OIG recommends terminating the USPS-CBRE contract and refers cases for criminal investigation

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The Postal Service’s Office of Inspector General has issued its fourth report criticizing the Postal Service’s oversight of the contract with its real estate broker, CBRE.  It’s entitled “Postal Service Management of CBRE Real Estate Transactions.”

The OIG finds fault with both the leasing deals and the sales of postal property, and it recommends terminating the contract with CBRE.  The OIG has also turned several cases over to the OIG’s Office of Investigations to determine if laws have been broken.

The possibility that illegalities occurred involves both the lease negotiations and sales.  The OIG examined about 4,700 leases that had been negotiated by CBRE and found 57 where there was a huge rate increase — 200 percent or more than the previous lease rate.  Considering that the average increase was about 8 percent, that looks suspicious.

The OIG also found many cases where the lessors said that CBRE was including commission fees in rents paid by the Postal Service, which is contrary to the contract, so this matter has also been referred to the Office of Investigations.

Finally, in the case of several property sales, the OIG found potential relationships between the buyer and CBRE.  Those cases have been referred to the Office of Investigations as well.

Given these and many other problems in the arrangement with CBRE, the OIG has recommended that the Postal Service terminate the current contract with CBRE and “recompete” it, i.e., put it out for bid again with a new “request for proposals.”

The OIG leaves it to the Postal Service to decide whether the new contract should be with CBRE, another contractor, or a group of contractors (the GSA’s model) — or if Postal Service personnel should do more of the work (as in years past).  Whatever happens, says the OIG, “the idea of terminating the current contract is to ensure that future lease and sale negotiations are done with the Postal Service’s best interest in mind.”

The Postal Service has already rejected the idea of terminating the CBRE contract.  In his letter responding to a draft of the OIG’s report, Mr. Tom Samra, USPS Vice President of Facilities, says that the Postal Service has hired a consultant to evaluate the leasing program with CBRE against industry best practices.

Pending review of the consultant’s report, Mr. Samra says that the Postal Service has insufficient personnel to manage all the lease renewals.  Besides, Mr. Samra says he doesn’t think CBRE is doing anything wrong.

 

The sales

The sales of postal properties came under scrutiny in 2013, when investigative journalist Peter Byrne published Going Postal: U.S. Senator Dianne Feinstein’s husband sells post offices to his friends, cheap.  (Available on Amazon here.)

Going Postal Byrne-250x347Byrne’s year-long research into over 50 sales (concluded from May 2010 to April 2013) indicated that about 80 percent of the properties had been sold below their assessed value, sometimes to CBRE’s clients and business partners.

The discovery was particularly troubling because the chairman of CBRE at the time was Richard Blum, the husband of California Senator Feinstein.  (He’s still a major stockholder and remains on the Board of Directors.)

The OIG looked at 21 sale transactions, “judgmentally selected” from the 48 sales that were conducted by CBRE between January 2012 and September 2013.  The OIG found problems with 14 of the 21 sales.

The period of the OIG’s study overlaps with the timeframe examined by Byrne, so the OIG and Byrne looked at many of the same sales, but the OIG report does not list which sales it reviewed, so it’s not possible to determine if the OIG included the more egregious examples that Byrne uncovered.

The OIG compared the sale prices with the appraised values obtained by CBRE, not the assessed value that Byrne used, so the two reports don’t examine the same data, but they come to many of the same conclusions.

Actually, Byrne had submitted a FOIA request to the Postal Service for the appraisals on the properties he was examining, but it was denied, so he spent months researching the 52 properties to determine their assessed value.

A word here on the terminology.  The assessed value is the most recent sale price for a property, adjusted to reflect local market trends.  The appraised value is an estimate of the fair market value of a property based on comparables, market trends, potential rental revenues, etc.  Normally, property values go up, so the appraised value is usually higher than the assessed value.

That’s why when Byrne found that properties were being sold below assessed value, it was compelling evidence that they were being sold below their market value.  Now it seems that there’s even more to the story: The appraisals are themselves a problem.

 

The appraisals

The OIG found that all of the 21 properties it looked at were sold “within the goal of 90 percent or greater of the appraised values.”  The OIG notes, however, that “CBRE managed the entire appraisal process.”

As the OIG explains, “The appraisals were solicited by CBRE, prepared by contractors, and used to determine whether the sale price was acceptable to the Postal Service.  To avoid conflicts of interest, the appraisal process is normally managed and performed by professionals not involved in negotiating sales and leases or by realtors marketing the properties.”

Many of these appraisals did not meet industry standards.  The OIG found that “appraisals for seven of the transactions contained questionable financial analyses and comparisons to other properties that could have affected the credibility and reasonableness of the estimated market value.”

There were other issues as well.  Postal Service employees did not ensure that these “questionable appraisals” were revised, they could not locate a file to support the sale of one property for $2 million, and they did not maintain appraisal reviews to support the sale of two other properties for $64 million.

The OIG also found that “for five properties, we also found potential relationships between the buyer and CBRE.”  In four cases, the properties were sold at or above their appraised value, but appraisals for three of the properties were “questionable” because they were inconsistent with market value.

