Sunday, August 4, 1996
RS bears down on deal
Gilmore completes inquiry into RF&P acquisition
BY JEFF E. SCHAPIRO
Times-Dispatch Staff Writer

Now that the criminal investigation into the Virginia Retirement System's acquisition of RF&P Corp. is over, attention is returning to efforts to undo the four-year marriage of the $22 billion pension fund and its controversial real estate subsidiary.
While both sides are saying very little publicly, VRS and Charles E. Smith Co., a Washington real estate giant, are exploring a possible partnership in which other investors could have a stake.

At a country club luncheon this past week, negotiators haggled over details of a deal that is a far cry from the outright sale of RF&P, once the expressed goal of most VRS trustees but now considered unlikely because it could trigger a potentially hefty tax bill for RF&P.

In fact, sources said, if VRS and Smith come to terms -- and other bidders hope that won't happen -- there's a strong chance that the 200,000-member retirement fund will continue running RF&P, though the company would shrink considerably.

That's because selected holdings of RF&P and Smith would be merged under a real-estate investment trust managed by Smith that, in turn, could sell shares on the open market to individuals and institutions.

Such a plan would shield the principals -- RF&P and Smith -- from the tax man, and could finally turn loose RF&P profits to VRS, which hasn't seen a dime on its $548 million investment in the former railroad. Profits have been kept by RF&P rather than surrendered to VRS for other investments.

Another winner in a Smith deal would be Lehman Brothers, VRS' investment adviser. The firm could collect millions of dollars in fees if the new partnership succeeds in going public.

To the dismay of other suitors, talks are accelerating between VRS and Smith. The latest round took place Thursday in Charlottesville.

VRS trustee and lead negotiator Edwin T. Burton III played host at the University of Virginia's McIntire School of Commerce and the exclusive Farmington County Club to Lehman associate Scott Hacker and Robert Kogod, a Smith co-chairman and the son-in-law of the company's late founder. Kogod flew in on his private jet.

Burton declined to comment. A Smith spokesman, John M. Kurtz, also had little to say.

At least two other firms have tried to get into the hunt for RF&P: a real estate fund managed by Lazard Freres & Co., the prestigious investment bank, and SFRE, an Alexandria firm that makes property investments on behalf of U.S. and foreign companies.

SFRE, in league with the investment arm of Cargill Inc., the privately owned agricultural behemoth, has complained that its offer has been ignored because VRS has designs only on Smith.

In a letter Friday to state officials, SFRE chief executive officer Nitin M. Chittal said, ''Our only goal is to be heard by the VRS board and it seems as if there is no desire to do so.''

SFRE, among a handful of companies to make unsolicited bids for RF&P in 1995, first offered a half-a-billion dollars in cash for the entire company. The bid was cut to $181 million when SFRE said it would pass on Crystal City, the sprawling complex built by Smith in partnership with RF&P on RF&P land in Arlington.

Not that SFRE wouldn't like to own Crystal City, which would be the centerpiece of the VRS-Smith union. Smith apparently became leery about giving a prospective competitor a peek at Crystal City's books, prompting SFRE to scale back its offer.

Another headline property that could complicate RF&P's future is Potomac Yard.

One of the last large tracts of undeveloped land inside the Capital Beltway, the former railroad yard was envisioned by former Gov. L. Douglas Wilder as a site of a new stadium for the Washington Redskins.

Because of environmental problems, Potomac Yard would not be included in a VRS-Smith partnership.

Completed in 1992, the RF&P acquisition was the subject of criminal investigations by federal prosecutors and Attorney General James S. Gilmore III.

Gilmore completed a nine-month inquiry last week, saying that because of the statute of limitations on state securities violations and misdemeanors, it was too late to prosecute three former VRS officials for possible wrongdoing in the RF&P takeover.

An investigation by the U.S. Attorney for Eastern Virginia collapsed in October after yielding only a felony mail fraud conviction of an ex-lawyer for the pension system.

© 1996, Richmond Newspapers Inc.

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