In September, the GAO issued the latest in a long series of reports concluding that GSA’s leasing strategy is flawed. This report, entitled “Greater Transparency and Strategic Focus Needed for High-Value Leases”, studied the 218 largest leases in GSA’s portfolio. Though these account for only 3% of the total number of GSA leases, they comprise more than one-third of GSA’s leased portfolio in terms of square footage or rent. The subset was selected because these leases are all large enough to require congressional prospectus approval. Action on this relatively small number of leases would have significant impact on the performance of the entire portfolio.
The report is notable primarily because it further presses on the concept that leasing space is more expensive than owning it, and that GSA’s overreliance on “costly leasing” will continue to earn it scrutiny from GAO. In its cover letter to the report, GAO notes that “our work over the years has shown that building ownership often costs less than operating leases, especially for long-term needs of space.”
OK, so why does GSA continue to lease more space than it owns? Much of the reason centers on the agency’s budget restrictions. As we have written recently on this blog, GSA has very little funding available for construction of new facilities or major alterations of existing ones. This lack of funding ultimately feeds demand for leased space. GAO observes this as well and apparently so does GSA. The report notes that “GSA officials stated that limited availability of existing federal space and funding for its capital program have given GSA no choice but to continue to lease space.”
In order to highlight the situations where leasing may be more expensive (and where scrutiny should be applied), GAO concludes its report with the recommendation that prospectuses should be augmented to include a description of the length of time that an agency estimates it will need space, an account of how long it has already occupied leased space and an accounting of the major investments it will need to make to the leased space. GAO also recommends submission of some form of lease vs. own analysis, a practice that was common in the 1980s and early 1990s.
The vision of federal tenants flowing from leased offices into government-owned buildings is rich fodder for landlord nightmares. Should you really be concerned that after decades of solid leasing demand the federal government will pivot back into its owned inventory? We think not.
GAO, Congress and even GSA’s policymakers are all expressing preference for an ownership-centric strategy–and the chorus gets ever-louder in tandem with increasing budget pressures. Yet, it’s unlikely that sweeping change will follow from this report. The GAO is making largely the same observations it has in reports dating back more than 20 years.
Leasing has an important place in the government portfolio. Even if budget restrictions were loosened, GSA does not have the capital resources to address all of its needs. This is where the private-sector steps in. The private-sector offers plentiful capital both in the form of new high-quality assets and funding for tenant improvements. It does so at pricing that is typically advantageous to its cash-strapped federal tenants.
Also, we find that the government’s comparison of the costs of leasing versus ownership is fundamentally flawed because it is comparing apples with oranges. Anyone familiar with the GSA lease form knows that the structure transfers tremendous costs, services and risk to the property owner; whereas, that burden would reside with the government in an ownership format. We maintain our enduring faith that GSA will one day recognize that modest changes to its leasing policy will yield substantial cost savings. In our view, federal leases, backed by the full faith and credit of the United States government could cost far less than they do.