Ward 1 Councilman Jim Graham, who chairs an oversight committee on D.C. leases, lamented at a June 6 council hearing that the agreements at 77 P St. NE with Douglas Development "lack any careful or thoughtful financial analysis, and the result has been the inability of certain agencies to meet these obligations."

"Some of these lease arrangements are clearly invalid because their annual payment exceeds $1 million, and they were not submitted to the [council] for approval," Graham said.

D.C. law requires all city contracts that exceed $1 million to be approved by D.C. City Council.

William Howland, chief of staff for Deputy Mayor for Operations Herbert Tillery, said the leases at P Street slipped below the council’s radar because they were executed as separate addendums to an earlier lease approved by the council for the Department of Employment Services (DOES). Howland said that all future addendums would be treated as a separate lease.

"They each must stand on their own," he said.

Rental rates in the building range anywhere from $20 to $37 per square foot, which many critics say exceeds market value for the building and its location – the old Peoples Drug Store warehouse near New York and Florida avenues NE. Graham said he has been unable to obtain a logical explanation for charging the city a different square footage rate for space in the same building.

The P Street leases were negotiated by the city’s Office of Property Management to provide space for the following government agencies:

• Department of Health, $1,681,607 per year for 47,360 square feet ($36 per square foot);
• NET 2000, $487,740 per year for 24,387 square feet ($20 per square foot);
• Department of Mental Health, $2,524,179 per year for 67,900 square feet ($37 per square foot);
• Department of Human Services, $1,847,696 per year for 67,900 square feet ($27 per square foot);
• Department of Transportation, $1,080,294 for 30,000 square feet ($36 per square foot);
• Department of Employment Services, $3,701,321 per year for 105,800 square feet ($37 per square foot).

Howland said that a review is in progress to determine the fair market value for all of the leases.

To date, four agencies have moved into the building, taking up approximately 200,000 square feet, but only two of the agencies are paying rent. Douglas Development receives rent from the Department of Employment Services and the Department of Mental Health, but lease payments from the Department of Transportation and the Department of Mental Health are being withheld until those leases are reviewed by the council, Howland said. He said no other city agencies will be permitted to take occupancy until after a full review by the council.

"I made a commitment to the council that we would not move any more agencies into the building without council approval," said Howland said, who has been assigned by Tillery to review the P Street leases.

The Department of Human Services (DHS) still operates from trailers on the grounds of St. Elizabeths Hospital at 2700 Martin Luther King Jr. Ave. SE because there was no appropriation in the DHS budget for new offices in fiscal 2003, Howland said. Howland said that money has recently been found in the Office of Property Management’s budget to move DHS to P Street by July 1, pending council approval.

In addition to using lease addendums to avoid the council’s review process, Graham alleged that Douglas Development was paid $863,299.28 on a "fraudulent invoice" in September 2001. The company invoiced the city for "tenant construction" in the P Street building’s basement for a new program administered by the Office of the Deputy Mayor for Planning and Economic Development. But Graham said construction had not yet started at the site and the former deputy director of the Office of Property Management, Michael Lorusso, neglected to secure a binding lease with the developer before approving the payment.

In August 2001, Lorusso was trying to secure the 25,000 square foot basement for a new project called NET 2000, a program funded under the federal New Economy Transformation Act to incubate start-up technology companies in the District.

Internal communications between officials at OPM and Deputy Mayor for Planning and Economic development Eric Price’s office in September 2001 indicated an urgency to spend the $863,299.28 left in the NET 2000 budget before it would revert to the city’s general fund at the close of fiscal 2001.

"There was a concerted effort to get the funds to OPM so they could secure an agreement for master lease space for the NET 2000 program," Price said.

Price said his office was trying to identify city-owned property for NET 2000 but was told by Lorusso in August 2001 that negotiations were under way with Douglas Development for P Street because city-owned space was unavailable.

A Sept. 10 memorandum from Price’s office to OPM confirmed that the money was available for transfer to OPM for the NET 2000 project and on Sept. 19, Douglas Development submitted a proposal to OPM calling for an advance payment of $1 million for prepaid rent and "tenant fit-out costs."

An e-mail message dated Sept. 25 from Price aide Judi Greenberg told Lorusso there were only a few days left to spend the remaining budget and questioned whether a lease would be required to spend the funds.

"Lease is my only contracting vehicle," Lorusso replied.

On Sept. 26, with no lease in place, Greenberg submitted a sign-off sheet along with a memorandum of agreement authorizing OPM to use the funds for "leasing, construction management and related services connected with" the NET 2000 program. On the same day, Douglas Development invoiced OPM for "reimbursement for tenant construction" that had not yet occurred.

"Someone from OPM must have called Douglas Development and told them to send over an invoice for construction reimbursement, because they didn’t have a lease," said a source close to the investigation who requested anonymity. "They hadn’t even started any work when they cleaned out the remaining budget [of NET 2000].

"The ink wasn’t even dry on the agreement between OPM and economic development when the invoice was generated. The efficiency in which they processed this payment is remarkable," the source said. "OPM simply cut a check without a full accounting of any services provided to the city by Douglas Development. It is unconscionable to send almost $1 million into the abyss without a legal agreement."

The lease for P Street was signed almost a year later in July 2002, without mention of the $863,299.28 advanced to Douglas Development in September 2001.

"It’s confounding how such a large sum of money was not accounted for in the lease – or even a mention that moneys had already been applied to rent payments," the source said.

Douglas Development informed the Office of Property Management last month that the basement at P Street is ready for occupancy. The May 7 letter also acknowledged receipt of the advance payment of $863,299.28 from OPM in 2001, noting that those funds would be applied to future rent payments as they accrue, beginning June 1, 2003.

Chris Bender, a spokesman for Deputy Mayor Eric Price, said the space was not ready for occupancy at the time the lease was signed in July 2002 and it was not ready in March of this year when funding for NET 2000 was eliminated.

"OPM was supposed to monitor the progress of the build-out, because they negotiated the terms of the agreement. Now we want the money back," Bender said.

Price said he asked Greenberg in March to locate the $863,299.28 given to OPM in 2001 from NET 2000’s budget. Dimond informed Greenberg that the money was in escrow and would be applied to future rent payments.

"We expect the money back," Price said.

But Dimond told Graham’s committee he began to inquire about the whereabouts of the $863,299.28 after Graham informed Mayor Anthony A. Williams of the problem during a May 5 dinner, two months after Dimond told Price’s office the money was in escrow for future lease payments.

Graham said Dimond could have avoided the situation at P Street by simply getting an agreement to lease the space for NET 2000 or by "obligating" the funds, without disbursement, under a lease was approved.

On June 11, Mayor Williams announced that Dimond would leave his job on June 27, following receipt of a June 9 letter from Graham that called for Dimond’s "immediate termination." D.C. Auditor Deborah Nichols last month also called for Dimond’s immediate dismissal for malfeasance, citing his failure to properly supervise former deputy director Lorusso’s activities.

"It is clear to me that Mr. Dimond was either not engaged in the business of his agency, permitting Mr. Lorusso a free hand with all lease matters, or he was involved in ways yet to be determined," Graham wrote to the mayor. "It is clear our system and our personnel have failed us."

Copyright 2003, The Common Denominator