YACHT CLUB AUDIT

Forensic audit delivers scathing report of restoration project’s finances, planning

 

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By DINA ARÉVALO
Port Isabel-South Padre Press
editor@portisabelsouthpadre.com

The Port Isabel City Commission heard a lengthy report about the Yacht Club project during its regular meeting Tuesday night. The presentation of the preliminary findings of a forensic audit, delivered by Bill Bradford, Jr. of Hales Bradford LLP, was just the first of three such reports the City expects to hear.

The City hired Bradford and his firm in 2016 to look into the purchase of the Yacht Club and its associated plans for improvement, as well as the Port Isabel Event and Cultural Center (PIECC), and the Economic Development Corporation’s (EDC) Revolving Loan Program.

Originally scheduled to deliver his findings on the Yacht Club project earlier this month, the report was delayed until this week. However, City officials say they expect the next report — on the revolving loan program — to be delivered on time, on April 10. The report regarding the PIECC will likely be delayed due to the City’s pending litigation with Colair, Inc., the firm that had originally been tasked with the construction project.

Bradford delivered a scathing review of the entire project, from its purchase, to the City’s plans to use the former hotel as a culinary arts institute, to its ultimate sale to a private developer for a substantial loss.

The certified public accountant began by explaining the parameters under which he and his staff began to explore the project. They were tasked by City staff, he said, to answer six questions.

First and foremost, the firm sought to determine if the City had prepared a plan of finance prior to taking on the project and if the projections were reasonable and supported by documentation. Next, they were asked to determine if the City had “properly procured professional services” for the project and if the funds borrowed in relation to the project were spent for their stated purposes.

They also sought to determine if the City received value for its expenditure. Finally, they sought to determine if City officials made accurate statements to the public regarding the project, and if any City officials had received “payments, gifts or gratuities from any person connected with the program.”

Bradford also defined what the Yacht Club project was, saying it was “the intent of the City to restore … an endangered building — the Yacht Club.”

After establishing the parameters of his investigation, Bradford then launched into a comprehensive timeline of the Yacht Club project, dating back to February 2014 — several months before the City purchased the property — and ending in late 2015 when the project was ultimately scrapped.

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The City of Port Isabel purchased the Yacht Club for $750,000. Yves de Diesbach and Adelaido Gonzales, Jr. appraised the property at $760,000, despite their lack of access to the interior of the building. It was an appraisal Bradford would later characterize as having “no bearing to reality.”

Bradford’s preliminary report indicates the appraisers arrived at that valuation because the Yacht Club “was considered to be historic (sic) landmark for Port Isabel, (and) indicated as placed on the list of endangered historical buildings.”

Too, the appraisers took into consideration projections for how much rental income the Yacht Club would generate. Those projections were outlined in a “pro forma analysis of rental property” submitted by STAR Consulting. It estimated a restored Yacht Club could generate $531,983 per year in rental income.

Speaking after the meeting adjourned, Port Isabel City Manager Jared Hockema remarked on that revenue figure. “How are you going to generate $531,000 in rent from a 13,000-square-foot building? What would you have to charge per square foot to generate that? And if you could generate that, what businesses would pay that?” he said.

Not long after the City signed the paperwork to purchase the Yacht Club, the architectural services agreement between STAR Consulting and the City began. The City agreed on a contract to pay the firm $238,100 for “pre-design services and stabilization design for construction,” $313,000 for “services of specialized consultants,” and an additional $77,000 for expenses. All told, the City agreed to pay $628,100.

On Nov. 4, 2014, just over a month after the City awarded the project bid to STAR Consulting , the firm submitted its first payment request to the City for $82,927. The City made payment three days later.

For Bradford, the amount of work STAR Consulting had been able to accomplish and bill to the City in just one month on the job didn’t add up. “Essentially, what it appears to be is that the pro bono agreement under which she (Teresa Fonseca) billed $1,900 wasn’t really pro bono at all because there’s no way in the world that she had that much time involved in that first draw request,” Bradford said.

A second request — for $77,921.33 — was submitted on Dec. 23, 2014 and paid by the City on Jan. 5, 2015. A third — for $40,156.25 — was submitted on Jan. 14, 2015 and paid two days later, on Jan. 16, 2015.

It had been almost a year since the seed had been planted for the idea of purchasing the Yacht Club, and just about four months since the City had actually done so, yet already the City had paid STAR Consulting $201,000. But, problems were beginning to emerge.

“It’s becoming obvious,” Bradford said. “The building was a disaster,” he said. The roof was damaged, there were structural problems, and it had even been condemned at one time, he said.

It was at this point that STAR Consulting brought in an independent project management and engineering services firm, El Paso-based ECM International. After the meeting, Hockema explained that a third party opinion was necessary in order to try to secure financing for the project.

ECM’s task was to identify any deficiencies and develop its own cost estimates for the project. The firm evaluated the property during a visit on Feb. 19, 2015. It also requested documents from STAR Consulting. However, it wasn’t until late June that STAR Consulting finally delivered the documentation ECM had requested. In that time — from February 2015 to June 22, 2015, several things happened.

The first was that Petra Reyna prepared a submission to the Texas Preservation Fund to have the Yacht Club officially recognized as a historical building. Though the Yacht Club pre-dates the City’s own 1928 incorporation by two years, it has never been officially recognized as a historical structure. It was Reyna’s second attempt to have the building formally recognized, Bradford’s preliminary report reads.

