Page 1 GAO-16-536R Federal Real Property

441 G St. N.W.

Washington, DC 20548

June 21, 2016

The Honorable Bill Shuster

Chairman

The Honorable Peter A. DeFazio

Ranking Member

Committee on Transportation and Infrastructure

House of Representatives

The Honorable Lou Barletta

Chairman

The Honorable André Carson

Ranking Member

Subcommittee on Economic Development, 

Public Buildings, and Emergency Management

Committee on Transportation and Infrastructure

House of Representatives

Federal Real Property: Leases with Purchase Options Are Infrequently Used but May 

Provide Benefits

Overreliance on costly leasing is one of the major reasons that federal real property 

management remains on GAO’s high risk list.1 Our work over the years has shown that, in 

general, buying a building often costs less than entering into a long-term lease.2 However, we 

have also found that the General Services Administration (GSA) typically lacks the budget 

authority from the Federal Buildings Fund (FBF) needed to purchase buildings outright3 and, 

according to GSA officials, must resort to leasing to fulfill the federal government’s space 

requirements.

4 In leasing buildings, one mechanism for potentially reducing costs is to include a 

purchase option as part of the lease. Such a mechanism gives the government a future option 

 1

GAO, High-Risk Series: An Update, GAO-15-290 (Washington, D.C., February 2015). Other reasons for the 

designation included unreliable data, excess and deteriorating property, and challenges associated with protecting 

assets against the threat of terrorism.

2

Under certain conditions, such as fulfilling short-term needs for office space, leasing may be a lower cost option than 

ownership. See GAO, Federal Real Property: Greater Transparency and Strategic Focus Needed for High-Value 

GSA Leases, GAO-13-744 (Washington, D.C.; September 2013).

3

The FBF, administered by GSA, is the primary means used to finance the capital and operating costs associated 

with federal space. The FBF is financed by income from rental charges assessed to tenant agencies occupying 

federally-owned and -leased space. Congress exercises control over the FBF through the appropriations process that 

sets annual limits—called obligational authority—on how much of the fund can be obligated for various activities, 

such as rental of space and construction and acquisition of buildings.

4

Within the vast portfolio of government owned and leased assets, GSA is the broker and property manager for many 

civilian agencies of the U.S. government. GSA is responsible for almost 400-million square feet of rentable federal 

space—over half of which is leased.
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to own the building, which may be a lower cost alternative than making continuing rent 

payments.

GSA’s decision to lease or purchase a building is influenced by scorekeeping,5 which 

determines the amount that GSA must obligate when it enters into a lease. Scorekeeping rules 

are established by the Office of Management and Budget (OMB), the Congressional Budget 

Office (CBO), and the Senate and House Budget Committees. In the early 1990s, scorekeeping 

rules on how federal agencies, including GSA, are to budget for leasing buildings were 

adopted.

6 In particular, the treatment of discounted purchase options in budget scorekeeping 

was affected by the rules.

7

You asked us to provide information on budget scorekeeping rules and the potential costs and 

benefits of entering into leases with purchase options. The enclosures present our findings 

regarding: (1) the adoption of budget scorekeeping rules in the early 1990s, and the effects of 

these rules on the use of leases with purchase options; (2) the extent to which GSA has been 

able to capture any financial benefits from exercising purchase options; and (3) selected 

stakeholder views on the use of lease purchase options, including potential advantages and 

disadvantages.

To address these areas, we reviewed OMB guidance that described scorekeeping rules. We 

reviewed congressional testimony presented by us, CBO, and OMB on public buildings and 

budget issues that arose after the rules were adopted (1993–1994). We also identified 17 

examples of GSA leases from 1992 to 2014 that included purchase options and described their 

characteristics, including any financial benefits of including a purchase option. For the purposes 

of this report, we considered GSA to have gained financial benefits if the exercised purchase 

price was less than the appraised or assessed value of the building at the time of the purchase. 

These financial benefits only reflect the difference between a purchase made by exercising a 

lease purchase option and a purchase made without such an option; they do not incorporate 

other costs and benefits such as rent paid under the lease leading up to when the purchase 

option was exercised. We also interviewed officials from OMB and CBO, as well as 

stakeholders, such as GSA officials, lessors, and industry association representatives. We 

selected lessors based on their involvement in one of the 17 leases that included a purchase 

option we identified or their involvement in high-value leases with GSA.8 The views we gathered 

from these lessors are not necessarily representative of all lessors that enter into leases with 

GSA.

