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Memorandum for the Chairman .
April 13, 1983
Page 6

The passage of time has made it impossible for the director/employee to reconstruct completely all the business conducted during the period. The officer/director has attempted to reconstruct his activities based on incomplete records. While the reconstruction does not cover all days for which reimbursement is sought, it does reflect substantial contact with Corporation employees and candidates for employment, and members of the executive and legislative branches.

The officer/director has located his receipt for the April 23-28, 1981, round trip between Atlanta and Washington, but not for May 15-16, 1981.

Further efforts to elaborate on the documentation in the files are continuing.

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At your request I have conducted a review of three matters relating to reimbursement of an officer and director of the Corporation that were raised as exceptions in the fiscal year 1982 internal audit of travel and relocation expenses and employee advance accounts conducted by the Office of the Inspector General and presented in a February 1983 Addendum. I set forth below the results of the review and the conclusions reached with regard to each matter.

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(5.a.)

A director and officer has been reimbursed $19,500 for the
real estate commission on the house he purchased in
Alexandria, VA on 20 August 1981. The closing statement
indicates the commission was being paid by the purchaser.
However, such commissions are normally paid by the seiler;
and, neither the old draft policy nor the new adopted policy
provide for real estate commission reimbursement on the
purchase of a house. The $19,500 on the surface appears to be
additional consideration toward the purchase cost of the
house. The employee did not sell or pay any selling
commission on his former residence. Therefore, no commission
seems to be reimbursable under the relocation policy.
Notwithstanding a memorandum from the Chairman of the Board to
Personnel stating "Reimbursement for relocation expenses of
[the director and officer referred to in 5.a.] should be made
in accordance with the full-range of benefits provided by the
Corporation's policy" there is inadequate justification or
documentation in the file for such a payment outside of
corporate policy.

[The matter remains] unresolved and adequate justification
supporting the propriety of the reimbursements is still
lacking.

I have reviewed the Corporation's file on the payment, interviewed the director/officer, spoken telephonically to the seller, Maurice N. DeGroff, and the settlement agent, attorney George E. Bitner, and have interviewed Pat Buck, sales associate, and William Malone, office manager, for Holley, Hargett & Spain, the real estate brokerage firm that received one half of the commission and on whose form the sales contract was written. I have

Memorandum for the Chairman

June 28, 1983 Page 2

also had a brief telephone conversation with the second broker, Gary Golubin of the firm of Golubin and Warwick. My review has also included a survey of area real estate commission practices and an interview with consultants from Hay Associates, managerial consultants retained by the Corporation.

The facts appear to be as follows:

The buyer, after several months of unsuccessful personal efforts conducted evenings and weekends to locate a residence, contacted a number of brokers specializing in residential homes in areas in and surrounding Washington, including Pat Buck of Holley, Hargett & Spain. The buyer told the sales associate that he expected her to work for him, not a seller. The buyer recalls no discussion of a commission or commission rate at the time of the engagement, although it was his intention to pay an appropriate commission. The sales agent has said that she believes that she was "working for" the buyer to find a house, and that she often does not reach an explicit agreement regarding a commission until a contract is signed for a home. While she does not recall the specifics of any discussion relating to commissions before the purchase, she was told by the buyer that she should not limit her efforts to homes offered with commissions by the seller, and that she would be taken care of in all events. No written contract was entered into between the buyer and Ms. Buck, or Holley, Hargett & Spain.

The house for which reimbursement of the commission was paid by the Corporation was subject to a July 29, 1981, listing agreement entered into by the seller with the real estate agency of Golubin & Warwick. The agreement provided for a three-month exclusive listing, a listed selling price of $349,000 or such other price agreed upon, and a commission of six percent of the selling price if the property were sold during the listing period. The agreement authorized Golubin & Warwick to make a blanket unilateral offer of "subagency" to real estate brokers and participants in a mulitple listing service, and it was through such a service that the Holley, Hargett & Spain agent learned of the availability of the property, and participated in the transaction. The Suggested Procedures Manual of the Northern Virginia Board of Realtors, Inc., states that all real estate brokers participating in a mulitple listing service do so as agents or subagents for the seller.

The buyer and seller entered into a sales contract dated August 2, 1981. The sales price was originally entered on the preprinted contract form as $305,500. This is stricken from the form and in its place is the figure $325,000. The seller states that he insisted that the contract include the higher amount. A preprinted provision for "agents fee" provides for payment by the seller. This was manually revised to provide for payment by the buyer "included in the down payment."

