The Postal Service has decided to relocate its postal facility in Dana Point, California. The Postal Service currently owns a 20,000-square-foot building housing a retail post office and a carrier operation, but postal officials say they need only 11,000 square feet, so they want to sell the building and lease a smaller space.
Diana Alvarado, manager of property management for the Postal Service, says that downsizing the Dana Point facility would save the Postal Service $52,000 annually. It’s hard to see how.
There’s a detailed description of the Dana Point deal on the USPS-CBRE “Properties for Sale” website right now (if it gets deleted, an archived version is here). It says that the Dana Point facility is being offered for sale at $6.1 million. The buyer must also submit an Alternative Quarters offer to provide space for the new facility.
The new space must be at least 11,511 square feet. The USPS will sign a 10-year lease with four 5-year renewal options at a rent of $19.50 per square foot. The website indicates that buyers “are welcome to submit their own ‘market’ rental rate,” so presumably the Postal Service would be willing to pay a bit more. The terms of the lease include a 2.5% annual increase in the rent.
In the first year of the lease, then, the Postal Service would pay $224,465. By 2043, those 2.5% annual increases would bring the rent to double that amount. The total rent paid out over the 30 years of the lease would be $9.8 million.
The Postal Service thus hopes to sell the building for $6.1 million, and it’s ready to pay out $9.8 million in lease costs. How does that save $52,000 annually?
If the estimate is somehow correct, the total savings over 30 years would come to $1.6 million. As an alternative to selling the facility, the Postal Service could subdivide the space and rent out the extra 9,000 square feet. If it were able to rent the excess space at the $19.50/sf (plus 2.5% annual increases) that it's prepared to pay for a new space, the Postal Service could generate over $7.7 million in revenue over 30 years (minus renovation costs).
It's hard to see how the relocation deal makes sense for the Postal Service. As every homeowner knows, renting may be cheaper in the short run, but owning is a better deal over the long term, especially if the owner also has an opportunity to bring in some rental income as well.
In any case, one entity that is sure to come out ahead on the Dana Point deal is CBRE, the Postal Service’s exclusive real estate broker. It may make a commission on selling the building and arranging the new lease.
The terms of the USPS-CBRE contract have not been made public, but we’ve heard commission numbers in the range of 4 to 6 percent on sales (as indicated in this OIG report). That would put the commission on $6 million somewhere between $244,000 and $366,000.
According to the same OIG report, CBRE typically gets 2% on the total value of the initial term of leases it negotiates. The rent for the first ten years on the new Dana Point facility would come to $2.5 million, so CBRE might earn another $50,000 for negotiating the new lease. In other words, CBRE could make $300,000 or $400,000 off this deal.
There seem to be other real estate interests involved with this deal as well. The city has a master plan to redevelop the town center as a "pedestrian friendly destination" through a series of public improvements and streetscape changes. Apparently the post office is a barrier that “divides” the town center area, and the master plan identifies it as an "ideal location" for a pedestrian connection between two main roads.
Word about relocating the post office appeared in the media in February 2013, by which time negotiations were underway with a Texas-based real estate development company called Majestic Housing & Development, which owns land adjacent to the postal facility. In April, the Postal Service held a public meeting on the relocation, as required by federal regulations, and a 15-day comment period followed. In May, the Postal Service announced its final decision to go ahead with the move.
As that chronology shows, the Postal Service was already negotiating a deal at least two months before it gave the public an opportunity to participate in the decision-making process. But with city officials behind the plan, that probably didn't bother anyone very much, except perhaps the customers who may be inconvenienced by having to travel to the post office's new location.
The listing on the CBRE website says there's a July 24 deadline for offers. Maybe something went wrong with the Majestic deal, and now the Postal Service is looking for a new buyer. But the fact that the website spells out the offer in such detail suggests that the Postal Service has already found a buyer. Whether it's Majestic or someone else, we'll know soon enough.
Dana Point is located in southern Orange County, in the district of Congressman Darrell Issa, the House’s leading proponent of downsizing the Postal Service. According to news reports, Congressman Issa “worked closely” with the Postal Service, Dana Point’s city manager, and Majestic to help make the deal happen.
Since Congressman Issa is so keen on ensuring that the Postal Service operates “like a business,” perhaps he can explain how selling a building for $6 million (or less) and paying out $10 million (or more) in lease costs — and passing up the opportunity to bring in several million in new revenue by renting out the extra space — makes good business sense.
There seems to be a lot more to this story than relocating the Dana Point post office in order to save the Postal Service a paltry $52,000 a year. One has to ask if Congressman Issa has used his considerable clout with the Postal Service to facilitate Dana Point's redevelopment plans and who stands to profit by those plans.
(Photo credits: Dana Point postal facility)