The second thing to happen was an additional series of payment requests from STAR Consulting.

The firm made a fifth payment request for $20,041.15 on March 17, which the City paid two days later. Bradford paused for a moment after saying this. “That never happens. Ever. Anywhere,” he remarked of the quick turnaround time between the request for payment and the issuance of payment.

STAR made a sixth request eight days later — on March 25, 2015 — for $21,890. The City issued payment the following day. Ten days later, STAR made a seventh payment request — this one for $33,171.61. Again, the City issued payment the very next day. Bradford described that as “highly unusual.”

But, he went one step further than that. Bradford implied that STAR Consulting knew the project was unworkable and was attempting to extract as much money as it could from its contract with the City while it could. “STAR knows this project is getting ready to fall apart,” Bradford said, before reiterating again the unusually short intervals between STAR’s requests and receipt of payment.

“STAR has been paid three times. They’d gotten their money. Now, the documents had been submitted (to ECM),” Bradford said.

With its physical inspection completed, and STAR’s documents finally in hand, ECM was able to complete its report. As the city manager put it afterwards, “Turns out their own person they (STAR Consulting) hired is saying their numbers don’t work.”

Whereas STAR Consulting and Petra Reyna had assured the City the project could be completed for $5 million, ECM’s report indicated a much higher price tag — approximately $9 million. “(The report) indicated the costs associated with doing what STAR and Fonseca had said could be done are through the roof, nowhere near the estimates,” Bradford said. The project was “just not feasible in any way,” he said.

On Oct. 15, 2015, the Port Isabel City Commission voted to return the $1.2 million EDA grant. Not long after, it also voted to put the property up for sale. The City’s plan to restore the structure and house rental space and a culinary arts school was over.

*        *        *

With his summary of the Yacht Club project chronology complete, Bradford returned to the six questions he had mentioned at the beginning of his presentation — the questions which defined the scope of his firm’s audit.

“Our finding is, no, the City did not prepare a plan of finance,” Bradford said of the first question.

Bradford characterized the answer to the second question — whether the City properly procured professional services related to the project — as “interesting.”

Superficially, yes, the City had procured professional services. It had sought bids, but it had failed in other regards. “You sent out the RFQ, (but) you didn’t hold the special meeting where the architect would come in and talk. And the next day, the contract was awarded,” Bradford said.

To Bradford, the evidence indicates that the project had been predetermined. “It’s clear that this outcome was predetermined all the way back to early February 2014 and that everything had been put in place by the mayor at the time, the commission at the time, the city manager at the time to make sure that that predetermined outcome happened,” Bradford said.

He turned next to the question of how the City had spent the project funds. The borrowed monies from the Texas Leverage Fund had not entirely been used in accordance with their stated purposes. Yes, the City had used part of the funds to pay the previous property owner for the purchase, but the rest were deposited in the City’s General Fund and used to pay for non-related expenses, such as $225,000 used to purchase a fire truck, Bradford said.

To the fourth question — did the City receive value from the project — Bradford responded, “Absolutely not.”

“The City sustained a significant loss,” he said. He estimated the total loss at approximately $770,000.

In response to the fifth question, Bradford also asserted that City officials did not make accurate statements about the project. “No, they didn’t,” he said. “The applications that were made with state agencies contained many statements that ultimately were proved to be inaccurate if not just downright false,” he said.

The final question tasked Bradford and his firm to determine if City officials had received payments or gifts from anybody associated with the project. “Our interviews with City employees indicated a very strong, close, personal relationship between these consultants and the city manager, Mr. Ed Meza, with many of them indicating knowledge of gifts being exchanged between the two,” Bradford said.

However, Bradford admitted his firm did not have access to personal records and therefore could not verify that conclusion.

“This project benefited very few. It benefited STAR Consulting in a big way. It benefited Petra Reyna. We’re not sure the extent it benefited anyone else,” Bradford said, wrapping up his preliminary report.

Former City Manager Ed Meza, who had sat in the back of the room for the duration of the report, had few comments afterwards. “It was just presented to make me look bad, and that’s it,” Meza said once the Commissioners had retired to executive session.

He called into question the information that had been made available to the forensic auditor, referring to Bradford’s early remarks that his firm had examined documents which had been provided him by City staff.

“Part of that work is delineated by staff in what, specifically, they wanted us to look into,” Bradford had said at the top of his presentation.

“So, whatever staff wanted him to do is my only concern right there,” Meza said.

Current City Manager Jared Hockema provided a different explanation for that remark, saying Bradford and his staff received what they, themselves, had requested. “The documents were given to them because they asked for them,” Hockema said. “They’re the ones they sought out,” he said.

Tuesday’s preliminary audit report was just the first of three originally ordered by City leaders in 2016. Next month, Bradford will return to deliver his findings on a forensic audit of the Revolving Loan Program.

His report on the third audit — of the Port Isabel Event and Cultural Center project — may be delayed due to the City’s ongoing lawsuit with the firm involved in that project, Colair Inc., Hockema said.

As to what the City will do now that it has received this first report, that remains unclear. The agenda for Tuesday’s meeting included an item for discussion in executive session regarding potential litigation in connection with the Yacht Club project.

Hockema remained mum on the subject, but did offer one comment. “I think that the City staff did have some shortcomings. I think they were not well served by the consultants that they had,” he said.

 

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