Friday, August 12, 2022

State auditor questions Bald Head ferry valuation, LGC postpones sale review

Bald Head Island Limited employees check passenger tickets on the island side of the company’s ferry operations. (Port City Daily photo/Mark Darrough)

RALEIGH — After months of delay and 17 letters exchanged this year, the proposed $47 million sale of the privately owned Bald Head Island ferry system to a new state-created authority was dissected in person this week by the regulatory body tasked with approving it.

At its Tuesday meeting, Local Government Commission staff recommended denying Bald Head Island Transportation Authority’s request for $56 million in revenue bond financing. LGC commissioners were likewise uncomfortable with moving forward, chiefly casting doubt on the appraised value of Deep Point Marina in Southport.

Related: Savior or sabotage? Village faces pressure from Brunswick, Southport in Bald Head ferry sale

“The village has been bringing that up, and up, and up,” Susan Rabon, BHITA chair said Wednesday. “We have no problem trying to satisfy that question. We’re working on a plan to address that.”

Originally slated for LGC review and approval the first week of January, the Village of Bald Head Island has slowed the deal through scrutiny, bolstered by support from hundreds of island residents and N.C. State Treasurer Dale Folwell.

When the LGC first heard the item as a preview in early December, Bald Head Island Limited CEO Chad Paul told Folwell there was no opposition to the deal, which the authority board approved days later 7-4, with all four dissenting votes coming from island residents on the regional board. The following week, Folwell received a letter from the village, objecting to the sale.

Folwell feels he was lied to by the seller. Paul insists he didn’t misrepresent the state of affairs, as objections arose after the initial LGC preview.

Commissioners rehashed this diverging moment at the meeting Tuesday. “When someone asks that simple of a question, it just — it’s very offsetting,” Folwell said of his initial inquiry asking to identify known opposition. “Because the miss was so bad, I trust nothing else that comes from the authority,” State Auditor Beth Wood said.

Appraised vs. tax value

Tuesday, the hour-and-a-half discussion centered around the Deep Point appraisal, which concluded the 56-acre property was worth $36.3 million, making up a majority of the total system’s $50.9 million valuation. The authority negotiated down the purchase price to $47 million with the seller before approving an asset purchase agreement in early December 2020. The 2017 statute that created the authority mandates the ferry system must be purchased at or below its appraised value.

Brunswick County tax records show the 76-acre parent parcel is valued at $16.45 million, less than half the appraised value. The appraiser, Earl Worsley, noted in his report his firm only utilized the cost approach — excluding the sales and income comparison approach — at the authority’s request. Worsley did not return multiple requests to comment.

To rectify concerns, Rabon said the authority may consider ordering a new appraisal — the Worsley appraisals cost $15,000; all of the authority’s expenditures are covered by the seller. 

With each delay, Rabon said the authority’s bills rise. Consultants are still working as interest rates rise and the authority misses out on boosted peak season ferry revenues.

The authority specifically chose an appraiser the village and Bald Head Island Club had engaged with, and intentionally avoided an appraiser Limited had experience with. “I think Earl Worsley is a very well respected appraiser in this area. We put a lot of thought into it,” Rabon said Wednesday. “But why there’s such a difference, I can’t speak to.”

Tuesday, commissioners debated whether tax value really does reflect market value, considering county tax assessors use an algorithm to determine value rather than individually assessing each parcel.

Auditor Wood said she spent an entire day “in the bowels” of documents surrounding the proposed transaction. “Either Brunswick County has got a really bad tax assessor and y’all are missing out on a lot of revenues, or there’s something wrong with the appraisal,” she said. “If Brunswick County and this evaluation are that far off, you got problems in Brunswick County.”

The concern is, if the tax value is supposed to reflect market value, and the appraised value greatly exceeds tax value, and the authority is purchasing the system for an amount less than but near the appraised value, then the authority isn’t getting a good deal. It could put an undue burden on the ratepayers, whose user fees the authority is using to back the 30-year bonds, with a $49 million principal and $49 million debt service.

