Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, and 

International Security, Senate Committee on 

Homeland Security and Governmental Affairs 

United States Government Accountability Office

GAO

For Release on Delivery

Expected at 2:30 p.m. EDT 

Thursday, October 6, 2005 FEDERAL REAL 

PROPERTY 

Reliance on Costly Leasing 

to Meet New Space Needs Is 

an Ongoing Problem 

Statement of Mark L. Goldstein, Director 

Physical Infrastructure Issues 

GAO-06-136T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-136T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark L. 

Goldstein at (202) 512-2834 or 

GoldsteinM@gao.gov. 

Highlights of GAO-06-136T, a testimony 

for the Subcommittee on Federal Financial 

Management, Government Information, 

and International Security, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate 

October 6, 2005

FEDERAL REAL PROPERTY 

Reliance on Costly Leasing to Meet New 

Space Needs Is an Ongoing Problem 

The underlying conditions and related obstacles that led to GAO’s 

designation of federal real property as high risk still exist. Many of the 

assets in the government’s vast and diverse portfolio of real property are not 

effectively aligned with, or responsive to, agencies’ changing missions. 

Furthermore, many assets are in an alarming state of deterioration; agencies 

have estimated restoration and repair needs to be in the tens of billions of 

dollars. Compounding these problems are the lack of reliable 

governmentwide data for strategic asset management and the cost and 

challenge of protecting these assets against terrorism. Additionally, a heavy 

reliance on costly leasing, instead of ownership, to meet new space needs is 

a pervasive and ongoing problem. Since GAO’s designation of this area as 

high risk in January 2003, some important efforts to address these problems 

have been initiated, but it is too early to judge whether the administration’s 

focus on this area will have a lasting impact. 

The federal government owns and leases about 3.3 billion square feet of 

building floor area in roughly a half-million buildings worldwide, of which 

more than 380 million square feet are leased. Building ownership options 

through construction or purchase and lease-purchase are generally less 

costly than using operating leases to meet long-term space needs. However, 

as GAO reported over the last decade, the General Services Administration 

relies heavily on operating leases to meet new long-term space needs 

because it lacks funds to pursue ownership. Operating leases have become 

an attractive option, in part because budget scorekeeping rules allow budget 

authority for some operating leases to be spread out over the term of the 

lease and “look cheaper” in any given year, even though they are generally 

more costly over time. In contrast, budget authority for ownership options is 

recorded fully up front in the budget to appropriately reflect the 

government’s commitment. As a result, this situation has encouraged an 

overreliance on operating leases for satisfying long-term space needs. For 

example, the Patent and Trademark Office’s (PTO) operating lease for longterm space needs was estimated to cost $48 million more than construction 

and $38 million more than lease-purchase. 

Examples of Leased Federal Facilities 

Source (from left to right): GSA and PTO.

From left to right: Department of Transportation Headquarters Building (under construction), 

Washington, D.C. and Main PTO Building, Alexandria, VA.

In January 2003, GAO designated 

federal real property a high-risk 

area and issued an update on this 

area in January 2005. GAO 

identified the government’s 

reliance on costly leased space as 

one of the major reasons for the 

high-risk designation. Other 

reasons included excess and 

deteriorated property, unreliable 

real property data, and the 

challenges associated with 

protecting these assets from 

terrorism. 

This testimony discusses GAO’s 

designation of federal real property 

as a high-risk area and focuses 

specifically on the government’s 

reliance on costly leased space. 

What GAO Recommends

GAO continues to believe that a 

comprehensive and integrated 

transformation strategy is needed 

to address several underlying 

obstacles to real property reform. 

These obstacles include competing 

stakeholder interests, various 

funding and budgetary 

disincentives, and the need for 

improved capital planning among 

agencies. 