 5

Scorekeeping is the process of estimating the budgetary effects of pending legislation and comparing them to a 

baseline. In addition, OMB uses scoring rules to determine the amounts to be recognized in the budget when an 

agency signs a contract or enters into a lease.

6

According to OMB, officials from both the executive and legislative branches of government were responsible for 

negotiating the scorekeeping rules. Several of these rules were included in OMB Bulletin 91-02—issued on October 

18, 1990.

7

A discounted purchase option means that the purchase price set for the space at the time the lease is signed is 

lower than the expected fair market value of the property when, at a future date, the option can be exercised.

8

Lessor involvement with a high-value lease was used as a selection factor because it was an indication that the 

lessor had experience with large, complicated GSA leases. To identify these lessors we used data from a prior GAO 

engagement. See GAO-13-744.
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We conducted this performance audit from August 2015 to May 2016 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.

In summary, we found:

• According to testimony from CBO, GAO, and OMB in the early 1990s, scoring rules were 

adopted to ensure Congress and GSA more clearly evaluated the full costs of acquiring 

a building at the time such decisions were made. These rules affected the treatment of 

lease-purchases—which include leases having a “discounted” purchase option giving 

the government a choice to buy a leased building for a price that is, at the time the lease 

is signed, lower than its expected future fair market value.9 Prior to these rules, agencies 

that had negotiated a lease with a discounted purchase option were only required to 

record the lease payments (plus any cancellation costs) on an annual basis for 

budgeting purposes. Following the adoption of these rules, agencies that signed a lease 

with a discounted purchase option were required to assume the option would be 

exercised and to budget for the full estimated costs of renting and purchasing the 

building, including total rent costs and the purchase price. As a result, officials stated 

that GSA has been reluctant to include purchase options in leases.

• GSA rarely includes purchase options in leases, especially discounted purchase options, 

but has realized financial benefits in some instances from their use. Of the approximately 

18,600 leases GSA entered into from 1992 to 2014, GAO identified 17 that included a 

purchase option. These leases were generally for relatively large spaces (exceeding 

100,000 square feet) with annual rents greater than $1 million. GSA has exercised 

purchase options on 3 of these leases to acquire buildings at costs that were collectively 

$80 million below their fair market values at the time the options were exercised.10 GSA 

chose not to exercise the purchase options on 2 of these leases, and options on the 

remaining 12 leases cannot be exercised until future dates.

• GSA regional officials, lessors, and industry association representatives we spoke with 

generally viewed purchase options as favoring GSA over lessors. These stakeholders 

cited benefits to GSA that included retaining the right to take ownership of unique 

properties that meet specific tenant needs, and taking advantage of market conditions to 

save the government money. In addition, the stakeholders also said that from a lessor’s 

perspective, purchase options can: (1) result in the loss of annual cash flow, (2) 

potentially lead to a loss on the sale of a building, and (3) result in higher financing costs.

 9

According to the scoring rules, lease-purchases may include leases with purchase options that a federal agency can 

exercise at a future date.

10The purchase option for one of the leases was considered to be “discounted” for budget-scoring purposes because, 

at the time the lease was signed, the $1 purchase price was expected to be lower than the building’s future fair 

market value. The other 2 purchase options were not considered to be discounted because, at the time the leases 

were signed, the purchase prices were not expected to be lower than the future fair market values.
Page 4 GAO-16-536R Federal Real Property

_ _ _ _ _

We provided a draft of this report to GSA and OMB for comment. GSA provided technical 

comments that were incorporated, as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we 

plan no further distribution until 15 days from the report date. At that time, will send copies of 

this report to the appropriate congressional committees, the General Services Administration, 

and the Office of Management and Budget. In addition, the report will be available at no charge 

on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2834 or 

wised@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 Mike Armes (Assistant Director); Matthew Cook (Analyst in Charge); Russ Burnett; 

Tim Carr; Bill Egar; Carol Henn; Hannah Laufe; Alex Lawrence; Christopher Stone; Michelle 

Weathers; and Crystal Wesco.

David Wise

Director, Physical Infrastructure Issues
Page 5 GAO-16-536R Federal Real Property

Enclosure I
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Enclosure II: Summary of General Services Administration (GSA) Leases with Purchase 

Options

Table 1: Summary of 17 GSA Leases with Purchase Options from 1992 to 2014 as Identified by GAO

Address

Tenant agency Lease 

term 

Rentable 

square 

feet

Valuea Purchase 

option

Option 

exercised 

(year)?

