Prospectus Approval: What Does It Really Mean?

Howard T. Markey Federal Courthouse, home to the U.S. Court of Federal Claims (photo: waymarking.com)

Looming large in the federal lease portfolio and in the minds of federal property investors is the “prospectus lease.” Numbering just over 200 nationwide, these are the GSA leases that exceed $3.095 million in annual levelized rent (net of most operating expenses). Before executing leases above this threshold, federal law (40 U.SC. § 3307) requires GSA to (i) prepare a prospectus document setting forth the particulars of the proposed lease, including a description of the required space and an estimate of the maximum cost to the government, (ii) submit the prospectus to GSA’s oversight subcommittees in the House of Representatives and Senate, and (iii) receive explicit authorization from those subcommittees. While government leasing professionals have long obsessed over the progress of major federal leases through the prospectus process, a basic question has always lurked in the background: Is an authorized prospectus truly binding upon GSA, or can it be ignored?

Prior to 2015, the long-held view at GSA was that an authorized prospectus and the associated subcommittee resolutions were not legally binding upon GSA, and thus that GSA was technically free to deviate from the terms of the prospectus and any additional conditions included in the resolutions (such as maximum annual rents or maximum rentable areas). As explained in its Leasing Desk Guide, GSA generally sought to comply with the prospectus and the authorizing resolutions, but this compliance was viewed as a matter of comity between GSA and its oversight subcommittees. Thus, while an authorized prospectus and associated resolutions were given considerable weight, GSA felt free to deviate from them when necessary, and on very rare occasions even executed prospectus-level leases without any prospectus authorization from Congress at all.

However, in 2015, the Court of Federal Claims roiled this prevailing understanding with its ruling in Springfield Parcel C, LLC v. United States. In that case, brought by a frustrated bidder, the court voided a fully executed GSA lease on the grounds that it exceeded the 625,000 square foot maximum rentable area included in the subcommittee resolutions authorizing the prospectus. The court held that the subcommittee resolutions “create binding conditions upon the availability of appropriations” for prospectus level leases. Under the court’s reasoning, if a lease is executed in violation of such a condition, then it is executed without any valid appropriation from Congress and is therefore void. Thus, under Springfield Parcel, not only are the subcommittees’ authorizing resolutions binding upon GSA, but the resolutions can also (i) provide the basis for a successful bid protest and (ii) supply a court with reason to void a fully executed lease agreement. For owners competing to win prospectus-level leases, this meant that a lease prospectus and its accompanying resolutions must be viewed as critical procurement documents, the violation of which could spell disaster.

Importantly, two recent events appear to have weakened the impact of Springfield Parcel, thereby swinging momentum back towards GSA’s traditional position. First, in January 2018, the Department of Justice’s Office of Legal Counsel (OLC) issued a formal opinion explicitly rejecting the court’s conclusions in Springfield Parcel. In short, OLC argues that because only the full Congress can enact legislation binding on the executive branch or appropriate funds for use by the executive branch, and because delegation of these core functions to mere subcommittees would be a violation of the U.S. Constitution, the prospectus authorization process must necessarily be no more than an internal Congressional bookkeeping process with no power to constrain GSA. In other words, GSA is technically free to ignore a prospectus and the authorizing resolutions. While the OLC opinion does not carry the force of law, it would certainly be considered by any court revisiting this issue, and it could easily supply the reasoning behind an eventual repudiation of Springfield Parcel.

The second important event mitigating the impact of Springfield Parcel is the March 2018 decision by the Federal Circuit Court of Appeals in Cleveland Assets, LLC v. United States. In Cleveland Assets, an incumbent lessor competing to keep its prospectus-level lease filed a pre-award protest in the Court of Federal Claims, arguing that certain unfavorable aspects of the prospectus (which GSA had incorporated by reference into its Request for Lease Proposals (RLP)) were arbitrary, capricious and unduly restrictive, and thus should be set aside.  In ruling against the lessor, the Court of Appeals held that 40 U.S.C. § 3307 (the statute requiring prospectus approval) is merely an “appropriations statute” and not a “procurement statute,” and thus does not supply frustrated bidders with any standing to protest lease procurements. While the court does not mention Springfield Parcel at all, its holding suggests that regardless of whether a prospectus is binding on GSA, bid protesters will not have standing to argue that a prospectus violation requires reversal of a GSA procurement decision. In other words, under Cleveland Assets, the prospectus-based arguments that prevailed in Springfield Parcel should never have been heard, and similar arguments should be rejected in the future for lack of standing.

Following Cleveland Assets and the OLC opinion, the lease prospectus and its approving resolutions appear to occupy a gray area in terms of enforceability. On the one hand, Cleveland Assets has largely defanged the prospectus as a weapon in bid protests, and the OLC opinion has forcefully questioned the reasoning of Springfield Parcel, thereby bolstering GSA’s traditional position that it honors the prospectus restrictions imposed by its oversight committees only as a matter of comity. On the other hand, the OLC opinion has not yet been adopted by any court, Springfield Parcel has never been expressly overruled, and the Government Accountability Office (an alternative venue for bid protests) has not yet adopted the reasoning of Cleveland Assets. With the legal landscape in flux, it would be premature for GSA lessors to forget the lessons of Springfield Parcel.

So what is the take-home point for federal investors? In short, the key message is that even if the courts formally validate GSA’s traditional view of the lease prospectus, the prospectus process will remain a critical aspect of the largest GSA lease procurements. GSA would still be required to seek prospectus approval, and the agency would continue to give great weight to the contents of an approved prospectus. Indeed, it is highly doubtful that GSA would ever routinely or materially disregard the wishes of its congressional oversight committees. Moreover, as in Cleveland Assets, GSA often incorporates by reference some aspects of a lease prospectus directly into its RLP, in which case the prospectus is just as binding upon GSA and prospective lessors as any other RLP provision. For all these reasons, GSA lessors must continue to understand the lease prospectus and how it shapes a lease procurement, as well as how best to engage GSA at critical points in the prospectus process. This will remain the case regardless of how the courts ultimately view the precise legal impact of the prospectus.

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