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48–328 PDF 2009

THE SERIOUS COMMERCIAL REAL 

ESTATE CREDIT CRUNCH 

AND THE GENERAL SERVICES 

ADMINISTRATION: 

LEASING AND BUILDING DURING 

AN ECONOMIC CRISIS 

(111–16) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND 

EMERGENCY MANAGEMENT 

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 20, 2009 

Printed for the use of the 

Committee on Transportation and Infrastructure 

( 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE 

JAMES L. OBERSTAR, Minnesota, Chairman 

NICK J. RAHALL, II, West Virginia, Vice 

Chair 

PETER A. DEFAZIO, Oregon 

JERRY F. COSTELLO, Illinois 

ELEANOR HOLMES NORTON, District of 

Columbia 

JERROLD NADLER, New York 

CORRINE BROWN, Florida 

BOB FILNER, California 

EDDIE BERNICE JOHNSON, Texas 

GENE TAYLOR, Mississippi 

ELIJAH E. CUMMINGS, Maryland 

ELLEN O. TAUSCHER, California 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

BRIAN BAIRD, Washington 

RICK LARSEN, Washington 

MICHAEL E. CAPUANO, Massachusetts 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

RUSS CARNAHAN, Missouri 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

MAZIE K. HIRONO, Hawaii 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

MICHAEL A. ARCURI, New York 

HARRY E. MITCHELL, Arizona 

CHRISTOPHER P. CARNEY, Pennsylvania 

JOHN J. HALL, New York 

STEVE KAGEN, Wisconsin 

STEVE COHEN, Tennessee 

LAURA A. RICHARDSON, California 

ALBIO SIRES, New Jersey 

DONNA F. EDWARDS, Maryland 

SOLOMON P. ORTIZ, Texas 

PHIL HARE, Illinois 

JOHN A. BOCCIERI, Ohio 

MARK H. SCHAUER, Michigan 

BETSY MARKEY, Colorado 

PARKER GRIFFITH, Alabama 

MICHAEL E. MCMAHON, New York 

THOMAS S. P. PERRIELLO, Virginia 

DINA TITUS, Nevada 

HARRY TEAGUE, New Mexico 

JOHN L. MICA, Florida 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

VERNON J. EHLERS, Michigan 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

CONNIE MACK, Florida 

LYNN A WESTMORELAND, Georgia 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

ROBERT E. LATTA, Ohio 

BRETT GUTHRIE, Kentucky 

ANH ‘‘JOSEPH’’ CAO, Louisiana 

AARON SCHOCK, Illinois 

PETE OLSON, Texas 

(II) 

SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY

MANAGEMENT

ELEANOR HOLMES NORTON, District of Columbia, Chair 

BETSY MARKEY, Colorado 

MICHAEL H. MICHAUD, Maine 

HEATH SHULER, North Carolina 

PARKER GRIFFITH, Alabama 

RUSS CARNAHAN, Missouri 

TIMOTHY J. WALZ, Minnesota 

MICHAEL A. ARCURI, New York 

CHRISTOPHER P. CARNEY, Pennsylvania, 

Vice Chair 

DONNA F. EDWARDS, Maryland 

THOMAS S. P. PERRIELLO, Virginia 

JAMES L. OBERSTAR, Minnesota 

(Ex Officio) 

MARIO DIAZ-BALART, Florida 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

MARY FALLIN, Oklahoma 

BRETT GUTHRIE, Kentucky 

ANH ‘‘JOSEPH’’ CAO, Louisiana 

PETE OLSON, Texas 

(III) 

(V) 

CONTENTS Page 

Summary of Subject Matter .................................................................................... vi 

TESTIMONY 

Morris, Samuel, Assistant Commissioner, Office of Real Estate Acquisition, 

Public Building Service, General Services Administration .............................. 5 

Purtell, Richard, Chair and Chief Elected Officer, BOMA International ........... 26 

Schear, Mitchell, D.C. Downtown Business Improvement District ..................... 26 

Schwanke, Dean, Senior Vice President, The Urban Land Institute .................. 26 

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS 

Carnahan, Hon. Russ, of Missouri ......................................................................... 40 

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Morris, Samuel ......................................................................................................... 41 

Purtell, Richard ....................................................................................................... 63 

Schear, Mitchell ....................................................................................................... 71 

Schwanke, Dean ....................................................................................................... 80 

SUBMISSIONS FOR THE RECORD 

Morris, Samuel, Assistant Commissioner, Office of Real Estate Acquisition, 

Public Building Service, General Services Administration, responses to 

questions from the Subcommittee ....................................................................... 44 

Purtell, Richard, Chair and Chief Elected Officer, BOMA International, responses to questions from the Subcommittee .................................................... 69 

Schear, Mitchell, D.C. Downtown Business Improvement District, responses 

to questions from the Subcommittee .................................................................. 77 

Schwanke, Dean, Senior Vice President, The Urban Land Institute, responses 

to questions from the Subcommittee .................................................................. 86 

vi 


Insert offset folio 1 here 48328.001
vii 


Insert offset folio 2 here 48328.002
(1) 

THE SERIOUS COMMERCIAL REAL ESTATE 

CREDIT CRUNCH AND THE GENERAL SERVICES ADMINISTRATION: LEASING AND 

BUILDING DURING AN ECONOMIC CRISIS 

Friday, March 20, 2009 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, 

SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC

BUILDINGS, AND EMERGENCY MANAGEMENT, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:05 a.m., in Room 

2167, Rayburn House Office Building, Hon. Eleanor Holmes Norton 

[Chair of the Subcommittee] presiding. 

Ms. NORTON. This hearing will come to order. The Ranking Member is on his way and has suggested we proceed. We will certainly 

ask him if he has an opening statement when he comes. 

Before I begin, I do want to indicate that the staff director, whom 

many of you know, is not here today because her mother passed 

last night, and so she is on her way, on a plane, to a funeral. I 

know all of us would want to offer our deepest condolences on the 

loss of a mother from our staff director, Susan Brita. 

I welcome today’s witnesses to the Subcommittee hearing on the 

tightening credit market for leasing and construction. 

As we are all aware, the current credit market originated in the 

subprime mortgage crisis and combined with exotic investment instruments and nonexistent or poor regulation, that then conflated 

with a bevy of other factors to spread like a virus and bring down 

major aspects of our entire economic system. What resulted was an 

all-consuming global economic crisis that has trapped even those, 

like the commercial leasing and construction sectors, which had 

nothing to do with precipitating the crisis. 

Today, we will build on the hearing the Subcommittee held in 

July of 2008 that examined the economic factors affecting Federal 

leasing and construction in the Federal marketplace. 

We examine the commercial-sector market because the General 

Services Administration is perhaps the largest customer for office 

space in the real estate market in the United States. Moreover, the 

agency now has $1 billion to construct the first of three buildings 

in the Department of Homeland Security complex, the largest development in GSA’s history. 

GSA’s ties to the commercial market are clear from its role in 

leasing alone. GSA leases slightly more space than it owns, approximately 176 million square feet of leased space, housing over 

2 

700,000 Federal workers, compared with 175.5 million square feet 

of owned space—almost as much, but rapidly tilting toward leased 

space. The owned space provides office space for 640,000 Federal 

workers. 

The Federal inventory is vast and ranges from 2,500-square-foot 

border crossing stations to 1-million-square-foot courthouse complexes in major metropolitan areas. GSA has a large stake in maintaining its strong real estate market position, particularly in the 

leasing market in light of the continuing shift to Federal-agencyleased space. 

At this hearing, we seek to learn how the GSA building owners 

and developers, who are accustomed to unimpeded access to credit, 

position themselves in today’s puzzling market. Even though the 

competitive system for leasing and construction awards in the Federal sector guarantees that only the most creditworthy need compete, we are concerned that the recent clampdown on credit has already affected even the most creditworthy competitors. Inevitably, 

GSA will be affected. 

Last year, as the subprime mortgage crisis worsened, I began 

talking with experienced developers and building owners and found 

that their strong credit standing with lenders and the lengthy time 

frames and lead time for construction or leasing had left them pretty much untouched. That was at the beginning. However, their reports to us had changed completely by last summer, when we had 

our first hearing on credit in the commercial sector. 

Today, more than a year after the housing crisis became fullblown, even the largest banks, whose customers significantly include the commercial real estate sector, are showing record profit 

losses. Uncertainty and mounting losses have caused continuous 

shrinkage in all parts of the credit markets. 

Federal leasing and construction contracts might have been said 

to be worth their weight in gold at one point, and perhaps they still 

are. But if credit becomes too difficult or too costly, the private sector will pass the increased cost on to the Federal Government, raising costs to taxpayers. 

GSA’s reliance on the commercial office space market and on the 

commercial construction sector to house Federal agencies ties the 

agency directly to commercial market conditions. As the Federal 

Government’s major construction and leasing agency, GSA cannot 

escape the reality that it is in the same boat with the private real 

estate and construction sectors. 

The agency, therefore, must begin to use its prime position in the 

commercial marketplace to better leverage its buying power and to 

capture its outsized potential for reduced costs to taxpayers. In today’s atmosphere of soaring budget deficits and rising costs for all 

concerned, GSA must work much more collaboratively than in the 

past with the private sector to reduce the cost of acquiring commercial office space. 

Considering the present economic crisis, it is also possible that, 

by working with our private-sector partners to achieve the vision 

and know-how necessary to reduce costs across the board, this Subcommittee, GSA, and its corporate-sector partners could help stimulate the local and national economies while addressing the needs 

of the Federal Government itself. 

3 

Today, we are interested to hear from GSA and financial and 

economic experts on the commercial markets and office development. We thank all of them for their testimony to be received 

today. 

And we are very pleased—and we knew he would be here—that 

the Ranking Member has arrived. And I would like to ask if he has 

any opening remarks at this time. 

Mr. DIAZ-BALART. Thank you, Madam Chairman. 

Before anything else, I also want to add to your words of condolences to Susan Brita, who, obviously, is the very dedicated majority staff director of the Subcommittee, and she suffered a great loss 

in her family. And I know that all of our prayers are with her and 

her family. 

So we are thinking about you and your family, Susan. 

Thank you again, Madam Chairwoman. 

The General Services Administration is the single largest building manager in the country. And GSA owns and leases over 340 

million square feet of space, which comprises nearly 9,000 buildings in more than 2,000 communities nationwide. So it is across 

the entire country, obviously, with a heavy involvement here in 

D.C. In addition to office buildings, though, GSA properties include 

border stations, courthouses, research facilities, warehouses, and, 

obviously, post offices. 

Now, because GSA leases more than half of its office space from 

private real estate owners, it is obviously reasonable to expect that 

the credit crunch in the real estate industry, as you were saying, 

Madam Chairwoman, and higher financing costs will impact the 

availability of space and the lease prices, frankly, for the Federal 

Government. So even small changes could significantly impact the 

Federal budget, given the huge amount of space that the Federal 

Government leases. 

So, as was mentioned before in several of our earliest hearings, 

Madam Chairwoman, that you had, part of the problem is the Federal Government’s reliance on increased leasing and to its longterm space office needs. And it becomes a revolving circle, that 

problem. 

Despite consistent reports by the GAO and others, which indicate 

that increased reliance on cost of leasing for long-term space obviously is wasteful, the problem persists. We need to continue to use 

scoring models, unfortunately, that promote leasing over construction or ownership, even though we know—and that is something 

that you have been battling for a long time. And I hope that this 

year we will be able to make some headway. But I know that you 

have been, frankly, a great leader in that area. 

So, you know, the very rules that are intended to guide the administration and Congress to make fiscally sound decisions result, 

frankly, in this leasing case, which means more spending of taxpayers’ dollars in a less efficient manner. So, again, I thank you, 

Madam Chairwoman, for your leadership there in trying to change 

that. 

Now, last month, the Recovery Act was signed into law. It included $5.5 billion for the Federal Building Fund. And, as we 

know, that Recovery Act provided, frankly, little to no oversight 

provisions. Instead, it just requires reporting to the Congress and 

4 

to the public how the money was spent after it was obligated. And 

we spoke about that at length in this Subcommittee. 

In response to this, I introduced a House resolution that simply 

provides some real basic guidance and guidelines with respect to 

these funds, so that we don’t relive one more time the horrors that 

we are now experiencing with the TARP program. That resolution 

would make it clear that GSA should not proceed with projects that 

this Committee rejected, and that it should include this Committee 

on reporting requirements contained in the Recovery Act. 

We know that the potential for waste is huge when it comes to 

real estate—frankly, when it comes to anything, but obviously also 

with real estate. Federal real property has been on the GAO’s highrisk list since 2003, obviously illustrating that problem. And, according to the GAO, longstanding problems in the Federal and real 

property area have multi-billion-dollar cost implications to the Federal Government, i.e., in other words, to the taxpayers. 

So the current credit crunch serves to emphasize the problems 

with the overreliance on costly leasing. With over 50 percent of 

Federal space in leased facilities, which is a problem, problems in 

the lending industry can have a tremendous effect on Federal property management. 

Now, in this economy, GSA should be investigating real opportunities—real, serious opportunities—that could be good investments 

for the taxpayer, that provide needed space and have, also, a real 

stimulus effect, as well, during the process. 

