Which Way The Political Wind Blows

During the first half of this year Congress has hosted a number of hearings, both on Capitol Hill and in various cities across the United States, that provide a clear view of its objectives regarding federal real estate. All of these hearings have one goal in common: reduce costs.

This goal is not new of course, but faced with the prospect of ever-increasing federal debt, leaders in both parties have begun to press the issue harder. Listening to the hearings, it is often difficult to distinguish the Republicans from the Democrats. Committee members from both parties recognize that there is room to reduce real estate costs, making the issue one of rare bipartisan agreement and improving the likelihood that progress will be made.

The means by which Congress expects this cost reduction to occur can be grouped generally into three initiatives: 1) dispose of vacant and underutilized properties; 2) reduce reliance on “costly leased space” and; 3) find ways to lower the cost of the space that the government continues to lease. As detailed below, each initiative has its merits and its challenges.

1) Dispose of vacant and underutilized properties

One would expect that disposing of unneeded federal properties would be the simplest means of paring federal real estate costs, especially as there are roughly 77,000 such properties, which cost $1.66 billion annually to maintain. Yet, implementation of an efficient and comprehensive federal property dispositions program remains elusive.

To that end, on June 16th both chambers of Congress held hearings related to federal real estate. In the morning, the Senate Homeland Security and Governmental Affairs committee hosted a hearing entitled “Federal Real Property Reform: How Cutting Red Tape and Better Management Could Achieve Billions in Savings” and in the afternoon the House Transportation and Infrastructure subcommittee on Economic Development, Public Buildings and Emergency Management held its hearing entitled “Saving Taxpayer Dollars in Federal Real Estate: Reducing the Government’s Space Footprint.”  Senate committee Chairman Ron Johnson set the tone for the day in his opening statement, asking the witnesses to comment on “what is being done today to stop wasting taxpayer dollars on unneeded and unused properties, what can be done to manage and provide reliable data on real property, what more needs to be done to truly see results, and what Congress can be done to make reform a reality.”

It was clear from the testimony that the fundamental challenge is simply identifying which properties need to be disposed. According to David Wise, the U.S. Government Accountability Office (GAO) Director of Physical Infrastructure Issues, federal real property management has remained on his agency’s “High-Risk List” since 2003, largely because the real property data reported by federal agencies are unreliable. Though President George W. Bush created the Federal Real Property Council more than a decade ago to establish and maintain a federal real property database, the data are still insufficient to support asset-level decision making.

Another long-standing challenge is the lengthy and cumbersome disposal process, which requires agencies to engage in any number of studies to determine the status of title, historical and archeological significance, NEPA compliance, hazardous materials mitigation and so forth before disposing of any property. The process also includes special provisions for “public benefit conveyances” – the act of first offering properties to local governments and certain public interest organizations. Chief among these provisions is the McKinney-Vento Homeless Assistance Act, which mandates that federal properties are offered to homeless service providers before they may be sold or otherwise conveyed. As demonstrated in the June 16th hearing testimony, however, McKinney-Vento is a hurdle to disposition that yields very little public benefit relative to the effort it imposes. Since its inception in 1987, the program has transferred just 122 of the 40,000 screened federal properties (0.31%) to homeless service providers. The public benefit conveyance review was required in all cases even though 80% of those 40,000 screened properties were obviously not practical for homeless use due to their location in national forests, on military bases and the like.

Norman Dong, GSA’s Public Buildings Commissioner, pointed to a related problem — that there is little incentive for agencies to engage in the arduous process of property disposals when they receive none of the proceeds from these sales. In Dong’s view, it is essential to compensate the agencies for the resources they must expend to run the dispositions gauntlet from end to end.

There have been recent legislative proposals that would resolve these and the other issues critical to identifying viable dispositions and executing transfers. In 2012 the Civilian Property Realignment Act (CPRA) and the Federal Real Property Asset Management Reform Act were introduced in the House and Senate, respectively. The two bills sought to address the property disposal problem through slightly different approaches, yet neither could attract the support necessary to be enacted.

Given the significant attention put to the dispositions problem in recent hearings and the bipartisan nature of the effort, it seems that Congress is poised to take up the issue yet again. We would expect to see the Civilian Property Realignment Act rekindled, especially as it passed the House when it was originally introduced. And it is possible that McKinney-Vento will be amended to allow for a more rational screening mechanism for potential homeless facilities.

2) Reduce reliance on leased space

At nearly every hearing on cutting federal real estate costs, one or more participants has issued soundbites regarding “costly leased space” and “reducing reliance on costly leasing.” Listen further and it is clear that one of the primary means by which those participants intend to reduce the government’s reliance on leasing is to shift tenants into federal buildings. This strategy has been featured in congressional hearings, White House budget requests and GAO reports back to the late 1980s (and perhaps further). Yet, the current emphasis on spending reductions has focused Congress on this issue as never before.

In both June 16th hearings, the witnesses noted that restrictions on GSA’s access to the Federal Buildings Fund are impeding the agency’s efforts to draw tenants out of leased space and into the owned inventory. As I observed in an earlier blog article, the counter-intuitive dynamic in federal real estate is that restrictions on GSA’s budget appropriations buttress demand for leased space. This is because GSA lacks the financial resources to fund the renovations to its owned assets that would be necessary to attract and accommodate new federal tenants.

GSA hopes to coax improved appropriations from Congress by providing case studies of cost savings from consolidation of federal tenants into owned buildings. In his testimony before both congressional committees, Commissioner Dong cited the example of HUD in Minneapolis, where GSA relocated the tenant from leased space into an historic downtown federal building. According to Dong, the move saved the federal government $700,000 in annual lease costs and reduced the agency’s footprint by more than 9,000 square feet. GSA would like to build further on this and has requested $200 million in the FY 2016 budget to fund renovations that would enable additional consolidations.

