Background

The federal real property environment has many stakeholders and involves  a vast and diverse portfolio of assets that are used for a wide variety of  missions. Real property is generally defined as facilities, land, and  anything constructed on or attached to land. According to FRPP data, the  federal government owned and leased 1.2 million assets with a  replacement value of $1.5 trillion in fiscal year 2006. The Department of  Defense, USPS, GSA, and the Department of Veterans Affairs hold the  majority of the owned and leased facility space. The makeup of the federal  government’s facilities reflects the diversity of agencies’ missions and  includes office buildings, prisons, post offices, courthouses, laboratories,  and border stations.
GSA is authorized by law to acquire, manage, utilize, and dispose of real  property for most federal agencies. These authorities are contained in title  40 of the U.S. Code, and GSA is responsible for its implementation.  Agencies are subject to title 40 authorities unless they have their own  specific real estate authority and are exempted from title 40. Under title  40, GSA is authorized to enter into lease agreements for up to 20 years that  the Administrator of GSA considers to be in the interest of the federal  government and necessary to accommodate a federal agency. GSA uses  this authority to lease space on behalf of many federal government  agencies. In 1996, GSA began a program called “Can’t Beat GSA Leasing”  that offered federal agencies the choice of using GSA as their leasing agent  or assuming responsibility for their own leasing. Under this program, GSA  delegated leasing authority for general purpose space to the heads of all  federal agencies. GSA’s original delegation consisted of six conditions,  which included the requirements that federal agencies acquire and utilize  leased space in accordance with all applicable laws and regulations. In  December of 2002, GSA revised its regulations to specifically state that all  agencies must follow the budget scorekeeping guidelines and OMB’s  requirements for leases, capital leases, and lease purchases identified in  appendixes A and B of OMB Circular A-11. Federal agencies also may  have their own independent statutory authority related to real property. In  November 2007, GSA amended its delegations of leasing authority to  acquire general purpose office space and special purpose office space.  GSA said its basis for amending these delegations of authority was to  increase oversight and to facilitate compliance with all applicable laws  and regulations governing the acquisition of real property, since several  recent audits of its delegation program found instances in which agencies  had failed to meet the requirements of their leasing delegation. USPS,  which is an independent establishment in the executive branch, is  authorized to sell, lease, or dispose of property under its general powers  and is exempt from most federal laws dealing with real property and  contracting.
Since 2003, we have reported that federal real property is a high-risk area  due to excess and deteriorating property, reliance on costly leasing,  unreliable data, and security challenges. Specifically, problems are  exacerbated by underlying obstacles that include competing stakeholder  interests, legal and budgetary limitations, and the need for improved  capital planning. For example, agencies cited local interests as barriers to  disposing of excess property, and agencies’ limited ability to pursue  ownership leads them to lease property that may be more cost-effective to  own over time. In February of 2004, the President signed Executive Order  13327 and added real property management to the President’s  Management Agenda, which scores agencies on their progress in meeting  performance targets. The order applies to 24 executive branch  departments and agencies, but not to USPS. Agencies under that  executive order have, among other things, designated senior real property  officers, established asset management plans, standardized real property  data reporting, and adopted various performance measures to track  progress. The administration’s establishment of FRPC also supports  reform efforts. Furthermore, OMB staff said that the administration  intends to work with Congress to provide agencies with tools to more  effectively manage their real property assets. To meet the order’s  requirement for standardized real property data reporting, FRPC worked  with GSA to develop FRPP. The first governmentwide reporting of  inventory data for FRPP took place in December of 2005, and selected  data were included in the fiscal year 2005 Federal Real Property Report,  published by GSA on behalf of FRPC in June of 2006. In our April 2007  update on real property high-risk issues, we reported that the  administration and major real-property-holding agencies had made  progress toward strategically managing federal real property and  addressing some long-standing problems.

	Federal Agencies Rely Extensively on Leasing, Especially for Office Space Needs; GSA Predicts It Will Lease More Space Than It Owns in 2008

Federal agencies rely extensively on leasing, occupying about 398 million  square feet of leased building space domestically in fiscal year 2006,  according to data from FRPP. According to fiscal year 2006 FRPP  information, GSA and USPS hold the majority of the federal government’s  leased building space, totaling about 270 million square feet, or about 67  percent of the leased inventory of space within the United States and U.S.  territories. Agriculture holds 4 percent of leased space. In fiscal year 2006,  GSA, which acts as a leasing agent for other agencies, had 6,750 leases and  provided slightly less than 169 million square feet of leased building space  to nearly every department within the federal government. Table 1 shows  the amount of domestically leased space by agency, according to FRPP.

		Office Space Is the Predominant Type of Federally Leased Space

According to FRPP data, over half of the space, in terms of square footage,  is office space, with a mix of other uses including warehouses, family  housing, and schools. The single largest category of federally leased  space—office-related purposes—accounts for approximately 201 million  square feet, or 51 percent of all domestic leased building space. This  category includes office space and military headquarters space. The  second largest category of leased space, “all other,” includes space for  post offices and laboratories, as well as other buildings that cannot be  classified in other categories. About 104 million square feet of leased space  were reported in this category. In addition, agencies reported leasing  about 29 million square feet of building space for warehouses and about 22  million square feet for family housing—a category that includes, among  other things, public housing and military personnel housing. Figure 1  shows domestic leased square footage by predominant usage.
As the federal agency that leases the most space, GSA leases space for a  variety of purposes, but about 152 million square feet, or 90 percent of its  leased portfolio, is leased exclusively for offices. GSA also leases about   15 million square feet, or about 9 percent of its overall leased portfolio, for  warehouses for agencies. Additionally, GSA leases building space for such  purposes as laboratories, family housing, and other miscellaneous uses.  These uses account for about 1 percent of its leased space. Agriculture had  more than 3,700 leases totaling nearly 17 million square feet of building  space in fiscal year 2006. About 92 percent of Agriculture’s leased space,  or slightly more than 15 million square feet, is for offices. Agriculture also  has a little over a million square feet leased under the all other, warehouse,  and service categories. According to FRPP data, USPS has roughly 28,100  leases, which are categorized as all other. According to OMB staff, because  of a USPS data-coding error, the square footage for USPS assets was  included in the “all other” category and accounts for about 95 percent of  the square footage reported for this category. USPS told us that the  majority of its leased buildings are used primarily for customer service  post offices, and a portion of its building space is used for retail facilities  and carrier annexes.
We did not develop data on the overall yearly cost of leased space to the  federal government. OMB staff said that variation in costs included in  lease payments among agencies would create data consistency problems.  As an indicator of asset value, FRPP tracks replacement value—or the cost  to replace leased space with owned space—and the estimated  replacement value of the federal government’s existing domestic leases  totals $48 billion.

