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Mr. HORNBOSTEL. An answer like that is speculative; yes, sir. Mr. WALLHAUSER. It is speculative to put in a figure like that Mr. Chairman.

Mr. BROOKS. You did say that you estimated when the Federal building is completed, if it is, that there would very likely still be a need for this office space?

Mr. HORN BOSTEL. This office space!
Mr. BROOKS. Yes, sir.

Mr. HORN BOSTEL. It could be. It might be also that we have other agencies that will vacate space of less cost than this. There are many facets that enter into it at that stage of the planning. It might be they would plan to move them into the new Federal office building. There are many things that would enter into planning.

As I said
Mr. BROOKS. The land for which has not yet been purchased ?

Mr. HORNBOSTEL. As I understand it. It would be in the paper if it had been.

Mr. WALLHAUSER. I have one or two other questions, Mr. Chairman. Is that all right?

Mr. BROOKS. Certainly.
Mr. WALLHAUSER. Is this in your opinion a fair rental ?

Mr. HORNBOSTEL. That, sir, is not a legal question. That is for the operating people. And of course I am interested to the extent as to whether it exceeds the Economy Act. I couldn't approve a lease if the rent-if I didn't see a statement from the operating people telling me that it was within the Economy Act.

Mr. WALLHAUSER. And everything is correct as far as the Economy Act is concerned ?

Mr. HORNBOSTEL. Yes, sir, that has to be in. That is why I get the files, so I can check these things.

Mr. BROOKS. Judge, under the Economy Act if the value of this building, instead of being set at $727,000 by the appraisal which was made up by apparently somebody in the GSA, if that appraisal had reflected that the building was worth $275,000 that these people are willing to sell it for, and agreed and obligated to sell it for, plus the $200,000 that they will spend remodeling it, if they had appraised this building at what seems to be a fairly realistic figure of the cost of the building, $275,000, and the cost of remodeling, $200,000, if they had appraised it at $475,000, rather than $727,000, could you have justified under the Economy Act a rent in the neighborhod of $496,800 for the first 3 years?

Mr. HORNBOSTEL. No, sir. That is correct.
Mr. BROOKS. What would the rent have been?

Mr. HORNBOSTEL. The rent would have been 15 percent of $475,000 plus the cost of your services that you list here.

Mr. BROOKS. 15 percent of the appraised value!

Mr. HORNBOSTEL. That is right. But that isn't correct, either, because we are not renting the building; we are renting space in the building. There is more space in that building than we are renting. So you have to take the value of the space in the building and not the value of the building and the land that it sits on.

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Mr. BROOKS. In other words, you take the value of the building and the percentage of it that you are going to occupy in setting an appraised value Mr. HornBOSTEL. That is correct. Mr. BROOKS. Upon which you would base the rent.

Mr. HORNBOSTEL. That is correct. And it could not exceed 15 percent.

Mr. BROOKS. Would you then, Judge, make a little study of that matter and give me an estimate of what the rent might be, if you appraised the total building at its total cost, and the total improve ments, then the percentage of the building that you anticipate utilizing for the Government, then what would the rent be on that kind of basis? It may take a little time. If you will work that up and submit it to us in Washington.

Mr. HORNBOSTEL. The operating people already have that.

Mr. BROOKS. Then it would be a simple matter to get it from them and send it.

Mr. HORN BOSTEL. Do you want me to send it to the committee?
Mr. BROOKS. To the committee in Washington.
Mr. HORNBOSTEL. I don't have to do it now then?
Mr. BROOKS. No, no.
Mr. HORN BOSTEL. Or over the weekend?
Mr. BROOKS. You can do it Monday.
(The letter requested is as follows:)

GENERAL SERVICES ADMINISTRATION,
OFFICE OF THE REGIONAL COUNSEL, REGION 6,

Kansas City, Mo., March 28, 1960.
Hon. Jack BROOKS, Jr.,
Chairman, Government Activities Subcommittee, House Government Operations

Committee, House of Representatives, Washington, D.C. DEAR MR. BROOKS: This refers to your request, when I was a witness during the hearing in Kansas City, Mo., March 25, that I supply for the record a maximum amount of rental which could be paid under the sublease with Third Recon Corp., bottomed upon the amounts of $275,000, plus $200,000, plus $50,000, representing the sale price of the building, land, and parking facilities, but exclusive of the value of any services such as light, heat, and janitor services which may be furnished by lessor under the sublease.

