(The material referred to follows:)

LETTER OF ACCEPTANCE

PUBLIC BUILDINGS SERVICE,
August 14, 1959. ·

THIRD RECON CORP.,
Kansas City, Mo.

GENTLEMEN: Acceptance is hereby made, effective November 15, 1959, of your offer dated August 6, 1959, as amended by your letter dated August 14, 1959, for 46,200 net square feet of office space, comprising the ground floor, first, second, and third floors, and 4,000 net square feet of parking space located in the basement, all in the building located at 2420 Broadway, Kansas City, Mo.

For the initial term of 3 years beginning with the effective date of the lease, the rental rate shall be $13,800 per month. The lease may be renewed for two additional periods of 3 years each. The rental for the first renewal shall be $12,914.50 per month, and for the second renewal period of 3 years shall be $12,529.50.

The rental rate indicated in this acceptance is subject to compliance with the terms of section 322 of the Economy Act of 1932, as amended (40 U.S.C. 278a). In the event the rental spécified in your bid exceeds the limitation in said act, it will be reduced to the maximum allowable amount.

Sincerely yours,

EARL H. LUND,
Regional Director.

Mr. BROOKS. Is it still your opinion that the letter was not a binding acceptance by the Government and that responsible bids should not have been rejected?

Mr. HORN BOSTEL. Yes, sir. If we had other bids. I don't know what we had. I am really in doubt about it. That may have been the only bid that came in. But if that was the only bid that came in, it was no bid. That is my testimony. My opinion, rather.

Mr. BROOKS. And also your testimony.

Mr. HORN BOSTEL, Yes, sir.

Mr. BROOKS. On that same page of your memo of November 6 sir, would you read the last paragraph on there, starting off "In our opinion."

Mr. HORN BOSTEL. Yes, sir.

In our opinion, to now revise, amend, supplement, and modify subject sublease which has been signed by W. D. Ray, president, for Third Recon Corp., in order to correct the chronology of events and interests of the various parties involved in this transaction, would not adequately protect the interest of the Government.

Mr. BROOKS. Do you consider that the lease finally executed on November 23, 1959, to be a valid and binding one?

Mr. HORN BOSTEL. Yes, sir, and I so made a written finding on that; under date of November 24. Yes, sir, I did.

Mr. BROOKS. Right after that, the day after the new date that had been written on that contract?

Mr. HORN BOSTEL. Yes, sir. It was forwarded in after-you see these come into the office under procedure, signed by the lessor. We know that that is what he will accept. Then it is referred to legal, so that we can check it so that the contracting officer for the Government will have the benefit of our opinion as to whether it is a binding obligation so he may execute it on behalf of the Government. That is the procedure that we follow.

Mr. BROOKS. We have a copy of that opinion. We will make it a part of the record.

The invitation called for a lease term of 3 years with five 1-year renewal options. Is that correct?

Mr. HORN BOSTEL, The invitation for bids?

Mr. BROOKS. Yes.

Mr. HORN BOSTEL. I believe that is correct. I think the file will show that. That is our policy in 99.9 percent of the cases.

Mr. BROOKS. They have five 1-year renewal options?

Mr. HORN BOSTEL. If we can get five, fine. If we can get three, fine. If we can get one, fine.

Mr. BROOKS. One-year renewals?

Mr. HORN BOSTEL. Oh, yes. So that we

Mr. BROOKS. You like to make them optional 1 year.

Mr. HORN BOSTEL. That is usually the procedure. You will find exceptions where they have sometimes 5 years. Ten years, maybe. In special cases. But that is the general run-of-the-mill policy; 1 year renewals only.

Mr. BROOKS. Why is that generally the policy?

Mr. HORN BOSTEL, That is, if the agency outgrew the space and it would be a drag on the Government we wouldn't lose too much rent; if the property wasn't needed we would move other agencies into it. There are many questions as to that policy. Of course that matter is one that should be spoken of. It is not a legal question. It should be spoken of by the operating officials, not by me, sir. I am not in the operating end of it at all.

I am just purely in the legal end of it.

Mr. BROOKS. On the date of acceptance of the Third Recon's offer by Mr. Lund, it was changed to provide for two 3-year options to renew this contract, was it not?

Mr. HORN BOSTEL. Yes, sir, and I think that is the final lease agreement; two 3-year periods, a firm 3-year period followed by two 3-year options. It makes a total of 9 years.

Mr. BROOKS. Do you know if the new Federal office building will be completed by the end of the initial 3-year term of this lease?

Mr. HORN BOSTEL. This-lease was effective January 1, 1960.

Mr. BROOKS. By January 1963 will they have that building finished? Mr. HORN BOSTEL. We haven't started on it yet. I don't believe the site has been acquired yet. It would take I am just drawing on my past observations in similar construction-it would take a year and a half I think for the architects and engineers to prepare the plans and specifications and probably 2 to 3 years. It will be a $39 million installation.

Mr. BROOKS. It might run more than 3 years then?

Mr. HORN BOSTEL. I would say if we go in there in 1964, late 1964 or early 1965 would be

Mr. BROOKS. That means when the first 3-year term is up for this property, instead of renewing for a 1-year option to renew, which would bring them into 1964, they will have to renew, if they do, for a 3-year period, which will bring them into 1966, which will be well after the estimated completion date of this new Federal building? Mr. HORN BOSTEL. Yes.

Mr. BROOKS. Does that follow?

Mr. HORN BOSTEL. That follows of course, if you grant the premise. If you grant the premise, that does follow, of course. That is pure

logic about that. But whether we will ever get the office building I don't know.

Mr. BROOKS. So the chances are the Government will renew again at the end of even the 6-year period?

