**UPDATE: Since the 2013 Shutdown, GSA has issued a new policy determination that allows for the agency to continue operating and making payments from the Federal Buildings Fund. In the event of a prolonged shutdown, GSA would gradually scale back operations as the Federal Buildings Fund is depleted.
The shutdown of the U.S. government commenced on October 1st and, with it, a deluge of questions from property owners and investors. This article is intended to answer those Frequently Asked Questions (FAQ). We will update it regularly as we get new information–or until the shutdown ends.
What is a government shutdown?
The Constitution requires that Congress enact spending bills each fiscal year appropriating monies to fund the U.S. government. In the event that Congress cannot agree on these appropriations it may instead pass a Continuing Resolution–a stopgap measure that allows for short-term funding of the government at then-current or reduced levels. However, if Congress fails to agree on either appropriations measure then the government must shut down. This is because the Antideficiency Act prevents the U.S. Government from making expenditures in excess of the amounts appropriated by Congress. The Antideficiency Act does allow for many “essential” government operations to continue through a shutdown but the negative effects are still far-reaching, with notable impacts to the leased inventory.
Will the government continue to pay rent during the shutdown?
Aside from a brief email to lessors on October 1st, GSA has communicated very little regarding payment of rent other than the hopeful expectation that the shutdown will be brief. If that is not the case, we can only guess at what will happen but our interpretation of the law is that GSA will not pay rent until Congress passes a Continuing Resolution or a specific appropriations act. As described above, the Antideficiency Act makes it illegal to do otherwise. The great irony is that the Federal Buildings Fund, the revolving fund GSA uses to pay rent, is actually flush with cash. Yet, GSA may not access monies in the fund without congressional appropriation.
Despite the shutdown, lessors received their September rent (the federal government pays rent in arrears) because the funds had already been set in motion by electronic funds transfer through the Automated Clearing House (ACH) network. The October rent will be due until November 1st. If the shutdown persists through October, it is unlikely rent will be paid on time. In that event, expect payment to be made shortly after the shutdown is lifted. The Prompt Payment Act may require the federal government to include interest with the rent (for more on prompt payment, refer to the General Clauses, Form 3517, attached to your lease).
Will the government pay reimbursements during the shutdown?
As with rent payment, we do not expect the government to pay tax reimbursements, CPI adjustments or other amounts owed. Many of these special payments are further complicated by the fact that humans are required to process them. With no humans at work it is near-certainty that the payments will not be made until the shutdown lifts.
I’m in the middle of a tenant improvement construction project. What should I do?
Most government leases are structured such that rent does not commence until the government “accepts” the space. And, a prerequisite to space acceptance is completion of the tenant improvements (TIs). Yet, TIs are a cooperative effort where the government provides input to design and construction drawings, approves contractor bids, issues Notice To Proceed, orders furniture, installs IT equipment and, ultimately, inspects and accepts the space. Depending upon where the TI project is in its schedule, the absence of government involvement could lead to suspension of the project. The longer the shutdown continues, the more detrimental (and expensive) the delay will become.
We have not yet seen a legal opinion on this but, in our view, these delays are not force majeure under federal contracting law. Therefore, lessors should carefully document the costs and timing associated with this delay. This can be used to recover costs if project expenses escalate and also establish the appropriate rent commencement date.
I have an offer due. What will happen?
If you have a lease offer due and one of GSA’s national brokers is involved, consider it business as usual. The national brokers are working through the shutdown and they will receive your offer and attempt to answer your questions. If, however, there is no broker involved then there is an awkward problem. Most of the GSA contracting staff is furloughed and they are not allowed to work–or even communicate–with offerors. So, offer extension notices aren’t being delivered. This, in turn, is causing angst among offerors, given the agency’s strict adherence to offer deadlines. We must assume that GSA will suspend the offer process while the shutdown is in effect. We can only hope GSA will act rationally on this issue.
My lease is with a federal agency other than GSA. Will that make a difference?
Maybe. If your’s is a traditional operating lease the funding for rent payments is likely dependent upon annual appropriations and, therefore, payment will probably not be made if the shutdown persists. However, some agencies have executed their own leases using multi-year or “no year” money. These are appropriations that specifically obligate funds beyond just one fiscal year. In that case, the agency is allowed by law to make payment. Just hope someone is there to see that it’s done.
If this lasts a long time, what are the other impacts?
A prolonged shutdown will create problems in other areas that may not be immediately apparent. For example, the government may be unable to sign novation agreements or statements of lease, which could impact the sale of government-leased assets. The Government may not consent to reimburse landlords for tax appeal fees (and tax appeal deadlines could be missed). The shutdown will also create a backlog within various federal legal departments, not only because of work that was not completed during the shutdown, but also because of new legal issues that will inevitably arise because of the shutdown itself. In rare instances, this shutdown could even result in the Government missing notice dates for lease renewals or terminations.