District of Columbia Expands Benchmarking

timthumbAccording to the U.S. Department of Energy, commercial buildings account for nearly 50% of all building energy use and about 20% of total energy consumption and greenhouse gas emissions nationwide. New York, Seattle, Boston, and a growing number of cities require or are developing benchmarking systems to track and improve building energy efficiency; the nation’s capital has been monitoring public building performance since 2010. The initial phase included only buildings over 200,000 gross SF, but by 2013, private buildings over 100,000 gross SF were required to report energy and water use. In 2014, the program expanded to include commercial and multifamily buildings over 50,000 gross SF.

The District of Columbia’s Department of the Environment (DDOE) collaborated closely for several years with developers, energy experts, and environmental groups to develop its benchmarking system. The Clean and Affordable Energy Act of 2008 (CAEA) requires that owners of large commercial buildings annually measure and report energy and water use to the DDOE for public disclosure. CAEA-mandated benchmarking means that each building’s annual consumption is tracked and compared with its own past performance and with the performance of similar buildings around the country. Studies have shown that benchmarking is an effective way to drive energy efficiency improvements and to improve property values. Tenants with the option of choosing between two similar buildings tend to choose the one that uses less energy and water (at least as those are manifested in reimbursable operating costs).

Benchmarks are also important tools for reducing energy costs to taxpayers, says Brian Hanlon, Director of the District’s Department of General Services. In the District Public Building Benchmarking Report for fiscal years 2009–2012, Hanlon emphasizes D.C.’s efforts to lead by example. Says Hanlon, “We want to show all building owners the value of energy benchmarking as a path to saving money, reducing environmental impact and improving our city.”

Even before the CAEA passed, some of the city’s largest property owners already tracked water and energy use, but many struggled at first to interpret the law’s requirements and welcomed a 2011 delay in implementation. The gradual phase-in of more buildings, based on size, has given the DDOE time to prepare detailed guidelines to facilitate compliance, including a handy Benchmarking Checklist. To determine if a property is required to benchmark, an owner or manager can check the DDOE’s Covered Building List and the building’s blueprints to confirm gross square footage. Notably, some exemptions may be granted for buildings that are unoccupied, vacating early in the year, new construction or where energy use disclosure might jeopardize national security. Exemption requests must be sent in writing to the DDOE. Also, in single-tenant buildings, benchmarking may be delegated to the tenant, with prior notification of the DDOE.

Data collection worksheets identify the whole building or individual meter utility information that needs to be collected. The Data Collection Worksheets also require disclosure of the major space use types within each building, essential to make accurate comparisons of consumption between buildings. Reporting involves accessing the correct year’s Report Template and downloading it to an Energy Star Portfolio Manager account. EPA’s Energy Star Portfolio Manager is the industry’s standard tool for benchmarking—already, 40% of commercial building space is tracked with Energy Star. From the Energy Star site, each building’s data needs to be sent to DDOE by each year’s April 1 deadline.

Help for those new to benchmarking or to DC’s system is available in several forms. The Energy Star site includes a benchmarking starter kit to help owners and managers make a habit of collecting needed data each month. The DC Sustainable Energy Utility (DCSEU) Benchmarking Help Center is available year-round to respond to technical questions and maintains a list of consulting firms offering benchmarking services for anyone seeking professional assistance. DCSEU also offers training sessions for learning how to benchmark and report any type of property. The most important step in benchmarking, however, may be interpreting and acting upon the results of year-to-year data comparisons. Experts at DCSEU will also work with owners and managers to identify needed energy and water efficiency upgrades so that the program’s goal of continually improving efficiency over time is achieved throughout the city.

Trouble Ahead With DC Real Estate Taxes

Tax_Customer_Svrus-300x195In the 2015 tax year the District of Columbia will implement a new assessment method that will substantially increase real estate taxes for most office properties. This method relies on comparable sales instead of evaluating net cash flow. The result is that assessments are expected to rise such that $10.1 billion will be added to the commercial tax rolls, a 12.6% increase. This, ironically, at a time that the office vacancy rate is near its historical peak and the market is suffering from stagnant (if declining) federal demand.