Title 40, United States Code Annotated, section 278a, usually referred to as the Economy Act, reads, in part, as follows:

"After June 30, 1932, no appropriation shall be obligated or expended for the rent of any building or part of a building to be occupied for Government purposes at a rental in excess of the per annum rate of 15 per centum of the fair market value of the rented premises at date of the lease under which the premises are to be occupied by the Government * * * the provisions of this section as applicable to rentals, shall apply only where the rental to be paid shall exceed $2,000 per annum."

General Services Manual GS 6–3, section 301.02c, defines the fair market value for rental purposes under the Economy Act, as follows:

“The highest price estimated in terms of money which the property would bring if exposed for sale for a reasonable time in the open market, to a seller, willing but not compelled to sell, from a buyer, willing but not compelled to buy, both parties being fully informed of all the purposes for which the property is best adapted and is capable of being used."

Section 301.02 d., of said Manual defines net rental as “The consideration paid for the use of leased premises exclusive of the value of any services such as heat, light, and janitor services, which may be furnished under the lease (12 Comp. Gen. 546)."

The cost of services (figures from Third Recon) is $62,749 per year. The gross rental to be paid under the sublease is $165,600 per year payable at the rate of

$13,800 per month. Prior to the end of 3 years the building may be purchased under the option for $275,000.

Third Recon Corp. is obligated to the owner of the building to expend not less than $200,000 for remodeling, alterations, and repairs in the building. The parking facilities are stated to cost $50,000. Thus, the computation is $200,000, estimated cost of remodeling, plus $275,000 sale price under the option, plus $50,000 cost of the parking facilities, a total cost of $525,000 for the land, building, improvements, parking, etc.

It is to be noted, however, that the Government is leasing only space in the building (not the entire building) but this within computation is for the purpose of showing and assuming that all the building is leased.

Fifteen percent of $525,000 is $78,750 which would be the maximum net rental. The cost of services is $62,749 per year. Adding the two sums gives a total of $141,499 as the maximum gross rental. Subtracting $141,499 from $165,600, the amount the Government pays to Third Recon Corp. under the sublease for space and services, gives a difference of $24,101. Therefore, $78,750 (not $102,851) is all the Government could pay for net rental under the Economy Act if the fair market value of the entire premises is $525,000.

The amount of space actually leased must be computed in relation to the useable area comprising the entire building in proportion to that occupied by the Government. We have not made a computation on this basis because it should be made by appraisers. The value of the premises occupied is an operating problem as distinguished from a legal problem.

For the purpose of the regional office, the regional appraiser made such a computation showing the value of the building in relation to the space occupied by the Government therein. The regional appraiser fixed the maximum amount which could be paid for net rental of the space occupied by the Government.

We believe that the committee has a copy of the appraisal made by the regional appraiser. He determined what could be paid as the maximum net rental and based upon his computation the limitations of the Economy Act were not exceeded.

I trust the above information answers the request of the committee. If not, I will be glad to supplement it or furnish to the committee any additional facts desired. Sincerely yours,

JAMES L. HORNBOSTEL, Regional Counsel. Mr. WALLHAUSER. Who made this appraisal?

Mr. Horn BOSTEL. I think the original appraisal was an outside appraisal firm.

Mr. BROOKS. Outside ?

Mr. HORN BOSTEL. Yes, sir. And the regional appraiser found the amount for the space that we are occupying under the Economy Act.

Mr. BROOKS. The Appraisal Associates, very well known?

Mr. Horn BOSTEL. I wouldn't know. That is the appraisal division that qualifies the appraisers and says whether they are qualified to appraise property.

Mr. BROOKS. It might be that a more realistic appraiser would cut that rent even maybe a hundred thousand dollars, or a couple hundred thousand dollars, over a 3-year period. Isn't that possible, Judge ?

Mr. HORN BOSTEL. Sir, we have a firm commitment. We can't blow hot one minute and cold the next. We are firm leased for 3 years on this figure.

Mr. BROOKS. It seems we should have thought about that before we signed that lease, doesn't it? If it was your money!

Mr. HORNBOSTEL. Well, sir, that is the operating people, and they are not dealing with my money.

Mr. BROOKS. No; but it is your tax money and mine.
Mr. HORNBOSTEL. That is right.

Mr. WALLHAUSER. Mr. Chairman, this appraisal was made by a responsible appraising concern. I don't think you or I or anybody else can question that appraisal without questioning the integrity of the appraiser.

Mr. BROOKS. I am not questioning his integrity. He said it is forth $727,000 and the people who owned it were willing to sell it for $275,000. And if you spent $200,000, that gives you $475,000 that it did sell for, and was improved for, which seems the most realistic basis on which you could set a value.