		Data Quality Remains a Challenge

In April of 2007, we reported that although agencies have made progress in  collecting and reporting standardized real property data for FRPP, data  reliability is still a challenge at some of the agencies, and agencies lack a  standard framework for data validation. For this review, we assessed the  fiscal year 2006 FRPP leasing data and found them to be generally reliable  for the purpose of profiling the leased inventory. However, we noted some  data quality issues that would be cause for concern if FRPP were used for  more than describing the inventory, such as strategic decision making. For  example, USPS categorized its 28,108 leased assets “mission dependent  not critical” and did not include annual operating costs for each leased  asset. The categorization of USPS’s leased facilities as “mission dependent  not critical” and “not mission critical” could be questioned, since USPS’s  facilities serve as the main channel for providing mail delivery service to  all people residing in the United States. In our April 2007 report, we  recommended that OMB develop a framework that agencies can use to  better ensure the validity and usefulness of key real property data in  FRPP. OMB concurred with this recommendation and has required  agency-specific validation and verification plans and, according to OMB  officials, has developed an FRPP validation protocol to certify agency  data. According to OMB staff, each score card agency has developed and  implemented an agency-specific data validation and verification plan.

		GSA’s Reliance on Leasing Continues to Increase

FRPP is a relatively new inventory, a result of implementing Executive  Order 13327, and therefore governmentwide data on leasing trends were  not available. However, GSA, whose tenants represent a cross-section of  federal agencies, maintains historical data that are useful in examining  trends. The most striking trend in GSA-leased space, GSA predicts, is that  for the first time it will lease more space than it owns in 2008. From fiscal  year 2003 through fiscal year 2006, GSA increased its leased space from  about 160 million square feet to about 172 million square feet while its  owned space decreased from about 180 million square feet to about   174 million square feet.
Besides tracking total leased square footage, as all federal agencies are  required to do for FRPP, GSA captures, analyzes, and evaluates a number  of other leasing trends, including trends in lease extensions, vacancy rates  in leased facilities, negative net operating income leases, and GSA lease  rates compared with market lease rates. GSA conducts trend analysis  using the data from prior years that it retains, or annually archives. GSA  officials stated that annually archiving data is the key to establishing  baselines and conducting trend analysis because it aggregates data for  similar fields over time, which allows for analyses of comparable data  each year. According to GSA officials, these analyses can then be used to  better anticipate and react to market changes, helping to ensure the most  efficient management of the lease portfolio. GSA officials said they can use  annually archived data to isolate key trends, examine the causes of these  trends, and identify potential solutions. According to GSA officials, they  are broadening the use of outside published data to forecast market  conditions and rent for leasing activity.
GSA officials told us that trend analysis with annually archived data can  identify “low- value” leases—those for which the government is currently  paying above-market rates. Such analysis also can identify leases in  markets where rental rates are forecasted to grow quickly and the  government risks paying higher lease rates in the future. Second, trend  analysis of market data comparisons can indicate whether a lease  extended without full competition is more expensive than a lease fully  competed in the free market. GSA estimated that approximately 65  percent of its expiring leases were extended at the request of tenant  agencies. GSA officials said that leases that are extended could potentially  place GSA at risk, especially in areas where the agency may be overpaying  because of changing market rates. According to GSA officials, information  on vacancy rates is crucial for asset managers to effectively manage and  minimize vacancies.

	Decisions to Lease Selected Federal Properties Are Not Always Driven by Cost-effectiveness Considerations

In the 10 leases we examined, decisions to lease space that would be more  cost-effective to own were driven by the limited availability of capital for  ownership and other considerations, such as operational efficiency and  security. To examine the cost-effectiveness of leasing decisions, we  analyzed economic analyses—30-year net present value calculations—that  GSA provided for seven building leases and that USPS provided for three  leases. We found that leasing was more costly over the long-term than  construction for four of the seven GSA leases, and these four GSA leases  were estimated to be $83.3 million more costly over 30 years than  construction.  Table 2 shows the results of our analyses for the seven  selected GSA lease acquisitions, the comparative cost advantages and  disadvantages of construction versus leasing for these acquisitions, and  the reasons cited by agency officials for leasing. USPS provided similar  data for its leases but requested that we not provide them in this report  because of a Postal Regulatory Commission ruling that such data should  not be disclosed to the public.