This new valuation policy is also troubling because it ignores specific lease characteristics that may dramatically affect real property value. GSA-leased properties, particularly, could be disadvantaged by D.C.’s new assessments because the sales comparison approach fails to recognize the unique features and risks of federal leases, namely rolling termination rights, flat rents, atypical operating cost reimbursement and the likelihood of short-term extensions or downsizing (though the current assessment approach probably doesn’t account for this nuance either).

The threat to owners of GSA-leased properties is that, where leases are renewed with a replacing or succeeding lease (and not merely extended), a new tax base must be established. The “Real Estate Tax Base” is defined in the boilerplate GSA lease as the “the unadjusted [i.e. unabated] Real Estate Taxes for the first full Tax Year following the commencement of the Lease term.” Therefore, leases commencing between October 1, 2013 and September 30, 2014 will establish the actual taxes incurred in the 2015 tax year as the Real Estate Tax Base.

Given the huge pile-up of lease expirations this is no small issue. More than 3.3 MSF of GSA leases expire in the District of Columbia in the 2014 tax year. Though many of these leases will simply be extended (with no change to the original tax base) there is opportunity for a substantial number of new leases to be established under the 2015 base.

Any lease commencing between October 1, 2013 and September 30, 2014 runs the risk of a higher than anticipated tax base. Lessors will undoubtedly appeal the tax increase but appeals are determined and awarded retroactively. The problem is that, while the GSA lease asserts that savings from successful appeals must be passed through to the Government, it doesn’t specifically state that the Real Estate Tax Base will be reduced retroactively due to a successful tax appeal. Going forward, lessors would be wise to add some clarifying language to their leases.

Perhaps the bigger problem is for lessors of properties with prospectus leases because OMB has been slow to increase the full service rent cap. Rising taxes will put the squeeze on NOI and, for many downtown and CBD lessors, the prospectus cap already feels tight. Rising taxes are trouble for GSA too because, where the tax base has already been established, GSA will be responsible for reimbursement of the expected increases caused by D.C.’s new assessment method. Assuming, for example, typical taxes of $7.50 per square foot and an expected assessment uptick of 12.6%, GSA could incur nearly $23 million in additional tax reimbursements next year.

In the short run, GSA and its lessors will bear the brunt of these tax increases. In the long run the District of Columbia will. Both GSA and Congress have become increasingly vocal in their intent to reduce reliance on “costly leased space”. Given that the primary cost differentiator between federal leased and owned property is real estate taxes (the federal government doesn’t pay taxes on its owned buildings), the District of Columbia’s efforts to increase taxes on office properties will ultimately damage the core of its office tax base The federal government pays rent on 24 million square feet in the city.

For more information on D.C. tax policy, please contact our strategic partner, McIntosh & Associates.

Sales Market Insights – Spring 2014

GSAXCHANGE, the investment sales arm of Colliers Government Solutions, has published its Spring 2014 “Government-Leased Assets” report, which includes an overview of sales activity and trends in the federal sector. 

GSAX Report Cover

Driven by the lack of product with long lease terms, investors have been forced to adjust their acquisition criteria by shortening minimum lease term requirements. Coupled with an increasing interest rate environment, 2013 produced two noticeable trends. First, per square foot prices for GSA-leased asset sales fell more in line with per square foot prices for office building sales overall, which is currently in the midst of a recovering investment environment. Second, the average cap rate for GSA-leased asset sales moved higher to match the increase in deals with shorter lease terms. Although interest rates continue to hold firm or even decline as Treasury yields stabilize and spreads tighten, this trend will likely continue into 2014, as the supply of available GSA-leased assets for sale with longer (ten or more years) firm lease terms remains tight and investors adjust their risk tolerances and pursue assets with shorter firm lease terms at higher cap rates.

To read the full report, click here.

Spotlight: CBER

PrintThe sprawling Food and Drug Administration (FDA) campus in Silver Spring, Maryland, will soon be welcoming another major regulatory component of the agency: the Center for Biologics Evaluation and Research (CBER). Beginning about May 1, moving vans will collect CBER employees from various leased suburban Maryland locations and deliver them to the federally owned 130-acre Federal Research Center at White Oak. One of six centers within the FDA, the CBER pursues a mission “to ensure the safety, purity, potency, and effectiveness of biological products including vaccines, blood and blood products, and cells, tissues, and gene therapies for the prevention, diagnosis, and treatment of human diseases, conditions, or injury.” Protecting the public against emerging diseases and bioterrorism is also part of CBER’s mission.