Alternatives to costly operating 

leases for long-term space needs 

should be considered because the 

current practice results in 

excessive costs to taxpayers and 

does not reflect a sensible and 

economically rational approach to 

capital asset management 
Page 1 GAO-06-136T 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to testify today on our work related to 

federal real property and, in particular, the government’s reliance on space 

leased from the private sector. As you know, at the start of each new 

Congress since 1999, we have issued a special series of reports entitled the 

Performance and Accountability Series: Major Management Challenges 

and Program Risks. In January 2003, we designated federal real property 

a high-risk area as part of this series, and we issued an update on this area 

in January 2005.1

 We identified the government’s reliance on costly leased 

space as one of the major reasons for the high-risk designation. Other 

reasons included excess and deteriorated property, unreliable real 

property data, and the challenges associated with protecting these assets 

from terrorism. My testimony today will (1) discuss our designation of 

federal real property as a high-risk area and (2) focus specifically on the 

government’s reliance on costly leased space. 

According to available data, the federal government owns and leases about 

3.3 billion square feet of building floor area worldwide in roughly a halfmillion buildings. About 380 million square feet of this space is leased. My 

testimony today will highlight the following points: 

• The conditions that led to our January 2003 high-risk designation still 

exist. Many of the assets in the government’s vast and diverse portfolio of 

real property are not effectively aligned with, or responsive to, agencies’ 

changing missions. Furthermore, many assets are in an alarming state of 

deterioration; agencies have estimated restoration and repair needs to be 

in the tens of billions of dollars. Compounding these problems are the lack 

of reliable governmentwide data for strategic asset management and the 

cost and challenge of protecting these assets against terrorism. 

Additionally, a heavy reliance on costly leasing, instead of ownership, to 

meet new space needs, is a pervasive and ongoing problem. The 

administration has acknowledged the problems in this area; in February 

2004, the President added the Federal Asset Management Initiative to the 

President’s Management Agenda and signed an executive order on real 

property management reform.2

 These and other efforts are positive steps, 

but it is too early to judge whether the administration’s focus on this area 

 1

GAO, High-Risk Series: Federal Real Property, GAO-03-122 (Washington, D.C.; Jan. 2003); 

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.; Jan. 2005). 

2

Presidential Executive Order 13327, Feb. 4, 2004. 
Page 2 GAO-06-136T 

will have a lasting impact. In addition, we continue to believe that a 

comprehensive and integrated transformation strategy is needed to 

address the problems and several underlying obstacles to reform, which 

include competing stakeholder interests, various funding and budgetary 

disincentives, and the need for improved capital planning among agencies. 

• As a general rule, building ownership options through construction or 

purchase are the least expensive ways to meet agencies’ long-term and 

recurring requirements for space. Lease-purchases—under which 

payments are spread over time and ownership of the assets is eventually 

transferred to the government—are generally less costly than using 

ordinary operating leases to meet long-term space needs but are more 

costly than other ownership options. However, over the last decade, we 

have reported that the General Services Administration (GSA)—as the 

central leasing agent for most agencies—relies heavily on operating leases 

to meet new long-term needs because it lacks funds to pursue ownership. 

Operating leases have become an attractive option in part because they 

generally “look cheaper” in any given year, even though they are generally 

more costly over time. Budget scorekeeping rules allow budget authority 

for some of these costly operating leases to be spread out over the term of 

the lease. In contrast, budget authority for ownership options, according 

to the scorekeeping rules, are recorded fully up-front in the budget to 

appropriately reflect the government’s commitment. As a result, this 

situation has encouraged an overreliance on operating leases for satisfying 

long-term space needs. Resolving this problem has been difficult; however, 

change is needed because the current practice of relying on costly leasing 

to meet long-term space needs results in excessive costs to taxpayers and 

does not reflect a sensible or economically rational approach to capital 

asset management. 

Over 30 federal agencies control hundreds of thousands of real property 

assets—including both facilities and land—in the United States and 

abroad. These assets are worth hundreds of billions of dollars. 

Unfortunately, much of this vast and valuable asset portfolio presents 

significant management challenges and reflects an infrastructure based on 

the business model and technological environment of the 1950s. Many 

assets are no longer effectively aligned with, or responsive to, agencies’ 

changing missions and are therefore no longer needed. Our high-risk 

reports highlighted problems with excess and underutilized property at 

several agencies, including the Departments of Defense, Veterans Affairs 

(VA), Energy, and State; the U.S. Postal Service (USPS); and GSA. 

