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approved by the Secretary of the Interior and that he shall be solely responsible for the management of the leased property, including the offering of transportation services for visitors to and from the center and points of intensive visitation and interest in the District of Columbia. It is therefore recommended that references to the Administrator of the General Services Administration and the Secretary of the Interior on lines 5 and 6, page 1, and lines 8 and 9, page 3 of the bill be changed to refer to the Secretary of the Interior after consulting with the Administrator of General Services.
GSA has undertaken, as a member of the Study Commission, a study of the station building and the proposed site of the parking facilities for the purpose of estimating a fair rental for these properties. However, pending a firm agreement as to the location of the proposed new terminal facilities and certain other details, we question whether it is advisable to fix the annual rental limitations as precisely as proposed in the bill. We suggest, alternatively, that the bill be revised to provide that the annual rental may not exceed the fair rental value determined by appraisal and in no event exceed $3 million.
Mr. Chairman, this, in brief, is my statement concerning the bill. As you know, we had a relatively short time to comment on the bill. We have furnished the committee with a report which was cleared with the Bureau late yesterday. We hope that will be helpful. In essence, it provides much the same as my statement here.
We would be glad to answer any questions or to come back after the full report has been printed and published, as we had hoped would be done before this hearing, and supplement any statements at that time.
Mr. Gray. Thank you, Mr. Knott, for a very fine and concise statement. We certainly will consider the suggestions you have made. As I understand your statement, you would rather be on a basis of consulting with the Secretary instead of having the authority to enter into agreements as Administrator of GSA. Is that not essentially your request?
Mr. KNOTT. Yes.
Mr. GRAY. You wish to be a consultant to the Secretary of the Interior rather than being a party to the contract.
Mr. KNOTT. These matters in the bill are joint enterprises, and I find it difficult to jointly carry out between two agencies the same function. I think it better to vest in the head of one agency the authority that this bill would provide.
Mr. GRAY. I think you are eminently correct, not only for that reason, but also by virtue of the fact that the Park Service would request in their annual budget request the funds with which to operate the center. If you had joint responsibility for entering into agreements, you might have joint responsibility for requesting the funds, and this would be a complicated procedure. We certainly will take that into consideration.
There is one question I would like to ask concerning the fair rental value. We will have the president of the Washington Terminal Co. here later this morning, but it is our understanding that on the existing facilities they have figured about a 5-percent return on investment and about 6-percent return on the capital they will have to borrow.
As General Services Administrator, you, of course, have jurisdiction over the Public Buildings Service which is constructing at the present
time several hundred million dollars worth of public buildings, and also leasing buildings all over the country for Government use. Would you consider this to be a fair return on the railroad's investment, or would you say it is a low or high return? How would you class a 5-percent return on the investment they now hold and 6 percent on the amount of money they want to borrow? Is this a reasonable rate for the Government ?
Mr. KNOTT. This is difficult to determine. This is one reason that we made the recommendation. As it unfolds, we might very well agree with them.
Let me say this in explanation of why we find it difficult to agree at this time. It is not entirely clear from our investigation whether the entire building will be used as a visitor center and whether the terminal will be at the lower level or whether the terminal will be a separate buiding. It is also not exactly clear as to where and what access will be provided on the north side for the parking. These are details that can be developed and may not vastly affect the rental value in any case. I think it would in terms of how much space in the original building is used.
To get back to your question as to whether the formula is one which we would endorse, I may say our biggest difficulty with the formula is that it contemplates that the interest rate of 6 percent will be over the entire period of the lease, which I believe is 20 years, whereas GSA's approach to it would be that the interest would be on the unamortized balance of the investment for each succeeding year.
Mr. Gray. We wanted to try to get for the Congress, and particularly this committee, as close an estimate as possible as to what this was going to cost on an annual rental basis.
Mr. Mulligan, president of the Washington Terminal Co., who will appear later, set this down and said that if this money could be borrowed for less, that saving would be passed on to the Government. I was merely using 6 percent as a reference. Knowing what you are having to pay generally on leases all over the country, I thought maybe you could give us a comparison as to whether 6 percent is a reasonable amount of return for the investment.