The on-going FDA consolidation was first authorized back in 1990 through the FDA Revitalization Act. The CBER can trace its origins still further back. Deaths of children from contaminated vaccines led to the Biologics Control Act of 1902, which regulated the interstate commerce in antitoxins, serums and vaccines. Originally called the Laboratory of Hygiene, the center’s name and oversight shifted through the decades. In 1937, the Division of Biologics Control formed within the National Institute of Health. Transfer to the FDA came in 1972, along with another new name, Bureau of Biologics, and an expanded mandate to regulate blood products and serums for allergy shots as well as vaccine. A 1982 merger with the Bureau of Drugs formed the National Center for Drugs and Biologics, but by 1988, drug and biologics components were separated again, creating the Center for Drug Evaluation and Research (CDER) and the CBER. CDER focuses on chemically synthesized drugs, while CBER regulates products derived from living sources (whether human, animal, or microbiological), often through advanced biotechnologies. Growing awareness of HIV and its spread through blood transfusions and related products led to CBER taking responsibility for regulating HIV/AIDS-related products.

“Biological products touch people’s lives on a daily basis,” says Dr. Karen Midthun, director of CBER. Each year, the center regulates over 200 million vaccinations, 29 million transfusions of blood and blood components, and 1.6 million musculoskeletal tissue transplants. Emerging biologic therapies are innovative, complex and vulnerable to contamination, presenting major technological and regulatory challenges to the CBER. CBER reviewers depend on an equally sophisticated regulatory science and research program to support their decisions. The CBER’s Strategic Plan for Regulatory Science and Research, FY 2012–2016, identifies the center’s 5 strategic goals for meeting these challenges:

  • Increase national preparedness for threats from terrorism, pandemic influenza, and emerging infectious diseases;
  • Improve global public health through international cooperation including research and information sharing;
  • Enhance ability of science and technology to develop safe and effective biological products;
  • Ensure the safety of biological products; and
  • Enhance research excellence and accountability.

Enhancing research throughout the FDA was a major driver behind consolidation of the agency at White Oak. In 1995, the BRAC Commission recommended closure of the U.S. Naval Surface Warfare Facility, and the coveted outside-the-beltway site was turned over to the GSA in 1997.  The GSA and FDA worked together to plan and design a multi-phase, state-of-the-art campus, then estimated to comprise 3 million SF, cost $650 million and require 7 years to complete. Groundbreaking occurred in 2000, and the first FDA occupants moved in 3 years later.  According to Clark Construction, which was awarded a $202 million contract from the GSA, the new CBER facilities include 2 lab buildings totaling 553,890 SF and a 334,000 SF office building, with a central atrium connecting the structures.

Energy conservation and sustainability are priorities for the White Oak development. LEED certification is in progress for the CBER labs and office, but the FDA’s Central Shared Use Facility already achieved a Silver award with daylighting, waterless and low-flow plumbing fixtures, a green roof and other conservation features. In 2011, the Department of Energy announced a $213 million Energy Savings Performance Contract (ESPC) with the FDA for the complex. The largest awarded to date, the ESPC established a public-private partnership to leverage private capital to pay for energy and water efficiency improvements at the site. Awarded by the GSA to Honeywell International, the contract supported construction of a heat and power plant, plus upgrades in heating, ventilation and lighting that are expected to save 279 billion BTU per year for 20 years—an estimated equivalent of annually removing 4,000 cars from the road.

CBER’s move should to be completed around July 1, but final completion of the consolidated campus is not expected until 2016.

Polar Vortex Not Chilling WDC Core Office Sales

WDC Risk Premium Analysis

Our investment sales team was especially prolific last week, issuing two new reports on the Washington, DC area property market. The 2013 Year End Washington, DC Capital Markets Report noted that many primary and secondary markets around the country saw markedly increased sales volume and pricing in 2013, yet performance of the Washington, DC metro region lagged slightly. Much of this is attributed to on-going political uncertainty in Congress, public- and private-sector efforts to improve space utilization and tepid growth in office-using industries.

