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Tuesday, December 3, 1996
State closes RF&P sale to Lazard
End of the line for 162-year involvement
BY JEFF E. SCHAPIRO
Times-Dispatch Staff Writer
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KEY DATES
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1834 - The General Assembly chartered the Richmond, Fredericksburg and Potomac Railroad Co. under a special act.
1964 - RF&P begins collaboration with Charles E. Smith Co. on Crystal City complex in Northern Virginia.
1989 - RF&P Corp. and its major stockholder, CSX Corp., plan for development of Potomac Yard, a vast former rail classification yard.
1990 - CSX merger with RF&P blocked, setting in motion state takeover of firm.
1991 - Virginia Retirement System completes acquisition of RF&P, spinning off railroad operations to CSX, leaving RF&P as real estate company.
1992 - State attorney general's office and federal prosecutors begin separate investigations of RF&P deal. Federal investigation collapses after 3 1/2 years and no action ever taken by state officials.
1992-93 - RF&P launches failed bid to build Redskins stadium at Potomac Yard.
1994 - RF&P converted to a real estate investment trust, significantly reducing company's tax bill.
1995 - VRS receives unsolicited offers for RF&P.
1996 - VRS concludes sale of RF&P to Lazard Freres & Co.
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WASHINGTON - The commonwealth of Virginia yesterday quietly ended its historic - and controversial - relationship with RF&P Corp., concluding the sale of the railroad-turned-real estate company to a prestigious New York investment bank for nearly $600 million.
The state has had a financial stake in RF&P since its founding 162 years ago. Most of those years were relatively tranquil. But the state's takeover of the company, through the $23 billion Virginia Retirement System, in 1990 triggered a series of legal, political and financial controversies that resonate to this day.
VRS parted with RF&P for $570 million, ceding control to a $1 billion real estate fund operated by Lazard Freres & Co. of New York, whose principals include Felix G. Rohatyn, the sometime economic adviser to the Clinton administration and mastermind of the New York City bailout in the 1970s.
Huddled in four conference rooms at a Richmond law office and resolving last-minute snags by telephone and laptop computer, more than a dozen attorneys nudged VRS and Lazard toward a signature-on-the-dotted-line deal giving Lazard office buildings, warehouses and raw land between Washington and Richmond.
"This ruined a lot of people's Thanksgiving," VRS director William H. Leighty said of the marathon of paperwork in the run-up to yesterday's closing.
Because of the snail's pace of the proceedings, the actual transfer of dollars to VRS from Lazard wasn't expected until today. VRS will realize $551 million in cash - all of which will be invested in bonds - and $19 million in high-grade securities, such as U.S. Treasury notes.
Lazard's intentions toward RF&P are not clear, and the firm - through Murry N. Gunty, vice president of its real estate arm - yesterday was again silent on its plans. Also uncertain: who, if any, of the RF&P's 28 employees will be asked to stay on.
"We'll just keep on keepin' on," said Denton U. Kent, RF&P president and chief executive officer, who will share with other staff members $500,000 in contested bonuses paid for with proceeds from the sale.
The atmosphere at the closing was businesslike, but, for some, wistful. RF&P corporate secretary Carolyn K. Fleming, with the company 29 years, recalled how engineers, with blasts of locomotive whistles, would alert their families living near RF&P rights of way when they could be expected home.
The purchase price is slightly better than the book value of RF&P, which was acquired by VRS for about $350 million in cash. However, because of bookkeeping questions, the state takeover is carried on the VRS ledgers at $548 million - a figure based on the historic value of RF&P stock.
Virginia obtained its first shares in RF&P the year the company was started: 1834. At the time, the state had embarked on a massive public works program, and it received shares in railroad, canal and turnpike companies in return for government subsidies to these nascent industries.
The only one to survive was RF&P, which grew to control the rails between Washington and Richmond - in essence, a key link between the industrial North and the agrarian South.
By 1990, CSX Corp., the Richmond transportation giant, had become RF&P's biggest stockholder and moved toward a merger with its tiny counterpart in a stock offer that was blocked by then-Gov. L. Douglas Wilder.
Laying the foundation for the VRS takeover of RF&P, Wilder sided with his ally the pension board, which viewed RF&P's extensive property holdings - especially the land beneath Crystal City office complex and the undeveloped Potomac Yard, both in Northern Virginia - as a gold mine for the pension fund.
Because of tax complications, among other reasons, VRS never claimed a cash dividend from RF&P. Had the CSX gambit succeeded - it was worth about $300 million - the pension system would have realized at least a three-fold return.
Wilder, who tried to steer the Washington Redskins to Potomac Yard, yesterday stood by his view that state acquisition of RF&P was good for VRS' 75,000 beneficiaries in state and local government: "I don't recall anyone - I don't remember a single solitary soul in the legislature - expressing any criticism of it."
Nonetheless, the acquisition was scrutinized by the General Assembly's investigative arm, the Joint Legislative Audit and Review Commission. JLARC, troubled by the perceived politicization of VRS, urged reforms of the fund that led to the installation of a new board of trustees and the system's designation as a constitutionally protected independent trust.
Seven years after the state takeover, a debate continues over whether it was appropriate for a public body to run a private company. RF&P apparently was the only private entity in the nation actively managed by a government pension fund.
"A public pension system has no business running a private company - real estate or otherwise," said VRS trustee Edwin T. Burton III, lead negotiator in the RF&P sale.
Also, the deal triggered a federal criminal investigation that collapsed after 3 1/2 years, netting only the mail fraud conviction of a VRS lawyer. Two Virginia attorneys general looked into the takeover, with one saying it was legally too late to prosecute for possible wrongdoing by VRS officials.
The first unsolicited offers for RF&P came in April 1995 - just a year after nine new trustees were sworn in at VRS. Nearly 1 1/2 years later, Lazard beat RF&P's partner in Crystal City, the Charles E. Smith Co., for control of the firm.
The sale to Lazard closed on a sour note: a last-minute dispute over bonuses for Kent and others that Burton criticized last month as indefensible "golden parachutes" for executives who already enjoyed lucrative compensation and severance plans.