One option, for example, is using acquisition or lease purchase as 

a way of increasing ownership in stabilized development projects 

that, frankly, are either stalling or will be stalling due to the economy. There are many development projects that are either stalled 

or at risk of stalling. This potentially creates an opportunity for the 

Federal Government to acquire needed property at real significant 

savings to the taxpayer and also to help reduce our reliance of costly leasing and the uncertainty of the leasing market. At the same 

time, such investments will help to stabilize economic development 

projects that local communities and economies are relying upon to 

help the neighborhoods and to create sustainable jobs. 

The meeting space that the Federal Government needs must be 

done in a way that gives the taxpayer the best return on the investment. And, obviously, lease purchasing or purchasing outright 

would be a much better deal. 

So the current credit crunch can provide a big impact on GSA’s 

leasing and building programs. I believe, however, that if managed 

right, if managed correctly, there is also an opportunity to make 

smarter decisions as to how the funds are used that, again, would 

bring long-term economic savings to the taxpayers. So I look forward to hearing from the witnesses on these and other issues. 

And I want to thank you, Madam Chairman, again. And I end 

my statement, once again, thinking of Susan. 

Ms. NORTON. Thank you very much, Mr. Diaz-Balart. 

We will ask our first witness to proceed, Mr. Samuel Morris, assistant commissioner, Office of Real Estate Acquisition at the General Services Administration, Public Building Service. 

5 

TESTIMONY OF SAMUEL MORRIS, ASSISTANT COMMISSIONER, 

OFFICE OF REAL ESTATE ACQUISITION, PUBLIC BUILDING 

SERVICE, GENERAL SERVICES ADMINISTRATION 

Mr. MORRIS. Good morning, Madam Chairman, Ranking Member 

Diaz-Balart, and Members of the Subcommittee. My name is Chip 

Morris, and I am the assistant commissioner for the Office of Real 

Estate Acquisition in the Public Building Service at GSA. Thank 

you for inviting me here today to discuss the impact of the serious 

commercial real estate credit crunch and GSA’s leasing and building during an economic crisis. 

My colleague, Bart Bush, the regional commissioner for the Public Building Service in the national capital region, is here behind 

me today to answer any questions that you may have about NCR’s 

recent real estate acquisition reorganization. We discussed that, 

Commissioner Winstead did, I believe, some at the hearings last 

summer, our plans for that. 

Since our new construction, modernization, and repair and alteration programs are funded through appropriations, they are generally not directly affected by any decreases in the availability of 

credit. Because GSA pays contractors and subcontractors for these 

projects periodically for work completed, they typically do not need 

to obtain third-party financing to complete these projects. 

The credit crunch what has had mixed impacts on our leasing 

program. Financing for government leasing deals where the leases 

are backed by the full faith and credit of the United States has always been lower than that for more risky ventures. Therefore, 

when credit becomes more expensive or difficult to obtain, lessors 

of government leased buildings have typically obtained financing 

more easily and on less costly terms than other borrowers. 

However, GSA is noticing an adverse impact of the credit crunch 

on its leasing program in certain instances. We monitor the impact 

of the credit availability on lease projects on an ongoing basis. Most 

recently, in February of this year, we asked our regional offices to 

identify leasing projects where lessors were experiencing difficulty 

in obtaining financing. The regional responses identified 21 lease 

projects that they believe were impacted by a lessor’s inability to 

secure funding that resulted in a delayed delivery of space or a 

need to recompete the procurement. 

The credit crunch is impacting some projects and some agencies 

to a greater degree than others. However, we have seen some impact on small, short-term leases as well as large lease construction 

projects. Several lessors have experienced difficulty obtaining financing for the build-out of tenant improvements. Others have had 

to withdraw from procurements due to their inability to secure financing. In some cases, lease procurements have been terminated 

because of the lessor’s inability to close on their planned financing. 

These delays can add cost to the overall project and impact our client agencies’ ability to fulfill their mission. 

On larger, more complex projects, we do have available the use 

of our credit tenant lease in order to attract more favorable financing. We are also working on our solicitations for offers to obtain 

more disclosures in our bids regarding the financing terms both 

from the lenders and the developers in order to protect the governVerDate Aug 31 2005 14:06 Jul 14, 2009 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 P:\DOCS\48328 LINDS
6 

ment and assure ourselves of the financial viability of the prospective offers that we receive. 

That concludes my testimony. I would be happy to try to answer 

any questions that you may have. 

Ms. NORTON. Thank you very much, Mr. Morris. 

Forgive me, I neglected to ask Members, and I would like to ask 

them now before I begin my opening statements. The fact is that 

we are talking about a problem that obviously affects the Nation’s 

capital and the national capital region, but we are having this 

hearing because of the nationwide effect of the credit crunch. So before I begin my questions, may I ask if any Members of the Committee have any opening remarks they would like to make? 

All right. And thank you, with my apologies. 

Mr. Morris, you mentioned what we suspected, and we wonder 

if it is going to spread, on page 2. In fact, you have given us figures, 21 lease projects that were impacted by the lessor’s inability 

to secure funding. That is the regional response. 

Mr. MORRIS. Yes, ma’am. 

Ms. NORTON. What about nationwide? Do we see that in other 

places, as well? 

Mr. MORRIS. Those responses came from across the country, not 

just in the national—— 

Ms. NORTON. Oh, these are regions across the country? 

Mr. MORRIS. Yes, ma’am, not just the national capital region. 

Ms. NORTON. Could you identify those regions for us? 

Mr. MORRIS. They were all regions. There were regions—let’s see, 

we have region 1 headquartered in Boston; region 2 and 3 in New 

York and Philadelphia; region 4 headquartered in Atlanta; region 

5 headquartered in Chicago; and region 9 out of San Francisco, 

California. 

Ms. NORTON. So we do see a nationwide effect? 

Mr. MORRIS. Yes, ma’am. 

Ms. NORTON. Then you say ′′some impact on small, short-term 

leases as well as large lease construction projects.′′ Now, that really 

would interest us since we are about to embark on some construction projects. 

But you say, in financing—that several lessors have experienced 

difficulty in financing for tenant improvements. And I am wondering if this credit tenant lease idea that you spoke of is your— 

would you explain that and how that might be helpful here to 

GSA? 

Because the tenant improvements would, of course, be very important to the agencies remaining in the building renewing their 

leases and the like. 

Mr. MORRIS. I would be happy to try and answer your question. 

Actually, the difficulty that we have seen in some of the developers obtaining financing for the financing of the tenant improvements have been in smaller, short-term leases dealing with the acquisitions we have been making on behalf of the Census Bureau in 

connection with the decennial census that is going on. 

Acquiring those spaces has been difficult anyway, because they 

are short-term leases, typically less than 2 years. So, in this kind 

of economic times, people are looking for us to go longer than a couple of years. 

7 

Ms. NORTON. But, Mr. Morris, aren’t they having trouble finding 

anybody who wants to lease? Why don’t we leverage the misery— 

forgive me—of the private sector here, who would seem to want 

anything they could get at this point with somebody who is able 

to pay? 

Mr. MORRIS. Well, and that is a very good point. We have been 

pretty successful in obtaining the lease space that the Census 

needs. Out of those 21 projects that we got feedback on, eight of 

them had to do with Census Bureau leases that we are acquiring 

now that we are trying to put in place by the end of August of this 

year. 

We haven’t suffered too much as a result of that because the 

Census Bureau has been able to step up. Some of the developers 

had trouble getting financing to handle those tenant improvements, 

and the Census Bureau has stepped up and funded the cost of 

those improvements upfront. So they have taken that issue away 

from those developers who were trying to build out that space. 

So we have been able to solve that problem so far. But there 

were a couple of instances where, in fact, the developer had—I 

know, in one case, had trouble actually closing on his loan after the 

award and was not able to actually pay his contractor and his subs 

on a timely basis. That was eventually taken care of, and we are 

back on track. 

But we are having—because of the critical nature of the timing 

on delivering those Census offices in order for them to get their 

mission started later this year, we are really following that very 

closely. We have seen some impact, but so far we have been able 

to handle it. 

But we have also seen it—and this is where your question about 

the credit tenant lease comes into play—we have also seen it on 

several large construction projects. We use our credit tenant lease 

on larger, more complex deals. Think of the Department of Transportation headquarters space in southeast Washington. We used a 

credit tenant lease in that particular transaction. 

The GSA lease is, if you think of it in commercial retail terms, 

we are tenant-oriented in the requirements, the contractual terms. 

It is more heavily weighted on what the government needs for its 

space, much like an anchor or a big-box tenant would be in a shopping center or a mall, where the developer or the owner of that 

mall is trying to win that anchor tenant to solidify his development 

for a shopping center. So the government has very strong tenant 

requirements in its contracts in our regular forms, if you will. 

When we are dealing with large, complex transactions, we have 

been willing, when the circumstances are right, to compromise 

some of our requirements in order to facilitate better financial 

terms. 

For instance, once a facility has been developed, built to our 

specs, and accepted by the government as meeting our requirements, and we are entering into occupancy and we are starting to 

pay rent and we have contact administration going on, normally we 

still have very strong rights to either terminate that contract for 

a default by the landlord in failing to meet their obligations or to 

take self-help actions, if you will, and offset our cost against the 

rent payments that we make. 

8 

Well, when you are really looking at large-scale financing for 

those kinds of projects, whether it be bond financing or traditional 

bank financing, we can pay a higher price for that, because the 

lenders, the bond holders want to make sure that we have an income stream over the life of that lease, which will amortize that 

debt. 

So when we have completed the project and accepted the possession of the premises, we will compromise, if you will, our rights to 

terminate that lease and walk away from it, especially with regards to that portion of the rent that goes to amortize the debt that 

is on the project. So that lender can be assured that at least so 

much of the debt that is needed to amortize their debt continues 

to be paid over the life of the lease. 

And we seek recourse for if the landlord defaults on maintenance 

or operation of the facilities, to a reserve account. Instead of paying 

all of our rent directly to the landlord, we may fund a reserve account that is held in escrow on the side. And if the landlord fails 

to live up to its obligations to maintain the premises, then we limit 

our recourse against that type of default to funds in that escrow 

account that can be used to cure that default and bring the maintenance and the operations up to par, up to the requirements of the 

lease. 

So we have found that, in those kinds of cases, it facilitates obtaining financing for those larger deals, and we can usually obtain 

better pricing. 

And we are looking at, instead of just the large headquarter 

leases, that that credit tenant lease approach may help facilitate 

some of our other large-lease construction projects. 

Ms. NORTON. Mr. Morris, I can’t say enough about the need for 

GSA to act like it is in the real estate business. I mean, we so seldom walked away from a lease. So the notion of leveraging this termination ability of the government—and it is in every lease—with 

the kinds of practices you are talking about, that is the kind of 

thinking we need to have to save the government money. That termination doesn’t bring us anything. We have it in there because we 

are the Federal Government. And, in my judgment, it needs to be 

leveraged more often, even in a situation that is not a credit crunch 

like this one. 

I am going to ask a question that is not unrelated to the statement of the Ranking Member, and then I am going to go on to him 

and to others before I come back. 

The Ranking Member did have a bill, and I am in sympathy with 

what he was after. I didn’t think that we could do it in legislation, 

but the Committee intends, in any case, to work on the theory of 

his bill, which is, you know, after-the-fact monitoring won’t do, especially for the stimulus projects that GSA is in the midst of doing. 

A specific number of jobs forecast, that is the whole point of the 

stimulus project. There is a certain number of days. We are going 

to require those days be met—that a similar period be met by GSA. 

The first thing that would aid and abet the theory of the Ranking Member’s concern about before-the-fact rather than after-thefact would be the requirement that the list of projects be published 

on the Web site. As of this moment, that list of projects is not on 

the Web site. How could that be? 

9 

How long has it been since we passed the stimulus bill? Huh? At 

least 3 weeks? GSA was, long before passage, correctly and justifiably, into considering what those projects—those projects are all 

over the country. Where are those projects? Why aren’t they posted? 

Mr. MORRIS. I am going to speculate on that, Madam Chairman. 

I have not actually been a part of the development of the project 

list. And—— 

Ms. NORTON. Is there anybody here from GSA who can come to 

the table and say anything about that to this Committee? 

Mr. MORRIS. I can tell you that I think that the GSA has come 

up with their project list, and it is being vetted by the administration. 

Ms. NORTON. Now, we are aware of that. We are aware of the 

project list. We are aware of it being vetted. Is it your testimony 

that the administration is holding it up? 

Mr. MORRIS. No, ma’am. I am not exactly sure what the status 

of going public with the list is, at this point in time. I would hesitate to speculate on that. We could find out, and be happy to get 

back to you on that. 

Ms. NORTON. The Subcommittee should get—the appropriate 

GSA official should be informed that, by close of business Monday, 

we either want the projects up, know the reason they are not up, 

or know when they will be up, particularly since GSA doesn’t have 

the same requirements that the States and localities have, although it shortly will have, with respect to time and the like. 

I am going to ask the Ranking Member if he has any questions 

on this testimony. 