The team also produced a report entitled “Polar Vortex Not Chilling Pricing For Core Assets”. In it they observe that the Washington, DC market has been pricing initial capitalization rates for ‘core’ product at an average of 195 bps over 10-yr Treasuries. Yet, increasingly, yield oriented investors are measuring returns against alternative investments such as 6-month CDs and AAA corporate bonds. Relative to CDs, cap rates for core properties have compressed, now to a margin of about 400-450 bps.

As relates to core government-leased properties, this certainly rings true. As we noted in our profile of last year’s 1301 New York Avenue sale. That building, which is leased for 15 years to GSA, sold in the low 5% cap range. The nearby Bond Building was also leased to GSA for 15 years and it was also valued at a low 5% cap rate.

If you would like to read further, the 2013 year end market summary can be found here and the Polar Vortex report is here.

Alternative Approaches to Funding for Federal Real Property

GAO Report Capital FinancingA recent bounce in GSA’s funds from Congress has modestly improved the agency’s ability to reduce the federal footprint and shift more toward owned space, as we discussed earlier this month. But the slight budget relief may be only temporary and does not resolve chronic funding problems faced by GSA and other agencies needing to acquire, renovate or dispose of federal real property without full upfront funding. This enduring difficulty—more acute in times of fiscal stress—is the focus of a new GAO report on how selected agencies have used other funding mechanisms to meet real property needs. The result of the GAO’s careful analysis appeared this month, “Capital Financing: Alternative Approaches to Budgeting for Federal Real Property.”

The GAO identified management of federal real property as a high-risk issue back in 2003. Efforts to improve the situation have included a 2010 presidential directive for agencies to save money through disposal of excess real property and by consolidating and increasing space utilization. A 2012 OMB memorandum specifically directed agencies to “Freeze the Footprint,” that is, not increase their real estate inventory. “As a result,” states the GAO report, “acquisition has become more about consolidation and identifying opportunities to share space rather than acquiring new space.”

A 2006 GAO analysis found upfront funding to be the ideal approach to fulfilling federal commitments and maintaining fiscal control. But purchases or capital leases are recorded in full in the budget year in which they are made. In contrast, short-term, operating leases require only the first year’s lease payments (plus cancellation costs) to appear in that year’s budget, making costly operating leases often preferable on paper to construction or renovation projects. Consequently, agencies regularly face funding challenges to acquiring or renovating federal real property.

In lieu of upfront funding, agencies turn to alternatives. Because legal authorities vary between and within agencies, alternatives are not universally available, and preferred alternatives also vary. The GAO chose to examine financing alternatives through case studies of four agencies that were among the top 10 federal real property holders in 2012: GSA, Department of Agriculture (USDA), Department of Veterans Affairs (VA), and Department of the Interior (DOI). Methodology involved analyzing agency documents, reviewing federal laws, regulations and policies and interviewing officials. The report emphasizes that the results are “nongeneralizable” but meant to illustrate a range of possibilities.

Alternative funding mechanisms used by selected agencies include:

  • Land swap—used, for example, by the USDA which exchanged land with the city of Ames, Iowa, which gave the city space to build a water treatment plant and the USDA space to dispose of diseased animals’ manure.
  • Retained fees—used in the case of DOI’s National Park Service to direct recreation fees toward essential repairs to eroding beaches and outdoor amenities and to install energy efficient features in a renovated park building in Massachusetts.
  • Enhanced use lease—notably used by the VA to lease excess space to the Volunteers of America of Greater Ohio, which renovated and maintained a building, resulting in cost savings to the government.

The report points out that many of the alternative mechanisms relied on partnerships, often public-private partnerships, to leverage resources. One consequence was that additional time was required to identify potential partners and work out beneficial arrangements for both parties. In the USDA’s Agricultural Research Service example, it took 10 years to successfully complete a land exchange.

Each alternative mechanism, in fact, had shortcomings for the agencies, and the report also considers how changing the budgetary structure itself might offer greater benefits for meeting federal property needs. The GAO offers options for consideration, rather than making recommendations. For example, Congress could improve flexibility for agencies needing to make acquisitions or repairs by allowing full access to the Federal Buildings Fund (FBF). Or, a capital acquisition fund could be created with authority to fund approved projects by borrowing from the Federal Financing Bank. The report concludes that there is no single best option for federal real property budgeting, but alternative budget structures should attempt to balance the need to provide agencies with flexibility with goal of promoting transparency and fiscal control for Congress.

