Will Foreign Ownership Receive Greater Scrutiny?

Foreign-owned buildings containing high security space leased by GSA (Source: GAO | GAO-17-195)

Last week the Government Accountability Office (GAO) publicly released its report titled GSA Should Inform Tenant Agencies When Leasing High-Security Space From Foreign Owners. The title pretty well summarizes the report’s conclusion – that GSA should determine if its high-security leased buildings are owned by foreign entities.

In response to the report, GSA agreed. Then-GSA Administrator, Denise Turner Roth, wrote that GSA agrees with GAO’s recommendation to “determine whether the beneficial owner of high-security leased space is a foreign entity and, if so, share that information with the tenant agencies for any needed security mitigation.”

Simple enough, except that anyone involved in real estate capital markets knows that it is often difficult to identify foreign ownership, a problem that GAO encountered in its own effort to review foreign stakes in buildings occupied by high-security federal agencies.

The problem for GSA is that its current leasing process provides two methods to determine foreign ownership and neither is sufficient. The first is Form 3518, Representations and Certifications, which requests the offerors’ taxpayer identification number and DUNS number and requires the offeror to represent whether it is a non-resident alien, foreign corporation, foreign partnership or foreign government.  Most property ownership, however, is held by special purpose entities (ex. LP’s or LLC’s), and standard reps and certs may not adequately reveal those structures. The second method, the System for Award Management (SAM), is ineffective for the same reasons. And in any case, GSA does not routinely share this information with its tenant agencies.

So, given the difficulty in obtaining foreign ownership information, what will GAO’s and GSA’s recommendations mean in practice?

If GSA is serious about implementing GAO’s recommendations it will need to expand its lease procurement documentation to require greater disclosure regarding ownership structure and individual owners’ interests. This won’t be well-received by property investors, who are already uncomfortable with the government’s broad rights to review documents relating to “evidence of ownership” and “signatory authority” prior to lease award. At minimum, expect additional disclosures to add more friction to an already cumbersome leasing process.

The recommendations also will bog down any subsequent sale of leased properties, which is important because as of now property sales move a lot faster than lease transactions. But in its efforts to pry further into its lessors’ ownership structures, GSA may invoke its right to impede property sales. GSA leases are federal contracts and contain a standard clause asserting that the contracting officer can determine if recognizing the new lessor will be in the government’s interest (see the “Change of Ownership” section of your lease). Pursuant to this clause, GSA may effectively block a transfer by holding the seller fully liable to the government for performance of obligations under the lease. The Federal Acquisition Regulation (FAR) spells out what happens if the Government isn’t satisfied with the new lessor: “the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.”  Scary situation.

To be clear, GAO’s report does not recommend that foreign ownership be restricted – simply that GSA identify it and reveal the information to the tenant agency. Under this scenario, GSA-leased assets should continue to be traded freely to the highest bidder; but the process of trading them may become more cumbersome.