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43–848 PDF 2008

CREDIT CRUNCH: EFFECTS ON 

FEDERAL LEASING AND 

CONSTRUCTION 

(110–158) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND 

EMERGENCY MANAGEMENT 

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 30, 2008 

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 

BRIAN HIGGINS, New York 

RUSS CARNAHAN, Missouri 

JOHN T. SALAZAR, Colorado 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

NICK LAMPSON, Texas 

ZACHARY T. SPACE, Ohio 

MAZIE K. HIRONO, Hawaii 

BRUCE L. BRALEY, Iowa 

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 

JERRY MCNERNEY, California 

LAURA A. RICHARDSON, California 

ALBIO SIRES, New Jersey 

DONNA F. EDWARDS, Maryland 

JOHN L. MICA, Florida 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

WAYNE T. GILCHREST, Maryland 

VERNON J. EHLERS, Michigan 

STEVEN C. LATOURETTE, Ohio 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

ROBIN HAYES, North Carolina 

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 

TED POE, Texas 

DAVID G. REICHERT, Washington 

CONNIE MACK, Florida 

JOHN R. ‘RANDY’ KUHL, JR., New York 

LYNN A WESTMORELAND, Georgia 

CHARLES W. BOUSTANY, JR., Louisiana 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

THELMA D. DRAKE, Virginia 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

ROBERT E. LATTA, Ohio 

(II) 

SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY

MANAGEMENT

ELEANOR HOLMES NORTON, District of Columbia, Chair 

MICHAEL H. MICHAUD, Maine 

JASON ALTMIRE, Pennsylvania 

MICHAEL A. ARCURI, New York 

CHRISTOPHER P. CARNEY, Pennsylvania, 

Vice Chair 

TIMOTHY J. WALZ, Minnesota 

STEVE COHEN, Tennessee 

JAMES L. OBERSTAR, Minnesota 

(Ex Officio) 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

CHARLES W. DENT, Pennsylvania 

JOHN R. ‘RANDY’ KUHL, JR., New York 

JOHN L. MICA, Florida 

(Ex Officio) 

(III) 

(V) 

CONTENTS Page 

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

TESTIMONY 

Chessen, James, Chief Economist, American Bankers Association .................... 3 

DiPrinzio, Raymond, Managing Director, Head of Project Finance, CIFG Assurance North America, Inc. ............................................................................... 3 

Grigg, Steven A., President and Chief Executive Officer, Republic Properties 

Corporation, Representative DCBIA .................................................................. 24 

Purtell, Richard D., Chair and Chief Elected Officer, Building Owners and 

Managers Association International ................................................................... 24 

Rudy, Kenneth, International Director of Corporate Capital Markets, Jones 

Lang LaSalle ........................................................................................................ 3 

Winstead, David, Commissioner, Public Buildings Service, U.S. General Service Administration ................................................................................................ 24 

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS 

Cohen, Hon. Steve, of Tennessee ............................................................................ 49 

Graves, Hon. Sam, of Missouri ............................................................................... 50 

Norton, Hon. Eleanor Holmes, of the District of Columbia ................................. 54 

Oberstar, Hon. James L., of Minnesota ................................................................. 57 

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Chessen, James ........................................................................................................ 59 

DiPrinzio, Raymond A. ............................................................................................ 68 

Grigg, Steven A. ....................................................................................................... 71 

Purtell, Richard D. .................................................................................................. 73 

Rudy, Kenneth ......................................................................................................... 79 

Winstead, David L. .................................................................................................. 96 

SUBMISSIONS FOR THE RECORD 

Winstead, David, Commissioner, Public Buildings Service, U.S. General Service Administration, responses to questions from the Subcommittee ............... 101 

vi 


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vii 


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(1) 

HEARING ON CREDIT CRUNCH: EFFECTS ON 

FEDERAL LEASING AND CONSTRUCTION 

Wednesday, July 30, 2008 

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 1:10 p.m., in Room 

2167, Rayburn House Office Building, the Honorable Eleanor 

Holmes Norton [Chair of the Subcommittee] presiding. 

Ms. NORTON. Good morning. I welcome the witnesses to today’s 

Subcommittee hearing concerning the tightening credit market, 

which originated in the subprime mortgage crisis, and on other factors affecting Federal leasing and construction in the commercial 

marketplace. 

GSA is perhaps the largest customer for office space in the real 

estate market in the United States. GSA leases slightly more space 

than it owns, approximately 176 million square feet of leased 

space, housing over 700,000 employees compared with 175.5 million square feet of owned space, providing office space for 640,000 

Federal workers. The Federal inventory ranges from 2500 square 

foot border crossing stations to a million square foot courthouse 

complexes in major metropolitan areas. GSA’s stake in maintaining 

its strong position in the marketplace is high, particularly in the 

leasing market, in light of the continuing shift to Federal agency 

leased space. 

At this hearing, we seek to learn how developers, building owners, lenders, and construction companies, who are accustomed to 

unimpeded access to credit, position themselves in today’s puzzling 

market. We have concerns, even though the strictly competitive 

system for Federal contract awards guarantees that only the most 

creditworthy need apply or need compete. When I began talking 

with experienced developers and building owners as the subprime 

mortgage crisis worsened, their strong credit standing with lenders 

and the lengthy time frames and lead time for construction and 

leasing left them pretty much unworried. 

However, since then, seven banks have closed, particularly 

IndyMac, which had significant home ownership loans. It seems 

doubtful that a departure as unprecedented as a mountain of bad, 

securitized subprime mortgages sold in an unregulated global market, can be contained. Today, a year after the housing crisis became 

full blown, even the largest banks, whose customers also signifiVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
2 

cantly include commercial real estate, are showing record profit 

losses. 

Although many of the players in today’s commercial marketplace 

remain untouched for now, experts say that today’s crisis is unmatched since the Great Depression. The Nation’s largest bank, the 

Bank of America, has experienced a large increase in bad small 

business-related loans and recently took a 41 percent reduction in 

profit. Some analysts have raised the possibility that commercial 

loans could be a ‘‘ticking bomb.’’ Some also predict that this quarter 

may mark a turning point, with lending flat, down from record 

highs. 

However, the best evidence that something that cannot be ignored is afoot are recent actions by the Federal Reserve and Congress, who have moved to quell the perfect storm of a housing 

downturn on which economic growth, although housing has been 

the basic source of our economic growth, double-digit increases in 

many basic food products, and indeterminate gas increases. Driven 

by the economy itself, rather than by any piece of it, President 

Bush has thought better of his threat to veto the most far-reaching 

housing bill in decades. 

This Subcommittee has an obligation to look now at whether 

there is or could be a metastasis of the housing crisis and other 

economic problems that could surface in the commercial sector and 

what, if anything, could be done about it when it comes to Federal 

leasing and construction. 

A credit crunch typically refers to factors that lead lenders to reduce the available credit by declining to make loans or doing so 

only at increased costs or with special terms, even for those who 

are creditworthy. The uncertainty about the losses from the 

subprime mortgage crisis still playing out with mortgage lenders 

has caused the credit markets to shrink considerably. 

Although Federal leases and construction contracts might be said 

to be worth their weight in gold, private sector competitors don’t 

have that assurance when they compete for a lease or construction 

contract. If credit becomes too difficult or costly, commercial office 

space available to the Federal Government could diminish or allow 

too few to take the risk of competing, raising costs to taxpayers. 

GSA’s reliance on the commercial office space market to house 

Federal agencies ties the agency directly to commercial market conditions. The agency must begin to use its prime position in the 

commercial marketplace by leveraging its buying power and capturing its great potential for reduced costs to taxpayers. For example, in the last three years, fiscal year 2005 to 2008, the FBI presented this Subcommittee with 23 leases, the largest group of longterm leases. 

As a result, the Subcommittee has indicated that it wants GSA 

to look very closely at a comprehensive lease package for agencies 

like the FBI, which have long-term viability in metropolitan areas. 

Almost all the FBI leases will be built-to-suit the agency, but already GSA has seen a reduction in competitors for these FBI 

leases. We must discover why this is so and whether it constitutes 

the beginning of a trend. 

In today’s atmosphere of soaring budget deficits and rising costs 

for all concerned, GSA also must work collaboratively with the priVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
3 

vate sector to reduce the cost of acquiring commercial office space. 

By working with our private sector partners to achieve the vision 

and the know-how necessary to cut costs across the board, together 

we have the potential to help stimulate the local and national economy while addressing the needs of the Federal Government. Today, 

we are very pleased to hear from the GSA, from financial and economic experts on the commercial markets and office development 

who are before us and have prepared testimony. 

The Ranking Member had very much wanted to be here and had 

asked that we change the day of the hearing so he could, but something has come up as we near the end of the session, so I am inserting his remarks in the record by unanimous consent. 

We want to begin by figuring out where we are. We are not going 

to get to the remedy unless we have a fix on what is happening 

in a very puzzling economy. It has fascinated me from the beginning, just as a general matter, and even more so as it has progressed with all of the unknowns that we are having to deal with 

for the first time. 

Therefore, I am pleased to welcome panel one, James Chessen, 

the Chief Economist of the American Bankers Association; Raymond DiPrinzio, Managing Director and Head of Project Finance at 

CIFG Assurance North America, Inc.; and Kenneth Rudy, International Director of Corporate and Capital Markets, Jones Lang 

LaSalle. 

Actually, you may testify in whatever order you feel like. I have 

no preference, since you are not Government officials and there is 

no protocol. 

Mr. Chessen, of the American Bankers Association. 

TESTIMONY OF JAMES CHESSEN, CHIEF ECONOMIST, AMERICAN BANKERS ASSOCIATION; RAYMOND DIPRINZIO, MANAGING DIRECTOR, HEAD OF PROJECT FINANCE, CIFG ASSURANCE NORTH AMERICA, INC.; AND KENNETH RUDY, 

INTERNATIONAL DIRECTOR OF CORPORATE CAPITAL MARKETS, JONES LANG LASALLE 

Mr. CHESSEN. I would be happy to begin, Madam Chairwoman. 

Madam Chairwoman and Members of this Subcommittee, my 

name is James Chessen. I am the Chief Economist of the American 

Bankers Association, and I very much appreciate the opportunity 

to testify on the current state of funding for commercial real estate, 

including properties leased by the Federal Government. Our Nation 

is certainly facing difficult economic conditions, one that affects all 

businesses, including banks. We have gone through these periods 

before and have emerged much stronger as a result. 

I want to emphasize one basic point: the core business of banking 

is lending. That is what banks do. Banks will continue to be a 

source of financial strength in their communities in both good 

times and bad. Even in a weak economy, there are strong borrowers, including developers and owners of government leased 

property, that merit bank funding. 

I am also very positive about the banking industry. Before turning to my main points, many of you may be wondering about the 

health of the banking industry in light of the several recent failures that you mentioned, Madam Chairwoman. Let me assure you 

4 

that the industry remains fundamentally sound. Banks entered 

this period with a very strong capital base and banks have continued to build capital over the last several quarters. 

