Operators of the Queen Mary and Spruce Goose have paid no taxes on about $15 million worth of improvements at the port attractions because of low county property appraisals, City Auditor Robert Fronke has maintained in an annual audit.
The audit suggests that Wrather Port Properties, which holds long-term leases on the famous luxury liner and wooden airplane, should be paying at least another $150,000 in property taxes and that the $50,000 rent it pays the city is too low.
The audit says the assessed value of the entire Queen Mary site should be about $31 million, because it was appraised at about $1 million in 1981 when Wrather leased it and Wrather reported about $30 million in improvements from 1981 to March, 1984.
The assessor's value on the property and improvements, however, was about $15 million less--only $15.9 million--in March, 1984, Fronke said.
Had the additional $15 million in improvements not "escaped assessment" Wrather would have paid an extra $150,000 in taxes, with about 25% of that going to the city, Fronke said in his audit report to the City Council and Harbor Commission this week.
In addition, Fronke's evaluation of the "income stream" and profitability of the Queen Mary properties indicates a potential increase in property taxes of another $250,000, he said in an interview Tuesday.
Fronke recommended that the city monitor values placed by the assessor on all major new Long Beach projects. Council members and harbor commissioners accepted the audit for study this week.
In a related audit recommendation, Fronke said the Port of Long Beach should, in ongoing negotiations with Wrather, "determine if the current minimum annual rent of $50,000 remains appropriate," because Wrather's profits were about $7 million before taxes, rents, interest payments and depreciation in 1984.
The $50,000 is less than 1% of such before-tax profits, "and that is lower than the city gets in many other leases of property both in the harbor and the city," he said.
Joseph Prevratil, president of Wrather Port Properties, disagreed with most of Fronke's conclusions, as did spokesmen for county Assessor Alexander Pope.
Profitable in 1984
Prevratil acknowledged that his company is now profitable, making in the "low millions" in 1984 even after property depreciation of more than $3 million is subtracted from earnings. (Wrather lost about $1 million in 1983 after depreciation, he said. Attendance at the Queen Mary has risen from 500,000, before the Spruce Goose was added in 1983, to about 1.7 million last year.)
Prevratil also confirmed that Wrather had spent about $30 million to improve the 55-acre Queen Mary leasehold by March, 1984, and another $10 million since then.
But Prevratil and Pope's spokesmen also said that millions of dollars in improvements are not taxable as real property, and $15 million in assessable property did not escape the attention of county appraisers as Fronke claims.
For example, Wrather has spent millions repairing and refurbishing the Queen Mary and shops on the site, and those costs should not be shown as increased value on the property tax rolls, said Prevratil.
He said, however, that "some of the aspects of this (issue) are still a question mark. A lot of these costs may or may not be additions to real property. By their very nature, these are unique properties. You don't exactly find the Queen Mary and the Spruce Goose in your basic assessment books."
Mark Ryavec, an assistant to Assessor Pope, said $2.5 million of the $15 million in improvements Fronke had said appraisers missed was recently added to tax rolls, raising the assessed value of the Queen Mary site to $18.4 million for 1984-85.
The structures and land on the site were valued at about $12 million, he said. Another $6.4 million of personal property such as computers and other equipment makes up the remainder of the $18.4 million, he said.
Pope's office will comment in more detail after it analyzes the documents used by Fronke, Ryavec said.
George Hickert, a county appraiser familiar with the Queen Mary assessment, further explained the county's appraisal in an interview.
The total assessed value of the Queen Mary site and its buildings, including the ship, was only about $1.07 million in 1981, when Wrather leased it, Hickert said. (The city had lost $3 million operating the attraction the previous year, and tens of millions in the previous decade.)
By far the most expensive addition since 1981 has been the $8.8-million construction of the geodesic dome in which the Spruce Goose was placed in spring, 1983, Hickert said.
"There has been some refurbishing and just replacing old stuff with new, and a lot of those things are not assessable as real property," he said. "(Fronke) could be considering costs of clearing the land and moving the plane, but (those) aren't assessable."
In response, Fronke said that his office did, in fact, include the costs of clearing the land for the Spruce Goose as a taxable improvement, as is general accounting practice.
Such differences of opinion should be reviewed, Fronke said.
"We wouldn't argue with the assessor's understanding and interpretation (of law), but $15 million is an awful big difference, and we will take the initiative with the assessor's office to clear the air."
Fronke said his staff members had spoken with county appraisers during the audit so they would completely understand the assessor's method of appraisal. Ryavec said no Fronke staff member ever asked specifically about the Queen Mary appraisal.
Fronke's recommendation that the port look closely at increasing Wrather's $50,000 annual base rent in current negotiations prompted the port, in an official reply in the audit, to say that Fronke had not mentioned Wrather's "extraordinarily high maintenance and utility costs."
Prevratil said it costs $2.5 million a year to maintain the attractions.
A matter that should also be discussed during contract negotiations, said Fronke, is the $1.07-million assessed value placed on the Queen Mary site in 1981.
"We're not knocking what the assessor did in 1981," said Fronke. "He didn't have advantage of information that is now available. But now it seems quite low."
Events subsequent to the early 1981 lease, especially an extension of the lease and increased income in the last two years, should allow a reconsideration of how much property tax Wrather is paying, he said.
In response, Wrather officials said state law allows real estate to be reassessed only when it is sold or improved, not because of the "changing economic conditions" cited by Fronke.
For a lease such as Wrather's to be considered a transfer of property, it must be for 35 years or more, not the 26-year extension Fronke cited as reason for reassessment, they argued.