Furthermore, many assets are in an alarming state of deterioration; 

agencies have estimated restoration, repair, and maintenance needs to be 

Federal Real 

Property: A High-Risk 

Area 
Page 3 GAO-06-136T 

in the tens of billions of dollars. For example, we reported in 2003 that the 

Department of the Interior had a maintenance backlog of between $8 

billion and $11 billion. Compounding these problems are the lack of 

reliable governmentwide data for strategic asset management, a heavy 

reliance on costly leasing instead of ownership to meet new space needs, 

and the cost and challenge of protecting these assets against potential 

terrorism. The problems facing the federal portfolio have been 

exacerbated by a number of factors, including competing stakeholder 

interests in real property decisions, various legal and budget-related 

disincentives to businesslike outcomes, and the need for better capital 

planning among real property-holding agencies. 

More specifically: 

• Competing Stakeholder Interests - In addition to Congress, the Office of 

Management and Budget (OMB), and the real property-holding agencies 

themselves, several other stakeholders have an interest in how the federal 

government carries out its real property acquisition, management, and 

disposal practices. These include foreign and local governments; business 

interests in the communities where the assets are located; private sector 

construction and leasing firms; historic preservation organizations; various 

advocacy groups; and the public in general, which often views the facilities 

as the physical face of the federal government in local communities. As a 

result of competing stakeholder interests, decisions about real property 

often do not reflect the most cost-effective or efficient alternative that is in 

the interests of the agency or the government as a whole, but instead 

reflect other priorities. 

• Legal and Budgetary Disincentives -The complex legal and budgetary 

environment in which real property managers operate has a significant 

impact on real property decisionmaking and often does not lead to 

economically rational and businesslike outcomes. For example, we have 

reported that public-private partnerships might be a viable option for 

redeveloping obsolete federal property when they provide the best 

economic value for the government, compared with other options, such as 

federal financing through appropriations or sale of the property. Resource 

limitations, in general, often prevent agencies from addressing real 

property needs from a strategic portfolio perspective. When available 

funds for capital investment are limited, Congress must weigh the need for 

new, modern facilities with the need for renovation, maintenance, and 

disposal of existing facilities, the latter of which often gets deferred. In 

disposing of excess property, agencies also need to consider a range of 

laws intended to address other objectives—such as historic preservation 
Page 4 GAO-06-136T 

and environmental remediation. 

• Need for Improved Capital Planning - Over the years, we have reported 

that prudent capital planning can help agencies to make the most of 

limited resources, and failure to make timely and effective capital 

acquisitions can result in increased long-term costs. GAO, Congress, and 

OMB have identified the need to improve federal decisionmaking 

regarding capital investment. Our Executive Guide,3

 OMB’s Capital 

Programming Guide, and OMB’s revisions to Circular A-114

 have attempted 

to provide guidance to agencies for making capital investment decisions. 

However, agencies are not required to use the guidance. Furthermore, 

agencies have not always developed overall goals and strategies for 

implementing capital investment decisions, nor has the federal 

government generally planned or budgeted for capital assets over the long 

term. 

Since our designation of this area as high risk in January 2003, some 

important efforts to address these problems have been initiated by the 

administration and executive agencies, including the addition of the 

Federal Asset Management Initiative to the President’s Management 

Agenda and an executive order on real property management reform 

which led to the development of guiding principles for real property asset 

management. The executive order requires the establishment of senior real 

property officers at most executive branch departments and agencies that, 

among other things, prioritize actions needed to improve the operational 

and financial management of the agency’s real property inventory. The 

order also established a Federal Real Property Council, with 

representation from major real property-holding agencies. The council has 

developed guiding principles for real property asset management and is 

also developing performance measures, a real property inventory 

database, and an agency asset management planning process. The 

executive order is clearly a positive step. However, it has not been fully 

implemented, and further actions are necessary to address the underlying 

problems and related obstacles to reform. Despite these efforts and the 

sincerity with which the federal real property community has embraced 

the need for reform, the problems have persisted. We continue to believe 

that a comprehensive and integrated transformation strategy for real 

 3

GAO, Executive Guide: Leading Practices in Capital Decision-making, GAO/AIMD-99-32

(Washington, D.C.: Dec. 1998). 