In fact, 99 percent of the banks are classified as ‘‘well capitalized,’’ which is the highest designation that can be given by bank 

regulators. Simply put, the industry has the capital and reserves 

to continue to make loans that are so vital to our communities. 

Let me now turn to commercial real estate lending. Like all specialized forms of lending, loans for construction, development, longterm funding of government leased properties have unique risks. 

These risks exist regardless of the economic cycle. The weak economy, however, does add an extra element of risk that affects the 

availability and price of credit. Against this backdrop, it is only 

reasonable and prudent that banks exercise caution in making new 

loans. Bankers are asking more questions of their borrowers and 

our regulators are asking more questions of the banks that they examine. This does mean that some higher risk projects that might 

have been funded when the economy was stronger may not be 

funded today. 

A very important factor affecting the volume of lending is the 

ability to sell loans on the secondary market, something that you 

mentioned, Madam Chairwoman. Even though problems in commercial real estate loans are low by historical standards, investors 

reacted to the problems in housing and have shunned new commercial mortgage-backed securities. As you mentioned, this has the 

consequence of reducing funding and raising the cost of new commercial real estate loans. 

Certainly, just as too much risk is undesirable, a regulatory policy that discourages banks from making good loans to creditworthy 

borrowers also has serious consequences. We are very concerned 

that a regulatory over-reaction could quickly convert a credit caution to a credit crunch. We witnessed just such a regulatory-induced credit crunch following the 1991 recession, and we are hopeful that regulatory reason will win the day this time. 

However, we hear reports from our bankers that examiners are 

demanding costly new appraisals on properties and forcing banks 

to write down collateral values even though the bank is not relying 

on collateral for the repayment of the loan. These unnecessary appraisals and write-downs will discourage banks from lending on 

similar projects. 

Fortunately, the bank agency heads seem to be sensitive to this 

potential problem and have pledged to avoid a repeat of the 1990s. 

The great challenge, however, may be to ensure that that message 

from those agency heads reaches the regulatory personnel examining banks in the field. 

To achieve our mutual goal of a safe and strong financial system, 

it is extremely important to remember the vital role played by good 

lending in restoring economic health, and not to allow a credit 

crunch to stifle the economic recovery. 

Thank you again, Madam Chairwoman, for the opportunity to 

present the views of the American Bankers Association at this 

hearing today. I would be happy to answer any questions that you 

have. 

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

5 

Who would like to go next? Mr. DiPrinzio? 

Mr. DIPRINZIO. Sure. Thank you. 

Good morning, Madam Chairperson, Members of the Committee. 

My name is Raymond DiPrinzio. Thank you for the opportunity to 

address the Committee on the impact of the current credit crisis on 

the development and financing of Federal real estate. I am currently head of Project Finance for CIFG, a financial guaranty firm 

headquartered in New York. 

Financial guaranty providers are essential proxies for retail and 

institutional investors in the capital markets, or lenders in the case 

of the bank loan market, since under the terms of their guaranty 

or credit protection contracts they are obligated to make principal 

and interest payments to investors and lenders in the event the 

borrower fails to do so. In this capacity, I am responsible for underwriting all forms of project financings for infrastructure, including 

transportation, energy, environmental and public use real estate facilities, such as office buildings, military and student housing, stadiums, and arenas. 

Federal project financing is a subset of the larger infrastructure 

market, a sector that has enjoyed unprecedented levels of interest 

from institutional investors across the globe due to the deep levels 

of demand for financing infrastructure in the United States which 

is in need of replacement or for new facilities which must be built 

to accommodate growth. In my 24 years working as a finance professional, I have had the opportunity to work on Federal projects 

as a financial advisor and investment banker to Federal agencies, 

as well as a provider of credit protection to investors in the capital 

markets. 

I have worked on financings for Energy, Justice, Veterans Administration agencies in both GSA form, as well as what I would 

refer to as direct agency leases. Given my background, I am speaking today with the perspective of a practitioner in the capital and 

bank markets, and more specifically one who has the perspective 

of both the borrower as well as the lender. 

The current difficulties in the financial market are unprecedented in both the breadth and depth of its reach, and it should 

come as no surprise that the market for Federal lease transactions 

has not escaped unharmed. I should mention I am looking really 

from the perspective here of the lease construction market, the 

types of financings that GSA and agencies enter into that require 

a build-to-suit and, more specifically, the raising of capital in either 

the bank market or the capital markets. 

While real estate projects involving Federal tenants under longterm leasing arrangements are viewed more favorably relative to 

their commercial counterparts, the overall reduction in liquidity, 

repricing of risk, and either the unavailability of credit protection 

from monoline bond insurers or the market’s diminished view of 

the value they bring, has led to delays in completed financings, 

tighter credit terms and, most importantly, dramatically increased 

credit spreads, i.e., higher borrowing costs. Indeed, higher borrowing costs are making many transactions impossible to complete 

as it translates to rental rates outside of approved levels. 

More specifically, financings that were able to get credit protection and complete a transaction saw spreads widen to 70 to 100 

6 

basis points over previous levels compared to the pre-credit crisis. 

Without credit protection, spreads have widened 200 to 300 basis 

points, levels never seen in markets for credit for Federal leasing. 

What can be done? In my prepared testimony, I have laid out a 

number of recommendations, but I think I would like to just touch 

on them briefly. 

What is striking to me, as an investment banker and a lender, 

is how unknown this market truly is to the wider capital markets. 

I have been struck by its obscurity, the lack of understanding of 

these transactions given the depth and the role the Federal Government plays in the real estate market, and the needs of the GSA. 

In many ways, Federal financing has significant untapped potential which, if properly harnessed, can result in broader market acceptance, higher levels of investor interest, lower borrowing costs, 

and ultimately lower rental costs. 

In this regard, I offer the following areas for consideration, and 

they are basically, I would say, four areas: market education, a 

more programmatic approach, addressing OMB rules that impact 

the structure of these transactions, and the consideration to enhance use leasing potentially for GSA agencies. 

On the market education front, my point basically is I think GSA 

and the other agencies could take a more comprehensive approach 

to educating both the bankers and advisors, as well as the rating 

agencies on the operation of the Federal Government in Federal financing. 

With respect to a programmatic approach, what is striking to me 

is how decentralized the approach to financing the Federal Government is in these markets, and an effort to bring together a more 

comprehensive programmatic approach to the market would go a 

long way, I think, to addressing these issues. 

OMB, quite rightly, guards the Federal budget process and balance sheet, but consideration should be given to revising the rules 

with an eye to an appropriate level of risk allocation between Federal agencies and private sector developers and financial participants, as well as the ultimate impact on financing structure and 

costs. 

In summary, while the current crisis in the credit markets is taking its toll on all players, including Federal agencies, the dislocation in market coupled with unprecedented levels of demand for 

properly structured infrastructure investments also provides an opportunity for the Federal Government going forward in its approach to financing real estate and other essential infrastructure. 

Steps should be taken to broaden the level of understanding of the 

Federal role as a user of facilities critical to the operation of government, streamline its approach to the market, and address the 

rules and regulations which govern its role while maintaining a 

careful eye on the impact on risk and return. 

Thank you, and I am happy to answer any questions. 

Ms. NORTON. Thank you, Mr. DiPrinzio. 

Mr. Rudy? 

Mr. RUDY. Good morning, Madam Chairwoman. Thanks for having me. I am Kenneth Rudy, and I am President of Jones Lang 

LaSalle’s Capital Markets organization in the Americas. I have 

been a practitioner for about 25 years. Our group tends to serve 

7 

private sector investors, owners, and occupants on capital strategies dealing with the capital markets in the United States. 

I hope you had a chance to read my prepared testimony, so at 

this time I will just take the opportunity to summarize and reflect 

on some of the things that have already been said. 

With your opening remarks, Madam Chairwoman, you talked 

about the subprime mess and how it has spread to larger markets, 

so I think it is good to level-set and understand where we are so 

we can predict where we might be going. With that, there is the 

recognition that real estate has always operated in cycles; it is a 

very cyclical asset class subject to lots of volatility, lots of swings 

because it is a complicated asset class subject to debt, supply, demand, confidence, and other economic fundamentals. As a result, it 

will swing. In my career, I am in my fifth real estate cycle of significance, and this one is a very significant one. 

So when you try to predict where we are going to go, why we are 

where we are today, and principally it is overflow from the massive 

amounts of capital that was chasing real estate investments both 

on the commercial and residential side. We all know what has happened with the abundance of mortgage debt and the origination of 

debt for less worthy creditors and borrowers. 

In the residential markets, that has led to an oversupply of product, as well as defaults for people who can no longer afford to pay 

their mortgages. What has happened now is those very same lenders, who are having trouble with their balance sheets because of 

the mortgage mess from the residential side, are also restricted 

from providing loans on the commercial side. 

You mentioned also earlier you don’t think that the commercial 

mortgage mess has spread, or there is such a mess yet, and that 

is true; the default rates on commercial mortgages are very low 

today. That is because on the commercial the fundamentals, meaning the supply and demand that creates value in commercial real 

estate, has largely been in balance since the last cycle. 

However, as a lot of these commercial loans are coming due, especially the acquisition loans that were made during this last cycle 

peak, it may be difficult for a lot of owners to refinance these loans. 

That, coupled with the overall scarcity of acquisition debt in the 

commercial markets, makes the investment cycle or the market 

pricing of assets very difficult, and therein lies the conundrum. 

A market is determined by buying and selling activity, or by two 

parties coming together. When transaction activity has hit the levels that it has hit today, which is nearly down 70 to 80 percent 

from years prior, it is difficult to come up with a market clearing 

price for asset values, commercial asset values. There is a big gap 

between the bid and ask, as they say. And when that occurs, the 

lending markets who help finance these acquisitions, they themselves have difficulty determining the value of the underlying asset 

as they are considering granting loans to commercial developers or 

investors buying real estate. 

So the whole pricing process is in disarray. And whenever there 

is disarray, uncertainty goes up and risk goes up, and risk is reflected in higher pricing of capital, both on the debt and on the equity side. For occupiers of leased or investment real estate, that 

8 

translates into higher occupancy costs or greater challenges in 

doing deals. 

So this is where we are today. People often ask where are we 

going in the future, and the only thing I can assure you is that— 

again, this is a cliche being in the real estate business—the only 

constant in real estate is change. You can be certain that it will 

improve, we will find a new bottom, but most economists will tell 

you you don’t know when you are there until you are looking in our 

rearview mirror, until you have already passed that bottom. 

Right now there is a great deal of uncertainty. Just this week you read that Merrill Lynch finally sold what was a portfolio of $30 

billion of CDOs to a private investor that they had previously 

marked down to $11 billion, and they sold it for $5.8 billion. That 

gives you an indication of the great deal of uncertainty that there 

is in pricing securities and assets associated with real estate. 

