*Forum News*\
September/October 1999, Vol.6, No. 1\
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**The Economics of Preserving Historic Federal Buildings**\
**by Constance Ramirez, Donald R. Horn, AIA & Bradley**\
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![](media/image1.png){width="0.21875in" height="0.21875in"}mong
assumptions governing real estate decision making, few are more
pervasive than the association of "historic" and "expensive," of old
buildings and continual repairs and high utility bills. But a recent
study of federal buildings by the U.S. General Services Administration
(GSA) shows that many older historic buildings in fact are more
efficient and profitable than newer buildings. The study is one of many
new approaches to property management now reshaping the way GSA manages
its extensive holdings of historic real estate.

The General Services Administration was created in 1949 to provide work
space, furnishings, services, supplies, and procurement support for
federal civilian agencies efficiently and economically---to enable
federal employees to do their jobs and to save taxpayers money. The
Public Buildings Service (PBS), GSA's largest component, is also the
largest commercial real estate organization in the U.S., providing 335
million square feet of workspace to more than one million federal
employees. For more than 100 federal organizations, PBS constructs,
leases, manages, maintains, and disposes of facilities. In each of GSA's
11 regional offices a Regional Historic Preservation Officer works with
property managers and real estate specialists.

The Public Buildings Service manages space in approximately 8,400
buildings. More than 1,900 buildings are government-owned, while 6,500
are leased from the private sector. Of the government-owned properties,
nearly 25 percent, or roughly 450, have historic significance based on
age, building type, architectural style, or involvement in culturally
significant events. While the greatest number of historically
significant structures were constructed in the early 1930s, 47 date from
the 19th century, the oldest having been built in 1809 (the U.S. Custom
House in Ogdensburg, N.Y.). GSA currently holds 207 buildings listed in
the National Register of Historic Places either individually or as part
of a historic district, including 33 National Historic Landmarks.

**Changing Business Practices and Historic Preservation**

Since the "reinvention of government" inspired by Vice President Al Gore
in the early 1990s, GSA has sought to become a fully competitive,
revenue-based organization. To further this goal, the Public Buildings
Service has adopted a portfolio perspective to manage its inventory,
closely examining how much income buildings generate and how much they
cost to run.

At the same time, PBS Commissioner Robert Peck has identified as a top
priority a "renewed PBS reinvestment philosophy for historic buildings."
(See Held in Public Trust: PBS Strategy for Using Historic Buildings,
May 1999.) As part of the process of making sound reinvestment
decisions, the PBS Office of Business Performance is examining economic
data on buildings in the GSA inventory.

The Office of Business Performance procured data for fiscal year 1998
from a sample of 470 GSA-owned office buildings that could be compared
with office buildings in the private sector. Most buildings in the
inventory were federal office buildings, courthouses, custom houses, or
some combination thereof. Buildings with specialized functions, such as
border stations and laboratories, were excluded because they are
difficult to compare with private industry. Of the 470 buildings in the
sample, those listed in or eligible for the National Register of
Historic Places were considered historic and all others were considered
nonhistoric. The industry standards for office building costs and income
came from the 1998 Building Owners and Managers Association Experience
Exchange Report.

The resulting study, Financing Historic Federal Buildings: An Analysis
of Current Practice, considers many performance measures to evaluate how
historic buildings operate within the total portfolio. Four areas were
particularly pertinent to decisions affecting historic buildings.

*Federal Buildings Fund*

The funding mechanism for almost all PBS activities is the Federal
Buildings Fund, which receives rental income, set at commercially
equivalent rates, from federal agency tenants. Income in excess of
operating expenses is used to fund repair and alteration projects and
some new construction. The study found that:

-   A building's operating cost to the Federal Buildings Fund (FBF) per
    rentable square foot (RSF) increases with more recent construction
    dates. The highest costs come from buildings constructed in the
    1970s.

-   Nonhistoric buildings of less than 25,000 rentable square feet had
    the highest operating costs to the FBF. In general, the smaller the
    building the higher the operating costs per rentable square foot.

*Funds from Operations*

While expenses are a major concern in operating buildings, income is
equally important. Funds from Operations (FFO) includes the rent from
federal tenants, permits, licenses, and miscellaneous items minus total
funded expenses. These expenses include cleaning, maintenance,
utilities, protection services, minor repairs, and overhead. Study
results indicate:

-   The Funds from Operations per rentable square foot changes very
    little with more recent construction dates.

-   The FFO increases with size for all buildings. The highest FFO was
    found to be associated with historic buildings with more than
    250,000 rentable square feet.