		Case Examples: FBI Field Offices in Chicago, Illinois, and Tampa, Florida

For FBI’s field office in Chicago, Illinois, the 30-year net present value cost  of meeting FBI’s long-term space need with an operating lease was  estimated to cost $40 million more than construction. In this instance, GSA  officials stated, limited availability of up-front capital and security  considerations prevented them from pursuing ownership at that time.  According to GSA officials, before deciding to enter into the lease in 2006  for the new field office, which has a 14-year term, GSA pursued other  options for its tenant agency, including repair and alteration and building  construction. Ultimately, these options proved unfeasible because,  according to GSA officials, massive repairs were needed at one of the  proposed facilities and existing facilities could not meet new building  security requirements established after the September 11, 2001, terrorist  attacks.
For the FBI field office in Tampa, Florida, the 30-year net present-value  cost of meeting FBI’s long-term space need with an operating lease was  estimated at about $7 million more than construction over a 30-year period  in 2005. According to a GSA official, building construction was never  considered as a viable option because of the perceived lack of necessary  up-front capital. A GSA official stated that FBI had outgrown existing  space in several leased facilities throughout the city and cited enhanced  security requirements, anticipated expansion, and the immediacy of FBI’s  space need as major reasons for consolidating existing leases into one  central location. The term of the lease is 15 years. Primarily because of the  amount of square footage required, virtually all downtown Tampa  locations were eliminated. GSA is using operating leases to help FBI meet  long-term needs for field offices. For instance, GSA is using operating  leases in 40 of 41 new FBI field office locations across the country. Figure  2 shows the FBI field offices in Chicago and Tampa.

		Case Example: Bureau of Alcohol, Tobacco, and Firearms and Secret Service, Chicago, Illinois

GSA entered into 10-year operating leases in Chicago for the Bureau of  Alcohol, Tobacco, and Firearms and the Secret Service in the same  building, estimated at a 30-year net present value to cost $33 million more  than construction. GSA officials said that the prior leases for both  agencies, which also were housed previously in the same facility, expired  and the original lessor opted not to retain the agencies as tenants for  various reasons, including the need for enhanced security requirements.  GSA did not have any owned federal space available in its existing  inventory to meet the specialized security needs of both agencies, so  finding another location that met their security needs was a major factor in  choosing the new space.

		Funds for Ownership Are Limited

For GSA, limited funding for construction is exacerbated by federal budget  scorekeeping rules which require, for ownership and capital leases, that  the full cost of the government’s commitment be recorded up front in the  budget. In contrast, for operating leases, only the amount needed to cover  yearly lease payments plus cancellation costs is required to be recorded in  the budget, thereby making operating leases “look cheaper” in any given  year. This is a long-standing problem, and overreliance on leasing is one  of the major reasons we designated federal real property management as a  high-risk area. The budget scorekeeping issue and efforts to resolve it will  be discussed at length later in this report.
GSA real property officials in the regions we visited told us that for most  space requests they fulfill, constraints on capital funding influenced their  pursuit of ownership as a realistic option. While several of the GSA  officials we spoke with noted that construction funds are available for  capital projects in their region, these dollars tend to be designated for the  construction of agency headquarters, courthouses, and border stations  and typically are not used for federal office space, such as that needed to  fulfill FBI’s field office needs. Specifically, for fiscal years 2006 through  2008, the President requested funding for GSA primarily for courthouses  or border stations, although for all 3 years GSA requested funds to cover  other construction and repair and alteration projects. According to GSA  real property officials, these types of constraints on construction funding  for federal office space often limit their ability to pursue ownership for  general purpose office space.
For this review, GSA developed and provided a 30-year net present-value  analysis of leasing versus ownership for the building leases we selected.  When proposing a lease, GSA no longer provides this type of analysis to  Congress. According to GSA officials, until the submission of the fiscal  year 1995 capital investment and leasing program, GSA included the  results of a 30-year net present-value analysis of housing alternatives in  lease prospectuses. Now, according to GSA officials, GSA instead  performs a scoring analysis for all lease prospectuses. The scoring  analysis, GSA officials said, includes an estimate of construction costs.  Other estimated costs include those for the proposed asset’s design,  management, and inspection and site acquisition. According to GSA, these  combined estimates provide a total asset value based on cost that forms  the basis for determining whether the proposal scores as a capital or an  operating lease. GSA officials said GSA’s authorizing committees  requested that they provide this information with lease prospectuses in  lieu of the 30-year net present value analysis.
Although USPS is self-financed and not dependent on appropriations or  subject to the scorekeeping rules that apply to other federal agencies,  USPS officials said that limited up-front capital to fund construction  projects is also a hindrance to ownership. USPS’s leasing guidance states  that a lease-versus-purchase analysis is to be conducted when new  construction leasing or the purchase of a building is the recommended  building acquisition alternative. These lease-versus-purchase analyses  consider the net present value and the return on investment of acquisition  alternatives. The lease-versus-purchase analysis at USPS includes the  purchase of a newly constructed building, but also can include the  exercise of options available in certain lease contracts to purchase a  currently leased building. USPS officials at the three facilities service  offices we visited said major reductions in capital funding dictated many  of their decisions about leasing and ownership. In particular, USPS  headquarters officials stated that they would prefer to own all of the larger  facilities, such as mail-processing facilities, but that capital constraints can  prevent ownership of all such facilities.