The August 20, 1981, closing statement recites a "contract sales price" of $325,000, but elsewhere the total is broken down as "$305,500.00 BASE

Memorandum for the Chairman

June 28, 1983

Page 3

PURCHASE PRICE PLUS $19,500.00 PAID BY PURCHASER EQUALS $325,000.00 TOTAL PURCHASE PRICE." A gross amount of $325,100 is listed as due to seller, and the $19,500 commission is listed as "PAID FROM SELLERS FUNDS AT SETTLEMENT." The commission of 6% is calculated at the $325,000 sales price. The buyer believes that the higher price was used in the closing statement at the direction of the settlement agent to reflect the appropriate transfer value. The settlement agent believes the statement reflects what the parties to the transaction had earlier agreed upon.

The buyer has no recollection of the circumstances surrounding the modification of the sales contract to reflect the higher sales price. Ms. Buck recalls that she filled in the initial terms and modified the printed text of the sales contract upon the instructions of the buyer. She met with the seller at the offices of Golubin & Warwick. The seller insisted that the sales price be changed to $325,000. The contract was thereupon modified and presented to the buyers for initialling. The contract was further changed at that time to provide that the commission would be included in the down payment, but Ms. Buck cannot recall at whose instance.

The relocation allowance policy in effect at the time of the transaction provided, in the case of "sale closing costs", for reimbursement of penalty, broker's commission, mortgage discount points, duplicate loan carrying costs, etc." (emphasis supplied). For "purchase closing costs" the policy provided for reimbursement of "all normal and reasonable buyer costs."

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It is our view that in the context of the facts of this transaction, the commission paid by the buyer cannot be treated as a normal and reasonable buyer cost. This is not to say that it may not be normal and reasonable under other circumstances for the buyer to incur such an expense. For example, it may under some circumstances be normal and reasonable for a buyer to retain his own broker in search of a house and agree to pay a fee independently of what the seller may be obliged to pay. in such a case, the seller owes no fee to the broker in the event of sale, and any payment by the buyer in no way bears on the consideration paid the seller for the house. In this case, the seller was obliged to pay a fee to Golubin & Warwick in the event of sale of 6 percent of the sales price including commission. That fee would be split by Golubin & Warwick with another broker if the sale were consummated with the assistance of that other broker through a multiple listing service.

The papers are somewhat inconclusive as to whether the purchase price for the home was $305,500 or $325,000, and whether the buyer or seller paid the brokerage commission. But even if the buyer paid the commission, as recited in the contract of sale and settlement statement, it appears that the lesser price was agreed upon only on condition that the buyer pay a commission the seller was contractually obliged to pay in connection with the transaction. This should be viewed as part of the overall consideration to the seller, so that the transaction involved a $325,000 purchase price, regardless of how

Memorandum for the Chairman

June 28, 1983
Page 4

denominated in the closing papers. Thus we view the commission not as a normal and reasonable buyer cost, but as part of the purchase price. We do not believe the negotiations surrounding payment of the commission have altered its essential character so that it would qualify as a normal and reasonable buyer cost rather than the purchase price.

We have additionally sought to determine whether, notwithstanding this analysis, it is common practice for buyers to negotiate their contracts of purchase so that they pay. directly to brokers commissions for which the seller is already contractually obligated, or whether there exists a consistent or substantial practice of reimbursement of such payments by employers.

William Malone, office manager for Holley, Hargett & Spain, could recall only three occasions in the last five years when a buyer had paid a commission. This represented less than 1% of all the office's transactions, although perhaps as much as 10% of transactions involving homes sold at prices in excess of $250,000. In no case was the seller already contractually obliged to pay a commission to the broker.

The results of a telephone survey of Alexandria or other northern Virginia offices of eight major residential real estate agencies suggests that commissions are paid by buyers quite infrequently, with answers ranging from less than 5% in one case, to 1%, to "never." Payment of a commission by a buyer when the seller is committed to pay was in all cases less than 1%, with half those polled responding with less than 1/10th of 1% or "never." Hay Associates is not aware of any policies of private corporations to reimburse commissions paid by the buyer, either as a component of the purchase price, or where broken out and paid by the buyer. They do not rule out the possibility that such costs might occasionally be reimbursed on a clerical level pursuant to a policy which generally reimburses "commissions." Advised of the Office of General Counsel's earlier tentative decision, the officer/director has voluntarily agreed to pay to the Corporation as soon as the Office of General Counsel reaches its final decision, a sum representing the reimbursement and interest thereon in the event the Office of General Counsel concluded that the reimbursement was not in accordance with the Corporation's relocation reimbursement policy. In agreeing to the payment the officer/director has restated his firm belief that the reimbursement was in accord with the Corporation's relocation reimbursement policy, and has reserved all his rights to ultimate repayment of the sum as well as all other amounts to which he may be entitled by law or Corporation policy.

(5.b.)

A mortgage interest rate differential claim of $1,590 per year for three years is open to question because the same employee referred to in 5.a did not sell his former residence or forego the benefits of the lower mortgage rate thereon. There is no evidence in the files that mortgage rate differential payments

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