Also in my written testimony I showed you the drop-off in the 

CMBS market, which is the amount of securitization of commercial 

loans that are available in the market. It is running at nearly 10 

percent of where it was at the last market peak. So the scarcity 

of capital is creating difficulty for borrowers and investors and 

speculators in real estate. Again, we won’t know where the bottom 

is until we are passed it and there has been a market clearing 

price for real estate assets. 

What does that mean to the Federal Government? Well, for the 

Federal Government it represents the best credit out there, and 

there is still money available, as you heard in the prior testimony. 

Real estate is still a valued investment asset across the world. It 

is in a balanced portfolio for most investors and it will continue to 

remain so, and there are lenders that are available. 

The difference between today and yesterday is now the lenders 

are primarily balance sheet lenders who do sound underwriting, 

sound credit analysis, as opposed to what you have heard in the 

residential market, the covenant-light, no dock loans. That occurred in the commercial market too, where there was a covenantlight commercial mortgages. That doesn’t exist any more. 

What it means when you have covenants in underwriting is the 

lenders and equity sponsors need to be able to pay back the loans 

more quickly, have lower amount of loan relative to the overall 

value of the asset—and that value is still undetermined in this 

marketplace today—and other sort of more restrictive terms. The 

Government can play well in that market because it can promise 

the equity sponsor and the lenders better ability to have that loan 

repaid, provided that the documents that are securing that income 

flow to that property are what we would call market conforming, 

or at least have market conforming sort of provisions to allow the 

equity sponsor and the lender to underwrite that risk, to know 

what they are getting when they make a loan on a commercial 

property. 

So I have provided in my written testimony a list of potential 

clauses and other features of GSA leases which, when made market conforming, have the effect of reducing borrowing costs and, 

therefore, equity yields and, therefore, occupancy costs for the Federal Government when they do leases. But the money is there for 

good projects, good sponsors, and good tenants. 

9 

Thank you. 

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

Now, let me see if we can get some of the basics. This is very, 

very compelling testimony. 

Let me ask you, Mr. Chessen. You warned about the so- called 

1991 overreaction and the reaction today. Do you consider what the 

Fed is doing, what the Congress is doing, do you reconsider that 

within the realm of reaction or overreaction? 

Mr. CHESSEN. I think, Madam Chairwoman, that was a very 

good reaction to try to stop what could eventually become a bigger 

credit problem. So I congratulate you and the Members of Congress 

for moving forward on that plan. 

My concern is what happened in the 1990s was that the regulators were looking over banks’ shoulders for every type of loan 

they made, and the message back then from Congress, as well as 

the regulators, was make no mistake in lending; and that has a 

chilling effect on the willingness of banks to get out and make any 

type of loans. 

Just to give you a recent example of that, Madam Chairwoman, 

we had a big meeting with 300 bankers and a banker from New 

York came up to me and he said they had examiners in his bank, 

and he has a lot of capital, never got into the problems with the 

housing, and he is anxious to lend, and he was describing to the 

examiner a loan that he wanted to make on a commercial property, 

and the examiner said why on earth would you want to make this 

type of loan in this environment, and he was stunned by that. 

He is a bank that is out there, willing to lend, he has the capital, 

doesn’t have the problems that are out there, and his regulators 

are saying, whoa, wait, I am not sure that is going to be a good 

loan a year from now. That is what we worry about. 

Ms. NORTON. His Federal regulators were saying that? 

Mr. CHESSEN. Yes, ma’am. 

Ms. NORTON. And you do not believe this was a risky loan? 

Mr. CHESSEN. I don’t know the details of the loan. He believed 

that this was a loan that met his underwriting standards and he 

was comfortable in making. 

Ms. NORTON. And if he was comfortable, one would wonder why 

the regulator was not. I don’t know the particulars there, but I 

must say to second-guess somebody, unless there is some issue for 

the Federal Government, is an interesting notion for a regulator. 

Mr. DiPrinzio, you mention on page two of your testimony properly harnessing—these are your words—properly harnessing Federal financing. I wish you would elaborate that and describe some 

of the benefits that you think this harnessing would bring to the 

Federal Government. 

Mr. DIPRINZIO. What I am getting at, really, is that the role of 

the Federal Government in the capital markets as a user of financing, if you will, a borrower, is not very well understood. There is 

a very small subset of practitioners out there who really understands how Federal leasing contracts work either at the GSA level 

and certainly at the agency level. 

It is striking to me how decentralized the financing of real estate 

for Federal properties is, and I have been doing it now for a number of years, so I have kind of seen it from time to time. If you look 

10 

at other examples of the Federal Government approaching the market comprehensively, military housing, the privatization of family 

military housing is a great example of where a comprehensive approach was taken, legislation was put into place in 1996 and private capital has come in in droves. I think the numbers are roughly 

$20 billion has been raised over time. 

Ms. NORTON. What are they doing with military housing compared with what they were doing before? 

Mr. DIPRINZIO. Essentially, the Federal Government got out of 

the role of providing housing for military families. 

Ms. NORTON. So what, did it contract to get it before and now 

what does it do? 

Mr. DIPRINZIO. And now basically money is raised in the capital 

markets; bonds are sold, either with bond insurance or without 

bond insurance, or privately placed to investors and the Federal 

Government is essentially allowing the BAH, the basic allowance 

for housing, to be used as a source of repayment for those bonds. 

The point being, not to get into the specifics of that program, but 

that it was a comprehensive approach. While there are differences 

among the services, Army versus Navy versus Air Force—they do 

things slightly differently, they have maintained the flavor of the 

different services in their approach to the market—there are broad 

rules and understanding as to what the intent of the Defense Department is in bringing in private capital, and it has worked really 

well. The rating agencies understand it and the market has accepted these transactions. 

Ms. NORTON. I am trying to analogize to the GSA, where I take 

it the lease payment would be the analogy. 

Mr. DIPRINZIO. That is correct. 

Ms. NORTON. How is the VA in the picture, then? 

Mr. DIPRINZIO. How is VA in the picture? 

Ms. NORTON. How is VA in the picture? 

Mr. DIPRINZIO. Right. Among the agencies, VA probably has the 

most sophisticated program and approach, and is probably one of 

the more well known agencies to the market. Again, it does things 

differently; it has its own approach to how it wants financings 

done. But as a practitioner, as a lender or finance professional, I 

recognize how the VA has been—— 

Ms. NORTON. I am sorry, I said VA. I meant DOD. DOD. I am 

trying to see if essentially the housing is given over to the private 

sector to build. 

Mr. DIPRINZIO. That is right. 

Ms. NORTON. What role does DOD play in the process? 

Mr. DIPRINZIO. Well, essentially, the Government is deeding the 

property over, it is conveying the property to a private entity under 

a 50 year development contract. At the end of 50 years, the property comes back to the agency. So unlike a project where you have 

nothing from scratch, you are basically going into the market with 

an existing group of housing that service members are living in, 

and the Defense Department or the services themselves convey 

that property and then basically enter into a development agreement with a private developer who is raising financing in the capital markets to either renovate or construct new housing for miliVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
11 

tary family members and operate that housing over the course of 

a 50-year period. 

Ms. NORTON. I am searching for whether or not we have done 

anything like this. We have often spoken of the DOD and the VA 

and what looks like a one-time transaction, because I haven’t been 

able to spread it. We were able to do that at the Southeast Federal 

Center when I was tired of not being able to get a Federal agency 

to move down there and put in a bill, which essentially has allowed 

that to happen, and look what is happening; they are building on 

the property. 

This was one of the most valuable properties in the Country. 

When I tried to say there must be similar property across the 

Country, why don’t we do it elsewhere, we were met with the notion, well, it scores. How can it score if it didn’t score here? I still 

haven’t been able to find that out. 

But this notion of scoring may be familiar to all of you. I don’t 

know if it was you, Mr. DiPrinzio, but one of you mentioned in your 

testimony scoring. I wish I could say that something would happen 

to change it. The worst times get, the more I think we won’t. The 

waste of it sends us up the wall, I can tell you. The willingness to 

spend money, billions of dollars because something scores, and especially because real estate is treated as if it were like any other 

commodity. 

I wonder if you have any notions about how to encourage the 

Federal Government to understand how distinctly different real estate is from other goods and services that are scored, because if we 

go with scoring generally, we obviously get pushed back, and we 

find that scorers have almost no understanding of real estate, and 

this is very threatening to us. We just got a bill, I had to do a bill— 

shouldn’t have had to do a bill, but because I had to do a bill because OMB wouldn’t move on the Old Post Office, this priceless 

heirloom at 12th and Pennsylvania Avenue. 

Obviously, no cost to the Government and we have a perfect example to prove it, and that is the old Tariff Building, which is now 

the Hotel Monaco, and the scorers scored it. Susan Britta here was 

tasked with somehow beating them back and she beat them back, 

frankly, because she knew a whole lot more about real estate than 

they did, number one, and, two, the Tariff Building was an example of how it works. 

But anything the three of you have to say on scoring, we would 

particularly pleased to hear. For example, does the DOD approach 

meet any scoring problems? How are they able to do that? I can’t 

imagine doing that on this side. 

Mr. RUDY. I am moderately—— 

Ms. NORTON. Maybe it is the 50-year, because it comes back to 

the Government and, of course, we could do that as well. The Government still owns the property. You put it in the hands of the developer long enough so that he can in fact benefit, even though he 

doesn’t own it. I can see that. 

Could we do something like that approach, Government property 

in that way? For example, at Saint Elizabeths we are about to 

build the Department of Homeland Security. This Department, 

GSA has never built anything like this. It is not like building a 

building; it is building a half dozen buildings and putting them in 

12 

one place. It is a compound. If you were tasked with that, what approach would you use? How would you do it? And keeping in mind 

some of the issues we have in the Federal Government. 

I am taking some of my cues from this 50-year military housing 

approach. How would you do it other than the way we do it now, 

which is building by building, essentially direct appropriation? The 

ownership of the property is the—the ground is ours, but the building belongs to the person who puts it up there. How would you do 

it if somebody said, okay, for the first time—because this really 

is—if we have any chance, we have it now, because we have never 

done anything like this. Even the Pentagon wasn’t like this. That 

is the biggest one, maybe. 

This, by the way, will probably be the second biggest, but it won’t 

be one building. So you could argue that precisely because you 

know exactly what you are going to do. There had to be a plan for 

what agencies, how many, exactly where they are located on federally owned property. Brand new situation for the Government. 

What would you do? 

Mr. RUDY. Madam Chairwoman, I want not remind you that my 

perspective and my history is servicing the private sector, which is 

I think why you asked me to testify, to bring private sector ideas 

to questions like you just asked. So I run the risk, when giving you 

some analogies, that I may not have a perfect analogy, whether it 

is to the DOD program or how you may want to build out Saint 

Elizabeths, but a real quick comment on the DOD program. 