The GAO also includes comments from the four selected agencies as appendixes to the report. Most are technical, but a letter from GSA Administrator Dan Tangherlini agrees that alternative budgetary structures could lead to improvements. While the report does not make recommendations as to which alternatives to pursue, Tangherlini contends that some are indeed preferable to others. His concluding remark is a call for a continuing discussion with the GAO and GSA’s congressional oversight committees “to help ensure that the Government has the capital and the flexibility to make cost effective real estate decisions.”

Better Buildings Bill Update

Thirty-two U.S. Senators stayed up all night on March 10, speaking non-stop to stir Congressional colleagues into action on climate change. Overnight talking points emphasized state-by-state economic damage such as crop losses from California droughts, coastal destruction from extreme storm surges in New Jersey, and shrinking lobster harvests in Connecticut’s warming Long Island Sound. Senator Jeanne Shaheen (D-NH) added concerns about diverse impacts of warming New England winters, ranging from falling maple sugar production to dwindling moose populations, and called for bipartisan efforts to find solutions. But no Republicans participated in the all-nighter, and political skeptics might reasonably ask: Is bipartisan legislation to reduce carbon pollution and improve energy efficiency possible in the current Congress?

Yet evidence is growing that common ground can be found. In fact, on March 5, the House of Representatives voted overwhelmingly (375-36) in support of the “Energy Efficiency Improvement Act,” a.k.a. the Better Buildings Act of 2014 (H.R. 2026). Introduced last May, the bill was crafted by Congressmen David McKinley (R-WV) and Peter Welch (D-VT) to improve energy efficiency in commercial office buildings, with particular application to tenant spaces. Key provisions of the voluntary, market-based approach include:

  • GSA requirement to develop and publish model leasing provisions encouraging energy efficiency in privately owned buildings with federal tenants;
  • Federal agency requirement to implement strategies for improving energy efficiency of data centers operated by the federal government;
  • Establishment of a benchmarking and disclosure process for energy consumption in buildings leased by the federal government; and
  • Revising regulations to facilitate manufacture of large-scale water heaters.

Perhaps most notably for federal leaseholders, the bill would require the EPA to develop a “Tenant Star” program within its Energy Star program, which is widely respected for improving energy performance in whole buildings. The new Tenant Star program would recognize tenants that achieve high levels of energy efficiency in separate spaces. Jeffrey DeBoer, CEO of Real Estate Roundtable, is among those praising the Tenant Star program, saying in a press release that it will “encourage cooperation between commercial tenants and landlords to design and construct high performance leased spaces, and make smart operational decisions to lower energy use by investing in measures that will pay for themselves through energy savings.” The bill’s co-sponsor, Peter Welch, also commended the March 5 House vote in a press release. “Saving energy creates jobs, saves money and improves the environment,” said Welch. “I have long believed that energy efficiency is an area of common ground in this divided Congress.”

Companion legislation is pending in the Senate. Democratic Senator Shaheen first joined Rob Portman (R-OH) in 2011 to promote energy efficiency in homes and commercial buildings, streamline government programs for energy efficiency and reduce energy waste in federal buildings through a bill widely known as Shaheen-Portman. Their original version of the Energy Savings and Industrial Competitiveness Act (ESICA) garnered broad support until it was derailed by unrelated amendments many supporters found objectionable. The co-sponsors reintroduced the ESICA, or S. 2074, earlier this month, with added bipartisan provisions including Tenant Star and improvements in data center energy efficiency to attract additional backers. The American Council for an Energy-Efficient Economy estimates that the new version would create more than 190,000 jobs, save consumers and building owners $16.2 billion per year and cut carbon dioxide emissions as much as taking 22 million cars off the road by 2030. Supporters are again lining up, ranging from the U.S. Chamber of Commerce to the U.S. Green Building Council.

The Natural Resources Defense Council’s analysis of the new version of Shaheen-Portman complains briefly that it would repeal requirements in earlier legislation that new federal buildings achieve zero-carbon footprint by 2030. However, the report emphasizes that the legislation would also significantly improve federal building energy efficiency, offsetting the estimated costs of ESICA ($357.5 million from 2014-2018) by reducing appropriations ($362.5 million for the same period). Passage of the House bill suggests that momentum is building for ESICA. If it can proceed through the Senate without poison pill amendments, Shaheen-Portman would prove that both parties can share ground when it comes to common sense energy conservation legislation.

