Report 2016-106 Summary - November 2016
Los Angeles County: Weak Oversight of Its Lease With the Los Angeles County Fair Association Has Likely Cost Millions of Dollars in Revenue
Results in Brief
In 1988 Los Angeles County (county) entered into a Ground Lease and Operating Agreement (lease) with the Los Angeles County Fair Association (association) that allows the association to operate the Los Angeles County Fair (LA County Fair) and conduct other activities on land the county largely owns, commonly known as the Fairplex. The terms of the lease state that the association will pay the county rent based on the amount of revenue the association receives from its activities at the Fairplex. Since entering into the lease, the association—a private nonprofit mutual-benefit corporation—has developed the Fairplex by constructing a hotel and conference center. In addition, the association has established a number of other for-profit subsidiaries and nonprofit organizations that operate at the Fairplex. In this audit, we reviewed the county's oversight of the lease and the steps it has taken to ensure the association's compliance with the lease's terms. Based on our audit findings, we conclude the following:
The county's failure to actively monitor its lease with the association resulted in the loss of significant revenue.
Although the lease states that the association will pay rent based on a percentage of revenue it receives from activities at the Fairplex, for reasons the county cannot adequately explain, the county allowed the association to exclude from its rent calculation the revenue that its hotel received. As a result, the county likely relinquished more than $6 million in rent related to the hotel's revenue from 2006 through 2015. Further, the county has never received rent related to the conference center, despite the association's representations to the contrary when the county provided it with a total of $12 million in rent credits to help cover the costs of the conference center's construction.
The association's executives receive much higher compensation than executives that run other large fairs in California.
The association paid its former president total compensation of more than $1 million in 2014, far more than the amount earned by the next highest-paid chief executive officer of a large fair. Although the county has no role in determining the association's executive compensation, its failure to collect all rent due under the terms of the lease allowed the association to retain revenue it otherwise would have owed the county and thus potentially contributed to the association's ability to pay its executives such high salaries. However, as a nonprofit corporation that is not a public charity, the association is legally allowed to set its executive compensation at levels greater than those of public entities.
The association operated an RV park with numerous safety violations.
Under a 2009 agreement, the Pomona Redevelopment Agency provided $3.3 million to the association in return for the association agreeing to maintain 50 spaces for affordable housing at one of its RV parks. Conditions at the RV park deteriorated until the Department of Housing and Community Development (HCD) identified several violations, including an imminent hazard to the health and safety of the residents at several spaces at the RV park in March 2016. Although the association took immediate steps to correct the imminent hazards at these spaces, HCD only determined that the association had corrected all violations in October 2016.
We have recommended that the county take the actions available to it to correct the problems we identified in this audit.
Summary of Recommendations
As soon as possible, the county should collect from the association all amounts presently owed under the lease as a result of the revenue generated by the conference center.
To protect its interests and maximize its future revenue, the county should strongly consider ensuring that any potential amendment to the lease includes a revised rent calculation formula that factors in revenue from all of the association's activities, including revenue from its hotel.
The county generally agreed with our recommendations, although it indicated its ability to implement them may be dependent on cooperation from the association. Although we did not direct recommendations to the association, it submitted a written response asserting that our report is generally inaccurate and incomplete. However, the information the association provided did not change any factual statements in the report or any of our conclusions and recommendations.