GovSpeak: “412 Authority”

Lately, there has been increasing buzz over “412 Authority” a little known legal right granted to GSA as part of the Consolidated Appropriations Act of 2005, which is more formally referred to as Section 412 of P.L. No. 108-447, 118 Stat. 2809, 3259 (2004). The entire Section is just 127 words, yet it could potentially reform the way GSA acquires, maintains and disposes of real estate. Here is how it reads:

“Notwithstanding any other provision of law, the Administrator of General Services may convey, by sale, lease, exchange or otherwise, including through leaseback arrangements, real and related personal property, or interests therein, and retain the net proceeds of such dispositions in an account within the Federal Buildings Fund to be used for the General Services Administration’s real property capital needs: Provided, That all net proceeds realized under this section shall only be expended as authorized in annual appropriations Acts: Provided further, That for the purposes of this section, the term ‘‘net proceeds’’ means the rental and other sums received less the costs of the disposition, and the term ‘‘real property capital needs’’ means any expenses necessary and incident to the agency’s real property capital acquisitions, improvements, and dispositions.”

Its significance stems from the authority to “retain the net proceeds” of its real estate deals. This doesn’t seem like a particularly unique right but in the federal government it is, because normally these proceeds must be deposited into the Treasury. Section 412 allows GSA to direct the monies to its Federal Buildings Fund.

Authorities such as those provided in Section 412 are not unique to GSA but they are fairly rare. In the cases where agencies have been granted such authorities, they have often been restricted to specific projects, typically for limited windows of time, and the use of resulting net proceeds has usually been heavily conditioned. In the case of Section 412, the authority is very broad and the law includes no sunset provision.

Section 412, and similar authorities, are receiving a lot of attention these days because budget pressures have made it difficult for GSA to receive the appropriations it requires to maintain and modernize its aging inventory. As a result, its buildings further deteriorate, reducing the rent it can charge tenant agencies. The declining rental income reduces available funds for modernization, and so the downward spiral goes.

In the private sector, property owners can access needed capital through loans but in the federal sector these additional funds must be appropriated by Congress–and Congress has cut GSA’s appropriations requests substantially in recent years. The provisions of Section 412 would allow GSA to access needed capital through public-private partnerships, receiving private-sector capital and then returning that capital to the private-sector over time.

Sounds great, but GSA has only made limited use of its 412 Authority, primarily to retain proceeds of property dispositions. Why doesn’t it use it more often to fund public-private ventures such as outleasing or leaseback transactions? The budget scoring rules, developed jointly by OMB, the Congressional Budget Office, and congressional committees have been interpreted in most instances to require the government’s cost of such arrangements to be budgeted up-front in the first year of such leases. That negative lump-sum budgetary impact makes most “412” arrangements a non-starter, regardless of their long-term benefits.

Improving the use of Section 412 is likely to be the focus of a roundtable on “Benefits and Challenges of Public-Private Partnerships in Federal Real Estate” to be hosted by the Subcommittee on Economic Development, Public Buildings, and Emergency Management this Tuesday morning. This roundtable is meant to be the first of a series of sessions to determine how GSA can be more creative in its ability to finance critical improvements to its inventory.

Want Capitol Markets articles delivered straight to your inbox?