Postal Service defends sale, rental deals (5/11 update)

MAY UPDATE: More in my column in today's Philadelphia Inquirer here. See also comment from Frank Binswanger Sr., dean of Philadelphia's commercial brokers, below at bottom.
APRIL: The U.S. Postal Service's Inspector General in this report recommends the agency fire CBRE Inc., the largest U.S. real estate broker, and re-bid the company's four-year-old contract for leasing private properties and selling surplus offices for the Postal Service.

The agency says CBRE's practices of representing its own private-sector clients -- buyers of surplus Post Office facilities, as well as landlords who rent sites to the Post Office -- at the same time CBRE is paid to get the best rental and sales prices for the Postal Service "are inherently risky and create conflicts of interest."

CBRE "followed the standard business practices explicitly defined in our contract," and is "committed to cooperating with any governmental review," said spokesman Robert McGrath in response. (More details from CBRE's response near the end of this item.)

The Postal Service "agrees with much of what the OIG recommends, (but) it must disagree with the recommendation to terminate its contract with CBRE and to cease allowing CBRE to be compensated by Postal Service landlords on a commission basis," Postal Service spokeswoman Sue Brennan told me. She said CBRE's practice is "the industry standard method for broker compensation."

While the service is reviewing broker commissions, it has no plans to end the CBRE deal, she added: "The commissions paid to CBRE to handle Postal Service leasing matters are negotiated between CBRE and the landlord, and are paid only on the completion of a transaction." More at usps.com/news, see "Featured Topics".

American Postal Workers Union Priesident Mark Dimondstein in a statement called the report "a stinging indictment of the way the U.S.P.. has sold" properties and "a condemnation of the cozy relationship" with CBRE. Dimondstein also noted CBRE Chief executive Robert Sulentic is a director of Staples, which has offered itself as an alternative mail collection center as Post Offices close.

As CBRE and other large brokerages have consolidated into national real estate networks, it has become common for one firm to represent both sides of a private transaction.

But Inspector General staff, reviewing a string of CBRE-brokered transactions, said some of the appraisals appeared incomplete, and some involved transactions with CBRE's private clients.

They also received reports of CBRE imposing unauthorized commissions on private landlords renting to the Postal Service, and CBRE-imposed rent increases used to fund CBRE private landlord commissions at the Postal Service's expense.

Since CBRE represented both sides in deals, "this arrangement allowed CBRE to negotiate with no parties present, representing both the lessor and the Postal Service and being paid by both," according to the report. CBRE has collected $20.6 million on lease commissions starting in 2012, while also qualifying for Postal Service lease-renewal payments.

The Inspector General also complained that rent increases on leased post offices where CBRE was the broker were more than triple rent increases the Postal Service renewed without CBRE, and "the Postal Service could be overpaying an estimated $9.5 million per year" on CBRE-assisted leases.

The Inspector General referred 57 leases on which CBRE brokers more than tripled the rent to its investigators "for further review." It also referred 5 of the 21 sales transactions it reviewed for investigation because of "potential relationships between the buyer and CBRE."

Also, the Inspector General said a majority of the sample negotiations and appraisals it reviewed lacked proper documentation to justify CBRE's valuations.

CBRE's McGrath said the firm has sent the Postal Service $62 million above independent appraisal values on Postal Service property sales, reduced Postal Service labor costs on more than 6,000 lease renewals, and negotiated leases below appraisal values worth $2.2 milion a year.

Postal work "is a complex undertaking involving the competing objectives of a variety of special interest groups, few of whom have expertise in real estate practices and standards," McGrath added. "We are proud of our work."

Besides recommending an end to the CBRE contract, the Inspector General recommended better training and oversight at the Postal Service for its rental and sale transactions, and a ban "to prohibit CBRE from collecting commissions from opposing parties" or "dual representation" while it is still doing work for the Post Office.

UPDATE: Frank Binswanger Jr., who runs the blue-chip corporate-client Binswanger commercial real estate brokerage here in Philadelphia, read my column and agreed with the Inspector General's concerns about brokers representing both sides in a deal. He told me:

"My father, Frank Binswanger Sr., who started in the business in 1933," knew the temptation to work both sides, and urged Frank Jr. to resist: "You can't burn the candle at both ends and be honest with the people you are representing. It's not because you don't want to do it. And people will always want to make excuses. But a little greed here, a little greed there, it goes a long way."