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Post Office Privatization Is Probably a Huge Real Estate Deal

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The United State Postal Service (USPS) was created in 1775 -- a year before the signing of the Declaration of Independence. In 2006, Congress forced the USPS to pre-fund 75 years of health care benefits in three years, and gave itself oversight powers.

This week, the USPS said it was likely to default on a $5.5 billion payment, and another $5.6 billion payment due in September, unless Congress exercised said oversight powers and allow it to resolve the mess, made worse by declining revenues over the past few years.

Congress promptly adjourned. A bill responding to the Postal Service's plight passed the Senate in April, but the GOP-dominated House hasn't taken it up.

Meanwhile, calls to privatize the USPS are being heard from mainstream outlets and on the Right. Bloomberg recently published a piece on the subject from Peter Orszag. Much on the Right issues from the American Enterprise Institute (AEI)and a group called the Institute for Research on the Economics of Taxation (IRET), which is funded by the Scaife Foundation, the Carthage Foundation, and the Charles G. Koch Foundation.

It's hard, in this pass, not to wonder if the Right Wing is forcing the issue by creating a crisis, then pressing for action. This, after all, has been its strategy for shrinking the Federal Government -- systematically starve it for money by cutting taxes and larding it with debt, then call for drastic reforms to stave off disaster, a la the Ryan Plan.

There's even what amounts to a business plan for privatizing the USPS, published by the AEI in 2011, called "Return to Sender: Reforms for the Failing Postal Service." The premise: The USPS is obsolete and doomed, and the taxpayers' interests have to be protected by getting it off the government's books as soon as possible.

Written by a Cornell University associate professor named R. Richard Geddes (Mr. Geddes also writes for the Hudson and Cato Institutes), it lays out a step-by-step outline for moving from today's government agency to, eventually, a public, stock-based corporation. It's all based on the idea that if the USPS was a private company, it could survive and even prosper in the world of e-mail. In fairness, Mr. Geddes does observe that many of the USPS's problems were created by the 2006 law.

But the idea raises a question: If Geddes and the AEI are correct and the USPS is such a bottomless money pit, why would anybody want it? Who ever heard of buying a service company with no upside? What's in it for them?

Well, real estate, actually, and Geddes and every commenter hints at this. Privatizing the USPS has the potential of being one of history's biggest -- and most profitable -- real estate deals ever.

Here's how it could work.

When the USPS became a private, investor-owned corporation, it would be split into two entities, an operating company that handles mail and packages, and a separate company that owns the real estate. The share prices paid by investors would probably reflect the company's discounted revenues -- not the value of the real estate.

The real estate company would then sponsor a series of vehicles -- real estate investment trusts, probably, or even limited partnerships -- each appealing to a specific subset of investors.

These in turn would lease some of those properties back to the USPS, and lease or sell others. That first would increase the operating expenses of the USPS, but also reduce its taxes, since leases are tax deductible. It would be billed as a way to subsidize the operating company, preserving universal mail delivery, jobs, and benefits. The unions would love it.

Then the real estate companies would take the cash flow from the USPS lease payments, and the other lease payments, and turn it into bonds.

Since the leases would be on commercial real estate, the income would be sheltered from taxes for years, because as commercial property, it could be depreciated. When the bonds matured, the company could lease the properties all over again, or sell them. The properties not treated this way would either be sold, re-developed, or re-developed and then sold.

How big would this deal be? Well, the USPS leases 24,671 square feet of space -- mostly small rural post offices -- and that property wouldn't be affected. But it also owns 8,621 properties (totaling about 318 million square feet of interior space), and about 500 acres of vacant land.

Most of that owned real estate is prime, downtown real estate in every town and city in America -- the main Post Office and the neighborhood branches in cities, suburban branches, and big operations centers. The land is scattered all over the country, but pretty much none of it is in wilderness areas.

How much is it worth? Nobody really knows. The USPS, like every government entity, doesn't regularly appraise its properties. But there is an estimate nosed about by the Right; the IRET reported in a 2003 paper that the USPS carried its properties on its books at $15 billion, and that in 1999, it reported that properties it sold went for about seven times book value.

So by the Right Wing's estimates, the owned USPS property portfolio is worth about $105 billion.

A deal like that is too big to be done all at once; it would flood the market and undercut itself. It would have to be done slowly, quietly, and under the radar -- hopefully so no one notices. If, as business prospects for the USPS fell, it eventually collapsed -- well, the organizers could always say the USPS was a sinking ship, and it sank.

But the real estate company wouldn't sink. And the deal could be used as a template for other privatizations -- your local Board of Education, for instance

Unless, that is, the Congressional oversight committee let the USPS do it itself. In that case, it would probably never have to worry about money again.

Visit me at www.Reinbachsobserver.com.

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