My company is heavily involved in helping the Department of 

Defense with Army and Air Force housing. There were some different objectives there. Clearly, it was to keep the Department of 

Defense from using its war fighting dollars on housing and to bring 

in private sector capital—— 

Ms. NORTON. There is no different objective. This is awful. This 

uses what is unheard of in real estate. We are now waiting to get 

out $300 million for the Coast Guard building, over $300 million 

for one building. Direct appropriation means here is the money. 

Mr. RUDY. You are right. Money is—— 

Ms. NORTON. So I understand that you can understand that is 

for war fighting, but most of it doesn’t go into war fighting. So they 

are using taxpayer dollars, and instead of handing the money over 

in one lump sum to build this housing, —— 

Mr. RUDY. Well, they actually did it a positive way. They didn’t 

hand any money over, they attracted capital, and they attracted it 

because they needed the capital and the management and development expertise to upgrade the housing and to modernize it and 

maintain it in a very nice fashion for the soldiers. So it has been 

a successful program. 

You asked about Saint Elizabeths, what would you do with Saint 

Elizabeths. I am setting aside whatever scoring rules or other rules 

of engagement there are and just saying, if it was a clean sheet of 

paper, what would you do. One of the things the private sector certainly would be interested in is some sort of a public-private arrangement where the Government owns the land—it is very valuable land, it is a terrific location—the Government has the occupancy demand with the agencies that want to be there, and these 

are permanent agencies, if there is such a thing as permanent. 

13 

They could provide a very long-term commitment to be housed in 

buildings to be built. 

So what does the private sector wants? The private sector wants 

what they wanted with the DOD, they want a reasonable rate of 

return to provide their own capital, both debt and equity, to build 

buildings to house the Federal Government, with the recognition 

that maybe at some point in the future there could be some risk 

out there of the Government no longer needing those buildings and 

them still having some financial responsibility for what is remaining on those buildings. So building a market conforming asset, one 

that physically could have adaptive reuse; designing the campus in 

a way where it is flexible, yet still meets the needs of the Government. 

So instituting some of the private sector disciplines in terms of 

asset value creation and financing, and on the financing side they 

would need to be able to secure whatever debt financing and equity 

yields by the lease structure that is in place; and that goes back 

to some of the market conforming comments I made in my written 

testimony. And the Federal Government is already experienced 

with those sort of lease forms. 

There is a form I am not that familiar with, called 3517X, which 

is essentially a financially optimized lease structure that the Government has used that enables the private sector to understand 

and underwrite the cash flow streams and separate cash flows between retiring debt or paying operating expenses and utilities and 

other sort of features that reduces the risk of those investors and 

allows them then to commit capital to get these sort of assets built. 

So there are tools out there that are available. 

I could elaborate more if you have questions. 

Ms. NORTON. That distinction you were just making, does GSA 

do that, does the Government do that? 

Mr. RUDY. This lease form is a Federal Government lease form, 

yes. 

Ms. NORTON. Do you have any ideas as well, Mr. DiPrinzio, on 

the Saint Elizabeths opportunity for the Federal Government? 

Mr. DIPRINZIO. Yes, thank you, Madam Chairperson. I think 

what I would add to Mr. Rudy’s testimony is that with a situation 

like Saint Elizabeths, the problem you are going to run into is if 

you have multiple buildings in a campus-like environment, in some 

ways that is an ideal situation for attracting private capital. The 

problem that you are going to have is to the extent that you allow 

the Government to walk away from one building, but not another, 

addressing that risk is always going to be a problem. 

Where the private sector gets most comfortable is when we see 

the Federal Government coming in and taking a large amount of 

space. If you go back and you look at the lease renewal statistics 

for GSA, the biggest campus-like transactions are the ones that 

have the least amount of risk for the private sector. Again, the 

problem here would be to the extent you have multiple buildings 

and one can be cherry-picked, if you will, over the course of a 10, 

20, 30-year period, that is going to cause a concern. 

So an all or nothing approach I think is something that you consider. If there is some way that the renewal of the leases are not 

building-specific, but across the entire campus, that may not be 

14 

possible, but that is going to be probably the biggest issue that you 

grapple with. 

Ms. NORTON. I am sorry, the biggest issue will be what again? 

Mr. DIPRINZIO. To the extent that a Federal agency within that 

complex can decide to not renew the lease on a particular building, 

versus the entire whole, if you can cherry-pick one building off of 

another, that is going to diminish the ability of the capital markets 

or the bank markets to finance the entire project. 

Ms. NORTON. I must say, when you consider—I am interested 

that you say that. I could understand if this were a finite—this is 

Federal property. 

Mr. DIPRINZIO. Right. I understand. 

Ms. NORTON. So the last group that can afford to just take the 

risk of the building that nobody will be in the building would be, 

of course, the Federal Government. Now, we are also putting out 

there maybe six agencies out of how many? There may be twice as 

many agencies there. We can’t find any one place to house them 

all and to get them all. They are headquarters agencies, so they 

have to be there. So I am interested in your notion that an agency 

might walk away. 

Mr. DIPRINZIO. Individually. I think—— 

Ms. NORTON. Of course, they can’t just walk away, they would 

have to come through—it would have to be an awfully good reason, 

maybe growing. Let me give you your hypothetical. Maybe it just 

grows—normally, as you may know in this region—so it gets an 

asset somewhere else for where it grows. The FBI has grown, so 

it is also going up to NoMa. So one wonders. 

Maybe I should go to Mr. Chessen. Is that a risk from the point 

of view of a bank who is lending the money? What is the risk you 

see at Saint Elizabeths at the Homeland Security? 

Mr. CHESSEN. Well, I don’t claim to know a lot about Saint Elizabeths. I can tell you, though, that protection of collateral for a bank 

is extremely important. So, as was described here, any danger that 

might undermine that— separating out that collateral, having that 

become vacant, not being able to lease that again—does pose a risk 

to that lender. So I think anything that reduces the risk to that 

lender is going to lower the price of that loan. 

Ms. NORTON. Do you think that the Government, if that is a risk 

with a cost, should seek to reduce that risk by—I hate to use the 

word guarantee—by some assurance that would be given to the 

owner? 

Mr. DIPRINZIO. I think to the extent that your objective is the 

lowest cost of financing and the lowest rental rates, some mechanism that groups together the multiple properties at Saint Elizabeths and the multiple rental streams from the different agencies 

that will be occupying those properties would go a long way to allowing you to approach the market with a comprehensive larger 

revenue stream to raise the most amount of dollars at the lowest 

rate. 

That is really the issue. It is very hard to—it is not easy to do. 

We saw one situation, I believe, with the Energy Department—— 

Ms. NORTON. The rental streams do not come individually from 

the agency, they come to one agency. That is one thing the Government has done right; it has a real estate arm. 

15 

Mr. DIPRINZIO. So you wouldn’t have a GSA lease for all of it on 

a comprehensive basis. 

Ms. NORTON. Well, no, whether it will be for all of them is the— 

the point is that it is all GSA construction, it all comes out of GSA. 

There may be individual agencies. What intrigues me about you 

was the notion of rental stream. It is one agency. How come all the 

rental streams—the existing rental streams, albeit paid over to 

GSA—— 

Mr. DIPRINZIO. Will there be a single GSA lease for the entire 

campus or will it be multiple GSA leases? 

Ms. NORTON. The way it is now—and this is what, of course, I 

rebel against—it is done as if GSA was building, let’s say, six different buildings in six different places, without leveraging the benefit of having a compound where you could say look at all of these. 

Now, you might want to compete them differently, especially 

since it is not being built at the same time, but the notion of not 

regarding this, when, in order for the authorization to occur, you 

have to have indicated what it is you intend to do over the time; 

and then to kind of forget that and to go back to what you always 

do, building by building, is what I am trying to find a way out of. 

Of course, we are dealing with not only the way it has always 

been, but within an entire Federal Government who has no knowledge and not much interest in real estate unlike the DOD, which 

is spread all over the world and has far more of its dollars going 

to real estate. 

I don’t even know how the VA got—I am not sure whether the 

VA has more of its dollars going, but you mentioned the VA — I 

think it was Mr. DiPrinzio—which has its own authority and apparently deals with building various kinds differently from GSA. 

Would you speak about their enhanced authority? 

Mr. DIPRINZIO. Well, the VA, quite rightly, Madam Chairperson, 

does have its own leasing authority, and it also has enhanced use 

leasing authority, which it has been utilizing in recent years to reduce its cost, ultimately of—— 

Ms. NORTON. So speak about what do you mean by enhanced 

leasing authority? 

Mr. DIPRINZIO. Enhanced use leasing authority allows the VA to 

basically take excess space—that may not be the proper term, but 

basically space that is not currently at the highest level of priority—and allow a private developer to develop that excess space 

in return for providing the VA with a lower cost of overall occupancy at say, for instance, a separate facility. There is a lot of interest in that. 

Obviously, it depends upon the particular property at hand. In 

Cleveland, the VA is vacating one facility and basically allowing 

the developer to take control of the land at that particular facility 

that it is vacating in return for a lower rental rate on a new facility 

that it is building at Louis Stokes. So, in that instance, the EUL, 

the enhanced use lease, basically allows the VA to lower the cost 

of financing to a new build-to-suit building that is being put in 

place at Louis Stokes. Very powerful. 

The Defense Department is attempting to do similar things using 

its own EUL authority. 

16 

It is striking to me, if I am not mistaken, GSA does not have its 

own EUL authority, and I would think, just based on my understanding, that there would be a lot of opportunities to better utilize 

and bring in private capital for space that is either deemed excess 

or not at the highest priority. 

Ms. NORTON. We attempted to give GSA what we call Section 

412 authority, which bit off a piece of that, and they not only sat 

on it, but OMB has kept them from using it, and I am going to try 

to—with the change in administration— loosen this up, make 

somebody understand how much money we are losing in the OMB; 

and OMB tends to have a say. If you have to go to OMB for everything, then, of course, you are really dealing with people who are 

outside of the whole real estate conundrum, dealing in another 

world, and yet they make rules that have to do with real estate. 

I am trying to find out how does the GSA lease? Because we 

build a lot of stuff. We are not going to build a lot more stuff, and 

that is why the Homeland Security is so important to me. But the 

Federal Government continues to grow, even in this climate. We always think, because there is so much competition in this region for 

a GSA lease, that that is the gold standard. How is the GSA lease 

viewed in terms of risk? 

Mr. RUDY. Let me try that one. If you don’t mind, can I just circle back and put an exclamation point on the Saint Elizabeths scenario? 

You have been asking how to compare it to the DOD. I think 

there are actually a lot of great analogies. What I think the Federal 

Government is trying to accomplish with Saint Elizabeths is to get 

a commitment from private sector capital and development capabilities that extends beyond one asset but goes over a period of 

time. Because in a cavernous environment, you are going to be 

building for quite a long time. And the DOD has been successful 

in arranging those sort of structures in exchange for all the right 

documents, the right risk assessment, risk assignment between the 

parties, deeding land or buildings or improvements to the private 

sector, then allowing the private sector to compliment with their 

own capital and get a good rate of return. 