		Operational Considerations Also Drive Decisions to Lease

While GSA and USPS officials emphasized that the limited availability of  capital was a major impediment to building ownership, they also cited  operational requirements— such as changes to an agency’s mission,  immediate space needs, security requirements, or a desire for flexibility— as drivers of the decision to lease rather than own space. Other factors,  such as shorter-term or smaller space needs, also may influence agencies’  decisions to lease space. GSA and USPS officials cited agency mission as a  reason they chose to pursue leasing rather than building ownership for  certain projects. For instance, USPS officials said they strive to locate  postal service buildings in areas that will optimize the efficiency of mail  delivery. Thus, when deciding between leasing and constructing a  building, they may consider operational factors such as the size of a  facility, traffic routes, access to parking, and convenience for the  customer. USPS officials noted, particularly for customer service post  offices, that leasing in existing retail space, rather than constructing a new  facility, is usually the optimal way to reach customers. However, as we  have previously reported, significant challenges remain related to USPS’s  planning and implementation of its infrastructure realignment, which is  designed to reduce excess capacity as well as reflect changes in  operations. Further challenges persist related to USPS’s identification and  disposal of excess property. We previously have recommended that USPS  develop a facilities plan that includes a strategy for how USPS intends to  rationalize the postal facilities network and remove excess processing  capacity and space from the network. In some instances, officials told us  that operational requirements take precedence over economic  considerations. For instance, automation at USPS has affected operational  planning requirements for future facilities by changing the expected need  for square footage. GSA officials also cited changes in a tenant agency’s  mission as dictating an immediate need for space. For instance, expanding  mission requirements for the Department of Homeland Security created  additional space requirements. Faced with a changing mission and  relatively immediate space needs, agencies may opt for lease construction  rather than federal construction, GSA officials told us, because lease  construction is perceived to take less time than federal construction.  Under lease construction, an agency works with the private sector to  design and build a building that the government leases to meet the  agency’s mission needs. The private developer finances the construction of  the building and agrees to lease the finished building to the agency. This  arrangement allows an agency to obtain a new building suited to its needs  without having to pay the up-front costs associated with federal  construction. GSA officials said that it is highly challenging to determine  when a tenant agency’s mission may change and what space needs may  subsequently emerge.
Both GSA and USPS cited the need for flexibility in their space  assignments as a reason for leasing rather than owning space. Certain  agencies that GSA obtains space for, such as the Social Security  Administration, try to locate their facilities close to their customers. As  demographic shifts occur in certain areas of the country, customers can  potentially move to new areas. GSA real property officials stated that  leasing rather than ownership is frequently used to give these agencies the  flexibility to relocate closer to their customers, if necessary. Postal  officials also cited flexibility as a reason for leasing retail post office  space. According to Postal Service officials in the Southwest Facilities  Service Office, recent population increases in Texas and Northwestern  Arkansas may expand the need for retail postal facilities in these areas.  Because the majority of the space USPS obtains in the region is small and  subject to demographic shifts, leasing provides flexibility to meet changing  operational needs.

		Security Considerations Can Lead to Leasing

Due to the expansion of security requirements in recent years, such as  those for blast-resistant building exteriors and the need for greater  setbacks, GSA officials said that agency requirements have become more  stringent and complex. In some circumstances, GSA officials said, these  security needs cannot be met in existing federal buildings, causing  agencies to pursue lease construction. When acquiring space for the FBI  field office in Chicago, GSA first pursued the option of repair and  alteration and then building purchase. GSA officials said that after  reviewing the federal inventory and investigating the site with the most  potential, GSA determined that the repairs needed to make existing federal  building space comply with post-September 11 security requirements  would be cost prohibitive. Given the costliness of the repair and alteration  method and the limited availability of capital for construction, GSA  officials selected lease construction as the method to acquire a building  for FBI. Similarly, when looking for new space to consolidate FBI  operations in Tampa, GSA real estate specialists told us they eliminated  downtown Tampa—where existing federal buildings were located—as a  site because of the difficulty of locating space with the required 100-foot  building setbacks. GSA did find, however, a private developer for a lease  construction project away from the downtown area on the Western Shore  of Tampa.

		Leasing Can Meet Short- term Needs and Is Sometimes Practical

An additional factor that may cause agencies to lease space is a customer’s  temporary or short-term space needs. For instance, GSA officials said that  over 200 GSA-owned and leased buildings were damaged by Hurricane  Katrina, necessitating the relocation of 2,600 federal employees from 28  federal agencies, many of which were GSA tenant agencies. To meet this  emergency need, GSA expanded its use of leases to house agencies in  temporary space to fulfill a short-term need. GSA Regional officials told us  they still have a number of Hurricane Katrina-related leases in their  portfolio.
Agencies also choose leasing over ownership because it is a practical way  to address issues such as a limited amount of available federal space in a  geographic area or a need for a small amount of square footage. GSA  officials stated that in certain rural locations, construction would not be  economically advantageous. The amount of square footage needed also  may dictate whether an agency chooses to lease rather than own space.  For instance, more than 80 percent of GSA’s leases are for 20,000 square  feet or less. When agencies require less than 20,000 square feet, GSA  officials stated, leasing is usually cost-competitive with ownership, and  federal construction is an unlikely option. Additionally, USPS officials told  us that many of their assignments are for 3,000 square feet or less and that  for assignments of this size, construction is not often practical.

	Various Alternatives for Addressing the Leasing Challenge Have Been Debated, but No Action Has Been Taken to Resolve This Difficult Issue

“Efforts to increase ownership are … hampered by a budgetary bias against capital  investment. GSA must record in 1 year’s budget the total cost of a newly constructed or  purchased building, but is required to record only 1 year’s lease payments for a leased  building. As a result, leasing appears to be less costly for the current year despite its  greater long-term costs” (December 1989, GAO/GGD-90-11).  “...consideration  be given to revisiting the scoring of operating leases. In principle,  those leases that are perceived by all sides as long-term federal commitments ought to be  scored in a way that is comparable to direct federal ownership. Applying the principle of  full recognition of the long-term costs to all instruments is more likely to promote the  emergence of the most cost-effective alternative” (October 1993, GAO/T-AIMD-GGD-94-43).  “…GSA’s economic analysis for 55 … leases it proposed showed that federal construction  would have been a less costly alternative and would have saved approximately $700 million  (present value) over a 30-year period” (July 1995, GAO/T-GGD-95-149).  “…a GSA present value cost analysis estimated that the recently leased U.S. Patent and  Trademark Office-complex currently being constructed in Alexandria, Virginia, by a private  company, cost taxpayers about $48 million more to lease over the 20-year lease period than  it would have cost to purchase it” (April 2003, GAO-03-609T).  “Federal real property is a high-risk area due to excess and deteriorating property, reliance  on costly leasing, unreliable data, and security challenges … Energy, Interior, GSA, State,  and VA reported an increased reliance on leasing to meet space needs” (April 2007, GAO- 07-349).
A complete listing of these reports appears at the end of this report in the  Related GAO Products section.
It is important to recognize in any discussion about the budget  scorekeeping rules that their intended purpose is rooted in sound budget  principles and transparency. For Congress to efficiently allocate  resources, it needs to know and vote on the full cost of any program it  approves at the time the funding decision is made. Hence, the  scorekeeping rules require that budget authority for the cost of purchasing  an asset—whether through construction or purchase—be recorded in the  budget when it can be controlled, that is, up front, so that decision makers  have the information needed and an incentive to take the full cost of their  decisions into account. Under current budget scorekeeping rules, the  budget records the full cost of the government’s commitment in the year  the commitment is made. As a result, for operating leases, only the amount  needed to cover the first year lease payments plus cancellation costs need  to be recorded, thereby disguising the fact that over time, leasing will cost  more than ownership.