Mr. Knorr. We had attempted to make an appraisal but, as I say, because of the uncertainties of some of these unknowns we were not able to complete, and this is why we suggested a more flexible formula which would base the rental ultimately-you see there are contracts to be worked out and there needs to be some flexibility in executive authority that carries this out to take care of unknowns and unforeseen events, with some limitation, of course.
Mr. GRAY. Let me, if I may, Mr. Knott, phrase my question a little differently.
If you are considering leasing a building worth, let's say, $20,000, some place for Government use, do you not generally figure say 10percent gross on the investment? In other words, you pay maybe $200 a month for that type of facility. What I am trying to get in the record is what is a fair gross figure for rental. What is the figure—9 percent, 10 percent, 11 percent?
Mr. Knotr. Nine percent is what we try for. This is our general guideline.
Mr. Gray. Nine percent?
Mr. Gray. So if we get a lease on the Union Station for 5-percent return, we are getting a good deal by those standards?
Mr. KNOTT. It depends again on what it encompasses.
Mr. Gray. I am talking in generalities. If you figure 9-percent of gross and we could get a 5-percent rate on the existing facility, this would be a fair and reasonable rental?
Mr. KNOTT. Right, and our 9 percent assumes full taxation.
Mr. GRAY. I realize you cannot comment specifically. I am trying to get some general figure for the record. You usually figure 9-percent return?
Mr. Knorr. Right. We have a statutory limitation in the Economy Act which provides that we may not exceed 15 percent, but we have never
Mr. GRAY. Gone that high?
Mr. KNOTT. Except very unusually. That is 15 percent of the appraised fair market value. There again, fair market value you get into it. This is per annum rental. We feel that is a liberal allowance and have no difficulty in staying within that, well within that limitation.
Mr. Gray. It is your feeling that this committee would be acting in the best interests of the Government to put a maximum in but to leave the exact figures up to negotiation between the Secretary and the owners of the Washington Terminal Co.?
Mr. KNOTT. I think so.
Mr. GRAY. We wanted to get as close as possible on estimates so we would not have another inflated proposition where we come and say we think it is going to be this, and when it is enacted and they come back to the Congress for a request for rental funds we find it is much in excess of what we told the Congress.
Mr. KNOTT. I agree it is desirable to do that wherever it is possible. But, if we were in the same position in constructing buildings, with increased building costs these days, I think we would be back before the committee almost every week with changes. So the Public Buildings Act wisely provides for a 10 percent override over the estimated cost. So there needs to be some kind of flexibility and that is all we are trying to suggest here.
Mr. GRAY. I might say that the figure we are using is $2.9 million and you suggest $3 million as a maximum so our figures are very close.
Mr. KNOTT. I just rounded it out at $3 million, that is all. Mr. Gray. So there is no great area of disagreement here at all? Mr. KNOTT. No. You could use your figure as a limitation. Mr. GRAY. Are there any questions? Mr. ROBERTS. I would just like to compliment the gentleman for his statement and the job he is doing. This is one agency where you can call down and ask for a straight answer, and in a few minutes or a few hours they will call you back and give you the answer to your question, and I appreciate it.
Mr. GRAY. Mr. Wright?
Mr. Wright. I would like to agree with the comments of Mr. Roberts. I have been impressed with the GSA's responsiveness to Members of Congress. I would like to thank GSA officials for their cooperativeness, their willingness to work with us as always. They have done a thoroughly creditable and workmanlike job in this task, and I would like to compliment and commend Mr. Knott for his splendid administration of a very effective agency.
Mr. GRAY. Mr. Grover?
Mr. GROVER. I would also like to compliment Mr. Knott and say it is very unusual to find a Federal Administrator move to divest himself of authority. It is somewhat indicative of the very responsible way the gentleman has done his job.
You have suggested to amend the bill to provide the determination of fair rental value by appraisal!
Mr. KNOTT. Yes.
Mr. Knott. I would assume this would be made by an independent appraiser employed by the Secretary under contract. GSA could perform that service for the Secretary. We would have no difficulty in doing that.
