depreciation. As tax laws change, the Service must alter its lease program in order to take advantage of the most attractive aspects of the tax law, thereby reducing for the Service its rental payment. Lease construction is really a way to fund capital expenses outside of the national budget. Therefore, investment opportunities created are often regulated by Federal and state security laws. Other quasi-governmental agencies or corporations (National Corporation for Housing Partnerships) have encountered problems in this area and have been forced to spend considerable time researching the law and developing a program designed to minimize the problem. The Postal Service will also find it necessary to structure the lease program in a way that security laws present no insurmountable barrier to attracting knowledgeable bidders. Credit, Lease Term and Competition Statistics indicate that the average tenancy under Post Office leases is eightteen years. This shows that the policy of an original ten year lease term does not reflect the average needs of the Service. In addition, options on leases under twenty years tend to increase the cost of borrowing money since the lender has increased exposure. In setting the lease term, consideration must be given to the expected life and its acceptance in the market place. Where the lessor obtains a thirteen year loan the cost of the project is repaid five years before the expiration of the average lease. If the lessor obtains a twenty year loan the interest rate reflects the uncertainty in the income stream during the last ten years. Both of these situations produce increased rentals, or stated in another way, do not afford the Government the prime credit rating it deserves. Lease terms should not have the effect of increasing the cost to the Government or diminishing the number of investors willing to finance this type of transaction. The end result of a coordinated program is to encourage knowledgeable investors to compete for lease construction projects. Each aspect of the program tends to encourage or discourage investors. The obvious objective is to select those desirable features which coincide with the Postal Service needs and to discourage features which are of little value to the Service and tend to diminish marketability. Sinking Fund Investment Lease financing is neither new nor novel. Therefore, many variations have been tried in the past and many have features which would benefit the Government. Where the Government lease provides the resources to borrow most, if not all, of the capital and repay the debt, the lessee should benefit from renewal and purchase options. Food retailers have often required lower rental rates on renewals after the basic twenty year lease. They have also negotiated favorable purchase options based upon the unamortized balance of the loan plus a termination fee. Neither of these features has been present in past Post Office lease construction projects. Certain investors might feel that this arrangement is no longer attractive. The experience of mortgage bankers has been that investors are willing to purchase net lease projects where depreciation offsets amortization. The investor pays ordinary income tax on the cash flow and capital-gains tax on the equity appreciation. This formula should provide an incentive to both parties. Following is an example of how the suggested sinking fund investment would work for the Postal Service. A postal facility costing $100,000 could be sold to an investor for cost in exchange for an annual rental for 20 years at $10,800 per year. The Postal Service could obtain two options to renew for 5-year periods at $5,400 per year. During the last 10 years of the original lease term, the postal service could purchase the property for the unamortized balance of the loan plus a termination fee of $10,000. The annual payments would produce a 9 percent return (the interest portion of the annual rental) to the investor which would be taxed at ordinary income rates. The difference between the 9 percent return and the annual payments (or the principal portion of the annual rental) would constitute amortization which could be offset for tax purposes during the term of the 20-year lease by the sinking fund method of depreciation. If the government exercises its option to purchase, the premium paid to the investor would be taxed as a capital gain, a consideration of importance to investors. If the Service elects instead to exercise the option and extend the lease beyond the original term, the investor would receive a smaller annual rental but, having recouped his original investment, his position would be sound and desirable. In conclusion, it is obvious that given the staff and desire to create a viable lease program the Postal Service can materially improve its existing method acquiring lease-construction projects. If we can help either your committee or the Postal Service in explaining our views, we would be happy to do so. Sincerely, LEE B. HOLMES, JULY 27, 1971. Memorandum. To: Chairman Jim Wright. Subject: Postal facilities acquisition. In answer to a request by this Subcommittee, the Post Office Department furnished its "1970 Annual Report of the Postmaster General." Statistics given are as of June 30, 1970, and reflect that: The Post Office operates 43,112 facilities: 32,002 are Post Offices, and 11,110 are branches and stations. 30,773 function in space owned by, or rent/leased to the Government. 3,051 facilities which are Government-owned: 2,750 are operated by the Post Office, 269 are operated by the General Services Adm., 32 are operated by other agencies. The 27,722 facilities which are either rented or leased break down to: 11,985 leased. 15,737 rented. The remaining 12,339 facilities have space provided by the Postmaster as part of his remuneration. Total annual payments for rented and leased facilities by the Post Office Department in fiscal 1970 were $140,612,469, which had increased every year since 1960. Subsequent data furnished by the Post Office Department in April 1971 show an increase of 177 rented/leased facilities or a total of 27,899. This information also reveals a large number of multiple-owners of leased properties who own two, three, or more facilities. Among those owning five or more, 153 own 1,181 facilities. Owner Dr. Donald Davenport and Elizabeth Davenport, 4201 Long Beach Blvd. and 3711 Long Beach Blvd., Long Beach, California. Building Leasing Corp., 600 E. 60th St., Kansas City, Missouri_ Number owned 79 59 26 M. M. Parsons & Sons, M. & P. Realty, 50 Woodbridge Rd., York, Maine__ Leo A. Daly Co., 8600 Indian Mills Drive, Omaha, Nebraska___ S. W. & B. M. Poorvu (& J. P. Schlager), 25 New Chardon St., Boston, Ray and Kathryn Eckstein, Cassville, Wisconsin___ The Knowlton Co., 1133 West Columbus Ave., Bellefontaine, Ohio-___ 20 The Post Office's estimate of land and building costs for the 79 facilities of the Number One owner totals $12,544,005. The properties yield annual rents of $1,050,687. Some properties leased from private owners have a dollar-value, individually, which exceeds the combined value of all 79 properties owned by the "top" owner: A Main Office in Detroit, Michigan, estimated cost $21,690,000, brings its owner an annual rent of $1,451,473, under a 30-year lease. Another Main Office in Milwaukee, Wisconsin, valued at $24,179,000, provides the owner with yearly rent payments of $1,824,000 for 30 years. The above two facilities are included in a group of ten reflecting ownership with a commonality of name and address. The total costs of the ten properties amount to $84,338,513, with annual rentals of $6,460,976. (See Attachment “A”.) Several articles have been written for circulation on the subject of ownership of facilities leased or rented to the Post Office Department. These articles and other records reveal such diverse ownership as: Insurance companies Real estate companies and developers Charitable organizations Heads and members of the New York Stock Exchange Principals in brokerage houses President of a major brewing company Assorted large business corporations Civic associations Labor unions Oil companies A university Fraternal organizations, which include: American Legion Masonic Lodge Lions Club Knights of Columbus M. H. McCloskey, 1240 Sub- William I. McCloskey, 1620 1620 West Thompson St., St., NW., Grand Rapids, Major facility, main office, Facility Lease 'rate cost cost cost Vehicle maintenance facil- 30 $141,673 $354,000 $204,000 $558,000 Sts., Philadelphia, Pa. Main office, 11th and 30 441, 232 424,900 6,780, 400 7,204, 300 Pacific Sts., Omaha, Main office, Market and Chestnut Sts., Harris burg, Pa. Airmail facility, ground Main office, 8th and Fort |