		Scoring Can Have an Effect on Public-Private Partnerships

In addition to encouraging the use of operating leases, the budget  scorekeeping rules have a clear impact on public-private partnerships. One  type of partnership that agencies such as the Department of Veterans  Affairs and the Department of Defense have specific statutory authority to  enter into is called an enhanced use lease agreement. Such an agreement  is a lease agreement for property under an agency’s control or custody that  the agency can (1) enter into with a public or private entity and (2) receive  as payment under the lease either cash or other consideration, such as  repairs of the property. According to the Congressional Budget Office  (CBO), in a public-private partnership, a business entity is created by  public and private parties for a single, specified purpose with activities  that are predetermined by the contracts and other arrangements between  the parties involved.
The scoring of H.R. 3947, the Federal Property Asset Management Reform  Act of 2002, illustrates how scoring has, and will continue to have, an  impact on the prospects for greater use of public-private partnerships. The  bill—which was not enacted—would have authorized most federal real- property-holding agencies, including GSA, to enter into partnerships and  other business arrangements with private firms to improve the  government’s real property. Agencies could have sold, leased, or conveyed  government property as part of the business arrangements and retained or  spent the proceeds without further appropriations. CBO expected that  many of the ventures that agencies would enter into would be used to  finance investment on behalf of the government. Because of the extent of  the government’s control and use of the projects likely to be undertaken,  CBO concluded that spending by the ventures associated with that  financing should be treated as governmental and recorded as budget  authority and outlays. CBO reported that spending would increase by $1  billion between 2004 and 2012. CBO’s report contains a full explanation of  CBO’s conclusions.

		Alternatives to the Current Budget Scorekeeping Rules Have Been Proposed

Over the nearly 20 years that we have been raising the scorekeeping issue  as a problem that needs to be addressed, several alternatives have been  discussed by, for example, the President’s Commission to Study Capital  Budgeting and us. In addition to improving capital planning overall so that  the most cost-effective capital investments can be identified, other  alternatives have included scoring operating leases up front and  establishing capital acquisition funds at agencies to fund ownership.  Although these alternatives would pose various implementation  challenges, they serve to illustrate proposals that have been considered.

			Scoring Long-term Leases Up Front

An alternative that could result in long-term savings for the government,  proposed in the past by us, would be to recognize that many operating  leases are used for long-term needs and should be treated on the same  basis as ownership. This would make such instruments comparable in the  budget to direct federal ownership and would foster more cost-effective  decision making by OMB and Congress. Applying the principle of full, up- front recognition of the long-term costs to all options for satisfying long- term space needs—whether through construction, purchase, lease- purchase, or operating lease—is more likely to result in the selection of  the most cost-effective alternative than using the current scoring rules. It  is important to note that there would be implementation challenges if this  option were pursued. Additionally, it would be challenging to reach  consensus on what constitutes long-term space needs that would warrant  this up-front budgetary treatment.
In commenting on various options for correcting the scoring issue, CBO  reported that ending the distinction between various types of leases has  been considered in the private sector. According to CBO, the Financial  Accounting Standards Board—noting that private firms often devise leases  that barely fall within the limits for operating leases—has considered  requiring firms to capitalize all leases in their books, rather than maintain  the current distinction between capital leases and operating leases. In the  context of federal budgeting, CBO reported that capitalizing all leases  could mean scoring all leases up front on the basis of the present value of  lease payments over the lease term, without attempting to distinguish  between leases that are equivalent to purchases—capital leases—and  those that are not—operating leases.

			Establishing Capital Acquisition Funds to Pursue More Ownership

The President’s Commission to Study Capital Budgeting recommended in  1999 that Congress and the executive branch have one or more agencies  with capital-intensive operations establish a separate capital acquisition  fund (CAF) within their budget that would receive appropriations for the  construction and acquisition of large capital projects. CAFs would use  authority to borrow from Treasury’s general fund and then charge  operating units within the agency rents equal to the debt service (interest  and amortization costs) on those projects. Although the Commission’s  discussion of CAFs was within the context of identifying measures short  of capital budgeting that the government could adopt, CAFs have  implications for the scoring issue because they represent a vehicle for  providing up-front funding for ownership. The main advantage of CAFs,  according to the Commission, is that they should improve agencies’  planning and budgeting. If units or divisions within agencies are charged  the true costs of their space and of other large capital items, they are likely  to make more efficient uses of those assets, according to the Commission  report. The report said that CAFs would not replace the Federal Buildings  Fund, GSA’s governmentwide revolving fund. Authority to acquire  buildings through CAFs could be delegated by GSA as agencies  demonstrate their effectiveness in using this instrument. In 2005, we  reported that implementation issues could overwhelm the potential  benefits of CAFs, which could be achieved through simpler means.

