GovSpeak: “Prospectus”

If you find yourself working on a large lease transaction, you’ll eventually hear the term “Prospectus”.  The Prospectus refers to the document that GSA produces each time it seeks to execute a lease over a specified dollar threshold.  This document requires review by the Office of Management and Budget (OMB) and, most significantly, Congressional approval.  As you can imagine, the entire process can easily take 18 months, if not much longer.

The current prospectus threshold is $2.79 million in annual rent.  That figure includes net rent, real estate taxes and amortized tenant improvements but it does not include the cost of most other operating expenses.  If the government intends to execute a lease – even a renewal – at an average annual cost above this prospectus threshold then Congress must approve it first.

The Prospectus document also sets the maximum full-service rent that the government is allowed to pay for its leased space.  This rental amount is expressed both per rentable square foot and in the annual aggregate.  In order to comply with the Prospectus, lessors must supply space at pricing that is under the maximum for both figures.

When you consider that the Prospectus is expressed as a levelized annual rent, the caps are sometimes restrictive.  For example, in Washington, DC the Prospectus cap is currently set at $49.00, full service, for most lease transactions.  In the city’s CBD and Downtown submarkets, this rent is already below market, a problem which is further compounded by the fact that the Prospectus is expressed as a flat rent while market rents inevitably have an annual escalation factor.

Lessors need to understand the implications of the Prospectus process when addressing large leases and government agencies need to consider the impact as well, especially as they plan for leases at points in the market cycle where rents are on the rise.