2401 E Street 

NW

Washington, DC

State 

Department

1992-2012 511,500 $150,000,000 

(appraised in 

2009)

$100,000,000 Yes (2012)

4700 River Road

Riverdale, MD

Department of 

Agriculture

1995-2015 337,500 $45,000,000

(appraised in 

2010)

$31,000,000 Yes (2015)

985 Michigan 

Ave

Detroit, MI

Internal 

Revenue 

Service

1995-2015 419,400 $14,500,000

(appraised in 

2015)

$1 (2015)

b Yes (2015)

250 Murall Drive

Martinsburg, WV

Internal 

Revenue 

Service

1995-2020 106,500 Unknown $24,916,790 

(2015)c No

888 1st Street NE

Washington, DC

Federal Energy 

Regulatory 

Commission

1995-2025 503,997 $133,438,730

(assessed in 

2015)

$20,000,000 To be 

determined

1090 Mesa 

Street

El Paso, TX

General 

Services 

Administration

1999-2014 4,237 Unknown Fair market 

value as set 

by 

independent 

appraisers

No

2901 Leon C. 

Simon Blvd

New Orleans, LA

Federal Bureau 

of Investigation

1999-2019 110,525 $18,500,000

(appraised in 

2016)

$23,599,195 To be 

determined

1801 N. Lynn 

Street

Arlington, VA

State 

Department

2003-2018 349,641 $206,639,200 

(assessed in 

2016)

Greater of fair 

market value 

or 

$224,000,000

To be 

determined

1200 New Jersey 

Ave SE

Washington, DC

Department of 

Transportation

2006-2021 1,350,000 $418,656,442

(estimated in 

2012)

95 percent of 

fair market 

valued

To be 

determined

2025 E Street 

NW

Washington, DC

State 

Department

2009-2020 296,421 $315,500,000

(appraised in 

2015)

$315,500,000 To be 

determined

5830 University 

Research Court 

College Park, 

MD

National 

Oceanic and 

Atmospheric 

Administration

2012-2025 268,762 $86,191,967

(assessed in 

2016)

$27,000,000 To be 

determined

300 E Street NW

Washington, DC

National 

Aeronautics and 

Space 

Administration

2013-2028 597,253 $317,702,248

(estimated in 

2012)

$680,000,000 To be

determined
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500 Adams 

Street

Eagle Pass, TX

General 

Services 

Administration

2013-2028 14,652 Unknown Fair market 

value as set 

by 

independent 

appraisers

To be 

determined

600 19th Street 

NW

Washington, DC

State 

Department

2014-2024 463,151 $181,953,410

(assessed in 

2010)

Fair market 

value set by 

appraisers 

when option 

is exercised

To be 

determined

1305 East-West 

Highway

Silver Spring, MD

National 

Oceanic and 

Atmospheric 

Administration

2014-2028 209,101 $55,048,700

(assessed in 

2010)

$154,000,000 To be 

determined

1315 East-West 

Highway

Silver Spring, MD

National 

Oceanic and 

Atmospheric 

Administration

2014-2028 512,774 $114,673,300

(assessed in 

2016)

$319,000,000 To be 

determined

1325 East-West 

Highway

Silver Spring, MD

National 

Oceanic and 

Atmospheric 

Administration

2014-2028 285,118 $59,542,700

(assessed in 

2010)

$146,000,000 To be 

determined

Source: GAO presentation of GSA lease data. | GAO-16-536R

Note: These are the 17 GSA leases we were able to identify that included leases that included purchase options and 

are not necessarily representative of all GSA leases with purchase options.

a

We use three terms to describe property value: appraised, assessed, and estimated. Appraised is used to indicate 

information from a building appraisal; assessed is used to indicate information from tax assessment records; and 

estimated is used to indicate that the value was calculated by GSA.

b

GSA also had the following purchase options: $102,500,000 (2000), $83,000,000 (2005), and $50,000,000 (2010).

c

GSA also had the following purchase options: $25,666,790 (1999); $25,516,790 (2000); $25,366,790 (2001); 

$25,216,790 (2002); $25,066,790 (2003); and $24,916,790 (2004).

d

The lease includes three purchase options for (1) 90 days prior to commencement of rent, (2) 5 years after lease’s

commencement, and (3) lease’s expiration. The first option is set by several factors including pre-fixed prices of $40 

and $12.5 million, invested equity, and cost of development and construction loans. The second and third options are 

set at 95 percent of fair market value or amount required to pay off outstanding principal.
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Enclosure III
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