Mr. WALLHAUSER. Mr. Chairman, I don't want to belabor the point, but there is a lot more involved than purchasing a piece of property and remodeling it. In other words, these men, whoever they may be, had to go out and at least take a chance for X dollars in order to secure an option, and probably pay something additionally for the extension of this option, which they took a chance on losing, plus the fact that they had to have the know-how to remodel it, submit it, and convince GSA that this was the proper type of building for it to occupy. There are many other factors that go in.

An appraiser coming in to appraise a piece of property does not take the reproduction cost entirely. He takes the economical value, the income and expense, and so forth. All of these factors enter into appraisals. It is not merely on bricks, mortar, and land that appraisals are based. There are three factors: Comparison with market, economic factor, and reproduction cost.

I assume that these appraisers did all of those, because if they are responsible appraisers I am certain they would have.

Mr. BROOKS. Is it possible that they considered the value of this reconditioned warehouse as an office building? Did they consider that as a factor?

Mr. MOORE. The appraisal is based—while the building was in the process of being remodeled, rather than afterward-on the plans and intentions which would be followed by the contractors and owners of the building

The appraiser comes up with his qualified figures, if they follow all these things and also based on the value of the Government rent that is to be paid, they have arrived at their value of the building.

Mr. BROOKS. No doubt these people are able operators and intelligent men. There is no question—we are not raising a question as to their integrity, and certainly as to their ability, because they are smart operators. A man who can parlay that kind of investment is a man of real capacity. We ought to put him in the Comptroller General's Office. But they probably don't pay them enough. They couldn't make a million dollars there in 3 or 4 years. But these figures apparently which have been compiled are only estimates, admittedly, as to the actual costs. They are as reasonable as we can get them. They are taken from GSA records and are sufficiently accurate, I think, to give a pretty clear indication of how some people can operate under Government leases to make windfall profits. And, of course, we cannot quarrel with the ability to make a good deal' in the instance of these two men. But we certainly can question, and I think it is perfectly ethical and right and proper that Congress do question Government employees when they handle projects in this manner. I wonder, Judge, if they would put out such a lease for office

space to just anyone who promised to turn a warehouse into Government offices. Is this a common case?

or 6

Mr. Horn BOSTEL. I think it is highly improbable.
Mr. BROOKS. I think it is highly improbable, too.
I sure thank you.
Have you any further questions, Mr. Wallhauser?

Mr. WALLHAUSER. Yes. I want to make one little statement. I don't want to be put in the peculiar position of trying to defend an improper act, if that is what you are intimating. But I do think that before we say this is a windfall profit, I do believe that we should have testimony as to comparable rents of similar buildings after completion. I think we should take into account the fact that they might have some losses in the first 3

years, years. There are many factors that should be taken into consideration before we assume a conclusion.

Mr. BROOKS. Basically, of course, there is a serious controversy in Congress, and I am on the side that believes that the Government should buy the buildings that they need and pay for them, because I think invariably when we lease buildings we end up leaving ourselves open to just this type of procedure, where it looks like the Government could have bought it for $275,000, reconditioned it, and we would own it. We won't own it at the end of this 9-year period. We will have nothing out of it.

Mr. WALLHAUSER. In this case, Mr. Chairman, is it not so, that they are contemplating building a Federal Building which may take these agencies in? Mr. BROOKS. It might. Mr. WALLHAUSER. This is all in contemplation already.

Mr. BROOKS. It might. But if they would sell the building, we still wouldn't be necessarily at any great loss.

Have you anything further to say? Mr. HORNBOSTEL. I believe not. Mr. BROOKS. We want to thank you for your testimony. We would like to call Mr. Joseph R. Collins, the area manager. First we will take a 5-minute recess. (Recess.) Mr. BROOKS. Mr. Joseph R. Collins. Will you rise and be sworn ? Do you swear the testimony you are about to give this subcommittee will be the truth, the whole truth, and nothing but the truth, so help

you God?

Mr. COLLINS. I do.

TESTIMONY OF JOSEPH R. COLLINS, AREA MANAGER, PUBLIC

BUILDINGS SERVICE, GENERAL SERVICES ADMINISTRATION, REGION 6, KANSAS CITY, MO.

Mr. BROOKS. Will you give us your full name and your position with the GSA?

Mr. COLLINS. My name is Joseph R. Collins. I am area manager, Kansas City area, for the General Services Administration.

Mr. BROOKS. Who is your immediate supervisor in the regional office?

Mr. COLLINS. The chief of buildings management, Mr. Kerlin.

Mr. BROOKS. Mr. Collins, we are interested in learning from you just what transpired following the installation of these partitions un

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