For Saint Elizabeths, again, a similar structure could be thought 

about, where you already own the land, so the cost basis of that 

land does not have to be embedded in the overall project cost once 

a building goes up. So now a developer has the ability, using whatever the private sector cost of capital is, with a good lease structure—you have asked about leases. You said the gold standard. 

Maybe there is a gold standard of a lease structure out there 

that an investor could get their arms around and underwrite along 

with their lending partners, and provide not only capital for one 

building, but a forward commitment for multiple buildings over a 

period of time. And if that lease has the right assignment and allocation of risk between the Federal Government and the developer 

in terms of design, delivery, long-term maintenance and occupancy 

costs that the private sector is accustomed to, you will get very low 

cost capital commitments and a lot of interest in delivering that 

sort of real estate to the Federal Government to be occupied. And 

these 20-year leases are sufficient to get ample amortization of 

debt, so when the debt is nearly fully paid off or reduced to a sigVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
17 

nificant amount, it really almost doesn’t matter whether the Government decides to renew or not. 

I would suggest that that campus environment, there is a story 

to be told about it that private investors understand when they do 

real estate deals, and that is there is a reasonable probability that 

the Government is not going to leave; and they are not afraid of 

that residual risk tail. And that residual risk tail is an important 

component of your overall occupancy cost. 

You said in your earlier testimony educate the consumer, educate 

the development investment community around what it means to 

do business with the Government. So educate them on risk of departure or renewal, educate them on the use of the facilities, perhaps deed the land over under a ground lease so it is not embedded 

in the building cost, write a commercially conforming lease, and 

you will attract abundant capital with good development expertise 

to get commercially viable buildings built for your agencies. I 

mean, that is a clean sheet of paper solution utilizing tools that I 

think are available to the Federal Government now. 

Mr. DIPRINZIO. If I may, I would like to pick up on Mr. Rudy’s 

point about residual or renewal risk at the end of a GSA lease 

term. 

We use the term ‘‘essentiality’’ quite a bit in the larger public finance markets and specifically with respect to Federal facilities 

that are being financed. To the extent that one educates the investor—and obviously the investment bankers and the advisors that 

are working on these transactions—of the essential nature of a particular facility, the essentiality of that facility to the Federal Government, that will go a long way to reducing that residual risk and 

that renewal risk. 

It is significant. It is probably the biggest issue that anyone faces 

in looking at a GSA financing from a credit risk perspective, setting aside the terms and conditions of the lease and how those may 

impact one way or the other. The renewal risk at the end of 20 

years or 15 years, depending upon how it is structured, is critical. 

One of the things that the market does understand is the notion 

of essentiality as it applies to State and local government, we see 

it all the time. Appropriation risk, the risk of annual renewal is 

something that the public finance markets have been used to taking for State and local government financings. 

We are essentially applying that to Federal financings, and being 

able to communicate the essentiality of a given facility to an agency, to a larger campus environment is critical to reducing that residual risk; and taking it outside of the way the commercial market 

looks at residual risk and putting it more in the context of an infrastructure financing for a Federal agency that, quite frankly, in 

many instances has no intention of not renewing. 

So you want to get that down. You want to do a good job of educating the investor ultimately, and the rating agencies or the bond 

insurers, whoever it might be that is involved in the financing, on 

the essentiality of that facility. 

When we look at military housing—just, again, to touch on another analogy—if a military base were to close, the investors are 

taking the risk of base closure. What the DOD does is essentially— 

18 

pardon the term—it educates the investors on the essentiality of 

that base, on the importance of that base overall. 

Ms. NORTON. Well, that is interesting. Let’s take that one, because I have gone through a couple of BRAC proceedings here and 

bases have closed. I think the chances of a base closing are perhaps 

greater than the chances of having an agency move out of Saint 

Elizabeths. 

Mr. DIPRINZIO. I completely agree. And the market has done $20 

billion worth of military housing financing that has base closure 

risk all over it. So the notion of Federal—— 

Ms. NORTON. So what happens when a base closes? So a base 

closes, nobody knows what BRAC is going to do the next time, so 

what happens to the housing then? 

Mr. DIPRINZIO. Essentially, the housing converts to commercial 

housing. 

Would you like to pick up on that? 

Mr. RUDY. I would suggest that the bases that the Air Force, 

Army, and Navy have pursued in terms of the housing privatization, they probably started at the top of the list of core bases, ones 

that had the least amount of risk for a closure. They haven’t rolled 

the program out—— 

Ms. NORTON. Least amount of risk because? 

Mr. DIPRINZIO. They have the least amount of closure risk. 

Mr. RUDY. Closure risk for whatever reasons. I can’t speak to the 

military strategy there. It may have been a very essential base. 

Mr. DIPRINZIO. But the important point is there is an education 

effort that is put in place to let the capital markets and the investors understand that. Federal renewal risk on a lease is a similar 

issue, and to the extent that one focuses on that and you reduce 

that concern, especially in a campus-wide environment, that is in 

some ways at the top of the list of the kinds of financings that the 

Federal Government can very easily tap private capital for. 

Ms. NORTON. What we struggle for and forget, frankly, is the 

ownership option, and staff always presses this, but the push-back 

is awful, and last time we did do it—before I came to Congress— 

it wasn’t an ownership option. In fact, I am not sure when the Government has allowed that and, therefore, I always look for analogies. 

What strikes me, particularly since it took a statute that I was 

able to get through when I was in the minority without any trouble 

here, for the Southeast Federal Center, what strikes me is to take 

a closer look at the enhanced use authority, at least of the VA. 

Now, are they outside of the scoring system? 

Mr. DIPRINZIO. It is always risky to venture—— 

Ms. NORTON. Mr. Winstead is shaking his head, so scoring—do 

you think that the kind of enhanced authority you have described—I guess it was Mr. DiPrinzio—if that was used again, let’s 

take Saint Elizabeths, Homeland Security, how would that work 

and would that reduce the risk? How would that improve or not 

things for building out there? 

Mr. RUDY. I am not an enhanced use leasing expert, but it seems 

to me—again, I go back to this financially optimized lease form 

that the Federal Government already uses. They use it for the 

PTO. So you have a campus environment, private sector capital, 

19 

and leases that are in place that allow those sort of improvements 

to be built and leased to the Federal Government. 

Ms. NORTON. What are you calling it? I am sorry. 

Mr. RUDY. What is called a financially optimized lease. 

Ms. NORTON. What? 

Mr. RUDY. Financially optimized lease. 

Ms. NORTON. Financially optimized. All right. 

Mr. RUDY. And the components of that, as I understand it, are 

components that make it more financiable, almost like a private 

sector bondable lease. It has a lot of definitions around where the 

lease cash flows go in terms of reducing debt service, in terms of 

paying for operating expenses. It has better assignment of risk relative to default provisions and capital improvements, and other 

sort of features that allow the private sector holder of that lease 

to get it financed. 

Ms. NORTON. Goodness. If the PTO used it—— 

Yes, Mr. DiPrinzio. 

Mr. DIPRINZIO. Just along those lines, I think one of the biggest 

concerns that the capital markets would have is the ability to set 

off lease payments because of some degradation in service provided 

within the building. So to the extent that you segregate a debt 

service component, if you will, of the rental rate versus the O&M 

component, and the two can never really go against each other— 

I have seen that done, if I am not mistaken, PTO I think did have 

that. 

Mr. RUDY. That is a feature of this lease, it is a bifurcated lease 

stream. 

Mr. DIPRINZIO. That is critical. 

The EUL authority, you had asked about that as it applies to 

Saint Elizabeths. Not knowing, frankly, enough about the current 

approach that the Government is taking at Saint Elizabeths, I 

don’t want to—— 

Ms. NORTON. They are taking no approach. Please, the approach 

is the same approach that we used for building, I don’t know, the 

ATF, all right. There is nothing different. So whatever you know 

about how the Government in fact goes about bidding for a new 

building and then moving a Federal agency in it, that is exactly 

what the Federal Government is trying to do here and what I am 

trying to get out and regard the building of a compound as an opportunity, at least for the compound, to get out of. 

Mr. DIPRINZIO. Let me just put one possibility out there that 

might be helpful in the context of a campus like Saint Elizabeths. 

At Fort Detrick, where the national interagency bio defense campus is being developed, enhanced use leasing authority allowed the 

Defense Department to take a parcel of land, give that parcel of 

land under an enhanced use lease to a private developer—in this 

case Keenan, in conjunction with Chevron—and have Keenan and 

Chevron build a central utility plant to provide steam, chilled 

water, conditioned power, backup power to the agencies that are 

taking those services from that plant. 

It would seem as though you could do something very similar 

with EUL authority at Saint Elizabeths, where, if you are building 

multiple buildings, the need for steam, chilled water, backup power 

would apply in a campus-like environment like that, and you would 

20 

get a lower cost for that by using an EUL in order to provide the 

site for that central utility plant at a facility such as Saint Elizabeths. 

Again, I am just positing one example. 

Ms. NORTON. No, keep positing, because, first of all, what you are 

dealing with are versions of things we are already using, and that 

is the only way I am going to be able to convince people; otherwise, 

they have to educate themselves in a whole area that they are not 

much interested in, which is real estate. 

Mr. DIPRINZIO. My years of advising the Government has trained 

me to reach for analogies. If it is done over here, it is always helpful to be able to pick up on that and see to what extent we can 

replicate something maybe that was done in one area or one agency 

for another. 

Ms. NORTON. In today’s market, if somebody has a GSA— I was 

interested that you said the market doesn’t have— that GSA is not 

as if—and that is interesting. Here, you would think GSA is a big 

player in the market nationally, but they are not much knowledge 

in the knowledge about how the Federal Government operates. 

Why is that? I mean, maybe they are not as big a player as I 

have posited. Here, we live, of course, in a region where there is 

a lot of Government work. How is the GSA lease regarded? Do GSA 

leases make up a significant part of the market or a part of the 

market that the market is interested in because it is the Federal 

Government? How does the GSA lease stand in the market when 

somebody goes with such a lease? 

Mr. RUDY. Let me give you a few of my personal observations 

over my career. I was talking about this at breakfast this morning. 

Outside of the National Capital region, while the Federal Government is clearly an important occupier of space, it pales in comparison to many other occupants all over the Country, so the private sector—— 

Ms. NORTON. But you see that the work is done here. 

Mr. RUDY. Understood. But you are asking a question about the 

understanding, I think, of the private sector’s perception or knowledge of the GSA lease instrument. And when developers in other 

parts of the Country or landlords are interested in doing a lease 

with the Federal Government, this is not something they do on a 

regular basis. Most of the development community here in Washington, just to exist here, has done lots of business with the Federal Government and are probably more expert at it. 

