August 22, 2014
Final Reports
San Mateo Courts - Civil Grand Jury 1999 Final Report: Cabrillo Unified School District Land Purchase and Sale Agreements
Background | Findings | Recommendations
Background:

The San Mateo County 1998 and 1999 Grand Juries received allegations of irregularities by the Cabrillo Unified School District's (CUSD) Board of Trustees involving the sale of an approximate 20 acre El Granada surplus school site to North Wavecrest Partners and Pepper Lane Properties (Owner/Developer) and the purchase of a 25 acre North Wavecrest site from the same Owner/Developer.

About four years ago, a Master Facilities Plan was developed which recommended the building of a new middle school to replace Cunha Middle School. A $35 million bond was passed in June 1996 to implement this plan. After evaluation of various sites, the CUSD Board of Trustees determined the selection was between two properties: the Podesta site adjacent to the high school (75 Cabrillo Highway, Half Moon Bay) and the North Wavecrest site 1 mile south of Half Moon Bay between Highway 1 and the coast.

In May and June 1997, the CUSD attorney commissioned appraisals by Arthur Gimmy International, San Francisco, of the Podesta and Nerhan (390 Main Street, Half Moon Bay) sites as well as an appraisal on the District's El Granada property. No appraisal was done on the North Wavecrest site. The decision was made by the Board of Trustees to pursue the acquisition of the North Wavecrest site.

The acquisition of the North Wavecrest property by CUSD is essentially a transfer of the approximate 20 acre El Granada property valued at $1,700,000 and $1,000,000 cash to the Owner/Developer for the title to the approximate 25 acre North Wavecrest property valued at $2,700,000. Title to the El Granada property is restricted by a development agreement in which CUSD has the possibility of receiving 75% of any profit arising from the development and sale of the El Granada land.

Under this agreement, CUSD will pay the Owner/Developer a development fee of $255,000 in semi-annual installments during the two years following the closing date. Profit is to be calculated by deducting from the sales proceeds $1,700,000 (base price) plus the costs of sale, any financing on the property, development costs paid by the Owner/Developer with interest and "bonus exception" payments.

CUSD has the right of first refusal and the option for buyback of the El Granada site at various times and with various conditions during the term of the agreement. If the property is not sold in 5 years, the CUSD may repurchase the El Granada site during a 30-day period for $1,700,000 (the balance owed on North Wavecrest) plus any approved development costs and interest. The lots to be developed for "market rate" housing from the approximate 20 acre property are to have school mitigation fees of approximately twice the current rate.

After the agreements negotiated between the parties were accepted by the CUSD Board of Trustees on March 12, 1998, appraisals were done on both properties in June and August 1998 by Duncan, Duncan and Associates, Inc. of Lodi, California to satisfy State requirements for lien removal. El Granada was appraised at $1,700,000 and North Wavecrest at $2,700,000. The contracts were fully executed by both parties on September 24, 1998. Escrow is pending the approval of all conditions.

Interviews were held in October 1998 and July 1999. Following a refusal to explain who had provided the information used in reaching the evaluations used in the transactions, subpoenas were issued. At that time, the Grand Jury first learned of the May 1997 Arthur Gimmy appraisal of the El Granada property for $4,400,000. The District felt that this appraisal was incorrect in assuming an adequate volume of sewer and water entitlements would be available for sale to satisfy the proposed developments. The appraiser was not asked to reevaluate the site assuming the unavailability of entitlements. The appraisal values were orally communicated to the CUSD Board of Trustees, however the Arthur Gimmy appraisals themselves were not given to the Board for review.

According to testimony, the North Wavecrest valuation was determined by discussion with area realtors, the cost of comparable lots as determined by a law suit several years earlier, and comparable costs as determined in the Podesta and Nerhan appraisals. The School District was unaware that within two years prior to the agreement the Owner/Developer had purchased 17.364 of the 25 acre North Wavecrest site for $909,000, or approximately $52,350 per acre, less than half the acreage price used for the $2,700,000 valuation in the agreement for North Wavecrest.

Findings:

The 1999 Grand Jury finds that the following parts of the agreement are of concern and may lead to misunderstandings and conflict later:

  1. Cost of development as defined in Paragraph 14.1 and Schedule 2 is extremely broad and could lead to charges normally included in the developer's fee such as the developer's administrative personnel and overhead being treated as a cost. If costs are not agreed to by both parties, they will be submitted to a neutral party. This could lead to significant delays and legal fees.
  2. Schedule 2, which is intended to further define development cost, was missing from the agreement originally given to the Grand Jury. Ultimately it was provided and was three pages which listed estimated costs and income. One witness testified that Schedule 2 was not complete but believed it was only one page subject to modification. Another witness thought it consisted of one page and was not subject to modification. Whatever Schedule 2 is, it should be clarified and agreed upon.
  3. The mitigation fees are established in 1998 dollars and are subject to adjustment by the change in the Consumer Price Index (CPI). The CPI should have been further defined as to whether it is the regional or national CPI and whether it is the All Urban Consumers Index or the Urban Wage Earners and Clerical Workers Index. The agreement also does not specify whether the adjustments are on a monthly basis or on an annual basis and what is the base index number.
  4. No time line for performance of the various steps leading to development is established in the agreement.
  5. If development and sale of the El Granada property is not achieved and the CUSD does not repurchase the property, the CUSD will have received $1,445,000, not $1,700,000 for their property because of the payment by the CUSD to the Owner/Developer of the $255,000 development fee.
Recommendations:

Recommendation 26

The San Mateo County 1999 Grand Jury recommends that the Cabrillo Unified School District Board of Trustees attempt to remedy the contractual deficiencies noted in this report by adopting addenda to resolve potential problems and protect both contractual parties from unnecessary delays and legal fees.


Recommendation 27

The San Mateo County 1999 Grand Jury recommends that in future land transactions that in performing their fiduciary duties properly the Cabrillo Unified School District Board of Trustees and other school districts in San Mateo County shall engage outside experts, such as appraisers, to advise Board members in writing of the reasonableness of the valuations used before transacting the purchase and sale of real property.

© 2014 Superior Court of San Mateo County