On February 8th, Congressman Lou Barletta introduced a new bill (H.R. 4487) known as the Public Buildings Reform and Savings Act of 2016. Some aspects of the legislation relate to the Federal Protective Service and economic development partnerships, but in this short summary we will only focus on the contents of the bill that could affect the federal leasing market. The goals of the new procedures set forth in H.R. 4487 are identical to those enumerated in H.R. 2322, which was introduced in 2015 but never enacted into law, and are as follows:
(1) reducing the costs to the Federal Government of leased space, including—
(a) 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;
(b) improving office space utilization rates of Federal tenants; and
(c) streamlining and simplifying the leasing process to take advantage of real estate markets; and
(2) significantly reducing or eliminating the backlog of expiring leases over the next 5 years.
The key components of the legislation pertain to the acquisition of small leases, prospectus-level projects, GSA’s exchange authority and the Department of Energy (DOE) Headquarters in Washington, DC.
- GSA’s inventory includes approximately 8,323 leases totaling 190 MSF.
- More than 50 percent of these leases are set to expire over the next 5 years.
- GSA is overworked and needs help eliminating the backlog.
- GSA continues to lower utilization rates and reduce its leased footprint.
Simplified Lease Acquisition
Mr. Barletta’s legislation directs GSA to implement a 5-year pilot program using “special simplified procedures” to address leases that fall below a Simplified Lease Acquisition Threshold (defined as any lease with an annual rental obligation of less than $500,000, net of operating expenses). According to the Government, 87 percent of all GSA leases fall under this threshold. We estimate this 87 percent covers 58 MSF, or 30 percent of the total square footage under lease. While we are not certain what form the GSA’s pilot program would take if this bill becomes law, one logical solution might be to utilize the GSA’s existing AAAP system as a mechanism to handle the growing backlog of expiring leases.
For one, the AAAP has proven to be effective and is already up and running on a national basis. Second, the AAAP accelerates the procurement process and would allow GSA to take advantage of the tenant-favorable market conditions that exist today. Third, the program allows landlords to submit offers for 10-year firm term leases (new or succeeding), in accordance with the goals of this legislation.
In most cases, the landlord community welcomes the push for longer lease terms. Firm, long term lease contracts with the federal government typically offer landlords stability, higher market valuations and open up a variety of opportunities for financing, disposition and capital investment into a property. On the other hand, short term lease extensions or holdovers essentially “kill” a property from a financing or sale perspective, remove a landlord’s incentive to invest in upgrades and ultimately result in an inferior working environment for the end users and a higher rent bill for the U.S. taxpayer.
H.R. 4487 would allow GSA to bundle multiple projects into a single prospectus, with conditions imposed to ensure greater efficiency and lower utilization rates (<=170 USF per person), puts a 5-year window on GSA’s ability to commit the authorized funds (use it or lose it), requires notification to Congress in instances where project scope and size are expected to vary by 5 or more percent compared to authorized amounts (and amended prospectuses when size or scope varies by more than 10 percent).
Finally, and this did not appear in last year’s version of this bill, the legislation would require GSA to provide a written justification for its customary practice of using three separate rent caps for prospectus-level leases in DC, Maryland and Virginia and an evaluation of whether these caps provide for maximum competition for build-to-suits between the jurisdictions. Many have argued, quite convincingly, that this structure automatically puts suburban locations, and Prince George’s County in particular, at a disadvantage. Consider the following real-world scenario: In 2009, GSA submitted a prospectus for a 1.1 MSF DHS consolidation lease that would have required new construction if satisfied with a single lease award. GSA imposed rent caps of $49.00 PSF for DC, $38.00 PSF for Virginia and $34.00 PSF for Maryland. Under that structure, a DC landlord’s offer for a 20-year, 1.1 MSF lease at $49.00 PSF ($1.08B aggregate lease value) would have been acceptable, while a Maryland landlord’s offer for a lease of the same size at $39.00 PSF (costing the taxpayer $220 million less than the DC alternative) would have been deemed “non-responsive” because it exceeded the rent cap for Maryland.
GSA’s Exchange Authority and the Forrestal Complex
The legislation would require GSA to obtain prospectus approval for the costs associated with any exchange of property with a fair market value of more than $2.85MM. Additionally, the law would require GSA to sell or exchange enough of the Forrestal Complex to generate the funding for a new DOE Headquarters, which must be a government-owned building on government-owned land. In keeping with the ongoing trend, it is reasonable to expect that a new DOE headquarters would result in the consolidation of some DOE leased locations into federally owned space.