Mr. GROVER. There was some discussion before of how that fair rental value would be determined. I suppose since this is a very unique situation, including air space and leasing and rebuilding of a new terminal, that you will not find a comparable situation.
Mr. KNOTT. Right. It is a difficult appraisal problem because it is a special-purpose facility, but to appraisers there are three techniques employed in the appraisal process and they serve as checks and balances one against the other. One is market data approach. This assumes a comparable facility. This assumes two houses alike or something of that kind. You do not have that there, but you do have land that can be valued on a square-foot basis.
Then you have a building that you can determine to what extent it contributes to the value of the land or detracts from the value of the land. Here you get into the cost-less-depreciation approach. This again would let you more closely approach the problem here. Cost less depreciation then becomes a factor of appraisal techniques that is more applicable here than market data.
The third one is the income approach, which is normally used in business enterprises where income is the principal factor of value, where the property itself may have little value but maybe the income is significantly large. This would have a bearing on that.
Mr. GROVER. One further question.
On the appraisal it would be your recommendation that the specific authority be given to the Secretary to have an independent appraiser. Would you advise whether he has that authority, or should it be in the bill?
Mr. KNOTT. I think he has that authority, and I have seen many pieces of legislation that do specifically provide that the Secretary shall determine the fair market value by independent contract appraisers, or words to that effect.
Mr. GROVER. That is all.
Mr. GRAY. Let me ask you this, would we be running some risk if we took, let's say, "comparables” as we call them, and found that instead of valuing this property at $19 million or so, they would come back and say the land is worth $30 or $40 million ?
If we base the legislation solely upon estimated value and the independent appraisers come in and give us a much higher figure, would we not be subjecting ourselves to a higher rental if it is provided in the law we abide by the appraisal?
Mr. KNOTT. But you would have a limitation under the language I have suggested—the appraised fair market value.
Mr. GRAY. This is for our own benefit and guidance, but I was addressing my remarks to the danger of putting in the legislation that the rental would be contingent upon the appraisal. If we do that we may be getting ourselves into a higher rental.
Do you not see that danger if some appraiser comes back and says this property, within two blocks of the Capitol, is worth $30 million and thinks the amount of rental should be based upon that fair market value?
Mr. KNOTT. I suggested in my statement the fair market value, but in no event to exceed $3 million.
Mr. GRAY. Yes. I am not against the appraisal. I would hope this committee would not write in that we would base our rental strictly upon the appraised value of the property because, if it is more, then we would be subject to paying more. If we put a limitation in as you propose, this would protect us.
Mr. KNOTT. Yes.
Mr. CRAMER. To solve this problem that has just been discussed : would you not also insert before fair market value, “not to exceed the fair market rental value, subject to negotiation,” as well as not to exceed $3 million?
Mr. Knorr. I believe that is in my statement, that the bill be revised to provide that the annual rental may not exceed the fair rental value determined by appraisal and in no event exceed $3 million.
Mr. CRAMER. I think that answers the question of flexibility.
Mr. CRAMER. Your recommendation is that GSA only be consulted, not to make recommendations or approvals. Is that right?
Mr. Knorr. That is right.
Mr. CRAMER. Do you see any problem then with the language on page 4, line 5, relating to the assessed valuation of the leased properties not including for tax purposes, any increase in value by reason of the improvements made on such properties by said company?
You think it is a proper function of the Congress to write such language in the bill; is that correct?
Mr. KNOTT. We think they could so legislate; yes.
Mr. CRAMER. Section 8 of the bill suggests continuing studies relating to the needs of visitors to the Washington area, including therein the necessity and desirability of different or additional visitor centers, and to report to the President and the President to the Congress. That does not, however, in any way commit the Congress in the future, does it?
It means Congress shall consider the matter as it seems fit through future authorizations; is that correct?
Mr. KNOTT. That is right.
Mr. CRAMER. It is not a commitment on the part of the Congress to approve additional centers in any way, is it?
Mr. KNOTT. I do not read it as committing them.
Mr. SCHWENGEL. First I want to join in paying tribute to Mr. Knott for appearing here, not only for his statement, which is a very good summary of his studies and thoughts, but for the work that he and his staff along with the Secretary have done in preparation for this hear