The Federal Home Loan Bank Board is paying most of the cost of equipping four restaurants in its new building and in allowing the private restaurants' owner to purchase the equipment from its own company at a 50 percent markup with no competitive bidding.
The arrangement described yesterday at a hearing of the Senate subcommittee on Hospital and Urban Development Independent Agencies "raises conflict-of-interest questions," according to subcommittee chairman Sen. William Proxmire (D-Wis).
As a result of the arrangement, General Accounting Office representatives told Proxmire the Board is paying roughly 12 percent more for equipment and services to outfit the restaurants than they would if they did the work through the General Services Administration.
Under a lease agreement signed between the Board and the 1725 F Street corporation, the Board is paying 75 percent of the cost of outfitting four restaurants - including a cafeteria, a disco which operates in the evening, a snack bar and a French restaurant, all at the board building at 17th and G Streets NW.
The restaurant firm, owned by the same company that owns the Rive Gauche in Georgetown, pays the other 25 percent of the equipment cost. The lease also provides that equipment will be purchased from Alto. Inc., also owned by the Rive Gauche's owner. The common ownership is acknowedged in the lease.
"The net effect of this agreement," according to Richard W. Guttmann, director of the logistics and communications division of GAO - the congressional watching organization - "is that 1725 F Street was permitted to equip, furnish and complete the facilities without the benefit of competition."
Alto. Guttmann said, marks up the cost of equipment it buys and labor it provides to its subsidiary company by 50 percent. Markups generally cover operating costs and other overhead of a company, plus profit.
In answer to a question by Proxmire, Guttmann agreed that the restaurant owner company could be equipping its business as a "minimal" investment, once the payments to the related equipment firm are taken into account, considering the noncompetitive arrangements entered into by the two related companies. Guttmann said an audit by the Board of the cost incurred in outfitting the restaurant is essential.
Guttmann also told Proxmire that the 1725 F Street corporation was the only bidder left in the running to operate the restaurant after 39 other potential operators dropped out as the Board narrowed the criteria to specify that the restaurant must be French.
Proxmire said that a "provident landlord" would have allowed the "wildest possible competition" for the leases. The process followed by the Board, he said, raises the possibility that the lease might have been "tailored" for the eventual recipient, as well as "conflict of interest questions."
Proxmire opened the hearing by noting that the $51 million structure at 17th and G streets was not paid for or furnished with taxpayers' money, but rather by assessing the member savings and loan institutions that the Board regulates.
"Consequently, although the taxpayer did not directly foot the bill, all those home owners or depositors who have dealt with the savings and loan associations regulated by the Board have paid for this structure," Proxmire said.
Proxmire also emphasized that the leases were negotiated before Robert H. McKinney, the board's present chairman, assumed office in 1977.
GAO and GSA officials disagreed at the hearing with McKinney on the cost of finishing and furnishing the building. J. Wayne Kulig, a GSA official, estimated that to do a "top job" and using "top level furnishings" purchased by GSA would have cost about $4 million. Guttmann said it cost the board $10.9 million to furnish, equip, and move into the building, a move that began in 1977.
McKinny disputed the methods used by GAO to compute the costs of finishing the building, asserting that the actual figure is roughly $4 million less than GAO's.
McKinney also asserted that "the price is fair" for the equipment and services being supplied in outfitting the restaurants. "If it's not, we can stop it," he told Proxmire. McKinney held out little hope that the 20-year lease negotiated with the restaurant concessionaire can be reopened to negotiate new terms. Guttmann, in his testimony, characterized the restaurant lease, which has the lowest square footage rate of any of the six leases signed, as being "favorable to the tenants."
Proxmire also asked McKinney to explain why another tenant, Frankie Welch or America, Inc. - a women's ready-to-wear fashion shop - had a lease that gives it three years of occupancy to no rent. McKinney said that the Welch firm had done all the interior work itself to finish and outfit its space and that that expense will be credited against a minimum rent. If Welch's revenues exceed a certain amount, McKinney said, Welch will pay a percentage of that amount.
A local savings and loan association, Proxmire said by way of summing up, "would have turned thumbs down on this transaction."