Mr. DIAZ-BALART. Yes, thank you, Madam Chairwoman. And 

thank you for that statement. I mean, you have been clearly pushing for some of the same things that I have obviously been talking 

about. You have been doing it for longer than I have because you 

have been here, leading on these efforts about accountability. And 

I know that you will do everything you can to try to get accountability. 

Obviously, as you well know, my problem has always been that, 

a lot of times, we just don’t put this in the legislation, and then 

later there is a lot of hoopla as to why things happen. And I think 

the TARP example is the most dramatic but, clearly, not the last 

one. But I wanted to make sure that I mentioned that obviously 

you have been a leader in trying to get accountability. And thank 

you for that. 

You know, we have about, what, $5 billion, as I mentioned before, that you have now because of the stimulus bill. And there is 

a great opportunity, a great opportunity to purchase properties, either those that are already up or those that are coming up, new 

facilities that may be coming up. So it is a great opportunity to acquire buildings. 

And what I would like is first an explanation now as to specifically what are you looking at? I mean, are you looking at those? 

Because this is a lifetime opportunity. And GSA did that a number 

of years ago and with very good results to the taxpayer. So are you 

looking at that? 

10 

And I am going to ask you for a brief statement on that. What 

I would like to do is get together with you, and let’s look at what 

you are looking at doing. Because I think we have an opportunity 

of a lifetime to save a ton of money for the taxpayers, to help some 

of the issues that GSA has because of the scoring problem, and you 

have the money right now, you know, $5 billion, a little bit over 

$5 billion. 

Mr. MORRIS. The concept of an opportunity to purchase, I think, 

from my standpoint, is a good one. The money that is in the stimulus bill, to the best of my knowledge—and, as I said earlier, I am 

not on top of that—but, to the best of my knowledge, the bulk of 

the funds are dedicated to repairs and alterations of existing Federal buildings to improve them, from an environmental standpoint, 

to make them more energy-efficient. 

There is also some money in there for swing space for leasing 

that I am aware of, because we have been strategically trying to 

plan for the needs of that swing space to coincide with when the 

repair and alterations of Federal buildings are come on-line. 

I am, quite honestly, not aware of money that is being devoted 

for those types of opportunity purchases that you are mentioning 

and that is available in the stimulus bill. I am not aware of that. 

Mr. DIAZ-BALART. Well, again, because the language specifically 

says it has authorized GSA to ′′initiate design, construction, repair, 

or alterations and other projects through existing authorities of the 

administrator′′—′′and other projects through existing authorities of 

the administrator.′′ So it does have an open-ended part there. 

And, again, I just think it would be such a shame, particularly 

with all the issues that we have and the fact that we have this 

issue of this vicious cycle of you all not getting the funds because 

we are leasing. So we have a great opportunity; there is the money 

available. 

And I am pretty sure that—I mean, the language, again, says 

that. You are right, what does that mean? But there is clearly a 

caveat there, an out, that says ′′and other projects through existing 

authorities.′′ You clearly have some existing authority to do so, because you have done it in the past, which is why I would like to 

sit down and figure out what you are doing. Because I think—my 

fear is exactly that, that maybe you are not really looking at this. 

We have an opportunity, and, you know, we should not be doing 

business as usual when you have this opportunity. The market is 

where it is at. You have the cash on hand. You have properties 

that are probably either available now or will be available shortly 

because of the circumstances. 

It is a no-brainer. And it is a no-brainer particularly because one 

of the things that we should always be emphasizing as first and 

foremost is to make sure that the taxpayers’ money is well-spent 

and is done efficiently. And I know you agree with that. So this is 

the opportunity, folks. 

So, anyway, with all due respect, what I would like to do is sit 

down and look at that. 

Mr. MORRIS. I would be happy to do that, Congressman. 

Mr. DIAZ-BALART. Thank you, sir. Appreciate that. 

Thank you. 

Ms. NORTON. Thank you, Mr. Diaz-Balart. 

11 

Mr. Perriello? 

Mr. PERRIELLO. Sure, I would just like to follow up on your point 

and the Ranking Member’s point and ask you, would you agree 

with the basic premise that there are long-term cost savings to be 

made if we looked at some of these procurement strategies, if you 

had that flexibility and took it? 

Mr. MORRIS. Yes. 

Mr. PERRIELLO. And can you give a sense of what kind of gains 

we could see, say, over the next 10 fiscal years? 

Mr. MORRIS. You mean quantify that for you? That is hard to do 

right now. 

One of the things about an opportunity purchase is trying to 

marry up the requirements of particular government agencies with 

the location of where those buildings might be. So I am trying to 

find the buildings in different markets, determine—we are actually 

getting a lot of calls. I fielded a call yesterday from a citizen saying, ′′We are looking for opportunity purchases for distressed buildings. Do you know where there are any?′′ And it is like, we are not 

really in privity of contract with landlords and their lenders. So, 

you know, what we hear or what we know about is really secondand thirdhand. 

But when you have an opportunity in a metropolitan area where 

you see buildings that are stalled and their development stalled in 

construction, and we know that we have, for instance, an expiring 

lease load in that community, that we need to transition Federal 

workers in, that is when you can try and marry those things up. 

I don’t think that we have done the kind of research that you 

guys are looking for to try and take advantage of that yet. 

Mr. PERRIELLO. But you would agree, both on the issue of renegotiating or looking at some of these leases and procurements, 

there are cost savings there? 

Mr. MORRIS. Yes. 

Mr. PERRIELLO. And then, on the issues related to implementation of recovery, can you give us a sense of whether you have the 

capacity you need to be implementing right now the various things 

that have come through as part of that? 

Mr. MORRIS. That is a strategic part of our planning effort to 

handle the recovery. I mean, we are looking not only at the work 

plans but what it is going to take to mobilize our workforce and 

our efforts. And I think we feel pretty confident about that. 

Mr. PERRIELLO. All right. I yield back. 

Ms. NORTON. Thank you very much. 

Ms. Edwards, do you have an opening statement or anything you 

would like to say at this point before I—— 

Ms. EDWARDS. No. 

Ms. NORTON. Mr. Morris, we had a hearing on the credit crunch 

last summer when it became clear that it had moved big-time to 

the commercial real estate sector. What has GSA done to evaluate 

the impact of the credit crunch on its portfolio since that hearing? 

Mr. MORRIS. Well, we have continued to monitor the situation. 

As I mentioned before in my testimony, we have gone out to the 

regions to try to find out if they can identify, and they have, 

projects where they have experienced difficulties that they believe 

were attributed to financing. 

12 

In addition to that, we have actually tried to look at our own 

processes and procedures, the form of our solicitations of offers, to 

see what we can do to protect the government in moving forward 

with procurements for lease acquisitions to make sure that we have 

financially viable developers who are bidding on our projects. We 

have continued the work of a lease construction group in my office 

that have drawn on people from across the country to look at how 

we can better structure our solicitation to make them more userfriendly. 

Secondly, we are looking at, as I mentioned earlier, the use of 

our credit tenant lease and more projects, and not just the great 

big headquarter leases but other lease construction projects, like 

the FBI, like—you know, we have a lot of Social Security Administration field offices that are lease construction projects, and they 

are in every congressional district around the country, and making 

sure that we are getting the best deal on those and that we are 

having developers that are able to secure financing, favorable financing. 

Ms. NORTON. Well, let me take up precisely an example like that. 

The Committee has expressed concern about quite a significant 

number of leases we have been asked to authorize for the FBI. 

Now, that means the FBI needs space here and nationwide. It is 

a perfect leveraging opportunity, one would think, of the kind you 

are talking about for Social Security space. 

Are there any plans to exercise purchase options on any of these 

new leases? After all, if the FBI is there, and you do go do all the 

work for build-out and the rest that a very special security agency 

needs, and you have a number of them coming up at the same 

time, isn’t that an example of how you could leverage your position 

in the real estate market? 

Mr. MORRIS. We do have purchase-option language in the leases 

that we are doing, these lease-construct leases that we are doing 

for the FBI. They are not as tight as they probably should be. We 

inserted those, quite frankly, Madam Chairman, at the suggestion 

of the Committee that we ought to be able to have those purchase 

options available to us when, down the road, we have funds available to actually exercise those. 

What we have been doing with the FBI is, for those projects that 

have been approved by the administration and by Congress and are 

under construction, we are monitoring those pretty closely to see if 

they are coming on-line according to plan. 

We have had a couple of instances where we have had financial 

problems with projects under way. We mentioned one at the hearing last summer, where we had an FBI project in Detroit that was 

canceled, in part because of financial difficulties of the developer. 

We had another one in Charlotte, North Carolina, where we had 

to cancel the contract after award because the developer couldn’t 

perform. 

But we have been going back on other projects that have 

been—— 

Ms. NORTON. Mr. Morris, could I ask a question? Are those FBI 

buildings more or less alike in these various locations? 

Mr. MORRIS. The program of requirements are similar, but they 

may vary dramatically in size from one project to another. There 

13 

may be very large ones, several hundred thousand square feet, to 

smaller ones. Even the small ones, though, are large by normal 

standards. They could be 75,000 or 80,000 square feet. 

Ms. NORTON. And do we have different developers over the country, different developers, based on their location, doing the work? 

Mr. MORRIS. Yes. Yes. We have some repeat competitors that 

are, I will call them, chasing those projects. Some of them are bidding on more than one, but—— 

Ms. NORTON. Well, I would hope so. 

Mr. MORRIS. Yes. 

Mr. NORTON. The reason I ask, it just occurs to me that, especially in this market, if you are able to bid on one, you know how 

to do it, you know the requirements—the requirements are rather 

special. To have to go from one end of the country to the other and 

start all over again does not seem to me to be looking at one’s portfolio as to how to leverage a need which looks pretty similar across 

the country and get the best deal for the government and the best 

deal for the developers. 

Mr. MORRIS. Right. 

Ms. NORTON. For example, if one had to do more than one of 

these and really knew how to do them and do them well, conceivably that could cost the government less. 

Mr. MORRIS. That is true. Part of the problem—— 

Ms. NORTON. And one would be able, indeed, to make a deal for 

more than one at one time if one had such a reliable builder to do 

it, given the specialized nature, and the quantity of leases we are 

talking about, or the space we are talking about. 

Mr. MORRIS. Part of the problem that we have had with some of 

the FBI projects is actually just making sure—and that is one of 

the things that we are having to do now—is really take a gut check 

on some of the projects that have been approved, to make sure that 

the terms and the prospectus that Congress has approved are still 

viable numbers. 

Ms. NORTON. In terms of what? 

Mr. MORRIS. In terms of being able to bring those projects in—— 

Ms. NORTON. At the cost? 

Mr. MORRIS. Yes, ma’am. So we are going back to those projects 

now and working with the FBI to do a gut check to see if the requirements and the rent caps and the limitations in those approved 

projects are really viable in this market to go out there. And we 

want to make sure that we feel like we feel comfortable that we 

can bring those in. 

In addition, we are hiring a contractor to go back and look at the 

program requirements and take a look to see where we might be 

able to value-engineer some of their requirements to try to save the 

government money and bring them in within the existing limitations of the prospectus. 

We are also spending some time with the FBI to see if we 

can’t—— 

Ms. NORTON. I would think the costs have gone down. 

Mr. MORRIS. Well, the costs of credit haven’t gone down. The cost 

of materials has leveled off. 

Ms. NORTON. Are these people still trying to get the credit? These 

people are just now trying to get the credit? 

14 

Mr. MORRIS. Well, in some of the projects that we haven’t gone 

forward with yet, yes. They are not out on the street yet. So those 

are the ones that we are looking—— 

Ms. NORTON. How many of these FBI projects are out on the 

street at this time? 

Mr. MORRIS. I need to provide you that information. 

Ms. NORTON. Would you please provide us that information within 30 days? 

Mr. MORRIS. Yes. 

Ms. NORTON. We would like to know—we would like a status report on the state of the FBI projects, in particular, where we are, 

whether it is a procurement stage, at some later stage. 

Mr. MORRIS. We can get that for you, ma’am. 

Ms. NORTON. You mentioned, in some of your remarks in answer 

to a prior question, making the process user-friendly, as well. That 

is going to be particularly important if you want to have anybody 

bidding on these projects. 

Projects have been worth so much that the private sector has absorbed really quite outrageous costs from GSA, larger amounts of 

it from delay, an absolutely frustrating bureaucracy. People can’t 

afford it anymore, particularly with the cost of credit. 

And I would hope that we would use this opportunity to make 

the entire process more user-friendly and save the government 

money, because when you say save—these developers find a way to 

get their money back after you have, in fact, raked them over the 

coals. Those who don’t get the contract, of course, are just left out 

in the cold, and that is a terrible thing to do, too. But it may be 

very much to the disadvantage of the government to leave so many 

out in the cold today, when credit is so hard to come by in the first 

place. 

What comes to mind is the so-called occupancy agreement, where 

there have been times when, the way GSA does the timing and the 

signing of an occupancy agreement, that there have been occasions 

where occupants have been allowed to opt out of an occupancy 

agreement after we are very deep into the process. 

Now, you would think that the occupancy agreement would be 

signed before the procurement. And what possible advantage of it 

is it to the government to allow agencies to act as if they are just 

free agencies, free agents? ′′It is just somebody else’s money. I am 

just going to ask GSA if I can opt out, and GSA almost always 

bends.′′ That is why we are going to reauthorize this statute to give 

the agency stronger authority so that that bending will go. 

