Promising Practices

Steven L. Schooner and Daniel I. Gordon | November 28, 2016 | 0 Comments

GSA's Trump Hotel Lease Debacle

Inside the Trump International Hotel in Washington. Inside the Trump International Hotel in Washington. Hunter Bliss/Shutterstock.com

As the clock ticks down towards President-elect Donald Trump’s Jan. 20 inauguration, the window is rapidly closing on the General Services Administration’s opportunity to extricate itself from the Trump Organization’s lease of the historic Post Office Pavilion. The lease—in which Donald Trump would, in effect, be both landlord and tenant—now presents unprecedented and intolerable conflicts of interest. 

As interest groups, domestic and foreign, contemplate booking rooms in the Pennsylvania Avenue landmark turned Trump International Hotel to curry favor with the President, it is easy to assume that Mr. Trump’s involvement in that lease presents challenges just as abstruse as his overseas business operations. Those overseas entanglements may, indeed, require analysis of the Constitution’s hitherto rarely discussed Emoluments Clause. Conversely, understanding and addressing the problems raised by the Trump Organization’s 60-year, $180 million lease is far simpler.

GSA need not wait for constitutional experts to weigh in, nor for Trump’s lawyers to craft a comprehensive solution to appropriately distance Mr. Trump from his entire web of business interests. The lease presents relatively straightforward government contracting issues, and the contracting agency with responsibility for addressing those issues is GSA. To protect the integrity of the federal government’s procurement process, GSA must end its lease arrangement with President-elect Trump now. 

When In Doubt, Read the Contract

The Post Office Lease differs from many of Mr. Trump’s other business arrangements. That’s because, in writing the contract, the federal and D.C. governments determined, in advance, that elected officials could play no role in this lease arrangement. The contract language is clear: “No ... elected official of the Government of the United States ... shall be admitted to any share or part of this Lease, or to any benefit that may arise therefrom...”   

The language could not be any more specific or clear. Donald Trump will breach the contract on Jan. 20, when, while continuing to benefit from the lease, he will become an “elected official of the Government of the United States.” 

The lease agreement, like many government contracts, is a lengthy document. Yet this clause represents a material (that is, significant) contractual term. While we recognize that some of the statutory ethics rules that generally apply to federal officials exempt the president and vice president, the prohibition on benefiting from the Old Post Office Pavilion lease does not exempt Mr. Trump. The terms of the contract were freely agreed to by the Trump Organization. Had President Obama or Vice President Biden (or any other elected official of the U.S. Government) attempted to participate in the original lease agreement in 2013, we are confident that GSA would have rejected their proposal. The lease’s plain language (a term favored by the late Justice Antonin Scalia) makes clear that Mr. Trump will be violating the lease’s terms when he becomes an elected official on Inauguration Day.

An Important Policy

The lease’s language is not meaningless boilerplate. The clause is consistent with longstanding prohibition on entering into contracts with federal employees. The prohibition extends to any “business concern or other organization owned or substantially owned or controlled by one or more Government employees.” This “policy is intended to avoid any conflict of interest that might arise between the employees’ interests and their Government duties, and to avoid the appearance of favoritism or preferential treatment by the Government toward its employees.”

That perfectly describes the problem here. The Old Post Office Pavilion lease is between GSA—whose administrator President Trump will appoint—and Mr. Trump’s family-owned company. Specifically, the lessor is Trump Old Post Office LLC, which, of course, is part of the Trump Organization, a privately owned conglomerate, of which President-elect Trump is chairman, president, and majority stakeholder. The situation is a casebook example of both the appearance of a significant conflict of interest and an intolerable intermingling of an elected official’s governmental duties and his family’s personal financial interests.

During the campaign, Mr. Trump suggested he would step away from his business before taking office, turning the company over to his children, Donald, Jr., Ivanka, and Eric. Mr. Trump’s lawyers may argue that that should end the matter (pointing out that most government conflict-of-interest rules extend only to the individual, spouse, and dependent children, and not to adult children). While turning over the Trump Organization to the president’s adult children may address the lease language (though only if—a big if—it ensures the president fully divests and no longer receives “any benefit” from the lease), it in no way ends the problems with GSA’s lease.

The Kids Are Not Alright

As long as the president’s adult children control GSA’s leasing partner, GSA and its staff will confront what any reasonable person would view as the appearance of a conflict of interest.  (This common-sense “reasonable person” test is frequently used to assess conflicts of interest.)  The principles of ethical behavior for government officials demand that no individual serve two masters, that government officials not be in a position to choose between the public interest and their own personal benefit. That is the essence of a conflict of interest. That is why we would not tolerate a judge deciding a case involving a family member, or a case in which she or he stood to personally benefit financially from the outcome.

The GSA employees handling the Trump lease will be caught between their duty to protect the interests of the building’s landlord—that is, the government, the public, and the taxpayers—and their duty of loyalty to the GSA administrator, who will be appointed by, and serve at the pleasure of then-President Trump. Having the building’s tenant represented by “other” Trumps (the President’s offspring) is plainly insufficient to “avoid strictly any conflict of interest or even the appearance of a conflict”—particularly where the President’s name will remain as the hotel’s name, brand, trademark, and marquee.

To make matters worse, since the election, Mr. Trump’s adult children have assumed prominent roles in Trump’s official transition team and interacted with foreign officials, thus eliminating any independence or “walling off” that might exist in other circumstances. For those who were hoping to see Mr. Trump establish a blind trust to manage his business interest, this is neither a trust, nor blind. 

Then, last week Trump appeared to backtrack even on that limited measure, disavowing his willingness to relinquish the company’s reins: “Prior to the election it was well known that I have interests in properties all over the world. Only the crooked media makes this a big deal!”