		Real Property Initiative Has Not Yet Addressed the Leasing Challenge

In our April 2007 report updating our designation of federal real property  as a high-risk area, we recommended that OMB, in conjunction with  FRPC, develop an action plan for how FRPC will address key problems,  including the continued reliance on costly leasing when ownership would  be more cost-effective over the long term. OMB agreed with our  recommendation and developed an action plan that included, as a priority  action, “analyz real property budget scoring issues.” OMB staff added  that in their view, basic improvements, such as developing a reliable,  governmentwide inventory of space and establishing performance  measures had to occur before the administration could take on broader,  complex policy issues such as how to address the leasing challenge. As a  result, the current real property reform initiative has lacked a  comprehensive analysis of alternatives and potential solutions to the  leasing challenge. Without such an analysis, agencies’ reliance on costly  leasing is likely to continue and opportunities for using other instruments,  such as public-private partnerships, may be limited. OMB staff said that  efforts to resolve the leasing challenge could benefit from the input not  only of FRPC, but also of other outside stakeholders, including Congress.  At a minimum, consensus on resolving this difficult issue would involve  analyzing current and past legislative and administration proposals that  address the budget scorekeeping issue in relation to real property, gauging  stakeholders’ perspectives on what proposals are most viable, and  determining the conditions under which leasing is an acceptable  alternative even if it is not the most cost-effective option.

	Conclusions

The leasing challenge—under which agencies have become overreliant on  costly operating leases to meet long-term space needs—has persisted for  many years. We have reported since the late 1980s that this problem has  cost taxpayers hundreds of millions of dollars and needs to be addressed.  Overreliance on costly leasing was, and continues to be, a major reason  why real property management is on GAO’s high-risk list. Trends show  continued reliance on significant amounts of leased space. In particular,  GSA predicts that in 2008 it will lease more space than it owns—an  unprecedented situation. The predilection for leasing has been driven, in  part, by federal budget scorekeeping rules, which make operating leases  an attractive alternative to ownership. The scorekeeping rules, though  rooted in sound budget policy and intended to improve transparency, have  had this undesirable effect. Various alternatives have been proposed to  remedy the problem, but it persists, and reaching a resolution will not be  easy. Whatever change is under consideration—whether it involves  scoring leases up front like ownership or using other methods to spur  ownership—will involve making choices among competing priorities for  limited federal resources. Whether to increase funding for federal real  property at the expense of other programs and initiatives is properly a  policy decision that only Congress and the President can make.  Nonetheless, with the improvements in federal real property management  made thus far and increased commitment by OMB and Congress to  address long-standing real property problems, there is reason to be  optimistic that stakeholders can reach a consensus on how to address the  leasing challenge.

	Recommendation for Executive Action

The Director of the Office of Management and Budget should direct the  Deputy Director for Management, Office of Management and Budget, in  conjunction with the Federal Real Property Council and in consultation  with key stakeholders including Congress, to develop a strategy to reduce  agencies’ reliance on leased space for long-term needs when ownership  would be less costly. The strategy should, at a minimum, analyze current  and past legislative and administration proposals that addressed the  budget scorekeeping issue in relation to real property, gauge stakeholders’  perspectives on what proposals are most viable, and identify the  conditions, if any, under which leasing is an acceptable alternative even if  it is not the most cost-effective option.