But what seems particularly wasteful is allowing agencies to opt 

out of an occupancy agreement. Under what conditions would an 

agency be allowed to opt out of an agreement following a procurement and all that the agency has gone through? 

Mr. MORRIS. Let me explain a little bit about that process for you 

and lead up to answering your question. 

The occupancy agreement, as you understand, is the agreement 

between GSA and its customer agency as to the terms and conditions of their space requirements. 

In a leasing—we have occupancy agreements not only in lease 

scenarios but also for our Federal buildings. In our leasing program, if an agency is moving into leased space, the occupancy 

15 

agreement basically is a pass-through for the terms and conditions 

of that underlying lease. 

When we get ready to start the procurement—— 

Ms. NORTON. A pass-through for the terms and conditions. 

Mr. MORRIS. Basically in terms of the square footage and the 

rent that they are going to be paying, they pay us what we are paying—— 

Ms. NORTON. So they are talking to you now, because you are already on a limb for this space. 

Mr. MORRIS. Well, at the very beginning, we go to the agencies, 

before we start the procurement, and get that commitment from 

them and have them sign a preliminary occupancy agreement that 

is essentially their commitment to us that they want the space that 

they say they do and that they are willing to pay the estimated 

rent that we are telling them it is going to cost. So we don’t start 

the process until we get—— 

Ms. NORTON. Yeah, and if you are in the private sector and you 

do that, you are going to be held to it. Why isn’t an agency held 

to it? 

Mr. MORRIS. Well, at the end of the day, when the lease is procured, we go back to that agency when we have the final numbers, 

after award, when we know exactly what the rent is going to be, 

and they sign up again, a final occupancy agreement, which basically is that billing document from which they agree to pay us the 

rent that is set forth in the lease that we have procured for them. 

Now, we don’t have many agencies opting out of those occupancy 

agreements at that point in time. The opt-out scenario really comes 

during the term of the lease. And we don’t see that too much, but 

there is a regulatory provision that agencies can, if they have a 

change in mission, give us 120 days—— 

Ms. NORTON. Well, Mr. Morris, you can rest assured I am not 

talking about that. 

Mr. MORRIS. Oh. 

Ms. NORTON. I am talking about—that is what I want to know. 

If that is the condition for opting out, somehow the Federal Government or the Congress has changed your mission in some significant way. And if your testimony is that that is the condition for 

opting out, then I would be perfectly satisfied. I want to know if 

there are any other conditions for opting out. 

Mr. MORRIS. I think what we get feedback on and what you may 

be really driving at are the delays that it takes for us to get that 

final occupancy agreement finalized and signed with that agency. 

Ms. NORTON. And what is it that they are negotiating during 

that time, with you? 

Mr. MORRIS. Well, I think it is not just the occupancy agreement 

itself. It is just getting them to sign it, to make sure that they have 

their requirements met—— 

Ms. NORTON. And what would delay them in signing? Here are 

some people who have asked GSA to go out and find them some 

space. Now, so tell me why they tell you they have not signed the 

agreement. We are going to deal with that in the statute, so I need 

to know candidly what is the reason that the agency would give 

you. 

Mr. MORRIS. Not valid reasons, I can tell you that. 

16 

Ms. NORTON. Thank you. 

Mr. MORRIS. They are not valid reasons. 

Ms. NORTON. And the agency needs to be protected here. Here 

I don’t want to blame GSA, I want to say what I think the problem 

is. Here is GSA charged with a government-wide mission. Not very 

many agencies have a government-wide mission. You deal with the 

public or you deal with a particular sector. Here GSA not only 

deals with the market, the leasing and construction sector, GSA 

has plants that are peer agencies. 

So essentially if you are a peer agency, you are just like me. Of 

course, you have a mandate, a very strong statutory mandate, it occurs to us it is not strong enough, because those delays cost the 

government. When you get down to it, those delays cost the government. 

As if somehow these people were on their own dime. Well, in a 

sense they are. Well, their own dime turns out to be the taxpayer’s 

dime. And it has gotten to the point where the delays of that kind, 

which mean being deferential to the agency becomes so costly so 

that particularly as we look at the state of the markets today and 

what it is going to take for it to really write itself up, I don’t see 

how you are going to keep the gold standard set of businesses let’s 

call them, because they are all across the board you deal with, unless we can make the agency far more user friendly and use this 

opportunity to do so. 

I would appreciate, Mr. Morris, if you would undertake to look 

at ways that you think the agency could be helped in serving its 

clients while making the process more user friendly to those who 

have invested money. When I say how could we be helpful, I mean 

there are things we could do, statutorily. There may be other suggestions but we do need your suggestions. If we don’t get them we 

will just do what the private sector tells us they need. If they are 

willing to come forward, I want to hear from the agency’s point of 

view, since you have got an agency responsibility to the Federal 

Government, I want to hear from you. 

And we will be having hearings over the next couple of years in 

any case. I would very much appreciate your doing so and making 

sure that those under you begin to think through, help us think 

through and reauthorize a public building service statute in effect. 

Mr. MORRIS. I would be happy to do that. I would like to point 

out there are certain instances, not just to bash our customer agencies, there are times—I don’t think they happen frequently, but 

there are times when an agency may resist moving into new space 

if they are not satisfied with the quality of the construction. Maybe 

the HVAC system is not operating properly, maybe there are some 

issues with adjustments in that. Maybe there are some other quality of constructions that aren’t being met to the government requirements and they will be loud and vocal about those types of 

issues. We have run across those from time to time. 

Ms. NORTON. And that is legitimate, obviously. In fact, to give 

you a perfect example, one where the agency has moved in. We 

brought consider being pressure on agencies to in fact move to 

space which cost the government less and is well within the delineated area. And so we have them moving to NoMa, which is within 

a stone’s throw of the Senate. One of those agencies was the Equal 

17 

Employment Opportunity Commission. They complained to us 

about the size of the spaces for lunches and heat and a number of 

things. And to the credit of the GSA, I said my goodness, after we 

have made sure these agencies would not continue to insist upon 

renting or leasing only in the highest cost parts of the district, now 

you get back complaints that basic in nature, heat, not enough 

space for employees to eat. That doesn’t speak well to the Congress, 

speak well of the Congress or the agency. And we have been informed that GSA has been out there and that there is a build out 

going on. And that is the kind of taking care of the customer that 

we think is absolutely called for. 

Were that all that we knew in our long experience about occupancy agreements we would be very pleased. Do know that that is 

something we will be looking at in this kind of climate. Somebody 

dare to say I don’t want to go there after all. 

Mr. MORRIS. That is not acceptable. 

Ms. NORTON. It just isn’t. 

Let me ask you about the holdover status. A witness is going to 

testify here that 60 percent of government leases enter into holdover status upon expiration. We believe this is a government-wide 

figure. We want to know how many leases are indeed in holdover 

status and where they are located. We want to know about leases 

in this region since so much of the Federal sector is in this immediate region, but we all want to know leases government-wide. And 

we want to know how many leases are expiring within the next 6 

to 12 months. Do you have any information to give us today? 

Mr. MORRIS. Yes, ma’am. I will start out by saying that holdover 

leases arise when we are not able to provide a replacement space 

solution for an expiring lease in a timely manner, and we are unable to negotiate an extension with an incumbent or an existing 

landlord. 

Ms. NORTON. Now what are the difficulties in negotiating? You 

are trying to get a better rent for the lease for the government perhaps? 

Mr. MORRIS. I think oftentimes it has to do with pinning down 

the requirements for that agency that is in that space. Believe me, 

a holdover is the worst-case scenario and should be avoided if at 

all possible. 

Ms. NORTON. Do most of these agencies want to remain in that 

space? 

Mr. MORRIS. Well, it really depends. A lot of them do. And that 

is one of the things that we are really working on, because, you 

know, when we are going out for a new requirement, we typically 

go out and have full and open competition. That is our modus operandi, if you will. But there are plenty of situations. And quite 

frankly you touched on it in one of the hearings that we had last 

summer where the tenant agency requirements haven’t changed. 

They are happy where they are. And in those cases the Federal 

regulations allow for a concept of entering into negotiations for a 

succeeding lease with that incumbent landlord. 

We have to do a market analysis to see what the rents are like 

in that area, in that market, see what we are paying under the current lease. We have to factor in things like moving costs. We actually have to go to the public and advertise that we do have a conVerDate Aug 31 2005 14:06 Jul 14, 2009 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 P:\DOCS\48328 LINDS
18 

tinuing need for space in that market and request expressions of 

interest from the market. 

If we get expressions of interest from other providers of space, 

then we have to make a decision based upon the numbers or 

whether or not it is worthwhile to go into a full and open competition. If there are no bona fide expressions of interest, then we are 

free at that time to go ahead and negotiate another deal with that 

landlord. 

There are plenty of those situations around the country through 

and in every region. One of the things that my office has been 

doing to try and address the problem of the number of expiring 

leases that we continue to face each year and our inability to replace those leases in a timely fashion is to use that as an important 

tool to say, look, if you know that the agency requirements aren’t 

changing, if you go through this regulatory process and you factor 

in the market analysis, you look at the moving costs and you seek 

expressions of interest. 

And the results of those efforts say take a look at negotiating 

with that current landlord, then right now especially in these times 

when rent rates are not rising, they are flattening, we need to go 

long. We need to negotiate the best deal we can and lock in on not 

a year extension, but go long and at least out go there 5 to 7 years 

where we can take advantage of the market rates and we can stabilize. 

Ms. NORTON. Is that happening? That is like ABCs how to operate in this kind of market if you have the leverage GSA has. Is 

there anything written to regions to tell them to proceed in that 

way? 

Mr. MORRIS. We issued a realty services letter just this past year 

on that very subject reminding them of this regulatory authority 

and encouraging their agents to use this whenever they have the 

opportunity when the situation meets. Now when you have got a 

brand new requirement coming in, we are typically going to be 

going to the market and doing a full and open competition, but that 

is not the case. 

Ms. NORTON. You are not going to in this market and doing 

much. That looks like another bureaucratic turn of events. 

Mr. MORRIS. One of the other things we are trying to do now is 

actually get information out to the regions on a quarterly basis 

about what the market rates are, what the market conditions are 

and major metropolitan areas around the country. 

Ms. NORTON. Then all you have to do, it seems to me, is to factor 

in the moving costs. 

Mr. MORRIS. Well, that is true. What we are doing is getting information in all the Metropolitan areas on a quarterly basis to say 

here is what rent rates are for general purpose office space in these 

markets. And by the way, here are our current leases that are expiring over the next 12 months, 24 months, 36 months and beyond. 

So you have got leases that are expiring in these markets and what 

we need to be doing is planning now, as soon as possible to take 

advantage of the current market conditions and go long where you 

can. 

We have seen trends over the last year and a half, because we 

do this on a quarterly basis where rents have continued to flatten 

19 

and in many markets have started to fall somewhat, and this is an 

excellent opportunity for us. 

Ms. NORTON. Mr. Morris, the Subcommittee will hold the agency 

very responsible, if you do not take advantage of this market to renegotiate these rents or to extend these rents or to move. Because 

this is the time to do it at the GSA if you are an individual you 

are stuck, there is not much you can do. And that is why I want 

you to get to us the list of the holdover leases, their status and also 

leases that will be expiring in 6 to 12 months. And what you say 

you are doing, I am sure has something to do with the fact that 

the Subcommittee required you do some centralizing once again of 

leasing. 

Mr. MORRIS. Let me say that the holdover rate is really rather 

small as a snapshot of our whole portfolio. What we end up seeing—— 

Ms. NORTON. Sixty percent, according to an upcoming witness 

entered into holdover status upon expiration. 

Mr. MORRIS. That is not correct. It represents about 4 percent of 

our overall portfolio. We have 8,600 leases in our portfolio. We have 

about 300 leases that are in hold over at this point in time that 

represents about 4 percent of our total inventory. 

Ms. NORTON. You would have to say a percentage of those expiring. 

Mr. MORRIS. It is about 13 percent of our total leases expiring 

in 2008. Now where the problem is we are not replacing all those 

leases and this is where I think we are getting some push back 

from the private sector, they are not all going into holdover status. 

There are a number of leases and about 40 percent of our leases 

that are expiring that are being extended on a short-term basis. To 

me, a holdover lease is when you don’t even have lawful possession 

of the premises, you are squatting in effect. 

Ms. NORTON. You have to extend it on a short-term basis, because they are holding over. 

Mr. MORRIS. Well, some of—— 

Ms. NORTON. You know this is not some apartment where we are 

on a month to month, or maybe that is what you are talking about. 

Mr. MORRIS. No. The holdover is a situation where the landlord 

has said, I am not going to give you an extension, we want you out 

of here. And we are trying to negotiate a short-term extension for 

a year or a 2-year extension while we get the agency requirements 

finalized so that we can effect a final solution, but—— 

Ms. NORTON. Do you have the staff and talent to do that quickly? 

Mr. MORRIS. We have laid out this past year a plan nationwide, 

and will be happy to share that with you to try and reduce the extension problem that we have with our expiring lease load. We actually are increasing the staff above what it has been nationwide. 