4

OMB, Circular No. A-11, Appendix B. 
Page 5 GAO-06-136T 

property is needed to build on the executive order. More specifically, the 

additional step of developing a transformation strategy would provide 

decisionmakers with a road map of actions for addressing the underlying 

obstacles, assessing progress governmentwide, and enhancing 

accountability for related actions. As an example, OMB and other 

stakeholders could look to the USPS Transformation Plan and related 

progress reports, which GAO has supported for guiding postal reform.5

If actions resulting from the transformation strategy and other efforts to 

address the long-standing problems are effectively implemented, agencies 

will be better able to recover asset values, reduce operating costs, improve 

facility conditions, enhance security and safety, recruit and retain 

employees, and achieve mission effectiveness. Realigning the 

government’s real property, taking into consideration the future federal 

role, likely organizational structure, geographic presence, and workplace 

needs, will be critical to improving the government’s performance and 

ensuring accountability within expected resource limits. 

One of the major reasons for our high-risk designation was the pervasive 

problem of over reliance on costly leased space to meet new space needs. 

As a general rule, building ownership options through construction or 

purchase are the least expensive ways to meet agencies’ long-term 

requirements. Lease-purchases—in which payments are spread out over 

time and ownership of the asset is eventually transferred to the 

government— are generally more expensive than purchase or 

construction but are generally less costly than using ordinary operating 

leases to meet long-term space needs. However, over the last decade we 

have reported that GSA—as the central leasing agent for most agencies—

relies heavily on operating leases to meet new long-term needs because it 

lacks funds to pursue ownership. In 1995, we reported that GSA had 

entered into 55 operating leases for long-term needs that were estimated 

to cost $700 million more than construction.6

 In 1999, we reported that for 

9 major operating lease acquisitions GSA had proposed, construction 

would have been the least-cost option in 8 cases and would have saved an 

estimated $126 million. Lease-purchase would have saved an estimated 

 5

U.S. Postal Service, Transformation Plan (Washington, D.C.: Apr. 2002); U.S. Postal 

Service, Progress Report (Washington, D.C.: Nov. 2004). 

6

GAO, General Services Administration: Opportunities for Cost Savings in the Public 

Buildings Area, GAO/T-GGD-95-149 (Washington, D.C.: July 13, 1995). 

Reliance on Costly 

Leasing 
Page 6 GAO-06-136T 

$107 million compared with operating leases but would have cost $19 

million more than construction.7

A prime example of this problem was the Patent and Trademark Office’s 

(PTO) long-term requirements in northern Virginia, where the cost of 

meeting this need with an operating lease was estimated to be $48 million 

more than construction and $38 million more than lease-purchase. In 

August 2001, we also reported that GSA reduced the term of a proposed 

20-year lease for the Department of Transportation (DOT) headquarters 

building to 15 years so that it could meet the definition of an operating 

lease. GSA’s fiscal year 1999 prospectus for constructing a new facility for 

this need showed the cost of construction was estimated to be $190 

million less than an operating lease. The Securities and Exchange 

Commission used a similar approach by reducing the terms of a proposed 

20-year lease for its facility to 14 years.8

 Although most of our work in this 

area has focused on GSA-controlled leases, other real property-holding 

agencies with leasing authority—such as the Departments of State and 

Veterans Affairs—also face the same obstacles to ownership. USPS 

officials have told us that they do not believe that USPS is overly reliant on 

operating leases. Figure 1 shows the main PTO building and construction 

of the DOT headquarters building, both of which are being leased by the 

government. 