Funding is tight, however, and is expected to remain so. Congress will likely budget additional funds to help GSA continue to consolidate leased space into owned buildings but not the amount that GSA is requesting. Congress also expects GSA to use its public-private exchange authorities, such as its  “412 Authority”, to negotiate transactions that require fewer (if any) appropriations. GSA is using these authorities to procure a new headquarters for FBI in the Washington, DC metro area and to award a swap-construct contract that will yield a new facility for the Department of Transportation at the Volpe Center in Cambridge, Massachusetts.

Though the Democrats and Republicans are generally in sync regarding their desire to decrease the leased inventory in favor of owed buildings, the largest such project, the DHS headquarters consolidation planned for St. Elizabeths, underscores the political difficulty in funding large-scale federal construction. Though it would ultimately enable DHS to vacate more than 40 leased locations in the Washington, DC metro area, the project has been stalled by repeated appropriations restrictions. In the nine years since the project was first announced, only the US Coast Guard headquarters building has been completed (and it was built with Recovery Act funds). There is little appetite, especially among congressional Republicans, to fund the estimated $3.2 billion to finance the remainder of the consolidation, and congressional leadership has expressed doubt regarding the project’s viability, as evidenced in the Department of Homeland Security Headquarters Consolidation Accountability Act,  introduced this year in both the House and Senate. This Act calls for additional scrutiny of the cost-benefit logic of the project.

While the future of the massive DHS consolidation remains unclear, smaller consolidation projects have been successfully completed. These modest “case studies” have been conducted by GSA using what limited funding they have in an effort to rally additional support. Clearly they have begun to nibble at the edges of the leased inventory. As I noted in a blog article earlier this year, GSA has moved a million square feet from leased space into owned buildings in each of the past two fiscal years. That figure is three times the average of prior years.

3) Find ways to lower the cost of the space the government continues to lease

Still, leased properties, will remain a significant component of the federal inventory. Leases are quicker to acquire and easier to dispose of, tend to be in buildings that are newer and of better quality than most federal buildings and are generally coupled with private-sector funding for tenant alterations.

Congress’s goal is simply to reduce rental costs by improving space utilization and by making better deals. Rep. Lou Barletta has led the charge on rent reduction since he was appointed Chairman of the House Transportation and Infrastructure subcommittee on Economic Development, Public Buildings and Emergency Management. He has hosted 13 hearings and roundtables devoted to federal property issues–both on Capitol Hill and at regional locations throughout the United States. He observes that it is still a tenant’s market in most of the major metros and is a great time to achieve very low rents if GSA is willing to engage in long-term leases. Further, GSA has the right timing to take advantage of this market because half of the leases in its inventory expire in the next five years. His constant refrain: “We don’t want to miss this opportunity”.

Barletta’s approach is pretty practical. Disposing of properties and moving from leased space to owned federal buildings may save money but those initiatives will also require the passage of new laws or increased appropriations. Good leases, on the other hand, can be had right now, and the savings gained from a strategic leasing program arguably will exceed the savings that can be achieved through other cost reduction efforts, at least in the near-term.

Though no legislation is required to enable more effective leasing, Barletta has nonetheless introduced the Public Buildings Reform and Savings Act to prod the effort forward. This bill seeks to implement a streamlined leasing pilot program with the goal of “executing long-term leases with firm terms of 10 years or more and reducing costly holdover and short-term lease extensions, including short firm-term leases” (emphasis added).

Without the force of law it is unclear if or when GSA will adopt a long-term leasing posture. Throughout its recent history, GSA has routinely structured termination rights in three-quarters of its leases. It does this to control its exposure, hedging against the possibility its tenant agencies will cancel their occupancy agreements with GSA and vacate space, leaving GSA on the hook to pay the rent. When Barletta routinely asks hearing and roundtable participants if they will commit to implementing long-term leases of 10 years or more, many artfully dodge the question, but all agree that long, firm-term leases will yield better lease deals.

The federal attraction to short-term leases persists because agencies are under increasing pressure to reduce the amount of real estate they occupy. These space reductions require planning and funding that take extra effort, leading agencies to buy time with lease extensions while they organize themselves.

Agencies are grappling with these planning issues right now. Beginning in 2012, the Office of Management and Budget (OMB) issued a memorandum directing agencies to freeze the size of their leased and owned real property inventories. This Freeze The Footprint policy immediately blunted net demand and it has even caused some reduction in the GSA leased inventory. More recently, OMB issued its Reduce The Footprint mandate. This goes further, requiring agencies to develop 5-year plans.

Summary

Bipartisan efforts to reduce federal real estate costs are likely to intensify. Already this has resulted in declining demand for leased space. I expect that trend to continue, especially as it is politically expedient.

Congress also is working to accelerate the most obvious form of cost reduction — for the federal government to rid itself of vacant and underutilized properties. Private-sector property owners would welcome that because federal property dispositions will help agencies achieve their footprint reduction goals before having to reduce leased inventory.

The government will also seek to improve its investment in its remaining assets, though budget constraints and GSA’s limited capacity to plan and execute consolidations will slow the transition away from leased space.

Therefore, one of GSA’s best opportunities for near-term cost reduction is in the leased inventory. But as long as GSA aspires to consolidate its leased space, long firm-term leases will be difficult to achieve. Most tenant agencies don’t seem to have the confidence–whether due to budgetary concerns or mission planning uncertainty–to enter into long-term agreements without generous termination rights.

In the meantime, there still exists a pretty wide gap between the government’s goals and the reality of what GSA has been able to achieve. Yet, the rhetoric issued from congressional and executive leadership indicates which way the political wind blows and where the market is headed.

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