We have been somewhat successful in that endeavor, not as much 

as we would like. We need more people to not only work in-house 

but also to manage our broker program as well. As you are well 

aware of and we talked about it I know last summer, just the staffing needs and our leasing specialists. 

I will say we made some progress just this past week we kicked 

off a week of what we call our boot camp in the public building 

service where we bring brand new people in who have joined the 

20 

organization in for a week’s worth of training in Washington. And 

I had the pleasure of meeting 15 new leasing specialists from regions around the country who just started with the agency, many 

of whom had come from the private sector and others we had actually recruited from other Federal agencies where they had been 

doing realty work. 

And so it looks like a freshman class of brand new realty specialists from around the country who were in Washington for a week 

of training, I got to meet them and talk to them and we had a reception afterwards. They were more than enthusiastic. They were 

really quite excited about joining our organization and trying to 

make a difference. We talked about this is a time where the country is having economic difficulties. And I hate to say it, but it is 

an opportunity. I hate to say it in the sense that we don’t want to 

have bad economic times, but it is an opportunity for the government to try to make the most of it. 

Ms. NORTON. Thank you, Mr. Morris. I am just about finished 

here. I will ask Ms. Edwards if she has any questions. 

Ms. EDWARDS. Yes. Thank you, Madam Chairwoman. And thank 

you, Mr. Morris, for your testimony. I want to go back to this question of lease expirations because my reading of the upcoming testimony is that 60 percent of your leases that are expiring that are 

extended. 

Mr. MORRIS. That is true. 

Ms. EDWARDS. Thank you. 

Mr. MORRIS. That is true. Not holdover, but extended. 

Ms. EDWARDS. Extended, but even still 60 percent extended it 

seems to me not only does that represent kind of an unfairness to 

the government and to the taxpayer but it perhaps represents an 

unfairness also to the landlords in terms of their ability to project 

what their business opportunity is going to be. I mean, 60 percent 

seems rather extraordinary. 

Mr. MORRIS. I think that is a valid point. There are bona fide 

cases where extension will occur. If we are moving clients, and 

when I say clients, if we are moving customer agencies into a Federal building or new lease space and there have been delays in the 

completion of that new space for whatever reason, we may have to 

extend the lease for a short period of time until we can actually accomplish the completion of their new facilities an move them in. 

Ms. EDWARDS. I think all of us understand that. 

Mr. MORRIS. But on a portfolio basis it is my belief that it is entirely incumbent when the government enters the marketplace to 

contract for leased space that they have an obligation to respond 

in a commercially reasonable fashion. It doesn’t do the government 

any good to do what I call serial extension of leases 1 year after 

another where we are not able to look into a long-term lease to 

house the government. 

And I believe you are right. We are getting pushed back from our 

private sector landlords who say we need stability in our portfolio 

in our building. And we need to know what you folks are going to 

do. And we have an obligation to be able to deal with this. 

Ms. EDWARDS. Well, I appreciate that and I look forward to hearing from you and from the agency and the future of your progress 

on that. Because I share the view of the Congresswoman we are 

21 

in a great position for the government, for the taxpayer to get a 

really good deal on a long-term lease opportunity in this current 

market. And we should take full advantage of that and so we 

shouldn’t come back here in another several months still discussing 

60 percent extension rates for expired leases. 

I want to go to another set of questions and it really has to do 

with this region, the Metropolitan region. In addition in some upcoming testimony we see a chart that shows the amount of GSA 

owned and leased space in the Metropolitan region. I represent a 

significant portion of Prince George’s County and some of Montgomery County. There has been a longstanding complaint particularly in Prince George’s County that Prince George’s County has 

not enjoyed in this region a fair share of GSA lease opportunities 

for full service lease base, not just for warehouse space. And so I’d 

be interested and it doesn’t have to be here, that I and this Subcommittee see some kind of breakdown of how those leases breakdown across the region by county, because when I look at 18 percent in this region of GSA space going into suburban Maryland 

compared with 25 percent in Northern Virginia and 57 percent in 

D.C., I certainly understand the District of Columbia numbers. I 

am not quite sure I understand the great discrepancy from suburban Maryland to Northern Virginia. 

I dare say that when we look at suburban Maryland and break 

that down by county that we will see that indeed it is not the 

imagination of developers in Prince George’s County that the County has been shortchanged and there is a fairness in this region. I 

think the concern isn’t just about this Metropolitan region, that it 

is replicated in other Metropolitan regions as well, where there 

needs to be sort of a fair shared opportunity for GSA leasing in our 

Metropolitan region. And I know that in my work on this Subcommittee, it will not be the last time you will hear this question 

until there is an answer that is much more satisfactory to the people of the 4th congressional district. 

I would also like to ask you about, if you would, please describe 

the process by which and the transparency provisions by which you 

analyze where GSA lease opportunities will take place. And I am 

particularly interested in the way that you both value the lease 

and how you assess things like transportation, because Prince 

George’s County has, I believe has the greatest number of Metro 

station stops in the suburban Metropolitan area, and those are all 

stations that could be fully developed out. And so I am curious to 

know how you analyze transportation as a core factor, and frankly 

as a green factor in determining where to locate GSA leases. 

Mr. MORRIS. It is a big consideration. I would like to start out 

by saying that we had the pleasure of this week, Bart Bush, my 

colleague from the national capital region behind me, and I, along 

with the acting commissioner for the public buildings, had a very 

frank meeting with the director of the economic development for 

Prince George’s County and along with several of the senior business men of the county to have a frank discussion about some of 

the issues that you just brought up. 

Quite frankly for me it was enlightening, because I am not only 

focused on NCR, but also the country at large. And some of the 

issues that they brought to our attention, I frankly, wasn’t aware 

22 

of. But in determining to try and answer your question to begin 

with where we go, transportation patterns play an important role, 

the agencies themselves that we are trying to find space for tell us 

where they come up under our regulatory scheme with the delineated area that they are looking for in terms of locating. 

Now they factor in a number of factors that are mission related. 

This very topic has been a huge point of discussion with the Chairman of the Committee, the Subcommittee and other Members of 

the Committee. In fact, we are now following guidelines in our larger deals where the prospectuses themselves contain an explanation 

of what that delineated area is going to be. And once that is determined and put into the prospectus, we are bound by that, unless 

there is some kind of significant change. In which case, we would 

have to come back and notify the Committee. 

To try to answer your question to begin with, transportation is 

a huge factor, establishing the delineated area is the first job of the 

agencies that we are trying to locate. And then we take a look at 

what they tell us and try and consult with them and advise them 

on what kind of competition opportunities are there and are they 

too small and is there need to actually enlarge that area to achieve 

better competition and the opportunity for better pricing. 

Ms. EDWARDS. Thank you, Mr. Morris. You can just bet that 

there will be ongoing questions at least from this Congresswoman 

about these issues because they are profound and they deeply impact the ability for the district that I represent to enjoy the kind 

of economic development and prosperity that the rest of our region 

enjoys. 

As well with 16 available Metro stop opportunities for transportation-oriented development that GSA can participate in, some of 

us will be very, very hard pressed to believe that you can’t find 

some on that class A space that is located in Prince George’s County, and not to take away from any other parts of the region, but 

as you begin to look at these leases that are expiring and I’d be 

curious to know the numbers of the leases and the square footages 

in the Metropolitan region as these are expiring so that you can 

take a new look, a fresh look at available opportunities throughout 

the Metropolitan region. Thank you very much. 

Mr. MORRIS. Let me just follow up, because I would like to share 

with you one important factor that they actually brought to light 

in our meeting was what they perceive as a disadvantage, the 

Prince George’s County officials in terms of the availability of existing space. Obviously in Washington, D.C. It is much more built out. 

Northern Virginia has a larger stock of existing buildings than 

Prince George’s County. So that oftentimes in these procurements, 

competitors from Prince George’s County their space solution in 

that kind of procurement is going to be new construction and that 

it was important to understand that if you are dealing with new 

construction and that is going to be a possibility, that the pricing 

on existing space is not really going to carry over to pricing for new 

construction because the costs are going to be probably the same 

across the region. The point was made the cost of concrete in 

Prince George’s County will be the same that it is in—— 

Ms. NORTON. Mr. Morris, the gentlelady has made a point that 

goes well beyond when new construction—and I am going to put it 

23 

on the record now given your explanation to her. In the leases that 

are expiring within 6 to 12 months, we want the exact location. 

Mr. MORRIS. We can give you that. 

Ms. NORTON. By county and by place in the County. And the reason that the gentlelady’s questions are so apropos has to do with 

many instances in the District of Columbia I could site, but a particularly shocking one from Prince George’s County. Now the reason that I want to put this on the record is because I believe that 

the developers in Prince George’s County are sophisticated enough 

to have written to the Chair of the Committee and therefore inform 

me. I must conclude that throughout the United States this same, 

and I am going to call a spade a spade, red lining is occurring. This 

is what we found. We got this long, almost scholarly letter from a 

developer in which he laid out how the procurement that you actually cited, you cited the prospectus, how the agency had in fact violated the prospectus through the amendment process. You are 

right. 

We said that these complaints about proceeding after the delineated area to have agencies do whatever they want have become 

so systematic that you can’t change a prospectus without coming 

back and reporting. And this is what the agency did when Prince 

George’s and Montgomery County, two very middle class counties, 

some of the highest, highest income counties in the United States. 

This is not like far in the southeast and northwest. This is how the 

agency handled that seeing that they had to come back if they were 

going to change the prospectus, they read into it that well, we are 

not going to change the prospectus, we will show Norton and the 

Committee, we are going to amend the prospectus. And they trusted us enough so that they didn’t get a lawyer to come down and 

get through every jot and tittle to catch us. So we are going to 

amend it. 

And what did they do to Prince George’s County? Here was an 

HHS new facility, not entirely new, but they needed more space. 

And this is what the public building service did, in absolute unadulterated collusion with the agency it came forward with a set 

of conditions that only the present Montgomery County location 

could possibly have met. These included places of worship. If I may 

say so that one really got to me as a strong believer in the separation of churches and state. That we could actually have a Federal 

Government document that said places of worship was a factor in 

location. And then they went down a trivial list that included hardware stores, beauty salons, we are trying to remember them all. It 

was as if someone went out and said what is it around the agency 

today that we have. And then they said fine, make a catalogue of 

that, put that on GSA’s desk and say get us a place where you can 

get that. Here was somebody trying to compete for the process that 

he had the—the one that really got us was distance from the 

Metro. Now, the Prince George’s location was closer to the Metro 

here where everybody is trying to change the world green before 

it completely boils over, they simply extended the distance of the 

Metro. They said, we will fix that. It says, uncertain conditions we 

can extend it. So we will just do that and it will all come together 

and they will never catch us. 

24 

That is why you don’t see me having confidence in the agency. 

A very, very sophisticated developer who didn’t just write me a 

complete, jot and tittle. I couldn’t believe it, that right under my 

very nose that the very agency with whom I worked so closely 

would do something that was abusive, deceptive, a lie. So we call 

them in and they tried to indicate as best they can why these unheard of conditions were put and doing it by amendment. And then 

the staff and I sat and said what can we do about that. And to 

make it worse, the RFP was already out. One of the things we 

don’t do in the Federal Government, we do abide by the right rules. 

We couldn’t then say well, look just throw it back and throw it all 

out. 

Never and I have worked with this agency ever since I came to 

the Congress in 1991. I can only think that under our very noses 

this was happening day and night, and we never would have 

learned about it. Well, that one instance has only been a part of 

a catalogue now of growing instances where the agency has essentially lied to and violated the express written requirements of the 

Subcommittee. When that happens enough and you have the nerve 

to sit here and tell her about the prospectus and to give her a lesson in how you go about it, when I have this outrageous example 

setting before us, I want you to know that it angered me to no end, 

it reduced to the level of minus zero my confidence in the agency. 

They double-crossed the Chairman, who they knew had had this 

problem with red lining in the district and they were doing the 

same thing to one of the counties. As a result, it was one of the 

circumstances that has lead me to engage in the present process 

of reauthorizing the entire agency and holding the agency much 

stronger to account on its reporting requirements to us. It was a 

total betrayal of trust. And the gentlelady wants to say something 

to this regard. 

Ms. EDWARDS. Thank you, madam Chairwoman. What I do want 

to say is that I am from Maryland, and I represent both Prince 

George’s and Montgomery County, and the last thing I want to do 

is to set up a competition between the counties. And that is why 

the imperative of fairness and parity in the GSA process is so important. Because I know Madam Chairwoman that the developers 

that you represent and the interest that you represent here in the 

District of Columbia and I in Prince George’s County and Montgomery County and my colleagues we just want a level playing 

field and want to know what the rules are. We want to know that 

when the rules are placed in order that the developers and the interest in our districts understand what they are and that people 

are playing by the rules. 

