U., Trammell Crow to restructure outsourcing deal

The two sides are redoing parts of their landmark agreement in order to maintain the tax-exempt status of many buildings. After reviewing Internal Revenue Service regulations, the University is restructuring its outsourcing agreement with Trammell Crow Co. so as not to jeopardize the tax-exempt status of many University buildings. Although Penn initially signed a non-binding 10-year agreement to outsource facilities management to Dallas-based Trammell Crow, the University is currently negotiating an agreement for a "one year preliminary term and a second agreement for a nine year term" in order to conform with federal income-tax restrictions, Executive Vice President John Fry wrote last week in a memorandum obtained by The Daily Pennsylvanian. While the IRS has yet to notify the University about possible tax violations stemming from the contract, Fry told the DP that Penn is taking an "ultra-conservative" approach in order to avoid future complications. The IRS unveiled a new set of regulations last year concerning joint ventures between non-profit and for-profit corporations, according to University Vice President for Finance Kathy Engebretson. Although the University is taking a cautious approach, the IRS restrictions may not even apply to the University's situation because "Trammell Crow is working for us," Engebretson said. As part of the October 8 agreement between the University and Trammell Crow, the company will pay the University $26 million up front and $6 million at a later date for helping it to start its new venture, Trammell Crow Higher Education Services. Penn, in return, will pay Trammell Crow about $5.25 million per year to manage approximately 10 million square feet of building space. Under the IRS' "management-contract" restrictions, all buildings under Trammell Crow's control and financed with tax-exempt debt could be declared taxable -- a prospect especially detrimental to people holding bonds whose proceeds go to financing University buildings. These bondholders would receive a "bad return" on their bonds if they were declared taxable, Engebretson said. For example, the $200 million in bonds sold last week to the Merrill Lynch syndicate would be negatively affected. Categorizing the unprecedented deal between the University and Trammell Crow as "an uncharted area" for the IRS, Engebretson said that University officials "didn't want to wait to have an audit." Vice President for Facilities Services and Contract Management Omar Blaik said the two parties "are simply changing the packaging" of the agreement. He added that the restructuring of the contract should have no impact on the more than 100 University employees who have already accepted positions with Trammell Crow. Fry is expected to sign the preliminary one-year agreement, which includes a stipulation that the contract will be extended for nine years after securing the IRS' stamp of approval, within the next week, Blaik said. If the IRS decides that the contract could endanger the University's tax-exempt status, administrators will merely adjust the "financial terms of the agreement," Fry said. And Blaik added that although the University will not receive a ruling from the IRS for at least several months, Penn will immediately begin to implement the one-year contract to assure employees a relatively smooth transition period. A lawsuit filed in October in U.S. District Court in Philadelphia also threatens to block the deal. In the suit, which seeks class-action status for all University employees affected by the deal, several employees accuse the University and Trammell Crow of illegally working the deal to reduce employees' benefits. Yet despite the lawsuit and tax-law issues, Fry contends that the deal is on track. "We're not going back because of this," he said.