	Agency Comments and Our Evaluation

We provided a draft of this report to OMB, GSA, Agriculture, and USPS for  review and comment. OMB generally agreed with the report and  concurred with our recommendation. OMB also provided technical  clarifications, which we incorporated, where appropriate. OMB’s  comments are discussed in more detail below. OMB’s letter is contained in  appendix II. GSA also agreed with the report and provided technical  clarifications, which we incorporated where appropriate. GSA’s letter  appears in appendix III without the enclosure that contained the technical  clarifications. USPS and Agriculture did not provide comments on the  draft report.
While generally agreeing with our report and recommendation, OMB  asked us to narrow the scope of the recommendation and identified other  issues inherent to the acquisition of leased space, including (1) leasing as a  more practical option in certain situations, (2) the validity of the 30-year  net economic analysis comparing the acquisition costs of owned and  leased space, and (3) challenges associated with pursuing building  ownership. OMB asked us to narrow the scope of the recommendation to  identify instances in which agencies are relying on costly, long-term  leasing. A means of identifying such leases could logically be part of the  strategy we are recommending and seems worthwhile pursuing. However,  our report objectives did not include how best to identify costly leases,  and therefore we chose not to change our recommendation. Over the last  decade, our work has shown that GSA relies heavily on operating leases to  meet new long-term space needs and that building ownership often costs  less than operating leases, especially for long-term space needs. In these  reports, we cite examples of leases that were estimated to cost millions of  dollars more than construction over the long-term, including operating  leases for the Patent and Trademark Office in Northern Virginia and the  Department of Transportation’s headquarters building and the Securities  and Exchange Commission building in Washington, D.C. In this report, we  identify examples in which the comparative cost advantage of building  ownership would result in significant financial savings over the long term,  including the FBI field office buildings in Chicago, Illinois, and Tampa,  Florida (see table 2). Also, OMB said that we carefully selected long-term  lease arrangements in our report. Our report methodology clearly  indicates that we chose GSA’s regional offices in Atlanta, Georgia;  Chicago, Illinois; and Fort Worth, Texas; and USPS facility service offices  in Lawrenceville, Georgia; Bloomingdale, Illinois; and Dallas, Texas,  because these locations had a high number of larger-dollar-value leases  and were geographically diverse.
OMB said that our report recognizes 80 percent of GSA’s leases are for  20,000 square feet or less. OMB also said that when there is general  purpose office space available in a competitive marketplace, leasing may  be a more viable option. Our report acknowledges that leasing is a  practical way to address issues such as a limited amount of available  federal space in a geographic area or a need for a small amount of square  footage. In addition, we cite operational requirements— such as changes  to an agency’s mission, immediate space needs, security requirements, or a  desire for flexibility—as drivers of the decision to lease rather than own  space. OMB said that the 30-year economic comparison of leasing to  ownership will almost always show that ownership is more cost-effective  than leasing, especially when including land values, and that the federal  government may not recoup the value the 30-year comparison suggests.  We believe that the 30-year net present-value analysis, which GSA has used  for decades and that measures multiyear cash flows in present-dollar  terms so the value of a dollar received today can be compared against the  value of a dollar received in the future, remains a valid measure for  evaluating long-term costs of leasing versus building ownership. Finally,  OMB states that in instances where there is a long-term need or if there is  a need for a special purpose facility not readily available in the leasing  market, that acquisition is an appropriate strategy and that agencies  should budget accordingly. Our report discusses at length GSA’s and  USPS’s concerns that they lack the up-front capital to pursue building  ownership for facilities. For example, GSA officials we spoke with in the  field said that construction funds are available for capital projects in their  region but these dollars tend to be designated for the construction of  agency headquarters, courthouses, and border stations and typically are  not used for federal office space, such as that needed to fulfill FBI’s field  office needs.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Director  and Deputy Director of OMB, the Administrator of GSA, and the  Postmaster General of the United States. Additional copies will be sent to  interested congressional committees. We also will make copies available  to others upon request, and the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 2834 or at goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to identify (1) the profile of domestically held,  federally leased space, including the overall amount and type of space  agencies lease, and discuss any related trends; (2) the factors that drive  agencies to lease space that may be more cost-effective to own; and (3) the  actions, if any, the administration has taken, and what alternative  approaches have been proposed, to address agencies’ reliance on costly  leased space.
To identify the profile of domestically held, federally leased space, we  examined the Federal Real Property Profile (FRPP), the government’s real  property database, and federal fiscal year 2006 leasing data and obtained  breakouts of leased building space by federal agency and predominant  usage. FRPP is maintained by the General Services Administration (GSA)  on behalf of the Federal Real Property Council, which controls access to  the data. We eliminated federal agencies from consideration that lease  their building space overseas. We identified three civilian real-property- holding agencies that are the largest in terms of leased building space held  within the United States and U.S. territories for a more detailed analysis  and assessment of FRPP data. These agencies are GSA, the U.S. Postal  Service (USPS), and the U.S. Department of Agriculture (Agriculture),  which collectively hold 71 percent of domestic, federally leased space. We  analyzed GSA’s, USPS’s, and Agriculture’s fiscal year 2006 FRPP leasing  data, including the data for elements such as real property type, use, legal  interest, status, reporting agency, using organization, size, rate of  utilization, value, condition index, mission dependency, annual operating  and maintenance costs, and general location. To analyze the major trends  in leased space, we were not able to use FRPP, since fiscal year 2005 was  the first year federal agencies were required to submit information on their  leased real property assets to FRPP. Therefore, we reviewed annually  archived GSA leasing data for fiscal years 2003 through 2006, including  analyses of certain aspects of the leased portfolio such as vacancy rates in  leased buildings, lease extensions, and leases that are operating at a  negative net operating income. Because GSA leases a variety of different  space types for many government agencies, its leased portfolio provides a  governmentwide perspective on federally leased building space. Issues  related to collection techniques and availability precluded USPS and  Agriculture from providing us with an electronic copy of annually archived  leasing data, and therefore we could not include information from these  agencies in our analysis of trends under this objective. We also reviewed  GSA’s System for Tracking and Administering Real Property and GSA- generated reports on real property, including the State of the Portfolio and  the Lease Portfolio Reports. We assessed the reliability of the leasing data  provided by the Office of Management and Budget (OMB) and GSA and  interviewed OMB officials because OMB oversees the implementation of  Executive Order 13327, which addresses real property management and  FRPP. We determined that these data were sufficiently reliable and valid  for the purposes of this review.
To determine the factors that drive agencies to lease building space that  may be more cost-effective to own, we focused on GSA and USPS, the two  agencies that lease the most building space. To determine the major  factors that guide these decisions, we interviewed GSA and USPS  headquarters and regional officials with authority over leasing building  space. In addition, we visited GSA regional offices and USPS facility  service offices that are either in the same metropolitan area or near to it.  We visited GSA regional offices in Atlanta, Georgia; Chicago, Illinois; and  Fort Worth, Texas; and USPS facility service offices in Lawrenceville,  Georgia; Bloomingdale, Illinois; and Dallas, Texas. We selected these  locations because they had space leased to multiple agencies and a high  number of larger-dollar-value leases and were geographically diverse. The  leases we selected were among the larger-dollar-value leases within these  locations. To determine the cost of leasing versus the cost of new  construction ownership, we selected seven GSA and three USPS building  leases. For GSA buildings, we used GSA economic analyses we requested  that compared the estimated costs of leasing with the estimated costs of  ownership, while for USPS buildings, we reviewed analyses previously  prepared by USPS officials comparing these estimated costs. For GSA  properties, we worked with budget allocation specialists from GSA’s real  property division to estimate the costs of leasing versus ownership over a  30-year period. We developed this estimate through a net present value  analysis of both leasing and purchasing using GSA’s The Automated  Prospectus System (TAPS). To estimate leasing costs, we used data from  the selected leases for each of the sample buildings, such as usable square  footage, tenant alteration costs, services and utilities, and lease terms. If  this information could not be located on a particular GSA lease, TAPS  program defaults were used. Certain rental rates, such as “step rents” that  increase over a period of years, were adjusted to present-value terms, as  appropriate. To estimate the costs of new construction ownership, we  used cost data from GSA’s General Construction Cost Review Guide (for  estimated construction costs), commercial real estate data from CoStar  (for estimated land costs), and the Public Building Service’s Design and  Construction Professional Services Budget Estimating Tool (for estimated  design and review and management and inspection costs). All inputs for  both estimated leasing and ownership costs were adjusted to 2005 dollars  using OMB inflation and interest rate data and certain TAPS program  defaults from that year. We selected 2005 as the base year because it was  the most recent year for which the General Construction Cost Review  Guide contained updated actual construction data, rather than estimates.  After estimating the costs of both leasing and ownership, we compared  these amounts to determine which method of financing would have  greater financial savings over the long term. Our findings from visits to,  and economic analyses of, federally leased space cannot be generalized to  federally leased space nationwide.
To assess the actions, if any, the administration has taken, and what  alternative approaches have been proposed, to address agencies’ reliance  on costly leased space, we reviewed previously issued GAO reports on real  property management and leasing. We also reviewed past proposals for  reforming federal leasing policy, including reports by the President’s  Commission to Study Capital Budgeting and by the Congressional Budget  Office on budget scoring. We also interviewed OMB officials about efforts  to address agencies’ reliance on leasing as part of ongoing reform efforts.  We conducted this performance audit from July 2006 to January 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.