But out in everywhere else it is back to the education discussion 

earlier, educating the private sector on really what does it mean to 

do business with the Federal Government, how do you go through 

a procurement, what are the risks of renewal, what are the rules 

governing how do you comply with the RFP or the SFO, and all 

those things. That level of uncertainty or just unknowingness on 

behalf of private developers leads them to price and risk. 

Ms. NORTON. This is important to hear from you because the 

Subcommittee had to beat the agency about the head and shoulders 

in order to get some centralized leasing component here. I mean, 

it bothered us to no end that leasing was going on in the field with 

out the centralized component here, essentially in charge, if I may 

21 

say so, in charge; and now, apparently, that has been rectified. We 

will be following that. 

But you can see just how far behind GSA is in measuring up to 

what, let’s say, if this were headquarters of a major corporation 

that had to build things around the Country, imagine letting those 

folks go out there and do their leases, and they are knowledgeable, 

without bringing to bear the market position of the Federal Government. That is what we are contending with and what we are 

trying to move from. 

But we are contending with it because the GSA has had a lot of 

incentive to do things differently. That is why you hear me keep 

talking about GSA. Perhaps people will see the huge waste, if they 

see that you have many leases to deal with. 

Now, in terms of credit rating and Wall Street recognition of the 

Federal lease, how does the Federal lease stand? Here you have 

something close to the full faith and credit of the Federal Government; you know that that is going to be paid. Is that how it is regarded by the market? What kind of credit rating does the Federal 

Government have? 

Mr. RUDY. It is about as good as it gets. Again, my comment just 

a moment ago and now was not so much as to the process of leasing and how it is done centrally versus distributed, it was more a 

matter of the private sector’s understanding of the process of doing 

a lease, their side of it, their perception; how complicated is it to 

do a lease and how complicated and nonconforming is the lease 

itself, which I think is the question you are now asking. 

The credit is great, but then you start detracting away from the 

benefits of that credit when the investor starts looking at clauses 

in the lease that gives them concern. 

Ms. NORTON. Such as? 

Mr. RUDY. Such as caps on operating expense pass- throughs, the 

inability—— 

Ms. NORTON. Say that again? 

Mr. RUDY. Limits on the ability to pass through actual operating 

expenses—maintenance and utilities—associated with that lease to 

the Government because of the structure of the limitations of those 

pass-throughs in the lease is one example. 

Ms. NORTON. How would you control that if you just had an ordinary pass-through? It is the Government, now. 

Mr. RUDY. Well, the private sector has the same concerns, by the 

way, so I don’t want to make you—— 

Ms. NORTON. What did you say? 

Mr. RUDY. The private sector has the same concerns. A strong 

credit corporate tenant is also concerned, oftentimes, about whether a landlord runs building amuck, does it run it efficiently, and 

they try to negotiate limitations on those pass-throughs. So the private sector is used to those sort of negotiations and limits—— 

Ms. NORTON. So those should be negotiated, you are saying. 

Mr. RUDY. They can be negotiated. 

Ms. NORTON. And this, I take it, would give an incentive to the 

owner to come up with perhaps ways to control it that would be 

attractive to the GSA. 

Mr. RUDY. Correct, energy saving, other sort of cost savings. So 

that is one feature of the lease. There are default features. SomeVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
22 

body on the panel mentioned earlier about the risk associated with 

potential interruption of services or some other sort of failure of a 

generator or an elevator or piece of plumbing. 

Ms. NORTON. Yes, that is troublesome. Spell out what would happen, what that lease means, that default clause means. 

Mr. RUDY. Well, if a tenant claims default, ultimately constructive default, it can terminate the lease as a result. That is pretty 

Draconian. 

Ms. NORTON. Now, of course, we know that never happens. 

Mr. RUDY. Well, if it never happens—— 

Ms. NORTON. But how should the Government—it doesn’t. These 

things happen. They are not going to move somebody out of the 

building, probably. I can think of no circumstance. I won’t say it 

won’t happen, but I would be interested—just a moment. Apparently, in the old DOT building there was mold and—they moved 

them out of two or three floors. 

I was trying to come up with whether it had ever happened. The 

only reason I raise it has never happened is that if, in the experience of the Federal Government it almost never happens, then to 

continue to put it in like it does, without making any modification, 

at higher cost to the taxpayer sweats me. So the question becomes 

what should the Government use instead of something like a blanket default, which, of course, they have never had to use. 

Mr. RUDY. Well, the Government definitely needs its protection, 

so I am not suggesting they don’t need any of the protection—— 

Ms. NORTON. Yes. So what kind of protection? 

Mr. RUDY. I am only suggesting that in the private sector, the 

triggers and clauses and remedies available to the private sector 

may be up here in terms of the negotiated thresholds; whereas, for 

the Federal Government it is much lower, much quicker, much 

more ability for the Federal Government to claim a default, to provide self-help and their own remedies. Which means they can offset 

rent, stop the rental payments, they can fix the buildings themselves, repair things, going around what might be the third-party 

management that is responsible for doing that, as opposed to going 

through what I would say is, again, a commercially viable private 

sector negotiated path for doing those things. So it is those additional trip wires that create additional risk to the investor that 

they have to somehow underwrite, they have to embed in their expected rate of return. 

Mr. DIPRINZIO. Again, I would add to that. You picked up on rating and credit rating for a GSA lease financing, setting aside what 

agencies can do themselves. That is where renewal risk and essentiality comes into play from my perspective, what I underwriting, 

a setting aside the term of the lease. When GSA is in the firm term 

period, no one questions the creditworthiness of the tenant at that 

point. What we have at the front end is construction risk and what 

we have at the back end typically is renewal risk, and those two 

components will degrade from AAA, which is essentially the Federal Government’s rating, down to some lower—— 

Ms. NORTON. Well, now, renewal risk would be there for everybody. Nobody can expect that they have the benefit of a lease. I 

don’t know why it would be any greater for the Federal GovernVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
23 

ment than anybody else. Nor do I know why the front end would 

be any greater. 

Mr. DIPRINZIO. Right. I think that is correct. The construction 

risk on the front end is no different. But, frankly, I think, with respect to the renewal risk, given what we were talking about earlier, 

about essentiality and the importance of a facility to a Federal 

agency, reducing that risk of non-renewal through an education 

process, an ability to allow the investor—and this is what I do 

when I underwrite these transactions, I go in there and I understand what is the likelihood of non-renewal. How important is that 

facility to the Federal agency. 

I think, frankly, the Federal Government has a much better 

story to tell in the vast majority of cases with respect to renewal, 

which would ultimately raise the rating and bring down the financing cost and ultimately the rental cost. 

Ms. NORTON. Indeed, I bet the Federal Government has a better 

record at renewal than private agencies, particularly in this region, 

where there is no place to run, no place to go. 

Is this what you mean, Mr. Chessen, when you speak in your testimony about Government leases that add risk to doing business? 

You call them covenants. 

Mr. CHESSEN. Right. That is exactly right, it is all the terms that 

surround the loan or the lease that a bank has to look at to evaluate how to price that loan and what risk they assume, and I think 

it was described very well here. You do have the construction at 

the beginning, which is like any other construction project; you 

have to weigh that and who is doing it and how you are financing 

that, what is the risk of that builder defaulting. 

And on the back side I would absolutely agree with you, I think 

the Government is probably better at that renewal rate than most 

companies. But there may be cases where the Government wants 

to abandon a property or they are leasing property that is only a 

small percentage of that overall building, and could put that owner 

in a situation where they may want to do something different, such 

as get another tenant and lease in the property, as opposed to the 

Government. 

So there are factors you have to weigh in terms of what is the 

risk—we think of the property, of course, as being owned and fully 

occupied by the Government, but I am sure there are areas where 

the government only leases a certain portion of that building, and 

that would be considered by the lender in terms of the risk of that 

whole property of non-renewal. 

Mr. RUDY. Mr. Chessen brings up a very interesting point on the 

renewal thing. I also agree with you that the renewal risk is inherent in any lease for any occupant, whether it is Government or private sector. But it is actually the end of the term issues that are 

also non-market conforming in a Federal lease that present some 

risk, such as the private sector developer has much less teeth or 

ability to move the Federal Government tenant out of the space at 

the end of the expiration if the Federal Government tenant wants 

to hold over, even beyond expiration. And that is a problem because they may have re-leasing plans or plan to bring in a new tenant to replace the income they may in fact be losing. So it is the 

end of the term issues that is one example. 

24 

Another one is the Federal Government has the ability to make 

physical alterations to their improvements, their space, through the 

lease term without necessarily having the obligation to restore 

those improvements to an originally approved condition. 

That is not correct? 

Mr. DIPRINZIO. No, no, that wreaks havoc on the financing. 

Mr. RUDY. Yes. So, again, those residual risks we are talking 

about go up, not because of renewal risk, necessarily, but because 

of some of the end of the term issues, such as the two I mentioned. 

Ms. NORTON. Talking about irrational issues in the Government, 

the condemnation and the holdovers, we tried to get behind that 

to find out what it is doing. Here, you raise the cost of credit because you don’t have enough experienced staff, apparently, to renegotiate, as we heard testimony, the renewal of the lease, so you 

put the homeowner—sorry, the building owner in an impossible position. You use this authority that nobody else would have, only the 

Federal Government, and it is a total outrage. 

As you can see, part of the problem is that nobody has looked 

with fresh eyes at any of this process for a very long time, and as 

we try to do so and are harnessed somewhat by OMB, we nevertheless see, particularly from your testimony, ways to begin to find our 

way out of this thicket. 

I want to thank each of you for, really, very, very helpful testimony to us as we try to look next term toward what can only be 

called a redesign of the entire system. We want to do leasing and 

construction very differently. We think we will have a good case to 

make about taxpayer savings, and we want to use some of the testimony you have given us to try and get an entirely different approach based on the model, perhaps, of showing what can be done 

with the group of buildings that will go up for the Homeland Security Department. 

So I thank you once again for excellent testimony; it has been 

very useful to us. 

The next witnesses Steven Grigg, Executive Committee past 

President, as well as District of Columbia Building and Industry 

Association; Richard Purtell, Chair and CEO, Building Owners and 

Management Association, or BOMA; and, of course, our Commissioner of the Public Building Service, David Winstead. 

We will, of course, begin with Mr. Winstead. 

TESTIMONY OF DAVID WINSTEAD, COMMISSIONER, PUBLIC 

BUILDINGS SERVICE, U.S. GENERAL SERVICE ADMINISTRATION; RICHARD D. PURTELL, CHAIR AND CHIEF ELECTED 

OFFICER, BUILDING OWNERS AND MANAGERS ASSOCIATION 

INTERNATIONAL; AND STEVEN A. GRIGG, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, REPUBLIC PROPERTIES CORPORATION, REPRESENTATIVE DCBIA 

Mr. WINSTEAD. Madam Chair, again, I am David Winstead, Commissioner of the Public Buildings Service, and I thank you for inviting us here again today to discuss the impact of the tightening 

credit market on GSA’s capital program. I want to recognize that 

we have had a number of hearings over the last three months. We 

appreciate the attention the Committee is giving our leasing program and our construction program, as well as trying to determine 

25 

what the impact of the current financial situation is on our business. 