The Bounceback: GSA’s Budget Returns to “Normal” (and what that means for lessors)

GSA Budget Trend

We’ve often said on this blog that you need only look at GSA’s budget as the bellwether for leasing demand. In recent years we’ve noted that budget reductions imposed by Congress have put GSA in a position where its owned inventory suffered and demand for leased space was buttressed. Despite the agency’s stated goal of reducing reliance on “costly leasing” there has been little funding available for upgrade of federal buildings to accommodate additional tenancy.

Now that may be changing. After suffering three years of historically constrained spending at the hands of Congress, GSA has received a little wiggle room. Let’s be clear: this year’s appropriated funds aren’t sufficient for watershed change but they are enough for the agency to move forward more quickly with its strategic initiatives to reduce the footprint and begin shifting into owned space. This prospect isn’t appealing to private-sector property owners.

So, what can lessors expect?

1. GSA will remain as cautious as ever. The détente established with Congress can easily be unraveled. The agency is just one false move from a return to the fiscal doghouse. If you’ve been frustrated with the maddeningly “deliberate” pace of GSA decision making, get used to it.

2. Wherever possible, GSA will seek to shift personnel into owned facilities and it will seek to downsize space. It will do this even in instances where it arguably doesn’t make financial sense for the tenant agency. Downsizing and elimination of “costly” leased space are the primary metrics that matter at GSA and on the Hill.

3.  Long term, non-cancellable leases will remain difficult to come by.  Yes, in some cases budget clarity will give agencies the green light to enter into long-term deals but we’ll also see agencies seek flexibility to enable future consolidations or relocations to owned space. Lessors will be frustrated by this because those future consolidation/relocation plans will often be purely aspirational, with no concrete plan behind them. It’s a different type of kicking the can.

4. In the event that tenants do embark on long-term leases, they will more often seek to improve space efficiency in conjunction with downsizing or consolidation. This will typically require substantial reconstruction of existing space that erodes the incumbent Lessor’s pricing advantage. In fact, it’s an outright disadvantage in those instances where swing space and phasing is required. Therefore, federal tenants will become more mobile, and renewal probabilities–especially among buildings with less efficient space build-outs–should decline. It will require a lot more planning to execute successful renewals.

GSA’s budget isn’t sufficient to cause immediate radical change and agencies will continue to resist huge lump-sum expenditures for relocation and replication of space, but we already see the above trends percolating in markets across the United States. If the federal budget continues to stabilize and GSA further funds programs like Total Workplace (which finances furniture and IT costs) we are certain to see continued downsizing in the leased inventory. The budget drives all of this.

New Cybersecurity Center Planned

Cyber_SecurityThe President’s 218-page FY 2015 federal budget request was released a week ago and it underscores the growing importance of cybersecurity. The word “cyber”, for example, appears 40 times in the budget. Collaboration is another major theme and Obama’s proposed request “identifies and promotes cross-agency cybersecurity indicatives and priorities, including improving cybersecurity information sharing while protecting privacy, civil liberties and enhancing state and local capacity to respond to cyber-incidents.”

In addition to the Pentagon’s request for $5.1 billion in funding for cybersecurity, GSA is requesting $35 million to establish a civilian cybersecurity center in the D.C metro area to consolidate various federal agencies. GSA Administrator Dan Tangherlini says the goal is to shift approximately 600,000 square feet of leased space to a federally owned building. “We’re spending substantial amounts of resources on rent to maintain multiple, separate activities that we think could provide value if they were consolidated and co-located in single state-of-the-art campus, recognizing that this is the type of work that we’re going to need to do in a collaborative way going forward,” he says. The plan is still in its initial stages, however it will be interesting to see how the proposal is received on the Hill, and ultimately how it will be implemented. 600,000 square feet is significant even in an office market the size of Washington.

