Surprising details emerge on Post Office sale

U.S. investigators say a local development group had an "apparent conflict of interest" in its many project roles.

The U.S. Postal Service's grand 30th Street building and surrounding properties in Philadelphia have been the subject of development dreams and rivalries for two decades.

Now, in the final stretch toward their $2 billion reconstruction as a glittering gateway to University City, surprising details are emerging about multimillion-dollar deals underpinning the project.

Federal investigators have concluded that Keating Development Group of Philadelphia, which represented the Postal Service, had an "apparent conflict of interest" by playing multiple roles in the project. The Keating Development Group is now poised to become codeveloper of the historic building. Keating Development is a unit of the Keating Group, which also includes construction and environmental management services. Daniel J. Keating III, its chairman and chief executive, said his company did nothing improper.

The buyer, the University of Pennsylvania, which had fought so hard over the $50.6 million purchase, now is planning to sell the iconic building to Brandywine Realty Trust, owner of the nearby Cira Centre, for $20 million.

And federal taxpayers, under the soon-to-close deal, would help finance part of the project by paying a high rent - up to $32.3 million a year - for the new tenant, the Internal Revenue Service.

While acknowledging the costs are high and a few players have an intertwined history, developers and government officials say the project is aboveboard and will be hugely beneficial for the city and Penn.

"We've taken the properties and gotten them successfully developed," said Craig Carnaroli, Penn's executive vice president. "This is part of our march eastward to the Schuylkill river, where we're able to improve the quality of life for everyone."

Proclaiming the project "great news for the city" in October, then-U.S. Sen. Rick Santorum, a Republican, announced congressional authorization of the IRS move. He said it "not only brings jobs to the region, but will allow the 30th Street facility to maintain its historic integrity."

Since then, a report by the Inspector General's Office of the U.S. Postal Service found several infractions by the quasi-private service and faulted it for letting Keating have several conflicting roles, a few simultaneously.

 

Multiple roles

Since 1999, Keating has acted as a broker for the Postal Service, a middleman with the IRS and U.S. General Services Administration, a potential buyer of the property from Penn, a codeveloper with Brandywine, and may yet become a part-landlord and construction manager, according to the report and parties involved in the project.

"These multiple relationships result in an apparent conflict of interest, so there is no assurance that Keating is acting in the Postal Service's best interests," said the report, signed by Deputy Assistant Inspector General Mary W. Demory and released with no notice in February.

Keating, in an interview last week, rejected the suggestion he did anything wrong and said investigators never asked for his side of the saga.

"We did exactly what we were asked to do," Keating said. "It was our charge to have those roles."

Indeed, the Postal Service had specifically sought a developer who could profit from the deal as compensation for his work. In its 1999 contract, the service even anticipated Keating's many roles and stipulated that he would forgo broker payments of up to $600,000 if he became a buyer or investor.

Politically savvy and well-connected, Keating holds similar exclusive contracts to represent the Postal Service in developing its properties from Maine to South Carolina. Keating said that, since 1992, he has done at least seven other Post Office projects, including developments in Wilkes-Barre, Pa.; Arlington, Va.; and Bethesda, Md.

Philadelphia was a unique challenge. After some false starts, the Postal Service in 1999 offered an exclusive contract to a developer just to sell its 24-acre site. It picked Keating over two other bidders: the commercial real estate firm Cushman & Wakefield Inc. and a venture called 30th Street Gateway Partnership, according to Postal Service records. "Neither raised any objections to the selection of Keating," it said.

But in the ensuing effort, Demory, the inspector general, cited several procedural failings: The Postal Service failed to sell the property "on the open market," did not give other government agencies first crack at buying it, and did not get an independent appraisal of the site.

Tom A. Samra, the Postal Service's vice president for facilities, acknowledged the errors and ordered a retrospective appraisal last year. Conducted by Cushman & Wakefield, it put the 2001 value at $50 million.

That is less than the $50.6 million price agreement Keating won for the service in March 2002. Only afterward did Keating take on other roles, Samra said. He added that Brandywine has promised a $7 million incentive payment to the Postal Service to close the deal.

"The proposed contract changes represent a significant financial benefit to the Postal Service," Samra wrote in a formal response to the report.

To prevent missteps again, Samra promised to clarify rules on documenting real estate actions and hold seminars for staff on conflicts of interest.

The inspector general's office said last week that Samra was "responsive" and that it no longer was investigating the deal, a spokeswoman said.

 

Closing time

The whole complicated transaction, including ownership changes and a memorandum spelling out the government leases, is expected to close this spring.

Alan Kessler, vice chairman of the Postal Service board of governors, said he considered the case closed.

"The bottom line is it's a fair price and a good price. To the extent there were any conflict issues, they came after the transaction" agreement, said Kessler, also a lawyer in Philadelphia.

Still, the inspector's questions, and other emerging details about the deal, drew a mixed response from other developers and real estate experts.

