Silly Con Valley

In the summer of 1995, the city of Phoenix was locked in a battle with an Oregon town to land the Sumitomo Sitix Corporation's newest silicon-wafer plant. To entice the huge Japanese conglomerate, city officials offered up a smorgasbord of lucrative incentives, including an offer to build more than $8 million in infrastructure improvements as well as secretive and possibly illegal efforts to pass zoning changes.

State officials made their own overtures to the company, specifically an offer to create a foreign trade zone, which comes with an 80 percent property-tax break.

But tax breaks weren't the only incentive the state and Governor J. Fife Symington III offered Sumitomo.

Newly discovered documents indicate that Symington directed state employees to secure an incentive the state had no right to give.

In September 1995, several weeks after two independent appraisers hired by the state Land Department had valued the state land Sumitomo wanted to lease, Symington sent a letter to Sumitomo officials assuring them that the appraisals were "flawed" and that new valuations would "provide a fairer market value" for the land.

Soon thereafter, state Land Department employees directed appraisers to reevaluate the Sumitomo parcel and subtract huge amounts of money from their original estimations.

In less than a week, the appraisers produced new reports--the first set of appraisals had taken nearly a month--and decided that the land Sumitomo wanted was worth a little more than half of what they'd said earlier.

Six days after the appraisers submitted their new, cut-rate valuations, Sumitomo announced that Phoenix had won the sweepstakes for the plant.

On their own, the state's fire-sale appraisals will end up saving Sumitomo $60 million over the life of the lease.

In their willingness to cut Sumitomo a deal, however, Arizona officials appear to have violated their legal responsibility to get as much money as they can for the sale or lease of state trust land.

That money goes to support Arizona's schools.
Symington and the state had several incentives to offer Sumitomo at their disposal, but diverting money intended for the state's schoolchildren into the coffers of a corporation that owns one of the biggest banks on Earth was not one of them.

Land Department officials claim they only reappraised the value of Sumitomo's parcel when changes in the conditions of the lease required it, and not on directions from Symington.

But that explanation is difficult to believe in light of Symington's letter to Sumitomo, in which he said he had discussed the "flawed" appraisals with state Land Commissioner M. Jean Hassell. Hassell denies ever speaking with the governor about the matter.

Bob Corbin, former Arizona attorney general, says the deal "doesn't look good" and that he would have investigated it. He also says the state could be sued by a taxpayer or school district in an attempt to set aside the lease agreement.

And if land-use attorneys New Times consulted are correct, Symington's letter, combined with the instructions later given to appraisers by the Land Department--instructions other real estate experts have called outrageous--could result in a criminal investigation.

Yes, another one.
The governor is no stranger to questionable property valuations. He has shown a penchant for adjusting the value of his assets up or down, depending on whether he was trying to get financing or trying to keep from paying back a loan. He is awaiting trial on 23 criminal counts, most of them for fraud--federal prosecutors say he lied on financial disclosure statements submitted to lenders.

In this case, the asset devalued for the benefit of a foreign corporation was the state land trust--a commodity designed to benefit the people Symington was elected to serve.

If the Sumitomo corporation wanted cheap land for its silicon-wafer plant, it went looking in a pretty unlikely place.

The Desert Ridge development in northeast Phoenix is one of the hottest-selling upscale neighborhoods in the Valley, and Mike Chierighino and Mark Wirth--who were hired by the Land Department to appraise state land containing the proposed Sumitomo site--found sky-high prices.

Neither was unfamiliar with appraising state-owned land. Wirth reportedly specializes in appraisals for county and state agencies. Chierighino has an even closer connection to the Land Department: He spent more than 20 years as an employee of the agency, retiring in 1989 as the state's chief appraiser.

They knew that to put a price tag on the 520-acre parcel of state land lying to the northeast of Tatum Boulevard and the Central Arizona Project canal, they would have to find what folks were paying for similar tracts in the area.

They found that sales ranged from $80,000 to more than $100,000 per acre for unimproved land.