This is precisely the theme of Byrne’s book — that postal properties are being sold below market value to business interests who have a close relationship with CBRE.  The OIG was concerned enough about this issue to refer the transactions to the OIG’s Office of Investigations for further review.

 

Seven cases

The OIG’s report contains a table about the seven properties where there were significant “discrepancies” with the appraisals.  The table shows the city, sale price, appraised value, and a note about the issue, but it doesn’t provide many details, so here’s more information about the seven disposals.

York, Pennsylvania

The OIG’s table indicates that the sale price was $350,000, slightly above the appraised value of $320,000.  The table states that “the appraisal’s estimate of market value was speculative and not well-supported because the appraiser did not perform an analysis of financial feasibility as required.”

As reported on “Save the Post Office” just a few days ago, the historic York post office had been appraised by the county’s Assessment and Tax Claim Office at $1,480,440 (according to the York Dispatch).  It was initially listed for sale on the CBRE-USPS Properties for Sale website at $800,000, and then dropped to $650,000.

In 2013, York businessman Themi Sacarellos bought the post office from the Postal Service for $350,000.  He may have put something into fixing it up, but then he sold it in April 2015 for $795,000.  That may be one reason why the appraisal of $320,000 looks problematic enough to warrant a criminal investigation.

Sandston, Virginia

The OIG says the property was assessed at $1,350,000, and sold for $1,454,250.  That looks fine, but the OIG proceeds to note the following:

“The market data for this appraisal was insufficient; therefore, the appraiser should have considered another approach to value the property.  For example, a comparable sale was distressed, but no adjustment was made for this condition.  The property resold for $2.4 million within 4 months of sale; however, we do not know the extent of the redevelopment or improvements made by the new owner.”

The property in question here is the USPS Richmond PD&F processing facility at 500 Trampton Road in Sandston, Virginia.  The USPS sold it to Swift Air Logistics in December 2012 for just under $1.5 million.  It was probably worth much more.

Byrne’s research found that the property had been assessed in 1999 for $2.5 million.  When CBRE offered the property on its USPS-CBRE website, the asking price was $2,625,000, and that was the price on the flyer, too.  A subsequent CBRE sales brochure dropped the price to $2.3 million.

After buying the property in December 2012, Swift resold it April 2013 to Trampton Properties, LLC, apparently for $2.4 million, as noted in the OIG report.  That’s almost $1 million more than the USPS sale price — and cause for a referral to the Office of Investigations.

Gilbert, Arizona

The Postal Service sold a facility on 900 N. Fiesta Blvd. in Gilbert, Arizona, for $2,9750,000, the same price listed on the USPS-CBRE website and sales flyer.  The appraised value was somewhat less, $2,750,000, but the OIG notes a serious problem in the appraisal: “The appraiser’s approach was flawed due to overgenerous estimates of expenses based on market data and very conservative in determining value per square foot of the property as compared to similar properties sold.”

That something may have been amiss in the appraisal is indicated by the fact that the new owner redeveloped the building and subsequently sold the property about one year later for $6.8 million. The OIG acknowledges that it doesn’t know the extent of the redevelopment or improvements made by the new owner, but an increase in value like that has to be suspicious.

A prospectus from April 2013 provides more details.  The building was constructed for the Postal Service in 1999 to serve as a distribution facility.  LGE Design Build in conjunction with a financial partner purchased the building with the intent of redevelopment for the specific needs of Air Transport Components, Inc.  LGE planned to redevelop the property in 2013, and set the asking price at $6.5 million.  To justify the price of about $104/SF, the sales brochure describes six comparables where the sale prices per square foot were $80, $97, $105, $108, $118, and $217.

A news item in AZBigMedia.com says that the property changed hands in June 2014, when Md 900 Fiesta LLC sold it to Commercial Properties, Inc., for $6.85 million — more than twice what the Postal Service sold it for.

Shawnee, Oklahoma

The 13,000-square-foot property at 5630 N. Harrison St., was listed for sale on the USPS-CBRE website and sales flyer for $680,000.  The OIG’s table says the property was appraised at $640,000 and sold for $576,000.  The OIG notes, “The market data for this appraisal, such as comparable properties sold were insufficient; therefore, the Postal Service should have considered another approach to value.”

Forest City, NC

The OIG says this property was appraised at $210,000 and sold for $225,000.  But the OIG also notes, “The appraisal did not include sufficient evidence or analyses to support the significant adjustments made to comparable land sales No or the estimate of market value. For example, the value of a comparable sale was adjusted downward by 115 percent.”

This is a reference to 4.8 acres of land at 133 S. Powell in Forest City.  The USPS-CBRE website and flyer offered the property at $290,000.

West Jersey, New Jersey

The OIG’s table says this property was appraised at $6,315,000 and sold for $5,950,000.  The OIG adds, “The appraisal contained mistakes in applying deductions to the market value.  For example, the appraiser applied a deduction for functional obsolescence twice.”

This property is the West Jersey P&D Center, 54 S. Jefferson Road, in Whippany, New Jersey. It’s on the USPS-CBRE website, with a sales flyer, but no price indicated.   According to Byrne’s research, the assessed value was $14,250,000.