 7

GAO, General Services Administration: Comparison of Space Acquisition 

Alternatives—Leasing to Lease-Purchase and Leasing to Construction, GAO/GGD-99-49R

(Washington, D.C.: Mar. 12, 1999). 

8

GAO, Budget Scoring: Budget Scoring Affects Some Lease Terms but Full Extent Is 

Uncertain, GAO-01-929 (Washington, D.C.: Aug. 31, 2001). 
Page 7 GAO-06-136T 

Figure 1: The DOT Headquarters Building and Main PTO Building, which are Being Leased By the Federal Government. 

Operating leases—in which periodic lease payments are made over the 

specified length of the lease—have become an attractive option in part 

because they generally “look cheaper” in any given year. Pursuant to the 

scoring rules adopted as a result of the Budget Enforcement Act of 1990, 

the budget authority to meet the government’s real property needs is to be 

scored—meaning recorded in the budget—in an amount equal to the 

government’s total legal commitment. For example, for lease-purchase 

arrangements, the net present value of the government’s legal obligations 

over the life of the contract is to be scored in the budget in the first year. 

For construction or purchase, the budget authority for the full 

construction costs or purchase price is to be scored in the first year. 

However, for many of the government’s operating leases—including GSA 

leases, which, according to GSA, account for over 70 percent of the 

government’s leasing expenditures and are self-insured in the event of 

cancellation—only the budget authority to cover the government’s 

commitment for an annual lease payment is required to be scored in the 

budget.9

 Given this, while operating leases are generally more costly over 

 9

According to the scoring rules (OMB Circular No. A-11, app. B), in cases where the 

operating lease does not have a cancellation clause or is not paid for by funds that are selfinsuring, budget authority to cover the total costs expected over the life of the lease is to be 

scored in the first year of the lease. 

Source (from left to right): GSA and PTO.
Page 8 GAO-06-136T 

time, compared with other options, they add much less to a single year’s 

appropriation total than these other arrangements, making operating 

leases a more attractive option from the agency’s budget perspective. This 

is particularly evident when funds for ownership are not available in an 

era of constrained budgetary resources. While the requirement for “upfront funding” provides for congressional control over the full costs to 

which the government is committing itself, the budget scorekeeping rules 

for self-insuring funds like GSA’s Federal Buildings Fund allow costly 

operating leases to “look cheaper” in the short term and have encouraged 

an overreliance on them for satisfying long-term space needs. 

Decisionmakers have struggled with this matter since the scoring rules 

were established and the tendency for agencies with self-insuring funds to 

choose operating leases instead of ownership became apparent. We have 

suggested the alternative of scoring the budget authority for all operating 

leases up front on the basis of the underlying time requirement for the 

space so that all options are treated equally.10 Although this could be 

viable, there would be implementation challenges if this were pursued, 

including the need to evaluate the validity of agencies’ stated space 

requirements. Finding a solution for this problem has been difficult; 

however, change is needed because the current practice of relying on 

costly leasing to meet long-term space needs results in excessive costs to 

taxpayers and does not reflect a sensible or economically rational 

approach to capital asset management. To address this and other complex 

problems related to federal real property, we continue to believe that a 

comprehensive and integrated transformation strategy is needed. 

We conducted our work for this testimony in September 2005 in 

accordance with generally accepted government auditing standards. The 

work is based on our past reports on federal real property and, 

specifically, leasing issues. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 

respond to any questions you or other Members of the Subcommittee may 

have at this time. 

 10GAO, Supporting Congressional Oversight: Budgetary Implications of Selected GAO 

Work for Fiscal Year 2003, GAO-02-576 (Washington, D.C.: Apr. 26, 2002). 

Scope and 

Methodology 
Page 9 GAO-06-136T 

For further information on this testimony, please contact Mark L. 

Goldstein on (202) 512-2834 or at GoldsteinM@gao.gov. Key contributions 

to this testimony were made by Christine Bonham, Susan Michal-Smith, 

David Sausville, and Kelly Slade. 

Contacts and 

Acknowledgments 

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