Mr. HORN BOSTEL. I think, yes, if they need the space, and the space is satisfactory, and the service satisfactory, I would say that there is not much doubt that we would move out at the end of 3 years unless we have rent-free space some place.

Mr. BROOKS. Are you fairly familiar with the cost figures on this lease?

Mr. HORN BOSTEL. Yes. I have read the options and I have read the of course I know what rent we pay. I think the rent graduates down during the option period. I am some familiar with it.

Mr. BROOKS. I wonder if you would take a look at this sheet on income and estimated expenditures under this lease that was prepared by staff, so as to present it in an understandable manner, a little memo which shows the various money factors involved in this lease. I wonder if those figures concur with the information available to you in the files. Take a minute to look at it.

(The staff memorandum referred to follows:)

Income and estimated expenditures of Third Recon Corp. under sublease GS-06B-5599

Total__.

Deficit

Breakdown of services and other expenses:

Services (figures from Third Recon), per year---
Insurance (estimated), per year---

For 3-year primary term--.

Mr. HORNBOSTEL. I wonder if I could have the files.
Mr. BROOKS. Take a look at it.

Mr. HORNBOSTEL. At this?

Mr. BROOKS. Yes. We don't want to crowd you. I believe we have asked the GSA to bring that file up here. If you want to check any figure in it, I believe they will have it and will probably be willing to have you look at it.

Mr. HORN BOSTEL. I have the right to examine the files. There is no disposition to keep-whoever prepared this, they have assured me that $13,800 times 12 times 3 equals $496,800. That will be it, unless you want me to make the computations.

Mr. BROOKS. The staff member who prepared it worked his way through college as a bookkeeper while getting a law degree, so I guess he is pretty competent to testify on that.

Mr. HORNBOSTEL. I will testify on this basis, that these figures were actually taken out of our records?

Mr. BROOKS. Yes, sir.

Mr. HORN BOSTEL. GSA records? And they represent the true amounts in the computations and all that are made from it? So I will assume the correctness of this and my testimony will be bottomed on the correctness of this for figures only.

if

Mr. BROOKS. To summarize these figures, at the end of 3 years, you will follow along with me, the Third Recon will have received $496,800 in rental income, and they will have paid $70,200 in rent, and the improvements will cost about $200,000, and other expenses will total about $192,000. This means that their income for the first 3 years will be sufficient to pay for all but about $2,000 of their entire expenditures for this 3-year period, including the complete remodeling.

Mr. HORN BOSTEL. That is mathematically correct; yes, sir.

Mr. BROOKS. Upon renewal of its option for another 3-year termand we are projecting how this will work out over the 3-year term and the next 3 and the next 3, their expenses and expenditures-upon renewal of its option for another 3-year period, the Government will be obligated to pay $464,922 in rent. And the Third Recon Corp. can then exercise its option with the Foremost folks to purchase the building at a cost of $275,000. There are other expenses during this period, liberally estimated to be about $221,826, which, with purchase price, exceeds the income by $31,904. And so, at the end of the sixth

year they will have received an amount sufficient to cover all but about $34,000 of the total remodeling, operating, and purchase cost of a building valued by the GSA at $727,000.

Mr. HORN BOSTEL. That is correct. I think your computation here, you should have subtracted instead of added. I am just catching it quickly here. Instead of being $34,000, it looks to me like it ought to be $29,000.

Mr. BROOKS. That $2,000 was a deficit, sir, in parentheses, because they lost $2,000 over the remodeling and cost of operation in the first 3-year period, Judge.

Mr. HORN BOSTEL. This appears to be mathematically correct from what it states; yes, sir.

Mr. BROOKS. Should the Government exercise its second option to renew-that is going into the 7 through 9 years the rental income during that period would be $451,062, while their expenses are estimated at $221,826. And allowing for the prior deficit of $34,051, they stand to make a profit of approximately $195,185, and own, fully paid for, a building valued at $727,000 at the end of 9 years of a Government lease, all on an initial investment of $1,500.

Mr. HORNBOSTEL. I think that is correct.

Mr. BROOKS. Does that add up?

Mr. HORN BOSTEL. Yes, on the figures here, and of course that is logical and that is a conclusion that can be drawn from the figures and the facts that you have given.

Mr. BROOKS. Mr. Wallhauser.

Mr. WALLHAUSER. Of course this is all predicated on renewals of leases, naturally. The witness has testified that it might not be renewed. The lease might not be renewed. There could be a Federal building erected. Therefore at some period the owner might end up with a deficit of some considerable size, and a building that is not usable for somebody else.

Mr. HORN BOSTEL. That is possible. Even at the first term lease, I think they have an option to buy a building of $727,000 for $275,000, even if no option is exercised at all. That could be. They could borrow the money and pay it. As you say, the building might not be usable for any purpose.

Mr. WALLHAUSER. It was converted for a specific purpose?

Mr. HORN BOSTEL. It was converted for a specific purpose.

Mr. WALLHAUSER. Of course the value of the building from the GSA appraisal I assume of $727,000 is an office building appraisal, not an old warehouse appraisal.

Mr. HORN BOSTEL. It is the appraisal of the land, the building, and what the building will consist of with the improvements.

Mr. WALLHAUSER. And no depreciation has been taken off of that figure?

Mr. HORN BOSTEL. You have to consider this: That we have to operate under the Economy Act, and we cannot pay rent more than 15 percent of the value of the building; and this crowds it right close. Services, of course, are not under the Economy Act.

Mr. WALLHAUSER. That is correct. I understand that. My point of putting the value of the building at $727,000, which is appraised as of today, it could be worth a million dollars, it could be worth $200,000 at the end of that time.