And what the chairwoman has described is a circumstance where 

there were no rules. And in fact, to the extent there were, they 

were changed in the middle of the game and that is not fair to anybody, not to any of our jurisdictions nor is it fair to those who want 

to compete for GSA leases. And so you can be assured that I and 

I know that the chairwoman on this Subcommittee are going to be 

looking at these issues in great detail because looking at our region 

and one only has to look, I think the Brookings Institute did a 

study several years ago called a region divided. And when you look 

at the dots on the map, you can see the disinvestment and that disVerDate Aug 31 2005 14:06 Jul 14, 2009 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 P:\DOCS\48328 LINDS
25 

investment is happening in a county that I represent. And so there 

will be additional questions and I hope that the agency is both held 

to account and then displays the kind of parity, fairness and transparency that the taxpayer deserves of and certainly that the people 

of the 4th congressional district deserve. Thank you, Madam Chairwoman. 

Ms. NORTON. I thank you, Ms. Edwards. I do want to say that 

the gentlelady makes a point. She represents both counties and she 

is not trying to pit one county against the other. But I need to tell 

the gentlelady that I am trying to put all the counties in play. I 

have put all parts of the District of Columbia in play. I mean, if 

K Street comes up with a lower figure and better space, too bad 

NoMa, too bad the other area that we have encouraged to develop 

down by M Street, sorry that is exactly what we want. We want 

the best deal for the government. I want Prince George’s in it. I 

see some explored—unexplored opportunity for price reduction, for 

encouraging—there was going to be new space here. This man was 

going to have to build so your notion about hey, as if Virginia had 

the smarts to build and Prince George’s did not. On the contrary. 

Virginia got the contracts to build and they built, that is the only 

way Virginia has gotten it. So that has left an opportunity. We see 

what happens when there is an opportunity. Let me tell you about 

opportunity. 

During the fiscal crisis in the District of Columbia real estate collapsed in one of the wards in Anacostia, Ward 8. So people abandoned property and moved out and sold it for nothing. And look 

what we have happening in Ward 8 now, smart folks like the Federal Government has not been swooped in to Ward 8, saw the that 

land prices were lower than they were in other parts of the district. 

We have whole new developments of middle class housing all 

through Ward 8. 

Now we are asking for GSA to play that role. As it turns out 

Prince George’s County ain’t Ward 8. Prince George’s County, and 

I repeat, is one of the most prosperous counties in the United 

States of America. And it got that way the same way that Fairfax 

got that way. All of them got that way because the Federal presence moved out into the area. When the Federal presence moves 

out, all other kinds of businesses move out and that is the way it 

happens. The same thing has happened in the District of Columbia. 

If the Federal presence moves into an area or a district, that is the 

good housing government seal of approval and others comes. 

So where you already are set up for success, because you have 

one of the most highly educated workforces in one of your counties, 

then I say she can—I understand it and I am not trying to put her 

in competition with one part of her constituency or the other, but 

I can say let’s get it on, let’s get it on. Between all the counties that 

are likely places for new construction to be built, where we are 

building new construction and it happens all the time so that we 

have a fair—to the government—yes, we want to be fair to Prince 

George’s, but guess what? I want to be fair first and foremost to 

the government and wearing her Federal hat that is exactly what 

the representative from Prince George’s wants. 

So you had to take this tongue lashing because you’re here before 

us. But we want to put it on the record so it can be clear that we 

26 

are not going to take the assurances from the agency any longer. 

We are going to put it into law. If this agency ever does to us what 

it did to Prince George’s, because when they did it to Prince 

George’s, they did it to us, we are going to hold you in contempt 

because it was a contemptible act. In any case, sir, you can take 

that tongue lashing and give it to the rest of the folks back there. 

Mr. MORRIS. I hear you, Madam Chairman, loud and clear. 

Ms. NORTON. We called them all before us right in my office and 

told them what we thought of the violation of trust between us and 

they needn’t violate trust with me, because I have been a prime defender of this agency. I have respected its expertise. And so when 

an agency double crosses me, believe me, they ain’t got no friends 

up here then. And I expect to be treated with the kind of respect 

that the Prince George’s County episode tells me I was not treated 

with, that the Subcommittee was not treated with. And frankly, 

Prince George’s with a treated with contempt and I believe it was 

red lined and I will not go any further than to say red lined. You 

know what that means. I think that is what happened. 

Thank you very much for your testimony, and I want to go on 

to the next or the last panel of witnesses who are very important 

to us. 

Richard Purtell, Chair and chief officer CEO of BOMA; Mitchell 

Schear, D.C. Downtown Business Development District, also is a 

president of Vornado Development. And Dean Schwanke, senior 

vice president of The Urban Land Institute. We are pleased to receive your testimony. 

TESTIMONIES OF RICHARD PURTELL, CHAIR AND CHIEF 

ELECTED OFFICER, BOMA INTERNATIONAL; MITCHELL 

SCHEAR, DC DOWNTOWN BUSINESS IMPROVEMENT DISTRICT; AND DEAN SCHWANKE, SENIOR VICE PRESIDENT, 

THE URBAN LAND INSTITUTE 

Ms. NORTON. As to who should proceed first, I am not sure we 

have any chosen order, so shall I just go from my left to my right 

or would any of you like to proceed first? Mr. Schwanke? 

Mr. SCHWANKE. Thank you, Madam Chair and the Ranking 

Member Diaz Balart and the rest of the Subcommittee Members. 

My name is Dean Schwanke. I am the senior vice president for 

publication and awards at The Urban Land Institute here in Washington, D.C. In Georgetown. We are a not for profit association 

with 38,000 members around the country and the world, primarily 

involved in development and investment in the real estate industry. Our mission is to provide leadership and the responsible use 

of land and in creating and sustaining thriving communities worldwide. 

Pertaining to the current real estate environment, we have been 

over a lot of this already, but I will go over some of the things that 

we see, the current financial crisis and the economic recession are 

pulling the commercial real estate sector into a very difficult business environment characterized by numerous negative trends including the following. Increasing vacancy rates, falling rents, dwindling development prospects, lack of available capital for lending, 

stricter underwriting, falling property values, sluggish investment 

27 

and transaction markets, increasing loan delinquencies and foreclosures and growing distress for property owners. 

While the trends are bad for the commercial real estate industry, 

they present somewhat more favorable environments for tenants as 

the availability of space is increasing while rents are declining. 

Of particular interest to the GSA is the office sector. A couple of 

facts here, office space rates in the U.S. have risen from 12.8 percent in the fourth quarter of 2007 to 14.7 percent in the fourth 

quarter of 2008 according to one estimate and others are even 

higher. And some estimates suggest that vacancy rates will go to 

18 to 20 percent by the end of 2010, which creates quite a favorable 

environment for tenants. 

Our office rent growth has turned negative in the latter part of 

2008 and negative rent growth is expected to continue well into 

2010 and probably longer depending on how the economy performs. 

Increasing vacancy and falling rents will translate directly into reduced income for commercial properties will which put strains on 

operating budgets, reduce values and create distress for owners. 

So commercial real estate developers facing a dismal period. Financing is evaporating for new construction, demand is falling and 

projects coming on line will struggle to lease up falling short of 

forecasts. By one estimate, office completions in 2010 will total only 

about one-third of the completions in 2008. I think completions are 

expected to remain at low levels until 2012. So we will have a real 

shortage of new space coming on line over that period of time. 

Turning to the capital markets, the lack of liquidity in the financial sector has been well documented and is promised particularly 

severe for the commercial real estate sector as it is a capital intensive business. Perhaps most important for real estate capital markets are the problems in the commercial mortgage-backed securities market. A CMBS issuance grew dramatically over the past 10 

years, and as of early 2008, had come to be a huge source of debt 

capital for commercial real estate, with over $230 billion of CMBS 

issuance in 2007 alone. However, there has been no new issuance 

of CMBS since the second quarter of 2008, zero. And it is unlikely 

this critical source of commercial real estate debt capital will be revised any time soon. 

In addition to the lack of capital availability underwriting standards have shifted drastically and the cost of debt capital has gone 

up. Commercial mortgage interest rates spreads over Treasury’s 

have increased substantially. Bank underwriting standards and equity requirements are now much more demanding and conservative. More of property values have declined not only because of declining fundamentals but also due to raising capitalization rates 

and lack of investor confidence. Further declines are likely for several more quarters if not years. 

As a result of all the trends, refinancing of any commercial mortgage coming through will be extremely difficult for most property 

owners in 2009 and 2010. Many borrowers with loans coming due 

will find themselves unable to obtain suitable financing as any new 

financing sources will require more equity and charge higher interest rates than many borrowers can manage, especially if the property’s value has declined which will occur in some cases. 

28 

As a result, many owners will find themselves in distressed situations and will either lose the property to the lender or will sell 

the property at a distressed price level. This can and will happen 

even to owners with properties that are performing well. And the 

problem will severely impact a large number of the commercial real 

estate owners and investors lenders that have used leverage to finance properties. 

So what does this mean for GSA? The current environment presents both opportunities and problems. Now on the negative side 

because of the lack of financing it will be more difficult for developers to develop new buildings to meet specific GSA standards and 

requirements as you have already talked about. Although GSA’s 

certainly a strong credit tenant for any proposed development deal 

and will make any such deal look much better than most others. 

The lack of new speculative buildings in the market tend to be 

more green and energy efficient will inhibit GSA’s ability to find 

the most technically advanced green energy efficient space through 

the leasing process. However, the retrofitting of existing buildings 

to be more green and energy efficient will proceed we think as owners seek to upgrade their buildings to compete in a difficult market 

that is increasingly demanding such space. GSA can certainly be 

a leader in hastening this trend as it has been in the past. 

On the positive side, availability and choice in office space markets is improving while costs are decreasing as we have discussed. 

In the 2009, 2010 period will certainly be a tenants market, if not 

into 2011 and 2012. Rents and occupancy costs will decline and stabilize at attractive levels for several years. Thus the next 2 years 

should provide an excellent environment for leasing new space or 

renewing or renegotiating leases at attractive terms. Moreover attractive acquisition opportunities will present themselves in a 

transaction market where there will be distressed sellers and few 

buyers. GSA could find attractive buying opportunities and could 

potentially acquire quality, well located office building for its own 

use, at greatly reduced prices. 

That is my testimony, and thank you, Madam Chair, and Subcommittee Members, and I appreciate being here. 

Ms. NORTON. Thank you, Mr. Schwanke. 

Ms. NORTON. Mr. Schear, am I pronouncing your name correctly. 

Mr. SCHEAR. It is Schear. 

Thank you for the opportunity to be a part of today’s session. My 

name is Mitchell Schear and I have been active in the Downtown 

BID since its formation in 1997. The downtown BID is a nonprofit 

corporation that works to improve a 1 square mile of downtown 

Washington, D.C. To include 62 million square feet of office space. 

Within that area, GSA owns 17 million square feet and leases an 

additional 7 million square feet. 

I am also president of Vornado/Charles E. Smith, which is the 

Washington division of Vornado Realty Trust. We are the largest 

lessor of office space to the Federal Government in the Washington, 

D.C. Area. Vornado is one of the largest owners, developers and 

managers of real estate in the United States with a portfolio of 

over 100 million square feet. 

Your decision to hold this hearing today is timely because these 

discussions are taking place all across the sector and people are foVerDate Aug 31 2005 14:06 Jul 14, 2009 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 P:\DOCS\48328 LINDS
29 

cused on these issues. What I would like to do is recognize Representative Norton and this Committee and GSA for their work on 

behalf of D.C. and the region. 

And on a lighter note Representative Norton I would like to congratulate you on your performance as Glenda earlier this week in 

the Arena Stage benefit. Having said that, I would like to skip over 

my formal testimony and having listened to the exchange back and 

forth I would just like to make several observations. 

I would like to reiterate that this is really an extraordinary time 

for GSA to be leasing space in the marketplace. There are great opportunities for the government to take advantage of and basically 

as you were saying before, come at us. We have got the space, we 

are going to compete against one another and demand is what we 

are looking for. 

It is also a great time for GSA to buy. And I think what I would 

say, it is not only good for the government to buy, it is also good 

from the owner’s standpoint for GSA to buy, because what the government will be doing is putting liquidity into the market, putting 

cash into the market. And if you look at companies and the amount 

of capital that then comes back out, then they can use that money 

for other purposes as well. So we think there is a win, win situation out there. 

I would also just like to add as you talk about these new projects 

because we think you will see very little construction taking place, 

that really new projects are not really economic in the marketplace 

today. And I think the reason we would say that is threefold. One, 

is due to the rents that would be required to be paid by the government in particular. Due to the construction financing and permanent financing, you need both pieces of that puzzle. 

Ms. NORTON. Did you say due to the rents that the government 

would—— 

Mr. SCHEAR. Yes, let me finish. So what happens is because of 

the availability of debt, and the cost of the debt, and the rents that 

would then be paid there is basically a current disconnect so that 

the developer would not go forward with a project generally speaking. And then finally, the third reason that the projects would not 

go forward is there is really going to be an abundance of space that 

is existing or under construction already. So I think that that is 

just not an avenue that will necessarily be pursued by the private 

sector in the near term. I am happy to answer any questions, 

thank you. 

Ms. NORTON. Thank you very much, Mr. Schear. 

Mr. Purtell. 

Mr. PURTELL. Good morning, I am Dick Purtell, portfolio manager for Grubb and Ellis Management Services. And I am here 

today in my role as chair and chief elected officer of The Building 

Owners and Managers Association International and our local association here in Washington, the Apartment and Office Building Association of Metropolitan Washington, DC. 