Even though these sales were very near the Sumitomo parcel, the appraisers rightly considered other factors besides location that differentiated the sample sales--called "comps"--from the large parcel Sumitomo wanted.

Chierighino, starting from a figure of $88,000 per acre taken from nearby comps, deducted discounts both for the bulk of the 520-acre parcel as well as for the time--six years, he estimated--it would take a typical developer to sell off various parts of the plot. He also estimated that $2 million of off-site improvements would be required before a typical tenant could make the land usable, and adjusted his estimate downward by that amount.

Chierighino arrived at a figure of $32.8 million for the land, or $63,250 per acre.

Wirth, meanwhile, operating from different assumptions and with different reasoning, arrived at the remarkably similar figure of $60,000 per acre.

A real estate analyst asked by New Times to examine the appraisals says the similarity of the valuations is remarkable for several reasons. The analyst, who requested anonymity, points out that the land being evaluated is relatively unique in size, shape and other factors. For two appraisers using different methods on an unusual piece of property to arrive at such similar valuations raises suspicion, he says.

New Times showed the appraisals to several industry experts, including other appraisers, and asked for their opinions on the work done by Chierighino and Wirth as well as the actions of state officials.

The consultants were unanimous in their scorn. The appraisals, they say, were shoddy and suspiciously unprofessional, especially given the magnitude of the project. They cited the lack of explanation the appraisers gave for some of their most crucial decisions, as well as errors in fact.

"Both of these reports are a piece of shit," says one appraiser. "They have flaws galore. They're not well-thought-out, and they're not professionally done."

But while experts familiar with land sales in the Desert Ridge area tell New Times that the appraisers seem to have been pressured to "go low," Sumitomo brass apparently thought Chierighino and Wirth hadn't gone low enough.

Three weeks after the Land Department accepted Chierighino's figure of $63,250 per acre (by law it must accept the higher appraisal), Symington sent his letter to Matajiro Nagashima, a Sumitomo manager in Japan.

"I have discussed the issue of the state land required for your factory with the State Land Commissioner and emphasized to him the need to provide fair treatment to Sumitomo Sitix, in the quickest manner possible," wrote Symington. "I am aware that the original appraisal on this property might have been flawed in that certain proposed future improvements were considered to be already in place. We are confident that the new appraisals will correct this and provide a fairer market value as the basis for the lease."

When New Times asked the governor about the appraisals during a recent public event, Symington frowned and turned away, saying, "Oh, I'm not going to get into that."

But the Land Department's actions in the wake of Symington's letter to Sumitomo suggest that he already had gotten into it.

"It's obvious what happened," says a former federal prosecutor. "[State officials] ran into hot and heavy opposition after the first appraisals and agreed to find a way to bring the price down."

The Land Department did find a way to bring down the price of Sumitomo's parcel.

On September 11, the department asked Chierighino and Wirth to reappraise the land, this time considering Sumitomo's smaller 132-acre site separate from the rest of the 520-acre state land parcel. The Land Department told the men to subtract $14 million from land values because of unspecified infrastructure costs--$7 million for Sumitomo's portion and $7 million for the remaining 388 acres.

The industry experts consulted by New Times say those instructions border on the ridiculous. And judging by the reaction of Chierighino and Wirth, the appraisers came to a similar conclusion.

Although they would drastically reduce their valuations, neither Chierighino nor Wirth followed the state's directions, and it's not hard to see why.

In Chierighino's original appraisal, for example, he valued the entire 520-acre parcel at $63,250 per acre. At that price, Sumitomo's 132-acre parcel would be worth $8.29 million (actually a little more, say appraisers, because the bulk discount would not be as great as for the whole 520 acres).

If Chierighino and Wirth had followed the state's directions and subtracted $7 million from the value of Sumitomo's parcel, the price would have gone down to about $10,000 per acre--in an area where raw land sells for up to ten times as much.

Wirth did not return numerous calls from New Times. Chierighino agreed to talk to New Times about his appraisals, and he acknowledged that the state's directions "didn't make sense." He says the $7 million for improvements "was just too much of a hit."

