Officials of the N.C. Agriculture and Cultural Resources departments violated state regulations in the acquisition of the 36-acre Gallant’s Channel waterfront property in Beaufort, an investigative report released Monday by the State Auditor’s Office says.

State Property Office officials also withheld important information from the Council of State when the council was asked to approve the transaction in October 2006. The report provides insight into why Pepsi Americas’ Sail 2006, a state-supported event linked to the property, lost almost $2 million.

A Carolina Journal story in November drew attention to the land transaction and apparent financial problems with the Pepsi Americas’ Sail event.

With the strong urging of Gov. Mike Easley and State Property Officer Joe Henderson, the council approved the acquisition at a meeting Oct. 3. The governor and nine other independently elected state officials, such as the state auditor, lieutenant governor, and attorney general are members of the council. By law, the council is required to approve or disapprove state real estate transactions.

Taxpayers had already paid $3.5 million to acquire the land in 1997, even though it was being held in the name of the Friends of the Museum, a nonprofit organization that supports the work of the three N.C. Maritime Museums. The main museum is situated in Beaufort. The Friends of the Museum is also the parent organization of Pepsi Americas’ Sail 2006, the organization that sponsored the tall-ships festival conducted in Morehead City and Beaufort in early July.

The audit report said the state will pay almost $9 million for the property when the mortgages and liens are paid off. “My biggest concerns are whether the State has failed to take title on other properties purchased with taxpayers’ money and who might be using those properties as collateral for new loans,” State Auditor Leslie Merritt said in a press release. “I think the State Property Office needs to go back and research all property acquisitions to resolve any unknown ownership issues.”

He said the state missed the opportunity to acquire the property for the $3.5 million paid in 1997 and that it is an “open question as to whether the taxpayers will actually reap the full benefit from the added $4.4 million in improvements to the property that were made without State input or control.”

The state acquired the land subject to deeds of trust in the principal amounts of $995,000 and $3.9 million. The loans were taken out July 12, 2005, and Oct. 17, 2005 as the Friends began preparing for the 2006 tall-ships event. The loans were used to build bulkheads, docks, and make other improvements to the property, but the improvements had not been approved by the state. After the financial losses became apparent, the Friends needed the Department of Cultural Resources to take over the property and debts, because the organization had no funds to make the payments.

Pepsi Americas’ Sail received revenue from ticket sales and sponsorships. A statement on the organization’s Web site said the July event attracted more than 150,000 visitors to Beaufort and Morehead City, including more than 30,000 who bought tickets to tour the ships.

In addition to private funds collected for the event, public funds were also involved. The General Assembly appropriated $1.65 million. The Golden LEAF Foundation made a $300,000 grant. The Department of Cultural Resources spent $225,000. The Department of Crime Control and Public Safety paid for law enforcement by Highway Patrol officers and other personnel. Proceeds from the event were to go to the development of the Olde Beaufort Seaport, a project of the N.C. Maritime Museum, to be situated on the same 36-acre parcel.

The audit report also provided substantial insight into the financial problems with the event. Not including the public subsidies, the event had revenues of $2,534,363 and expenses of $4,358,816, for a net loss of $1,824,453.

Ten independent committees were established to work on the event, but no single individual oversaw the activities of the committees. Many event organizers had no experience with large events and had no financial background. Media and public relations costs were almost $750,000. Three advertising and public relations contractors operated without signed contracts invoicing Pepsi Americas’ Sail $429,853 for their services.

The reports findings and subsequent recommendations were as follows:

• There was no signed agreement between the state and the Friends regarding the ownership or development of the property. The report recommended that any future property acquisitions involving non-state organizations be clearly outlined in writing.

• The departments of Agriculture and Cultural Resources violated the State’s Natural Heritage Trust Fund regulations that require the title to any land purchased with trust funds to be held by the state. The report recommended the Trust Fund follow up on awards to verify compliance with state law.

• The State Property Office failed to complete the property acquisition after the Council of State first approved it in 1998. The report recommended that the office institute follow-up procedures to ensure completion of all property acquisitions.

• The Department of Cultural Resources did not notify the State Property Office when a five-acre portion of the property was deeded to the state in 1999. The report recommended that all deeds received by state agencies be forwarded to the Property Office.

• The Council of State was not informed during its October 2006 meeting of liens filed against the property. The report recommended that the Property Office ensure that all relevant facts are adequately presented in the future and that the details of complex property transactions be presented to council members in advance.

• Pepsi Americas’ Sail 2006 did not have signed contracts with vendors for major service for the Tall Ships event. The report recommended that the Friends should always use contracts for goods and services for major events.

• Insufficient revenue and inadequate cost control resulted in financial losses for the Tall Ships event. The report recommended that the Department of Cultural Resources establish procedures for organizing and managing events.

Concerned legislators

Several legislators, including Rep. Mickey Michaux, D-Durham; Sen. Richard Stevens, R-Wake, and House Republican leader Rep. Paul Stam, R-Wake, have expressed concerns about the land transaction. All had questioned whether the council could acquire land that had mortgages and liens attached to it. According to the state constitution, only the legislature has the authority to appropriate funds, but the legislature has not appropriated additional funds to cover the debts.

Stam sent a letter to Attorney General Roy Cooper questioning the legitimacy of the transaction. He received a response from Deputy Attorney General Donald R. Teeter. Stam shared the April 5, 2007 response with CJ, but he did not want to comment on it until he had also read the State Auditor’s report.

Teeter is the lawyer with the Attorney General’s Office assigned to the State Property Office and had a significant role in the transaction.

“Our conclusion was that such an acquisition did not offend the Constitution because the liens and deeds of trust encumbering the property did not legally constitute the assumption of the underlying debt by the State or otherwise make the State of North Carolina a co-debtor with the Friends,” he wrote. “Therefore, neither the faith and credit of the State, nor its taxing power, would be pledged in connection therewith.”

But then, in an apparent contradiction, Teeter went on to write that the Council of State approved taking title to the property subject to the encumbrances.

Don Carrington is executive editor of Carolina Journal.