The property was sold to the UniFirst Corporation in September 2012.  As Byrne notes, Unifirst is a client of CBRE, and it appears on the CBRE website as clients of several CBRE executives.  This is probably one of the cases where the OIG was concerned about the potential relationship between CBRE and the buyer, so it was referred to the Office of Investigations.

St. Paul, Minnesota

The OIG’s table indicates that the property was appraised at $2.7 million and sold for $5.25 million.  The note reads, “The market data for this appraisal was insufficient; therefore, the appraiser should consider another approach to value the property. For example, there was no market evidence to support the 75 percent downward adjustment of a comparable sale.”

There is much more to this story, as told by Byrne in his book.  The property in question here is none other than the historic Eugene McCarthy Post Office, a 17-story tower of 750,000 SF built in 1933 and expanded in 1966.  Byrne’s research discovered that in 2009 the Ramsey County assessor estimated the fair market value of the property at $ 25.3 million.

The Postal Service sold the building to developer Jim Stolpestad for $5.25 million.  He proceeded to get an $850,000 grant from the St. Paul’s Met Council for cleanup costs associated with removing lead paint and asbestos.

The building is being is now being sold off in parts.  In February 2015, Des Moines-based Nelson Development paid $2.85 million for the first three floors, according to BizJournals and a certificate of real estate value.  This part of the building is being turned into a Hyatt Hotel.  The upper floors will be luxury apartments.  The whole conversion is estimated to cost $78 million — a lot of money to put into a building that cost just over $5 million.

 

The leases

The OIG’s report also focuses on the leases that CBRE manages.   As with previous reports on this issue, the OIG identified several issues.

One big problem is the lease rates.  The OIG compared the lease rates negotiated by CBRE with market rates and found that 70 percent of these leases were at or over the maximum amount the Postal Service should have paid, “providing additional evidence that CBRE may not be providing the best deal for the Postal Service.”

In 57 cases of the 4,700 reviewed, the renegotiated lease had a rate increase of 200 percent or more than the previous lease rate.  The OIG referred these cases to the OIG’s Office of Investigations for further review.

The OIG also compared the leases negotiated by CBRE with those negotiated by the Postal Service and found that the average rent increase was three times higher when CBRE did the negotiation.  According to the OIG, the Postal Service could be overpaying nearly $10 million a year in lease costs.

Another issue is that the Postal Service continues to allow dual agency transactions, in which CBRE represents and negotiates for both the Postal Service and buyers or lessors.  The OIG repeats the criticism it has previously made of such transactions:

“These actions are inherently risky and create conflicts of interest whereby CBRE may not negotiate property sales and lease transactions in the Postal Service’s best interest or may capture opposing party fees from the Postal Service.”

The OIG also criticizes the way CBRE collects commissions from lessors for lease negotiations in addition to payments from the Postal Service based on performance targets for lease renewals.

Some lessors have claimed that CBRE informed them that they could “recover” commission fees from the Postal Service’s increased rents to them.  As the OIG puts it, “CBRE represented that the fee would, in effect, be paid by the Postal Service. If true, the contractor is causing the Postal Service to pay for CBRE to negotiate against the Postal Service.”

This is another of the issues that has been referred to the OIG’s Office of Investigation for further review.

 

The USPS response

As is customary, the OIG shared the report with the Postal Service for comments.  Mr. Samra’s response runs to 12 pages.  The OIG’s report, which is 22 pages plus appendices, summarizes the response and makes some observations about them.

“Management disagreed with significant parts of our report,” says the OIG.

The OIG made a half dozen recommendations to Mr. Samra about how to improve appraisal review, records management, and policy implementation.

Mr. Samra was fine with most of these recommendations, but he rejected recommendation number 1 — “Terminate and recompete the current CB Richard Ellis, Inc. (CBRE) real estate management services contract.”

Mr. Samra told the OIG that the Postal Service disagreed with terminating the contract and prohibiting CBRE from collecting commissions from lessors.

He said that terminating the contract would be imprudent because the Postal Service lacks sufficient personnel to handle all of the required leasing and real estate transactions.

Mr. Samra also believes that the Postal Service is using the industry standard method for compensating CBRE, and he does not think lessors need to be told that they are not required to pay commissions for new leases.

Mr. Samra also told the OIG that the Postal Service was in the process of engaging an independent consultant to evaluate aspects of the leasing program with CBRE and determine if they are following industry best practices.  Until then, the contract with CBRE will not be terminated.

The OIG did not consider Mr. Samra’s response to recommendation 1 “fully responsive.”  The OIG therefore says it’s time for the “audit resolution process,” and it is not going to close the book on these issues until it has received and approved written confirmation from the Postal Service that corrective measures have been taken.

For now, anyway, the contract with CBRE will continue.  But with several issues being referred for criminal investigation, the story is hardly over.


(Photo credits: former postal properties in St Paul, MN; York, PA; Sandston, VA; Gilbert, AZ; Shawnee, OKWhippany, NJ; and St Paul, MN)

 

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