As the district’s Congresswoman, you may be interested to know 

that AOBA’s members own or manage 75 percent of the city’s private office space and that one-third of the city’s privately owned 

space is leased by GSA. When I appeared last summer at a hearing 

on the credit crunch it was already clear that our Nation was in 

30 

a downward spiral and the commercial real estate industry was beginning to feel the pinch. Unfortunately there is no good news. 

Today, the roughly $6.5 trillion income producing U.S. property 

market faces its worst liquidity challenge since the Great Depression. With virtually no liquidity, commercial borrowers face a growing challenge of refinancing maturing debt and the threat of rising 

foreclosures and delinquencies. Through the end of 2009, an estimated $200 to 500 billion in commercial and multi-family real estate loans will mature from a variety of sources. Over the next few 

years these maturities increase to well over $1 trillion. We are 

faced with the dual challenge of developing strategies to stop the 

downward spiral and restoring confidence in the markets. 

While the incremental measures taken to date to address the crisis may have fortified the balance sheets of certain financial institutions, they have failed to address the root cause of the problem. 

It is imperative to enact measures that will enable financial institutions to effectively restructure their balance sheets to take toxic 

assets off banks’ books and to start lending again on solidly underwritten transactions. By stabilizing financial institutions and restoring confidence to the credit markets, commerce will once again 

move forward, but the time to act is now. 

We are encouraged by the creation of the TALF and the Public 

Private Investment Fund. If engineered properly, these programs 

could provide credit markets with the economic confidence they 

need to reconnect in the wake of a broad dislocation and help restart the stalled economy. 

The cost of not taking immediate action grows higher with each 

passing day. Real estate directly and indirectly generates economic 

activity, equivalent to nearly 20 percent of the Nation’s gross domestic product. Nearly 9 million jobs are created from real estate 

activities which annually generate millions of dollars in Federal, 

regional and local tax revenues. Local governments especially depend on this revenue which amounts to approximately $0.70 on 

every local budget dollar to pay for public services such as education, road construction, law enforcement and emergency planing 

and response. 

Beyond these industrywide credit issues there are specific areas 

where private sector and the public building sector could effectively 

work together for our mutual benefit. First, we congratulate Congress for allocating funds to the General Services Administration to 

implement energy efficiency retrofits in Federal buildings. We 

would like to suggest that these retrofits not be limited to Federally-owned buildings but also allocated to make needed retrofits to 

space the government leases from the private sector. 

The building owner will benefit from capital improvements made 

to the building, the Federal Government will benefit from improved 

high performance space, while demonstrating leadership and new 

technologies and taxpayers will benefit from job creation and improving our environment. 

We would also like to call attention to a growing problem of the 

government’s overuse of short-term lease extensions. With increasing frequency the U.S. Government is asking its commercial landlords to enter into short-term extensions at the end of the lease 

31 

term instead of renegotiating the lease or giving notice to vacate 

the space according to the termination terms of the lease. 

It is standard market practice to give anywhere from 6 months 

to 4-years advance notice of the intention to vacate or renew a 

lease prior to the lease expiration. Some of our members have estimated that currently 60 percent of the government leases enter 

into these makeshift holdover arrangements upon lease expiration. 

This practice happens for a variety of reasons. In some cases, the 

future space needs have not been addressed by GSA’s client agencies which can be due to budget uncertainty or the agency’s growing pains. Also the lengthy process for securing congressional authorization for GSA’s large deals goes through the prospectus process and this can cause delays or get bogged down in bureaucracy. 

While the causes may be understandable the result can be costly 

for both the Federal Government and for the landlord. Leasebacks 

carry a large penalty, typically 50 percent above the rent they were 

paying before lease expiration. The government deprives itself of 

the ability to obtain the best financial terms and a full range of options in the marketplace. This practice is also problematic for the 

landlord. If the building is trying to secure financing, potential 

lenders will treat the space as vacant in the absence of the lease. 

A vacant or underutilized building will have a low income stream 

and therefore impact the credit worthiness of the building which in 

turn leads to onerous loan terms. In addition, the landlord cannot 

market the space to potential clients without the knowledge of the 

tenant’s intentions to vacate the space. It can also effect other tenants in the building who may have expansion rights in their leases. 

The government has always been a valued tenant and customer 

of the private sector real estate community. Due to their credit 

worthiness and guarantee of payment, many landlords are willing 

to make significant accommodations for government lease tenancy. 

However, in the present economy, the increasing practice of lease 

holdovers is creating additional distress. We encourage this Subcommittee to consider ways to help streamline GSA’s leasing practices and eliminate unnecessary bureaucracy. We support full and 

open competition, but with sufficient time remaining on the lease 

to eliminate the uncertainty and upheaval to the landlord. 

Thank you very much for the opportunity to be here today. 

Ms. NORTON. Thank you. 

All three of you have given a virtual catalogue, a very synopsis 

form, in not only the market today, but the areas where we should 

be particularly conscious to look, that testimony is particularly 

helpful to us and I would like to begin with some questions. Mr. 

Purtell, your testimony, page 4 you take 245 raised question I was 

putting to GSA regarding the scenario that makes us see both sides 

of the issue and come to grips with what is at play here. Indeed, 

if BOMA has within its BOMA portfolio, so to speak, 90 percent of 

the leased space in this region. And third of these leased by GSA, 

that says everything about why we have to look at these credit 

markets just as you would like it as perhaps even more so given 

the way we are affected across the board. 

Just let me begin with the lengthy process, because with my government hat on, GSA knows I am going to insist that it go through, 

as you yourself mentioned, the competitive process, that gets us the 

32 

best deal for sure. But we are particularly interested in really outside the box thinking about how to do things that meet the government’s competition requirements and other regulatory requirements, while at the same time, doing so speedily. My great interest 

in government and coming to the Federal Government was precisely—I came as a lawyer to a very troubled agency, the Equal 

Employment Opportunity Commission, and started a practice 

which my allies in the various movements shrunk at that. I looked 

at it and I saw the cases, the large cases where the payback was, 

where you would want to bring a systemic charge. And then I saw 

where the agency was putting its time into cases of individuals 

that deserved full attention from the government, but for lack of 

a better term, I would call nickel-and-dime cases, because there 

were nickel-and-dime cases and had a very open process. There 

were almost no remedies, because people could file very easily. 

And so I started a settlement process whereby very early brought 

both sides together. When both sides are in doubt and put the investigators to work, calling out to each side what the areas of doubt 

were. We ended up with a much larger revenue rate for those who 

brought grievances. Had they gone through, in fact, some of them 

would have gotten something, but more the energy, more of the 

agency resources going into where the biggest payoff was. My 

major interest is in the jigsaw puzzle of making government regulations meet the standards of keeping the balance moving. 

Now when you heard our first witness describe what he went 

through—and then, of course, you have to advertise, because there 

may be somebody who comes forward, that even when you factor 

in all your moving costs and so forth, it makes sense to move out. 

And just knowing nothing about the process, I said, well, you know, 

the market conditions—why do you have to do that every time? 

You know what those are. They don’t change. In fact, you don’t 

want to change on a day-to-day basis. You want to market to conditions in—I hope not even the quarter—but in some larger time 

frame. So you really don’t have that many expenses to look at to 

make a judgment. 

I don’t know if any of you have suggestions that you would like 

to offer at this time, but I would like to know any suggestions you 

have for streamlining that process where we have had so much 

concern, what we are calling the holdover process, what amounts 

to leases for short-term, which also are not in the interest of anyone concerned, whether you can offer any suggestions for streamlining that particular process. 

Mr. PURTELL. I would just start to say that I am from Cincinnati, 

Ohio. I have worked with GSA leases in a number of cases. I think 

in the previous testimony there were comments about, I think, 

looking at leases expiring in 6 to 12 months. I think the process 

needs to start a lot sooner than that. 

Ms. NORTON. So one of the most obvious things you can do is to 

start earlier than when the thing is about to expire in the first 

place. 

Mr. PURTELL. Absolutely. 

Ms. NORTON. How much earlier? 

Mr. PURTELL. Right now, I am working with tenants, and the 

properties I am responsible for, about 2 years in advance of that 

33 

process. And it takes a while. Even GSA has its own issues to deal 

with. But even in the private sector, the companies I am working 

with, it takes a while to get through a significant lease renewal. 

So I would highly recommend you start that process sooner. 

Mr. SCHEAR. Madam Chair, I think it is really not for me to really necessarily suggest how for the General Services Administration 

or for the Congress to attack this, but you asked for outside-thebox ideas, so I am going to throw one out there for you. 

The situation, I think, is such that if—you asked GSA if they had 

enough resources to take care of everything, and I think the answer was not a resounding ′′yes′′ in terms of that. So if you take 

a look at today’s marketplace and you look at all of the real estate 

professionals who are unemployed because of what has happened— 

and you have them right here in this region. You have them in 

every region. Because there have been—they are very qualified, capable people. 

So I guess the question is, might there be some resources available perhaps on a short-term basis where the government would either hire or contract some additional resources? And what they 

could perhaps do is catch up once, if you will. So if they are working right now on leases that are already on holdover, then they 

can’t get quite ahead, as we suggested, on the deals that are 2 and 

3 years out. So it is possible that there could be a one-time sort 

of clean-up, if you will, and then begin to try and get further and 

further. 

Ms. NORTON. Mr. Schear, just as Mr. Purtell suggested, a 

commensense notion, hey, start a little earlier, and a large part of 

the problem will take care of itself. Your notion is about backlog. 

That, by the way, is exactly what I meant at the EOC, a 100,000- 

case backlog. So no matter how much I streamline this process in 

the front end, I am still going to end up with a backlog. So we just 

separate it out into backlog cases and say we will proceed on a 

backlog strategy. That is different from the other strategy, takes 

into account other factors. 

You are right about their own personnel. They have been bled 

dry. And it may be for on a short-term basis something like that 

could be done. But that is the thing we are looking to. If you are 

serious about it, you don’t keep filling the backlog and congratulating them for getting the new cases. You try to find a way to 

clear the decks so that the new procedures can, in fact, click in. 

Mr. Schwanke, I am nervous about exactly what you indicated in 

your testimony. You say in page 5 that financing of any commercial 

mortgages coming due will be extremely difficult for most property 

owners in 2009 and 2010. Many commercial real estate loans are 

structured as 5-year loans and, thus, for these type of loans, roughly 40 percent of the loans will be coming due in the next 2 years. 

That reminds me of the subprime mortgage crisis. Some of these 

are securitized loans. But these are certainly not the same kinds 

of things. 

What is going to happen? Do you think that they will—those who 

hold these loans will see that are all in the same boat and will negotiate their way out of this problem that apparently you see as 

large scale? 

34 

Mr. SCHWANKE. Yes. I think it is large scale; and no one really 

knows how we are going to get through it, especially the securitized 

loans, which are set up with servicers that have certain requirements they have to follow and may not be able to renegotiate that 

loan, as a bank might be able to. 

Ms. NORTON. May not be able to because of what? 

Mr. SCHWANKE. Because they have certain rules they have to 

abide by. Because these securities are held by a whole set of owners in the securitized loan market, and they have rules they have 

to follow, and they don’t have a lot of leeway like a bank. 

Ms. NORTON. You know, the government has had to help with 

this in the private sector. Do you believe the government may have 

some role to play here for—I mean, we see 40 percent of these 

loans then take down office space in large cities across the United 

States. Somebody will wish they had come up with some way to do 

something here. And I am not sure anybody is paying much attention at those levels because we are so occupied, preoccupied here 

with what is on the plate now. 

Mr. SCHWANKE. If something is not done, this could be the next 

wave of problems. It is a mortgage-backed security. It is a commercial mortgage-backed security, just like the other mortgage-backed 

securities that are causing all of the problems with the subprime. 

It is a much healthier market. They didn’t have the kinds of problems as the subprime. They were generally good loans when they 

were made. They are going to go into distress situations simply because of the economics of the marketplace. 

Ms. NORTON. These are people who could pay. These are not people who are in distress. 

Mr. SCHWANKE. They are going to be in distress because property 

values are going down and interest rates are going up, and what 

they are asked to put back into the next refinancing deal is going 

to be way more than they had to start with. 

Ms. NORTON. Whereas if they were a bank, they could negotiate 

in keeping with the state of the market. 

Mr. SCHWANKE. And even some banks won’t negotiate these. 

Ms. NORTON. Mr. Purtell. 

Mr. PURTELL. Many of these loans that we are going to be dealing with are interest-only loans. So the impact, when those come 

due, that is going to play out. 

Just, for example, in the metropolitan D.C. Area, in the next 5 years there is $21 billion of these loans alone. 

Ms. NORTON. Of these securitized loans? 

Mr. PURTELL. By 2013. 

Ms. NORTON. And do you have any idea how much of that space 

would be government occupied? 

Mr. PURTELL. I don’t have those statistics. We will be glad to 

help do that. 

Ms. NORTON. Mr. Schear, did you have anything to say on that 

score? 

Mr. SCHEAR. Nothing additional. 

