OIG warns of possible conflicts of interest in CBRE contract

blum-and-feinstein1Allowing a real estate broker to represent both sides in a property deal would seem to be an obvious conflict of interest, but the US Postal Service doesn’t seem to think so. In a report issued last week, the USPS Inspector General warned of the possibility of conflicts of interest arising out of the contract the USPS has with CBRE, the big real estate firm chaired by the husband of California Senator Dianne Feinstein. USPS Management disagreed, and does not plan to modify its contract with CBRE to eliminate possible conflicts. From the OIG Report:

Introduction

The U.S. Postal Service awarded a contract in June 2011 to CB Richard Ellis, Inc. (CBRE) to be the sole provider of Postal Service real estate management services. The Postal Service believed that leveraging the capabilities of a national real estate firm would allow for a more effective use of limited resources. As the largest real estate owner in the world, CBRE has one of the broadest industry platforms. In 2012, CBRE was responsible for more than $189.8 billion in property sales and lease transactions globally and managed more than 3.3 billion square feet of commercial properties and corporate facilities.

The U.S. Postal Service Office of Inspector General (OIG) completed an audit in June 2013 of the Postal Service’s real estate management services contract with CBRE. We concluded that Postal Service Facilities officials should improve oversight of the CBRE contract to mitigate inherent risks and conflict of interest concerns. In response to our recommendations, management implemented a maximum contract amount and appointed contracting officer’s representatives to monitor contract performance and approve payments.

Because of the urgency and sensitivity associated with CBRE contract control weaknesses, we are issuing this alert to make the Postal Service aware of the need to further modify the CBRE contract.

Conclusion

As a result of our audit and ongoing concerns surrounding the CBRE contract, we have identified additional information that increases the financial risks to the Postal Service. Specifically, Postal Service officials modified the contract in June 2012 to allow CBRE to negotiate on behalf of the Postal Service as well as prospective buyers and lessors in the same real estate transaction. Also, CBRE was responsible for soliciting appraisals to determine the fair market value of the properties that it then sells and leases.

The contract modification also requires CBRE to notify the Postal Service of any actual or potential conflicts of interest, such as owning or having an interest in a property that may be part of a Postal Service real estate transaction. To date, CBRE has not notified the Postal Service of any such conflicts. Given the multiple roles CBRE plays within the real estate industry, the Postal Service should take steps to lessen the potential for CBRE to engage in transactions that create conflicts of interest. CBRE conflicts of interest could lead to financial loss to the Postal Service and decrease public trust in the Postal Service’s brand.

Contract Modification

Initially, Postal Service officials contracted with CBRE to represent the exclusive interests of the Postal Service. However, they modified the contract on June 28, 2012, to allow dual agency representation, in which CBRE represents the Postal Service and prospective buyers and lessors. Officials stated that dual agency representation is a commercially acceptable real estate practice. They further noted that these types of practices arose while CBRE provided real estate management services to the Postal Service. However, the initial contract did not specifically allow for dual agency representations, and as a result, the contract was modified.

The contract modification requires CBRE to notify the Postal Service of any actual or potential conflicts of interest within 5 days of any request for or ordering of contract work. CBRE has submitted 10 dual agency disclosure letters detailing transactions in which it represented both the Postal Service and potential buyers or lessors. CBRE potentially violated the initial contract by representing both parties in three of these transactions before the contract was modified to allow for dual representation. See Table 1.

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Real estate transactions are normally negotiated by agents who stay at arm’s length from each other’s interests. An arm’s length transaction occurs when the buyers and sellers in the transaction act independently and have no relationship with each other. Contract terms that give too much financial control to either party and create interwoven business interests nullify the safeguards of arm’s length transactions. The Postal Service continues to allow CBRE to conduct transactions despite the disclosure of non-arm’s length transactions.

Recommendation

We recommend the vice president, Facilities:

1. Modify the CB Richard Ellis, Inc. (CBRE) contract to prohibit CBRE from representing the Postal Service as well as prospective buyers and lessors in Postal Service real estate transactions.

Management’s Comments

Management disagreed with the findings and recommendation. Management stated that by allowing dual agency arrangements, the Postal Service can obtain wider exposure to potential offerors and, thus, ensure rigorous competition. Management also stated that dual agency arrangements are permitted under CBRE’s contract with the U.S. General Services Administration (GSA) and are a common business practice in the real estate marketplace. They also did not agree with our conclusion that allowing dual agency arrangements resulted in non-arm’s length transactions.

Management further stated that CBRE has not reported any conflicts of interest and it does not appear that the OIG has identified any actual conflicts of interest. Therefore, management believe that the reporting and consent requirements they have instituted are sufficient to minimize any risks associated with conflicts of interest.

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