Spotlight: Federal Bureau of Prisons

BOP SealA highly-efficient HVAC system, locally sourced stone and recycled construction waste are just a few of the sustainable features at a new federal building complex in Hazelton, West Virginia. An innovative laundry water recycling system is also expected to save over 2 million gallons of water per year. But design elements that bring daylight into the facility, without compromising security, may be the most appreciated by building inhabitants: 1,100 inmates of a medium security Federal Correctional Institution. The 540,000 SF complex is the first LEED Gold project of the Federal Bureau of Prisons (BOP), the federal law enforcement agency tasked with administering the federal prison system. A subdivision of the Department of Justice (DOJ), BOP has headquarters on First Street in N.W., D.C., 6 regional offices, 26 residential re-entry offices, 2 staff training centers and 119 correctional institutions. A BOP staff of 38,948 is responsible for 215,000 federal inmates.

The first three federal penitentiaries were authorized by the Three Prisons Act of 1891, under the DOJ. Congress established the Bureau of Prisons in 1930 (through Public Law No. 71-218), charging it with “management and regulation of all Federal penal and correctional institutions.” Only 11 federal prisons with about 13,000 inmates existed when the bureau was established but within 10 years the system had roughly doubled to include 24 institutions with 24,360 inmates. The prison population remained relatively stable for the next four decades, but BOP nearly doubled the number of facilities again, from 24 to 44, as it shifted from running large institutions with multiple security levels to small facilities housing inmates with particular security requirements.

The Sentencing Reform Act of 1984 dramatically increased the challenges faced by the BOP. The act, and additional reforms in the 1980s, established mandatory minimum sentences and abolished parole, resulting in a rapid increase in prison population. Prison population reached 136,000 by 1999, fueled particularly by convictions related to illegal drugs. The BOP managed the growth by constructing new facilities, expanding existing prisons and, increasingly, contracting with state, local and private facilities to house inmates.

Film buffs might imagine that federal prisons resemble the austere and brutal conditions in Bird Man of Alcatraz. But facilities are surprisingly diverse, classified by BOP largely based on security needs:

  • United States Penitentiaries (USP) are high-security facilities with highly secured perimeters and high staff-to-inmate ratios, including film-favorite USP Leavenworth and Administrative Maximum Security Florence, the “supermax” facility currently housing terrorists such as Oklahoma City bomber Terry Nichols.
  • Federal Correctional Institutions are medium and low security facilities with strengthened perimeters such as double fences and electronic detection systems, including Butner in North Carolina, which is home to Bernie Madoff.
  • Federal Prison Camps are minimum security facilities with little or no perimeter fencing and dormitory-style housing, such as Alderson in West Virginia, where domestic guru Martha Stewart served five months for insider trading.
  • Administrative Facilities have special missions such as pretrial detention, medical treatment, or confinement of extremely high-risk prisoners. The Medical Center for Prisoners in Springfield, Missouri, has housed Mafia bosses such as John Gotti, assassin Jared Lee Loughner, and the Birdman of Alcatraz himself, Robert Stroud.
  • Federal Correctional Complexes (FCC) include various facilities with different levels of security, such as FCC Terre Huate, which includes a Special Confinement Unit for male prisoners sentenced to death and where Oklahoma City bomber Timothy McVeigh was executed.

The BOP accounts for about 25% of the DOJ budget, yet federal prisons remain overcrowded and understaffed. Members of the committee from both parties have called for BOP reform, recognizing the high costs and other challenges posed by swelling prison populations. In testimony before the Senate Judiciary committee last year, BOP Director Charles Samuels, Jr. endorsed the DOJ’s “Smart on Crime” initiative, which promotes alternatives to incarceration for some non-violent offenders. Samuels also pressed the Senators to support programs that aim to reduce recidivism, such as vocational training, substance abuse counseling and job opportunities within Federal Prison Industries (FPI). According to Samuels, inmates need “job skills, vocational training, education, counseling and other assistance. . . if they are to successfully re-enter society.” But the number of federal inmates employed by FPI had declined by 2012 to 12,394, the lowest level since 1986 and far below the BOP goal of 25% of the inmate population. Some at the hearing resisted recommendations for shorter sentences or fewer incarcerations. According to Senator Chuck Grassley (R-IA), “It’s hard to think of a more successful domestic policy accomplished over the last 30 years than the reduction of crime that we have.” Senator Leahy (D-VT), however, asserted in a press release, “The dramatic increase in the prison population threatens public safety and critical funding for victim services.” No matter how much money is saved through energy and water efficiencies at new LEED prisons, it is hard to imagine how the current rate of inmate population growth can be sustainable.