Ms. NORTON. Let me ask you, Mr. Schear, how do you believe 

that even with a GSA lease whether you believe or, for that matter, 

whether any of you believe that if you have a lease or a Federal 

tenant they are still going to have trouble getting financing? A FedVerDate Aug 31 2005 14:06 Jul 14, 2009 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 P:\DOCS\48328 LINDS
35 

eral Government lease with the good faith of the Federal Government behind it, will that have an effect on the cost of credit itself? 

Would it have an effect on credit availability? 

Mr. SCHEAR. Are you thinking in terms of new construction or refinancing an existing or both? 

Ms. NORTON. First new construction, then refinancing. 

Mr. SCHEAR. Okay. I think that in terms of new construction, I 

think, clearly, if anything is going to get financed, it is going to be 

a Federal Government lease. But I think in today’s market in this 

month of this year, it is nearly impossible to get financing for a 

new project, even with a government lease. 

Ms. NORTON. Now, a new project with a government lease with 

the government behind the project, what makes it difficult to get 

a loan in that case? 

Mr. SCHEAR. Just simply the scarcity of lending capital available, 

the number of lenders who are willing to lend. 

Ms. NORTON. Even to the government that is financing so many 

of them? 

Mr. SCHEAR. That is what I would say. 

Mr. SCHWANKE. Certainly you could find yourself in a situation 

where, well, the cost of construction is going to be higher than 

what the rents are going to support. 

In a leasing situation, you can see a situation develop where if 

the loan is coming due and a lease is coming due at the same time 

and the market has a situation where the rents go down and the 

owner still has to cover the cost of his debt and he has to put more 

equity into it, he has less income—— 

Ms. NORTON. That was the problem we were describing before. 

This is all circular. You have got to have somebody who can pay 

and yet, with the costs going down, the market going down, that 

controls the square footage, the cost per square foot, which isn’t 

enough to take care of the higher cost of credit and debt. 

Mr. SCHWANKE. It does present an opportunity, I think, where if 

the GSA is in a building that becomes in a distressed situation and 

they have to sell, GSA can be a buyer and get a very good price 

on that and not have to move and find themselves in an attractive 

market situation. 

Ms. NORTON. Now, the GSA testified that, well, yes, but that 

might depend upon the location and the rest. Should it really? I 

mean, if you have got a rock-bottom price in an area where you 

usually need some space, should you be that picky about, well, we 

can’t meet the—that is not exactly what the agencies are looking 

for at this time. 

How would a private party look at that market when he leases 

all over a defined region, may need more, for the moment, in Fairfax than in Prince George’s, but there are some properties in Prince 

George’s that are particularly favorably priced? How would somebody look at that? As an opportunity or a risk? 

Mr. SCHWANKE. Well, it depends on what kind of leasing is in 

place. If it is an empty building, it would be a huge risk, because 

you would have the risk of leasing it up. And in this market, it 

would be extremely difficult. 

Ms. NORTON. No. We are talking the government and that the 

government needs spaces all the time. Because, as you have heard, 

36 

some of these leases expire, people would like to move somewhere 

else, and the question of getting new space, you just testified, is not 

going to be easy. So here comes a building—maybe it is one of 

these buildings you just testified about. The ARM, as it were, became due, so they just can’t meet it. 

So there that building springs up in D.C., Prince George’s, Montgomery County, what if you had the money, like the government 

does, and were weighing the risks and opportunities? What would 

you regard as the risk and what would be the opportunity, if any? 

Mr. SCHWANKE. If you have an empty office building that the 

GSA can fill, that is a golden opportunity and meets your specifications. Now, a lot of these buildings won’t necessarily do that. They 

are not going to be trans-oriented. They are going to be out on a 

highway somewhere. They are going to be empty. 

Ms. NORTON. I am assuming—our own procurement rules say— 

Ms. Edwards would tell you, you have to be near a subway and we 

show you an exact number of feet. So I am assuming all of that 

is in order. And, in fact, we know where people build. They build 

because they want us to come in the first place, so do understand 

that. The first and foremost kind of tenant they want is the Federal Government. 

So assume that is all in place. But you don’t have a tenant in 

the moment. You may not even have the money at the moment. 

You may have to come to say to Norton, can you help us? Because 

this will help the save the government a gazillion dollars. Whatever it is. 

If you could get hold of the money, my question is, even though 

there may not be someone right now who wants that space in that 

place, is this for a big-time lessor or developer? A risk or is it an 

opportunity? 

Mr. SCHEAR. If I think I understand the question, if capital were 

available and the government were available to lease, that is a 

win-win-win for everybody. So I think that regardless—as long as 

it meets the requirements, then I think that would absolutely be 

a good thing. 

Ms. NORTON. We are trying to orient the GSA to think in a down 

market what the advantages are. There are obvious disadvantages 

that have come out in this very hearing. But the terrible disadvantage of having someone who is prepared to continue to pay on his 

mortgage but the short-term mortgage has become due, it is hard 

for me to see, as a benefit to somebody in the market there—I don’t 

see the benefit to the lender. I don’t see the benefit, of course, to 

the builder put in that position. But, heaven help us, it might be 

to the GSA to take advantage of it instead of having to come up 

with a procurement for a building it doesn’t own and then lease it 

and then still it doesn’t own it. And then, by the way, keeps on 

leasing it until it buys it several times over. Those are the kinds 

of practices we are trying to get rid of. 

Should the government, in short, have an investment strategy of 

its own? If you were—just off the top of your head. You haven’t had 

time to think through this question. If you were to advise the government today on an investment strategy—and one of you—I think 

it was Mr. Schwanke—testified of a reasonable financing strategy 

for the Federal Government. Bearing in mind that we lease and 

37 

sometimes we have to construct entirely a new space for an agency, 

what would be your investment strategy, given where the Federal 

Government and the market are at this time? 

Mr. SCHWANKE. I would suggest it is a great time to buy. Over 

the next year, it will be a great time to buy commercial real estate 

if you are going to use it. You don’t have to take a risk if you can 

occupy the space. It will not only serve the government well by allowing them to acquire space at very greatly reduced prices, but it 

will also help the overall commercial real estate market by putting 

a floor under prices of buildings. 

If there is a buyer in the marketplace willing to buy at a certain 

level, that is a floor that is there. Right now, no one quite knows 

where the floor is going to be, and that is bad for the commercial 

real estate market, it is bad for all of the banks and all the lenders 

that are lending into that market. So you can serve two purposes 

with one by buying low and being a market maker, essentially. 

Mr. SCHEAR. I think, simply stated, if you are a user of space in 

today’s marketplace, investment strategy would be to be opportunistic and take advantage of today’s current situation. 

Ms. NORTON. Ms. Edwards, do you have any questions? 

Ms. EDWARDS. Thank you, Madam Chairwoman; and thank you 

to our panelists today. It has been a very illuminating conversation. 

I think one of the points of illumination—and I hope that our colleagues have heard that—is a very similar warning that we received from the FDIC 3, 4 years ago about the subprime market 

and the securitization that was taking place in that market and 

the impending disaster. 

What we have heard right now is that we have a lot of commercial-backed securities that are maturing and need refinancing over 

the next 5 years, and it is a boatload. And the credit markets are 

closed in, and so the capacity to refinance in this situation is dire. 

And we are talking about loans that are good. 

I think when we looked at the housing market, we saw a housing 

market where, at first, we started out with a subprime problem; 

and we have quickly deteriorated into a prime problem and with, 

again, a shrinkage of credit. And this is really scary. 

So thank you for that, because it is a bit of an illumination for 

me. 

My questions actually have to do with looking at the GSA sort 

of lease plan and the lease-versus-buy options. I am reminded that 

a few years ago, I, actually, for a nonprofit that had cash, was looking at leasing space and then decided—because, in 2000, it was a 

horrible commercial market. There was space available all over 

this city. I got a great deal on a building over on Dupont Circle, 

retrofitted the building, and it is a good deal right now. 

It seems to me GSA isn’t exactly in that kind of position, whether it is positioned to take advantage of that or has the capacity or 

analysis to do that or not. So, again, I appreciate your pointing out 

those options. 

I wonder if, when you look at what the possibilities are for GSA, 

if you have some recommendations. You made a couple about how 

to proceed from here. Because I think we are in a little bit of a 

quandary. We know that it is a buyer’s market. We know that it 

38 

is, in some ways, a landlord’s market. But we don’t seem to be able 

to take advantage of it. How do we do it? 

Mr. PURTELL. I think the first way is to assist the GSA with 

some of that backlog by getting the expertise that maybe is not 

there right now so they can deal with that. Because, obviously, the 

opportunity won’t last forever. So I think the next 12 months are 

critical to take some steps to deal with that. 

Ms. EDWARDS. Do you have some sense—I wasn’t quite sure GSA 

knows what—has a handle on the numbers of leases that are coming to term. Because I don’t know how you both, as the chairwoman has pointed out, deal with what is ahead when you haven’t 

dealt with what is behind. And it wasn’t clear to me that, whether 

it is using technology or something else, that GSA fully has a grasp 

on the magnitude so that they can deal with issues of capacity. 

Mr. SCHEAR. I think that, clearly, the uncertainty of GSA prior 

to today has been thinking of these matters. The industry is available to work with them. It is easy for us all to sit here and say 

there are great big opportunities out there, but then to match a 

specific situation to a specific requirement really is a challenge, 

whether you are in the private sector or in the public sector. So I 

think that that will be seen as time goes on. 

We should make sure whatever resources are available and see 

if, in fact, those kinds of situations will emerge. If they emerge in 

2 of 15 situations and something is able to be done on an opportunistic basis, that may be a great standard, as opposed as to not 

being able to take advantage of any. 

So I think that we will have to see how it plays out, really, in 

the trenches. Because it is really not that—we can’t sort of look at 

it from on high and say, hey, just go do it. 

Ms. EDWARDS. I can appreciate that. 

Just one question, and it is about retrofitting for energy savings 

versus new construction. And I am just really unclear about how 

you assess the cost. Because we hear all the time—and some of you 

have said it. You have said in your testimony that, you know, retrofitting buildings might be a more effective strategy than new construction just because of the gaps in the rents that would be available and the new construction financing. 

But if you factor over a period of time—and I don’t know what 

that period of time is—how much energy savings that you might 

get by building new and green, is there some parity in the retrofitting versus new construction? 

Mr. SCHWANKE. Well, I think retrofitting, clearly, you have an 

asset in place. So it is greener to use an asset in place than it is 

to build something new. And strictly from an energy efficiency 

point of view, the payoff should be pretty good over a short period 

of time. If you start going into other greener things that are more 

costly and don’t get into cost savings, operating savings, that is another question. 

But, clearly, from an energy efficiency point of view, I think it 

is something we will see a lot more of. Because building operators 

are going to want to reduce their costs, and they then can then position their buildings as being more green. Clearly, the Obama administration is positioning the whole Federal Government to attack 

that issue and become more green. 

39 

So I think it is a win-win, and a lot of building owners are seeing 

that as something they are having to do whether they are building 

a newer or retrofitting an older building. Especially if you find a 

situation where a building becomes largely empty or has enough 

flex in it so they can start retrofitting the space within the empty 

space, then that gives them an opportunity to become more green. 

I know our offices we turned into a green office several years ago 

just because we wanted to. 

Mr. SCHEAR. I think you are right on sort of the forefront, and 

it is really an interesting and important question that is not yet 

answered. Because I think we have all figured out how to build 

new green buildings, and I think the industry has advanced very 

rapidly in a very short period of time. So from ground up, I think 

we can deliver really good quality, sustainable product. 

In terms of the existing inventory, which is mostly what we are 

focused on, we are not going to be in a period of huge building. It 

is much more complicated to figure out, within the existing inventory, how to build efficiencies. So I think that is a question that the 

industry is focused on right now, looking at the cost effectiveness, 

looking at a whole variety of issues, and I think there is more to 

come in the coming months in that front. 

Ms. EDWARDS. Mr. Purtell, you actually specifically mentioned a 

desire to retrofit leased buildings, which I think is a little bit more 

complicated. So I wonder if you could elaborate on it. 

Mr. PURTELL. I guess the comment—and I would confirm what 

has been said before me—is that the existing building stock is the 

biggest part of this discussion and the opportunities are probably 

the biggest there as well. It is aging, we have a lot of equipment 

that has to be replaced, and I think it is another opportunity to 

incentivize those owners to do that and be more efficient at the 

same time. 

Ms. EDWARDS. The government would only get—and the taxpayer—a real benefit from that if there were really a long-term 

lease so that we actually get sort of our bang for our buck, as opposed to what could amount to, essentially, a windfall for a leaseholder who then, when the lease terminates, gets to lease out this 

great green building. 

Mr. PURTELL. I can give you a simplified example. 

For buildings in my market, the energy cost is near $2 a foot. 

If we can save, you know, 10 percent by being more energy efficient, do the math on all of the numbers and see how that works. 

So there is an opportunity immediately to save money for the 

taxpayer and the GSA. 

Ms. NORTON. I want to thank the gentlelady very much. 

And I want to say to all three of you that, first, I appreciate your 

waiting us out as we went through the issues with our GSA representative, but to say as well that, as we try to think of what to 

do going forward, your testimony, in particular, has been of immeasurable value to us, and we thank you very much for it. 

This hearing is adjourned. 

[Whereupon, at 12:35 p.m., the Subcommittee was adjourned.] 

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Æ 


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