Raising user fees was baked into the feasibility consultant’s estimates — an increase that concerns islanders but that’s long overdue and hasn’t kept up with inflation, according to the authority and seller. Tickets will increase for the first time since 2010 by $4 to a $27 round-trip ticket by July. Folwell has concerns fares will increase to impact low-wage earners and make the island inaccessible to low-to-middle-income visitors.

“You can’t not look at this deal through the eyes and the back and the feet and the heart of people who make $12 an hour who service everything that goes on on this island,” Folwell said. “This is not about the people who can afford these homes.”

With personal experience in and around the ferry system, Wood was unconvinced by the $47 million price tag. Warned a new appraisal could come in even higher in line with rising property values, she said she still thought the appraised value wasn’t right.

“I’m not convinced it’s 47. I’m not convinced it’s there. If it goes higher, it goes higher. But I’m not convinced it’s at 47,” she said.

Village vs. authority

Rabon, village Mayor Andy Sayre, and the authority’s bond counsel, Mary Nash Rusher of McGuireWoods LLP, traveled to Raleigh to attend the LGC meeting in person.

Sayre rehearsed many contentions he had previously put in writing, including concerns the community was kept in the dark for too long while authority trustees (himself included) were shielded by non-disclosure agreements and closed sessions. He spoke of a dysfunctional baggage handling system and overfilled ferries and parking lots during peak use. “Remarkably, at present, there are no toilet facilities,” he said of the island-side terminal.

Deferred capital expenditures are not incorporated in the purchase price, he said, leaving the authority little financial wiggle room to invest in the system once the bonds are issued. “Disturbingly, these issues were not adequately analyzed, often not even acknowledged during the due diligence process.”

In March, the village presented another boomerang: It wanted to purchase the ferry for itself. This move triggered unanimous resolutions of support for the authority out of the City of Southport and Brunswick County, which each has one appointee on the board. Since the announcement, LGC staff asked the village to make a case for its legal authority to purchase the ferry system; the village obliged, responding that outside legislation was not necessary for it to act as a buyer.

Addressing concerns about a village-owned system not adequately representing neighborly interests, Sayre explained it’s not a regional responsibility. “It is not a gateway to other destinations. It is a utility of the community of Bald Head Island which will be paying off its debt,” he said.

Four out of ten riders last year were working on the island in some capacity; nearly all of these riders are county residents.

Grilled by Wood about the origin of the legislation, Rusher, the authority’s bond counsel, said it was spearheaded by Limited. “There’s no question that Limited and transportation were interested in getting this asset out of the estate of George Mitchell,” Rusher said. “This was an asset they wanted to get out of the estate and into public hands.”

Limited has spent the last decade shedding the Mitchell estate’s assets on the island; Paul previously described the ferry system as the “holy grail.”

Responding to calls to follow the legislature’s goal, Wood cast doubt on the origin of the bill and the legislature’s actual involvement in writing it. Rusher explained an authority was one of the only means of ensuring the future of the ferry gets protected.

“The [Department of Transportation] said, ‘No no, we don’t need any more ferries,'” Rusher said. “The General Assembly said, ‘This is not about taxpayer money. This is about users. So sorry, authority, good luck.'”

The auditor asked the parties to try to approach things more amicably before the upcoming meeting in June, when the item will return to the LGC’s agenda. “I don’t care who runs it. I really don’t care who runs that ferry system, and the barge — I don’t care. As long as when I get on that thing, it floats and it gets to the other side,” Wood said. “I need numbers I can count on and feel comfortable with.”

Catch up on the ferry sale saga:

Savior or sabotage? Village faces pressure from Brunswick, Southport in Bald Head ferry sale

After objecting to state acquisition, Bald Head Village Council wants ferry for itself

State treasurer asks Bald Head Limited to donate $47 million ferry system, company denies request

Trouble in paradise: Bald Head Island Council objects to private-to-public ferry sale

Deep Dive: Inside the three-year, unique, $47 million private-public Bald Head Island ferry transaction

Two years in, Bald Head Island Transportation Authority still negotiating ferry acquisition

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