level need officials to develop the willpower to move efficient property management into the forefront of political priorities to overcome this hurdle.

Inventory development is also hampered by a lack of standardized reporting methods at agencies and departments that do keep records. In many cases, an inventory could be compiled simply by requiring all agencies to report information on the property they own, lease or otherwise manage.

Conclusion

It is a nearly unconscionable reality, but when it comes to knowing where each parcel is and how it is being utilized, many states are unaware of what they own and at great cost. Considering the nation's recent economic difficulties, governments must do whatever they can to maximize the value of their resources, ensure efficient management and enable private sector economic growth through divestment and use of private expertise.

A few states are making substantive policy moves toward more effective real property management. In July, recently elected Virginia Governor Bob McDonnell ordered all Virginia state agencies to begin complying with state law and submit detailed reports of their property usage as a step toward getting a better sense of what the state owns. New Jersey Governor Chris Christie also has called for a centralized inventory available online that shows what government is doing with its property and what surplus assets are for sale.

Soon both states should be able to identify everything they own, determine whether government or private ownership is the most effective and efficient use of it, and streamline the efficient transfer of all unnecessary or underutilized real property.

Unfortunately, there are far more states that aren't taking the initiative to build an inventory. Government at all levels needs to be a better steward of the land it owns. And while the private sector can look forward to public asset investment opportunities in a few states, a broad movement toward well-managed public resources still appears a long way off.

This article was adapted from the paper "Knowing What You Own: An Efficient Government How-To Guide for Managing State and Local Real Property Inventories," published by the Reason Foundation, June 29, 2010. It originally appeared in the July/August 2010 issue of The Institutional Real Estate Letter from Institutional Investing in Infrastructure.

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Anthony Randazzo is director of economic research at the Reason Foundation.


Anthony Randazzo is Director of Economic Research


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