"The one person who is the custodian for the Post Office becomes the broker, developer and investor, and that's not right," said Frank G. Binswanger Jr., a broker who once represented owners of the property currently leased to the IRS in Northeast Philadelphia.

"They ignored the facts and gave the Post Office a slap on the wrist," Binswanger said.

But Gerard H. Sweeney, chief executive officer of Brandywine Realty Trust, which Keating brought into the deal, said multiple roles were common and acceptable as long as they were disclosed.

"This was a long, fair-valued, clearly educated-seller and -buyer transaction," Sweeney said. He added: "The time line was years between these agreements" involving Keating.

Between 1999 and 2002, Keating came up with three prospective buyers: Penn, the Phillies for a baseball stadium on the parking lot, and Home Depot for the main building. Only Penn wanted it all and was serious, he said.

In March 2002, Penn and the Postal Service, represented by Keating, tentatively agreed to a price, then dove into detailed discussions on the site. The university was focused on parts bordering its campus and was less interested in the historic building, for which it could not figure out a use.

In October 2002, Penn privately approached Keating with a proposition: After Penn acquires the whole Postal Service property, it would sell the main building alone back to Keating for development.

Keating said he did not have a tenant and "didn't want it." Still, the pitch foreshadowed deals to come, troubled the inspector general, and proved the value of having an insider position.

 

Chance meeting

In November 2002, Keating's No. 2 executive, Dennis A. Martin, was walking through the Dallas-Fort Worth airport on a business trip and bumped into Paul Chistolini, a top official at the General Services Administration, which administers federal real estate. They knew each other from previous deals.

"Would you be interested in doing an IRS deal at the Post Office?" Martin recalled Chistolini's asking. "We didn't know it at the time, but the GSA was trying to replace its Philadelphia [IRS] property. They wanted to build a new facility, but couldn't get the money."

That chance encounter, according to Keating and Martin, led to a series of meetings with the GSA and IRS. The inspector general later faulted the Postal Service for failing to contact the GSA earlier and not documenting the conversations.

Keating and the Postal Service agreed to keep the GSA/IRS talks secret from Penn. "We didn't want to do anything that would take Penn off track" as the buyer, he said.

Finally, in March 2004, the Postal Service and Penn officials met in a Philadelphia law office and signed the sale agreement with the closing set for spring 2007. With the ink still wet, the Postal Service officials turned to Penn's people.

"Keating has a potential tenant for the main post office, and we'd like you to talk," Martin recalled.

Penn liked the idea. Keating came up with the idea of Penn's flipping the building to another entity that would lease back to the government.

"We were thinking about buying it ourselves," Keating said. Instead, he said, he brought in Brandywine, which has experience in obtaining historic tax credits worth millions of dollars.

In late 2005, after more delays and management changes at Penn, its new president, Amy Gutmann, approved the plan, according to Keating and Martin.

It calls for the Postal Service to sell the building to Penn, which would turn around and sell to Brandywine, with Keating as a partner or investor, according to the inspector general's report. Sweeney said Keating would be a "codeveloper" and possibly have other stakes.

To abide by federal leasing rules during the long renovation period, Brandywine would lease the building back to the Postal Service, which in turn would sublet to GSA - all at no cost. After renovation, when the IRS moves in, Brandywine would take over the direct lease to GSA, the Postal Service said.

The IRS lease would include a new garage that Keating and Brandywine intend to build on the adjacent Post Office Annex site. Separately, Brandywine would get rights to develop office/condo towers flanking the garage. Penn would keep ownership of the land and have a say over the building designs.

The Post Office would keep its current vehicle maintenance garage and may develop the site into a retail center. Penn gets first-refusal to buy the tract at a later date, it said.

And Penn keeps what it always wanted: the 14-acre vacant lot south of Walnut Street, on which it intends to build sports, academic, residential or cultural facilities.

 

Key to the deal

Lease income from the GSA is key to the whole deal. The developers last year won congressional approval for the agency to spend up to $36 per square foot on moving the IRS into the 862,000-square-foot space, or roughly double the IRS's current rate at its aging Northeast Philadelphia campus.

The regional GSA office, in an e-mailed response to questions, defended the rate as "fair and reasonable" and noted it included parking, renovations and security-related improvements.

It called the current facility too big for the shrunken workforce and impractical to renovate. The GSA hired a private real estate search firm to find alternative sites and found none, it said.

"We must provide a modern office environment, in accord with today's requirements for IRS operations in Philadelphia for the next 20 years," the GSA said.

Renovation plans envision work space for up to 5,500 IRS employees, or perhaps all the IRS Philadelphia-area employees after consolidations this year, developers said.

For developers, the national taxpayer cost pales compared with the local benefit. Besides, said Carnaroli of Penn, there were no other tenants.

"If somebody else wanted it, where were they?" he said. "Not a lot of people have come in to me with a demand for 800,000 square feet."

 


Contact staff writer Thomas Ginsberg at 215-854-4177 or tginsberg@phillynews.com.