What Chierighino did instead was average the cost of the total $14 million in improvements over the entire 520 acres of the original parcel. That came to a cost of $27,000 per acre, which he subtracted from his original price (along with other minor adjustments) to come up with a final cost of $36,000 for Sumitomo's parcel.

Wirth, meanwhile, took another direction. He dumped his original set of comparable sales and came up with a new batch. This time, rather than looking at sales in the immediate area, Wirth took data from all around the Valley, writing, "Sales from throughout the metropolitan area were selected due to the lack of [commercial and industrial land] sales within the neighborhood."

Wirth chooses one sale in particular that he feels is most comparable to Sumitomo's parcel. It's a sale of 265 acres in Glendale: not exactly on a par with upscale Desert Ridge.

Although the Sumitomo parcel was not only in a pricier neighborhood but half the size, Wirth considered the Glendale site his best comp. He recommended that the Glendale site's $37,000-per-acre price be adopted for Sumitomo's land as well. Since his price was the higher of the two reappraisals, it was the one chosen by the Land Department.

Using all new comps, Chierighino and Wirth had produced their new appraisals in only three days. And this time, they differed by only $1,000 per acre--an astounding feat, analysts say.

Even more amazing, analysts say, is that Chierighino and Wirth, in a reversal of the reasoning appraisers normally use, found that a smaller, 132-acre site was cheaper by the acre than the larger, 388-acre parcel that bordered it. Wirth placed its value at $68,000 per acre, Chierighino at $60,000.

A week later, the press announced that Phoenix had beaten out Newberg, Oregon, for the wafer plant.

Industry experts who called the first set of appraisals sloppy and unprofessional say the new appraisals were much worse. If the first evaluations were shoddy, the second set were dishonest, they say. But it intrigued analysts that Chierighino and Wirth hadn't completely acceded to the state's wishes.

"The state Land Department, clearly under pressure from the Governor's Office, instructed their appraisers to do something that appears to be nonsensical and clearly favorable to Sumitomo," says an attorney who examined the documents. "The appraisers obviously got those instructions and said, 'Say what, Jack?'"

The state's chief appraiser, Edward C. Jones, is carefully explaining the reasoning behind the Land Department's instructions to Chierighino and Wirth.

"The instructions on [the first set of appraisals] was for 500-plus acres. Under that situation, the Sumitomo site was not specified, it wasn't located yet. So they came back and identified the Sumitomo site. The second instructions were to appraise the Sumitomo site as one valuation and the balance of that 500-plus acres. And that's what occurred."

One of the most basic rules in appraisal, experts say, is that carving out a smaller parcel of land will cause the per-acre price to go up, for the same reasons it costs more to buy milk by the quart than by the gallon. If Chierighino and Wirth were simply asked to reassess the value of the smaller Sumitomo parcel, their valuations should have gone up, not down.

"Not necessarily," says Jones. "There were a certain number of infrastructure requirements. There were $7 million of infrastructure that was going to be required to be placed on that property."

How does that affect the value of the land?
"It will take the value down. Because the developer is going to have to put it in."

But the developer, Sumitomo, isn't putting in those improvements. As part of its incentives package, the City of Phoenix signed an agreement with Sumitomo Sitix which obligates the city to build improvements around the plant that the city itself has said could cost up to $10 million.

Those improvements will enhance--not devalue--Sumitomo's parcel.
But when Chierighino and Wirth were asked by the state to revalue that land, they were specifically told to disregard that the City of Phoenix would pay for those improvements.

In fact, the appraisers were told to assume that the improvements would subtract from, not add to, the value of Sumitomo's land.

Appraisers say it is important to subtract the price of improvements that a typical owner would require to make a piece of land usable. But costs required by a special user--such as a huge silicon-wafer plant--shouldn't be part of the equation.

The state's instructions to Chierighino and Wirth, however, ask the appraisers to give Sumitomo full credit for all of the water-sucking, power-eating requirements it will need.

That's something the department doesn't do for other customers.
Just ask the plant's next-door neighbor.