I did want to mention several areas I wanted to touch on. Clearly, the former panel—we very much appreciate their input—focused obviously on leasing and scoring issues, and the authorities 

that we have, or lack thereof, to do lease financing approaches. I 

did want to focus, first off, on new construction and modernization, 

because through the funding of direct appropriations from the Federal Buildings Fund, our new construction modernization R&A program is really not directly affected by the decreases in the availability of credit generally. 

As noted by the former panel, we have seen 70 percent of the fi- nancing in real estate disappear over the last year. We see $235 

billion that has been lost in financing for real estate and the economy generally. I think that Mr. Rudy’s comments certainly demonstrated that. So we are continuing to see issues on the construction side in terms of escalation of cost and subcontractors in terms 

of what they typically require. But, as you know, we do not obtain 

third-party financing, and most of our construction is financed 

through the Federal Buildings Fund, direct appropriations. 

Secondly, on the leasing side, which the prior panel and your 

questions largely dealt with, I do want to say that we are noticing 

some impact of the credit crunch on our leasing program. As you 

know, our leasing program consists of 176 million square feet of 

space, of which a third is in the National Capital Region, your district, or the Metropolitan Washington area. We have asked, as a 

result of this hearing, each of our regional offices whether GSA 

offerors were experiencing difficulty obtaining financing for GSA 

leases. 

We had a prospectus hearing earlier last month on this, and we 

have determined that most costly leasing terms, of course, generally result in higher rates for the Government. But what we are 

finding is that we are not experiencing a lot of lack of competition 

on our major prospectus leases. Therefore, in a general way, when 

credit becomes more expensive, it obviously could be reflected in increasing rent downturn and, also, on the financing side, 75 percent 

of capital financing and real estate has disappeared over the last 

year. The terms are getting more constricted and, obviously, certain developers aren’t going to find the financing to proceed and deliver new office space on time. 

In a few instances, we have seen successful GSA offerors who, 

because of the issues in the credit markets that the former panel 

addressed, have not been able to proceed with lease construct 

projects. At our last hearing we dealt a lot with the FBI lease program, the SSA lease program. Offerors have attributed some of 

these issues to tighter credit markets. For example, in 2005, GSA 

initiated a lease construction project for the FBI for up to 266,000 

square feet and 271 parking spaces in Detroit, Michigan. 

In May of 2006, we finalized negotiations for a no-cost assignment of 10 acres on a two-phased, best value procurement for that 

space. We awarded the lease, actually, of that development in February of 2007. The developer indicated that, as a result of the tight 

credit market and post-award addition of modifications to the 

projects, they couldn’t secure the financing as they had anticipated, 

26 

and we actually rescinded that contract in February of this year 

and are out now for rebidding it. 

So while I testify here today, it is not as if we are not immune 

from impact; there are two or three cases which I would be happy 

to supply this Committee full information on where it has created 

problems. 

Secondly, the former panel talked a lot about—a different term 

was used, but persuading and our utilization of credit tenant 

leases, or what we call CTL leases, and we have proceeded on that. 

The PTO project, the DOT project in the District that you know 

well, were under credit tenant leases, and it does allow the developer to gain better leasing terms for more effective financing availability. The CTL has been used with varying degrees of success in 

several GSA regions. We did have a GAO report that alluded to the 

fact that we can get, and are getting, better leasing terms under 

some of these CTL leases. 

I will tell you that GSA has, in response to those two leases here 

in the region that you are probably most familiar with, modified 

general clauses in the CTL to enable better lease financing for 

major transactions. Under the CTL, successful offerors may be able 

to obtain better and higher loan amounts at lower interest rates 

under the CTL. 

Once the lease space is delivered according to the lease requirement, the Government, GSA, has been able to compromise on some 

termination and setoff rights against the debt service portion of the 

rental payment in order to allow an uninterrupted rent flow to the 

lessor’s debt. So the Government retains its rights to enforce the 

lease service obligation in any regard. 

In order to ensure that we are obtaining the value of the lease 

modification, we have encouraged our regions to request pricing on 

both standard lease requirements and CTL so that we can be seeing savings, and, obviously, the current credit market requires this. 

At the same time, Madam Chair, I will tell you 80 percent of our 

lease actions nationwide are under 20,000 square feet, and what 

we are talking about is the real value or the large prospectus 

leases that we are looking at CTL approaches for. Chip Morris, who 

heads up our leasing programs, is behind me and could certainly 

provide additional information to the Committee on those specific 

cases. 

A third area that we are seeing some impact, which I know has 

been the subject of hearings here before, and that is on our green 

building program. We are relying on energy savings performance 

contracts to accomplish renovations of building systems in our 

some 1500 owned inventory, of which 600 are 30 and 40 years old. 

Through these ESPCs, we conduct a comprehensive energy audit, 

identify improvements that will save energy to the facility, and arrange financing to pay for them. 

The energy service company guarantees that the improvements 

will generate savings sufficient to pay for the project and we estimate that our potential use of these ESPC and utility energy service contracts in the current fiscal year, fiscal year 2009, will be approximately $24 million. We are seeing that ESPC financing is not 

traditional financing, it is based by guaranteed energy savings resulting from improvement, and, therefore, the financing markets 

27 

are impacting the ESPC contracts where we see rates now 6 to 

about 10 percent. 

A fourth area that we do see some potential impact, but, fortunately, we haven’t seen any here in the National Capital Region, 

is on retail leasing. Obviously, the economy is having real recession 

issues, purchasing and information is a bit more than it was a year 

ago, and we do, as you know, have mixed use and retail tenancy. 

The Ronald Reagan Building, the International Trade Center, the 

ATF Headquarters building has 8,000 square feet of retail and restaurant space and the ATF. Banks are tightening standards for 

loans to small business, and a lot of the retail food service vendors 

that we have. 

But so far, fortunately, these more restrictive credit conditions 

that the former panel presented to the Committee are really not 

having an adverse impact on our retail tenants in the Reagan or 

the ATF situation. In fact, the Ronald Reagan Building is fully 

leased at 100 percent of retail space; the ATF Building, as you 

know well in the NoMa District, has four retail tenants that are 

in the process of moving in. We have had some unfortunate delays 

as a result of getting gas service to the facility, but we do anticipate that by the end of August [subsequently edited to ‘‘January’’ 

- ed.] those retail tenants will be in place and providing food service and other amenities to the ATF employees. 

So in conclusion, Madam Chair, the tightening of the credit market does potentially affect GSA in three areas: obviously leasing, 

energy service performance contracts, and retail leasing, as well. So 

far, none of these areas we have seen any significant impact negatively on GSA and its leasing actions. Credit is available to our lessors at favorable rates with the Government tenancy, the AAA rating that the panel member earlier alluded to. 

The Federal Government generally may experience an increased 

reliance on larger ESPC contracts that might have higher rates, 

but although some small businesses may in fact, in our retail functions in some of our mixed space in our buildings, may find tighter 

credit, we do not see that in the current situation with those buildings I mentioned in Washington. 

Madam Chair, the last thing I would mention before turning it 

on to the other panelists is that, as Mr. Rudy mentioned, in the 

Jones Lang LaSalle testimony earlier, being a major player in the 

market, we do see the credit tenant leases getting very competitive 

offers to date. We are seeing, fortunately, in the slow down that 

there is less demand, for example, in Lower Manhattan because of 

the Bear Stearns collapse. There is a lot of space on the market in 

Lower Manhattan now and a lot better rates, and we are seeing 

600,000 square feet available in Lower Manhattan for Federal tenants. We are actually getting better deals as a result of some of the 

market turning down. 

But I would conclude, lastly, that we appreciate the Committee’s 

inquiry into these leasing issues, the former discussion on scoring 

I dealt with on June the 10th in great detail and St. Elizabeths as 

an example. Thank you again for this opportunity. 

Ms. NORTON. Thank you very much. 

Mr. Purtell? 

28 

Mr. PURTELL. Thank you. Good morning, Chairman Norton and 

Members of the Subcommittee. Thank you for holding this important hearing on the impact the current credit crunch is having on 

the leasing and construction of Federal office buildings. 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. 

With the rise in delinquencies and defaults on subprime mortgages over the past couple of years, it is only inevitable that this 

financial crisis would ultimately have some impact on commercial 

real estate. My testimony today will touch on how the current economic circumstance is affecting the renovation of buildings, buildto-suit leases, attracting and retaining tenants, as well as rents 

and occupancy rates. 

In general, much of the economic dynamics of the commercial 

real estate sector can vary due to local market forces. However, one 

thing our member all across the Country acknowledge: it is becoming increasingly difficult to acquire capital for new projects and 

renovations for public buildings, as well as those intended for private sector use. Lenders are making it more and more expensive 

for even the most economically sound companies to borrow money. 

And for those whose balance sheets aren’t as healthy, it is nearly 

impossible. Consequently, this has negatively affected building 

owners wishing to refinance, sell existing buildings, or plan for future renovations in which the financing for the project has not yet 

been secured. It could also become a favor in a building owner’s 

ability to attract and retain tenants by limiting tenant improvement packages offered in the future. 

An example of where access to capital has made it difficult to liquidate properties is in San Diego, where one BOMA member, who 

has the responsibility for a municipal government’s portfolio, has 

had a number of buildings on the market for over a year at what 

are considered bargain basement prices. But due to the increased 

borrowing restraints and cost of funds, he has had trouble finding 

buyers without having to reduce the price even further. In Philadelphia, we have received reports that building owners are currently moving forward with renovations and improvements that 

were more than likely already in the pipeline; however, plans for 

renovations in 2009 do not appear to be in the budgets of most. 

The increased difficulty to obtain capital for the purposes of developing commercial buildings has also negatively impacted buildto-suit leases. We are hearing that very few build-to-suit leases are 

being executed at this time. Stricter underwriting requirements, 

skyrocketing construction costs, combined with the increasing vacancy rate, decreasing effective rent and economic slowdown, has 

eliminated any new construction. Currently, those build-to-suit 

leases that are in the works were either begun some time ago or 

are being financed largely through private equity. 

From the Federal Government’s perspective, in areas where 

there are owners or developers with larger existing buildings or 

buildings under construction that are looking at the Government as 

prospective tenants, current conditions may actually help the Government, as their demand never goes down. 

29 

However, it is adversely affecting large build-to-suits, even those 

for the Federal Government, due to the uncertainty of financing, 

capitalization rates, and buyers. Since, in these times, the Government is an even more important player in the building and construction industry than it is normally due to its demand for space 

continuing at a more constant rate than private industry, it becomes even more critical for the Government to eliminate barriers 

and constraints to the Government leasing space, especially in 

build-to-suits that were discussed in previous BOMA testimony before this Committee. 

