The owner of the Lexington office building that houses the Bluegrass Area Development District should give the building to the district, State Auditor Adam Edelen said Tuesday.
A special exam by Edelen's office found that Bluegrass ADD secured the loan used by the Bluegrass Industrial Foundation to buy the property at 699 Perimeter Road in 1993. And the district has paid enough rent — more than $1 million since 2009 — to pay back its original investment.
"We could have built an important asset that could have been used for the public good," Edelen said at a news conference Tuesday.
Instead, the relationship between the district and the foundation has cost taxpayers money, and provided more potential conflicts of interest for the district, Edelen said.
The foundation was created in 1982 by Jas Sekhon, who was also director of the district between 1971 and 2005. Lenny Stoltz II took the reins in 2005.
Edelen's examination found that the district provided the foundation with more than $650,000 in collateral, allowing the foundation to get a bank loan for the building at below-market interest rates. Bluegrass ADD also provided a $450,000 grant to help buy the building from the Kentucky Department of Local Government.
The district moved its offices to the Perimeter Road building, which sits near the intersection of Alumni Drive and New Circle Road, in 1994, although auditors could not find a lease agreement for any years before 2005. The district pays about $258,000 in rent a year.
After Sekhon stepped down from the district, he continued as president of the foundation and was paid about $60,000 in compensation between 2009 and 2011. The two groups share current and former board members, including Madison County Judge-Executive Kent Clark and Georgetown Mayor Everette Varney, who currently serves on both.
"There is not question that BGADD has significant influence over BIF since the two entities shared an executive director and certain board members," the auditor's report found. "Ultimately, this gives the appearance that BGADD was leasing space from itself."
In 2012, the Bluegrass ADD board ordered Stoltz to negotiate with Sekhon to buy the property, but nothing ever happened, the examination found.
In addition, the auditor found that the foundation loaned money to the district for office renovations and equipment in oral agreements, a deal that bypassed the district's procurement policies.
Sekhon declined to comment on the audit. His lawyer, Luke Morgan, said that in 1993, state and federal rules prevented the district from taking on a mortgage, which is why the deal was financed through the foundation and approved by the governor's office. Morgan said the foundation would consider Edelen's suggestion of giving the building to the district at its next meeting.
"BIF stands behind the approval it has received from its board of directors, its accountants, attorneys as well as state and federal officials over the years," Morgan said.
Linda Blackford: (859) 231-1359. Twitter: @lbblackford.