The Ethics Office Can’t Bail Out GSA

We are sympathetic to GSA’s quandary. Yet, despite media suggestions to the contrary, GSA cannot foist this challenging situation on the Office of Government Ethics. OGE is a policy shop. Its website explains that it “does not handle complaints of misconduct, nor does OGE have investigative or prosecutorial authority. OGE's mission is one of prevention.” GSA is the contracting agency that entered into the lease with the Trump Organization, and it must clean up this mess.

We do not understand how GSA or its inspector general failed to anticipate the possibility of this eventuality or devise an exit strategy (such as identifying an alternative lessor and preparing a contingent novation agreement) prior to Election Day. None of this happened quickly. Trump announced his candidacy in mid-June 2015, nearly two years after the lease was signed and more than 16 months before the election. GSA’s lack of advance planning does not excuse inaction now.

It’s Not Just Appearances

The federal procurement system, despite being complex and often too slow, has a 200-year record of transparency and integrity. To protect the contracting process from corruption, federal contracting regulations mandate that "Government business shall be conducted in a manner above reproach . . . to avoid . . . even the appearance of a conflict of interest in Government-contractor relationships."  

Inside both federal agencies and government contractors, employees “look up and around” for cues and models of acceptable behavior. If the President discounts the importance of avoiding conflicts, disrespects transparency, and disparages the importance of compliance with contractual and regulatory requirements, we fear that the message will not be lost on the broader procurement community.

What the Trump lease presents is not just a hypothetical appearance of a conflict. In any long-term lease of property, it is normal that issues arise that need to be resolved. The Old Post Office lease is a particularly complicated and, for GSA, rather unusual, 60-year agreement that requires significant annual disclosure of detailed financial information. These extensive disclosures are followed by negotiations over escalation of the rent and any other payments that the Trump Organization must pay to the government. Just imagine GSA pressing the Trump organization for more detailed revenue and expense information, or the President’s children negotiating annual rent adjustments with a career civil servant who reports to the GSA administrator appointed by their father, who serves at his pleasure. Any reasonable person would worry about the undue pressures and the inherent risk of favoritism that the government might show to such a well-connected contractor.

Nonetheless, last week, the President-elect told the New York Times: "The law's totally on my side, the president can't have a conflict of interest[.]” He’s wrong. 

While the President and Vice President are exempt from some of the ethics statutes, including some of the prohibitions related to conflicts of interest, many of the statutes that prevent conflicts of interest and corruption do constrain the president. For example, if the president wanted to award another hotel lease on a sole-source basis to a company he, or his adult children, controlled, he could not. The Competition in Contracting Act would prohibit it.  Similarly, the president could not lawfully direct GSA to house official guests of the government or dignitaries at a hotel owned by him or his adult children.   

Courting Disaster

Looking ahead, things may get worse before getting better. Last week, in announcing its $25 million settlement, the New York State Attorney General explained that the state had “sued Donald Trump for swindling thousands of innocent Americans . . . through a scheme known as Trump University. Donald Trump fought us every step of the way, filing baseless charges and fruitless appeal​s​ and refusing to settle for even modest amounts of compensation for the victims of his phony university.”

Such an announcement normally would prompt members of Congress to prod GSA to consider suspension or debarment proceedings against a contractor accused of such dishonest behavior.  The Trump University settlement suggests that the New York attorney general found “adequate evidence” of “making false statements,” which satisfies the regulatory standard for a federal agency’s suspension and debarment officer to take action. Of course, knowingly breaching a contract would alone be a cause for concern. But we also fear that, over the next four years, other plaintiffs will sue, accusing the Trump Organization of committing, for example, tax evasion, or “other offenses indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor.”  Yet every federal suspension and debarment officer would be caught between their duty to consider action to protect the public interest and their loyalty to their supervisors, the highest of whom will have been appointed by then-President Trump.

It’s Only Money

The government should immediately end the hotel lease relationship, before Trump becomes president. In a perfect world, Trump and the GSA would negotiate a mutually agreeable termination of the lease or a novation/transfer to an unrelated firm. Nothing thus far suggests that President-elect Trump appreciates the need to do so. As a result, GSA must take unilateral action.

In almost all federal government contracts, the government reserves the right to terminate the contract “for the convenience of the government” (with appropriate compensation due to the contractor), whenever “it is in the Government’s interest.” Unfortunately, the Trump hotel lease explicitly prohibits GSA from exercising that longstanding, well-established, Congressionally-mandated right.

Based on the agreement’s express terms, we believe that Trump has breached the contract. In the alternative, GSA should breach, or do whatever it takes to end, the contract. This unusual lease even envisions that the sovereign may appropriate—or effectuate a “total taking”—of the property (although we do not think such a step should be necessary). 

Of course, the President-elect or his family business may sue GSA. The Trump organization is notoriously litigious, and we do not expect Trump to walk away from the lease and the prestigious property without a fight. 

For the reasons explained above, we believe GSA can justify its termination in litigation. But the worst thing that can happen is that the government will be liable for monetary damages. (We are aware of no precedent in which the Trump organization could gain injunctive relief that would require GSA to continue the lease relationship.) 

To the extent that damages could be awarded, we expect them to be nominal at best. Courts are skeptical of claims for anticipatory profits, primarily because any such recovery is, by its very nature, speculative. Regardless, it would be a price worth paying to preserve the integrity of our government and its contracting system. The faster GSA ends its business relationship with the Trump Organization, the better.

Steven L. Schooner is the Nash & Cibinic Professor of Government Procurement Law at the George Washington University Law School. Daniel I. Gordon is senior advisor to GW’s Government Procurement Law Program and was President Obama’s first administrator for federal procurement policy.

Image via Hunter Bliss/Shutterstock.com.

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