Appendix II: Comments from the Office of Management and Budget

Appendix III: Comments from the General Services Administration

Appendix IV: GAO Contact and Staff Acknowledgments

	Staff Acknowledgments

In addition to the contact person named above, Elizabeth Repko, Susan  Michal-Smith, David Sausville, Gary Stofko, and Adam Yu also made key  contributions to this report.

Related GAO Products

Federal Real Property: Progress Made toward Addressing Problems, but  Underlying Obstacles Continue to Hamper Reform. GAO-07-349.  Washington, D.C.: April 13, 2007.
High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
Federal Real Property: NIH Has Improved Its Leasing Process, but Needs  to Provide Congress with Information on Some Leases. GAO-06-918.  Washington, D.C.: September 8, 2006.
Federal Real Property: Reliance on Costly Leasing to Meet New Space  Needs Is an Ongoing Problem. GAO-06-136T. Washington, D.C.: October 6,  2005.
Federal Real Property: Further Actions Needed to Address Long-standing  and Complex Problems. GAO-05-848T. Washington, D.C.: June 22, 2005.
U.S. Postal Service: Bold Action Needed to Continue Progress on Postal  Transformation. GAO-04-108T. Washington, D.C.; November 5, 2003.
Budget Issues Alternative Approaches to Finance Federal Capital. GAO- 03-1011. Washington, D.C.: August 21, 2003.
General Services Administration: Factors Affecting the Construction  and Operating Costs of Federal Buildings. GAO-03-609T. Washington,  D.C.: April 2, 2003.
High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.:  January 2003.
Budget Scoring: Budget Scoring Affects Some Lease Terms but Full  Extent Is Uncertain. GAO-01-929. Washington, D.C.: August 31, 2001.
General Services Administration: Comparison of Space Acquisition  Alternatives—Leasing to Lease-Purchase and Leasing to Construction.  GAO/GGD-99-49R. Washington, D.C.: March 12, 1999.
General Services Administration Opportunities for Cost Savings in the  Public Buildings Area. GAO/T-GGD-95-149. Washington, D.C.: July 13,  1995.
Budget Issues: Budget Scorekeeping for Acquisition of Federal  Buildings. GAO/T-AIMD-94-189. Washington, D.C.: September 20, 1994.
Public Buildings Budget Scorekeeping Prompts Difficult Decisions,  GAO/T-AIMD-GGD-94-43. Washington, D.C.: October 28, 1993.
Federal Office Space Increased Ownership Would Result in Significant  Savings. GAO/GGD-90-11. Washington, D.C.: December 22, 1989.

Summary:
Why GAO Did This Study

In January 2003, GAO designated federal real property as a high-risk area, citing the government's overreliance on costly, long-term leasing as one of the major reasons. GAO's work over the years has shown that building ownership often costs less than operating leases, especially for long-term space needs. GAO was asked to identify (1) the profile of domestically held, federally leased space including the overall amount and type of space agencies lease, and any related trends; (2) the factors that drive agencies to lease space that may be more cost-effective to own; and (3) any actions taken by the administration and alternative approaches proposed to address this issue. GAO reviewed fiscal year 2006 Federal Real Property Profile (FRPP) leasing data and relevant documents and interviewed officials from the General Services Administration (GSA), the Office of Management and Budget (OMB), and the U.S. Postal Service (USPS). GAO also reviewed 10 building leases that were among those with the largest dollar value in 3 locations GAO visited.

What GAO Found

Federal agencies rely extensively on leasing, occupying about 398 million square feet of leased building space domestically in fiscal year 2006, according to FRPP data. GSA, USPS, and the U.S. Department of Agriculture lease about 71 percent of this space, mostly for offices, with the military services leasing another 17 percent. GSA is increasing its use of leased space and predicts that in 2008 it will, for the first time, lease more space than it owns. In the 10 GSA and USPS leases GAO examined, decisions to lease space that would be more cost-effective to own were driven by the limited availability of capital for building ownership and other considerations, such as operational efficiency and security. For example, for four of the seven GSA leases GAO analyzed, leasing was more costly over time than construction--by an estimated $83.3 million over 30 years. Although ownership through construction is often the least expensive option, federal budget scorekeeping rules require the full cost of this option to be recorded up-front in the budget, whereas only the annual lease payment plus cancellation costs need to be recorded for operating leases, making them "look cheaper" in any year even though they generally are more costly over time. USPS is not subject to the scorekeeping rules and cited operational efficiency and limited capital as its main reasons for leasing. While the administration has made progress in addressing long-standing real property problems, efforts to address the leasing challenge have been limited. GAO has raised this issue for almost 20 years. Several alternative approaches have been discussed by various stakeholders, including scoring operating leases the same as ownership, but none have been implemented. The current real property reform initiative, however, presents an opportunity to address the leasing challenge.