East of the Sumitomo site and across 56th Street, a similar, unimproved plot of state land went on the auction block in January. The 216-acre parcel was sold to the Mayo Clinic, which plans to put a 132-bed hospital on the site.

The Mayo parcel is twice as big as Sumitomo's.
It's in the same neighborhood, under the same zoning restrictions.
And its value was estimated by Mark Wirth, the same appraiser who judged the price of Sumitomo's acreage.

But only a month after he decided Sumitomo's land was worth $37,000 per acre, Wirth recommended that Mayo's land--only hundreds of feet away--should carry a price of $57,000 per acre.

Asked about the discrepancy, Jones, the state's chief appraiser, suggests that the market may have changed in the time--one month--that elapsed between the two appraisals.

The big discount the state wanted appraisers to give to Sumitomo for off-site improvements (as if Sumitomo were paying for them) are nowhere to be found in the Mayo appraisal. "This appraisal assumes the infrastructure and street improvements for the Sumitomo Plant will be installed by the City of Phoenix," writes Wirth.

When the City of Phoenix announced that it was paying for $7 million to $10 million in infrastructure improvements, city officials said that the improvements would benefit both Sumitomo and the Mayo hospital, and that in any case the roads and sewers would be needed regardless of who was moving into the neighborhood.

In other words, after the City of Phoenix promised to build streets and sewers for Sumitomo and Mayo, Wirth gave Sumitomo credit for paying cash for the improvements, but didn't give Mayo the same discount one month later.

Mayo seems to have been stiffed.
Mayo officials declined to comment, but sources close to the deal between Mayo and the state say that Mayo knew about Sumitomo's discount but didn't press for the same treatment.

Mayo officials, sources say, knew that the company didn't have the clout of the Japanese giant.

The reappraisals ordered by the Land Department will save Sumitomo $60 million over the 99-year life of the lease.

The lease itself is written in the most forgiving terms. In the first five years, Sumitomo will pay only $58,711 annually to lease 131 acres of prime desert real estate. It's ten years before increases for inflation kick in. And Sumitomo will incur no penalty if it backs out of the lease in the first 15 years.

In the high-tech field, that's almost an eternity.
If Sumitomo does move on to greener pastures after 15 years, it will have paid only $3.3 million in rent--which is less than half what the land is worth, according to the original appraisal.

"It's still $100 million, no matter how you slice it," says state Land Commissioner M. Jean Hassell when asked about the reappraisals and terms of the lease. (Actually, the lease requires Sumitomo to pay $90,377,087 over 99 years. Using Chierighino's original appraisal, however, Sumitomo would have paid $149,999,440.)

Hassell says that despite what the governor says in his September 5, 1995, letter, Symington never asked him to come up with a cut rate for Sumitomo.

"The governor never called me or said one word about Sumitomo to me. That's just garbage," he says, and suggests the governor may have been confused. "The only people who talked to me about Sumitomo were people at Commerce." Hassell says former Commerce director Sara Goertzen-Dial stressed verbally to him the importance of the Sumitomo plant, but made no mention of appraisals of state land.

"These were good appraisals," he adds. "[Chierighino and Wirth] do a lot of work for the Land Department." And Hassell says it's not important that the appraisers didn't follow state instructions to the letter. "If they came up with another way to value it, then [chief appraiser] Jones would be a damned fool not to consider it."

And Hassell disagrees that the Sumitomo deal spells trouble for the Land Department.

"New Times thinks everything looks bad. I can't control what you think. I just do the best I can do. To us, Sumitomo was just another deal."

In fact, Hassell stresses, even after the appraisals were done, Sumitomo wasn't guaranteed to win an auction for the lease. For that reason, Hassell says, he and his employees never gave Sumitomo any more consideration than they would any other applicant.

Months before the auction, however, Sumitomo, city officials and the developers of Desert Ridge had made sure that nothing so messy and unpredictable could possibly take place.

Northeast Phoenix Partners Inc., a development partnership, had "first refusal rights" on the Sumitomo parcel. That meant that whatever anyone bid at the auction, Northeast Phoenix Partners had the right to match it and win.

And Northeast Phoenix Partners had already committed to sell the lease to Sumitomo.