*Operating Costs*

Operating costs consist of cleaning, maintenance, and utility expenses.
These were compared for historic and nonhistoric buildings with Building
Owners and Managers Association industry standard costs. The study found
that:

-   The overall operating costs per rentable square foot for historic
    buildings were 10 percent less than for nonhistoric buildings.
    Cleaning costs were 9 percent less, maintenance costs were 10
    percent less, and utility costs were 27 percent less.

*Customer Satisfaction*

Because government agencies are no longer required to go through GSA to
lease space, customer satisfaction has become a significant factor in
GSA decision making. An annual customer satisfaction survey provided
input for this measure. Results showed that:

-   When all buildings were grouped by age, customer satisfaction was
    greatest (85 percent) in the oldest buildings.

-   When considering all buildings by size, customer satisfaction was
    lowest (74 percent) in small historic buildings (less than 25,000
    RSF) and highest (86 percent) in historic buildings with 25,000 to
    50,000 RSF.

**Managing Reinvestment Decisions**

Real estate managers need a strategy for reinvesting in their buildings
in a cost-effective, fiscally prudent manner. This requires knowledge of
a building's value, its physical needs, and its financial performance.
PBS seeks to balance this knowledge with other factors, such as cultural
and environmental concerns.

*Return on Investment (ROI)*

The Return on Investment (ROI) of GSA-owned properties is factored in to
decisions to retain or dispose of buildings in the GSA inventory. ROI is
also an indicator of how much should be reinvested in a building. For
example, when PBS decides to invest in building repairs, it must
consider whether those funds will be recovered through a rental stream
over a 25-year period. A high ROI indicates that a building's rental
stream can support the cost of the anticipated repairs or alterations.

*Functional Replacement Value (FRV)*

A building's FRV is the cost of building a new structure that would
perform the same function, as opposed to the cost of reproducing the
building using the same materials and architectural detailing. Since the
early 1990s, PBS has used 50 percent of FRV as an Acceptable
Reinvestment Level (ARL) for a building modernization project.
Significant historic buildings have been allowed an ARL of 60 percent of
FRV, although cultural and historic factors were not taken into account
in calculating the FRV and were only minimally considered in
calculations of the ARL.

*Other Significant Factors*

Recently, PBS instituted a computer-modeling analysis method that
incorporates other significant qualitative factors in determining and
ranking viable reinvestment projects for the federal inventory. Among
the factors that are now considered in project ranking are the demand
for space by federal agencies; political, environmental, and community
development issues; and cultural and historic significance. A formal
process is being developed for outlining the range of economically
viable investment alternatives that encourage the protection of historic
buildings. This approach will help PBS quantify cultural importance and
provide a more equitable project selection system.

*Environmental and Energy Advantages*

Historic preservation practices can make substantial contributions to
environmental and energy conservation. GSA has pursued energy
conservation in its new construction for many years, and it is now
looking at energy issues in its historic buildings. As the PBS study
showed, most historic buildings have lower utility costs than buildings
built in the 1970s. Historic buildings have thick, solid walls,
resulting in greater thermal mass. Normally, a large thermal mass
improves insulation, thus requiring less energy for heating and cooling.

Lighting is another area where GSA's older buildings save money and
energy. Those designed before the widespread use of electric lights
feature transoms, high ceilings, and large windows for natural lighting.
PBS is learning that retaining these features, rather than covering or
blocking them, can reduce the energy used for lighting.

**Preservation Practices**

GSA has the responsibility of providing in a fiscally sound manner
office space of all sizes and in every part of the United States for the
federal government. At the same time, GSA, like all federal agencies,
has a responsibility to administer its historic properties in a spirit
of stewardship. The findings from the PBS analysis are helping GSA to
understand the economic value of the historic buildings in its
portfolio.

The PBS analysis also has raised some questions about how we perceive
the operation of historic buildings. It begs for more data from state
and local government buildings for further comparison. Unfortunately, a
quick scan of existing economic data for nonfederal public buildings
indicates that only rehabilitation and restoration costs have been
recorded and that operation costs and reinvestment decisions are not
available for analysis.

The most vulnerable buildings in GSA's inventory, from a financial
perspective, are buildings of less than 25,000 rentable square feet.
These buildings cost the most and bring in the least revenue. A
challenge for preservationists is to help GSA discover new ways to
operate small buildings more cost-efficiently.

GSA recognizes that the federal government's historic buildings not only
provide economic support to their surrounding areas, they also provide a
sense of identity. PBS is continuing to track the many ways that its
historic buildings contribute economically, culturally, and visually to
their communities and to the federal government.