So no matter who showed up to bid on the land, Sumitomo would have won. In some circles, that's known as a rigged bid. But Hassell dismisses that label.

"People still could have bid," he says rather unconvincingly.
Edward Jones, the state official who sent Chierighino and Wirth their new instructions on the appraisals, also denies that he received any communication from the Governor's Office. He says he was unaware that Symington had ever considered the first appraisals "flawed."

And he vigorously denies that he was party to an effort to artificially lower the price of state trust land. "No. That's against our ethics. And it's against my ethics," he says.

Arizona's constitution spells out the state's responsibility very clearly: Before being sold or leased, state lands "shall be appraised at their true value," and not sold or leased for less than that amount.

But more than the state's constitution may have been betrayed if the governor and Land Department officials artificially lowered the price of Sumitomo's land below its "true value."

The beneficiary of that land's value is the public school system of Arizona.
If Governor Symington has been able to survive the wrath of angry retirees left holding the bag after his previous business failures, the ire of the state's parents may be another matter entirely.

Given the governor's increasingly precarious position--just last week his former accountants agreed to help federal investigators in their case against him--the last thing he needs is an angry electorate.

And Chris Klein thinks that's just what an investigation into Sumitomo's appraisals will generate. Klein is a member of the coalition of residents opposed to the Sumitomo plant who has spent hundreds of hours going through government documents about the factory.

"The governor used his authority to leverage a state department to discount state land. That money is supposed to go to Arizona's children. What the governor did is wrong," Klein says.

"The whole process sure looks crooked," says Steve Brittle, one of the leaders of Phoenix residents who oppose the building of the silicon-wafer plant. Brittle says the coalition of anti-Sumitomo protesters will urge state Attorney General Grant Woods to look into the appraisals and the governor's involvement.

"It's a scandalous way of robbing our children of their education fund, especially at a time when the state is so concerned with how to finance education," Brittle says.

Karie Dozer, spokeswoman for Attorney General Grant Woods, says that the matter has not yet come to the attorney general's attention, and that she couldn't offer any comments about the appraisals. "It's best for us to see what somebody has sent us before we offer to comment," she says.

Former attorney general Bob Corbin says there is precedent for the AG to act. He once filed a lawsuit to get the state more property after the Land Department had agreed to an inequitable land swap.

"I said, 'We're getting a bad deal on this exchange,'" Corbin recalls. "So we went after them and we got a bunch more land for it."

Corbin says a citizen or a school district could also sue in an attempt to get a true value.

"This land belongs to the people," Corbin says. "When you start selling it for half price, you've got to have a reason. If there's not a logical explanation, then I'd look into it."

Sumitomo Sitix President Robert Gill declined to comment on the Land Department's handling of the appraisals, saying that his company had nothing to do with how the department valued state land. "I can say that we were surprised by the initial appraisal. We thought it was too high from what it was originally estimated at," he says, saying that those "original" estimates had come from appraisers hired by Sumitomo. "We assumed a number far less than what the [Land Department's original] appraisal was."

Gill says he was not personally in contact with either Land Department officials or Governor Symington at the time the appraisals were being produced.

He also claims to be unaware that Symington was in contact with his superiors in Japan.

"I never saw such a letter," says Gill.
Chierighino also says he was never aware of the governor's concerns about the appraisals, and he is adamant about his independence from the Land Department. "I did not know about that [Symington's] letter. I was not influenced in any way to come up with that value . . . and I think I adequately documented how I got from one value to the other," he says. "I don't do whatever [Land Department officials] tell me to do. . . . If they ask me to multiply three by six and come up with 12, I won't do it."

But he acknowledges that some people had fully expected him to follow the department's directions no matter how nonsensical. And Chierighino says they were angry that he hadn't.

Chierighino claims he was berated by some land-use attorneys who believed the land was worth only $15,000 an acre, and produced comps to back up their argument.

But Chierighino dismisses those figures, adding without a hint of irony: "You can find comps to back up anything you want to say. You know that.

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Tony Ortega
Contact: Tony Ortega