The ability of building owners to attract and retain tenants, as 

well as stabilize rents and occupancy rates, are issues that appear 

to be more sensitive to the local area’s supply and demand. Some 

reports from members have indicated that rents continue to be on 

the rise, but not quite as rapidly as in recent years, as is the case 

in the District. 

In other markets, the economic slowdown has hurt overall occupancy levels as tenants are struggling to survive. Owners are still 

trying to maintain the same rental rates, but are now offering significant tenant and broker incentives. In these parts of the Country, it is definitely a tenant’s market. In buildings with weak occupancy, owners are having even more trouble making mortgage payments. 

In some markets, owners are taking a wait and see approach to 

see if the slowing economy leads to tenants shedding unwanted 

space. Due to the nature of the industry, the possible negative effects in certain parts of the Country may not be felt for several 

years. 

If there is an upside to this, it is the amount of supply coming 

online over the next several years will be significantly less, which 

will have a positive impact on the market overall from a landlord’s 

perspective. 

We thank the Subcommittee for holding this important hearing 

and hope this testimony has provided some insight on the effect of 

the credit crunch has had on the commercial real estate industry. 

I would welcome any questions you may have. 

Ms. NORTON. Thank you, Mr. Purtell. 

Mr. Grigg? 

Mr. GRIGG. Good morning, Chairman Norton. It is good to see 

you again, Ms. Britta and the rest of the staff. I am Steve Grigg, 

President of Republic Properties Corporation. I am here testifying 

on behalf of the D.C. Building Industry Association, where, as you 

know, I am past President, one of them, and member of the Executive Committee. 

As it has been clear to the Committee and to everyone else, the 

credit crunch is having a direct and broad impact on development, 

leasing, and management of commercial office space nationwide. 

The District of Columbia and the Nation’s Capital Region are neither distinct nor immune from those problems. The collapse of conventional debt financing for development projects and the permanent financing market are working in tandem to make new development and major renovations of existing buildings much more difficult and expensive. 

30 

With the collapse of securitized debt markets and with the values 

of existing loan portfolios in doubt, lenders have become reluctant 

to assume any risk, underwriting standards have been tightened, 

and loan-to-value ratios have shrunk. The result is higher borrowing costs and higher levels of required equity participation, if 

capital funding is available at all. Meanwhile, equity investors are 

repricing their conceivable participation to reflect higher perceived 

risk. 

The Federal Government is a major user of office space and is 

not immune from the impact of this credit crunch. It is probable 

that the Government has not seen the impact of the credit situation thus far. As existing space is being absorbed up, however, that 

will become an inevitable change. Larger procurements with prospectus level rents that were established some time ago are going 

to be seeing less competition now and going forward. 

The Government is a special class of user of commercial office 

space; hence, the Government leases are essentially flat for various 

terms. Space leased by the Government used to be advantaged by 

steady, prompt payment of rent. The margins associated with rental income have declined as a result of problems in timing and the 

amount of reimbursement in increases and real estate passthroughs and operating expenses, which are indexed to CPI increases. Both the business reality and underwriting standards have 

increasingly noted those changes in dealing with the Federal Government in leases and occupancies. Either the system has to 

change or face rents will dramatically increase to reflect these conditions. 

The Government’s prospectus level rents and expectations of various tenant agencies will have to be adjusted upward in the future. 

While we believe that the availability of financing will eventually 

be eased, the effective increased costs will become more predominant over the coming years. 

Thank you for your attention. I am available to answer any questions. 

Ms. NORTON. Thank you, Mr. Grigg. 

We put the three of you together. Normally, the Government witness is separate. We mean no breach of protocol, but the fact is 

that Mr. Winstead’s job is to work with people around his table, for 

the benefit of the taxpayer, to be sure. Thus, the exchange among 

you would be very valuable to us. For example, Mr. Winstead spoke 

of getting better deals. He spoke of the Government’s AAA rating. 

And Mr. Winstead knows that my concern is whether or not we are 

taking full advantage of that rating. 

But you have testified we are getting better deals. You pointed 

to the vacancy rate in New York. I would like to hear you elaborate 

on that and give me an example of what a better deal is and let 

me ask you about the vacancy rate in the National Capital Region. 

That is a two-part question. You hear Mr. Purtell say it is a tenant’s market. You hear it from the—excuse me, Mr. Purtell— 

horse’s mouth. 

Mr. WINSTEAD. Madam Chair, I think, obviously, the market, as 

alluded to, in terms of the crunch and Mr. Grigg talked about the 

impact of the financing tightening lending on the delivery of new 

31 

space, and that will impact. I think it is going to be a couple years 

before we really see that. 

Ms. NORTON. So it is very important to note for the record, because I think Mr. Winstead’s testimony was like the early reports 

we had from developers who were already in the market, from 

business owners. They didn’t see much different. The Committee 

sits here trying to think ahead, trying to think as I am, for example, about Saint Elizabeths. Hey, there are some people in some 

buildings now, there are some leases that neither party, frankly, 

can do much about, but the Federal Government is, for example— 

leave aside leasing new space all the time—about to build the largest compound, at least for GSA, in its history. So even when it 

comes to leasing, while I accept Mr. Winstead’s testimony, I am sobered by the testimony of his brethren beside him. 

Who am I quoting from here? Become increasingly difficult to acquire capital for new projects and renovations for public buildings, 

as well as those intended. This may be you, Mr. Winstead. 

Mr. WINSTEAD. Madam Chair, your comment—— 

Ms. NORTON. Wait a minute. Both Mr. Grigg and Mr. Purtell 

have spoken really to the major concern we have. Mr. Winstead, 

our own work verifies what you say about present conditions. You 

have been dealing with the top of the mark; you always will. But 

the testimony here from those who have those leases, have those 

contracts is that those same very creditworthy owners are finding 

it difficult today—if they were today, not the process that we deal 

with—what does it take, 10 years, 8 years, 5 years, whatever it is, 

to get going — but today—that there would be increased costs to 

borrowing. 

There would be, in other words, a totally different situation from 

what it is right now. And what I am trying to learn is, for example, 

from your own testimony, that you are already beginning to take 

advantage of the tenant’s market, what is the difference between 

what you have been doing before and what you are doing—let’s 

take your own example—in New York now. 

Mr. WINSTEAD. Madam Chair, you have raised several questions 

and I will try to answer them. First one was about our vacancy. 

You know, this Committee well knows, improving our leases 

prospectuses, that we are managing our leased portfolio of 176 million square feet, a third of which is in the National Capital Region, 

very tightly because we control those terms and it is about a 1.5 

percent vacancy on our leased inventory currently nationwide. So 

that is a very tight margin. 

Secondly, your question about St. Elizabeths and the market and 

how it might change. There is no question that if in fact there is 

attrition in—— 

Ms. NORTON. I am sorry, I was trying to understand. What vacancy are you talking about? 

Mr. WINSTEAD. I am talking about on our leased inventory. If 

you look at—— 

Ms. NORTON. Your own leases? 

Mr. WINSTEAD. All leases, 176 million square feet nationwide, in 

terms of any vacancies. We keep that very tight because we are obviously leasing the space about 1 percent. Nationwide, in terms of 

Federal ownership, it is higher, unfortunately, because we have 

32 

had some attrition, consolidation of IRS, FBI moving out of some, 

as you well know, center city buildings in Federal field offices, new 

offices. 

Your second question dealt with St. Elizabeths and its impact on 

the market, and there is no question that as financing of new 

projects and the—— 

Ms. NORTON. Wait a minute. I also asked you what were you 

doing—I am sorry, you said you were able to get better deals. I am 

not sure I heard the answer to that question. Because I wanted to 

know what is a better deal. 

Mr. WINSTEAD. Well, I don’t think there is any—okay, in terms 

of better deal, you know, whether—you want specific rental rates 

in D.C. or—— 

Ms. NORTON. You acknowledged—— 

Mr. WINSTEAD. There is no question the next couple of years, and 

currently, with the impact of the credit crunch, we are going to see 

vacancies creeping upwards; we are going to see effective rents 

going downwards; we are going to see specific markets in urban 

areas like New York and Lower Manhattan, where we have had 

huge vacancies created because of Bear Stearns’ failing and consolidation, we are going to see better deals. 

Ms. NORTON. So what would the GSA do? Not what is it doing, 

but what is it that the GSA would do differently, operating in that 

market today, with vacancy rates up? How would you operate any 

differently from how you have been operating before? What kinds 

of different deals might you be able to forge? 

Mr. WINSTEAD. Well, I think, again, it is largely, unfortunately, 

the lack of authority for enhanced use leasing and some of these 

other authorities DOD has and VA—— 

Ms. NORTON. So you think enhanced use leasing would help? 

Mr. WINSTEAD. Enhanced use leasing has been shown, Madam 

Chair—I supplied this Committee six months ago our 10 most costly leases in which we showed the relative cost of lease construct 

versus direct Federal construction versus enhanced use leasing, 

and enhanced use leasing is almost as cost-effective as Federal construction in building out those housing demands. So you have good 

evidence of our analysis of the cost of options. 

Ms. NORTON. So you would need—— 

Mr. WINSTEAD. Authority. 

Ms. NORTON. You would need authority, statutory authority. 

Mr. WINSTEAD. We also would need OMB’s approval in terms of 

prospectus, and from both the June 6th hearing, the July 11th 

hearing and this hearing, it is clear to me that this Committee 

would love to see more use of that kind of authority that DOD and 

VA—— 

Ms. NORTON. As of now—and you heard me say I am going to 

try to get more authority and you heard me say I am trying to find 

out as much about the authority that other agencies have that will 

help me convince the Congress that we should have the same authority, but being in the position you are now, seeing with some 

leases and some agencies are up, and an agency—I am trying to 

give you a direct hypothetical— an agency looking for space—and 

you have heard Mr. Purtell call it a tenant’s market—how, given 

33 

the limitations on you now, would you go about seeking space in 

a tenant’s market? 

Mr. WINSTEAD. Madam Chair, I think we are leveraged very well 

with our partners in the private sector to take advantage of the 

best deals, and if they are going down in the near term because of 

this unfortunate credit crunch, then I think that through the national brokerage contract that you have asked a lot of questions 

about, we have supplied a lot of information, we are leveraging the 

strength of the Federal purchasing power and getting below market 

lease rates around the Country. 

Ms. NORTON. Would you give us examples of getting below market lease rates? 

Mr. WINSTEAD. Well, I would certainly suggest that recent acquisitions in NoMa—and I know some are being contested—have had 

very competitive rates because availability and new space coming 

online in NoMa. 

Ms. NORTON. So you believe those were below market rates? 

Mr. WINSTEAD. I think they were very effective rates. I mean, 

they responded—— 

Ms. NORTON. You may be right on NoMa. NoMa, of course, 

looked at the market and said what do our rates have to be to get 

people to move here, and you may be right there. If it were a part 

of the city, for example, midtown, would you be able to negotiate 

similar rates? 

Mr. WINSTEAD. Well, Madam Chair, I am not a financial expert, 

I am a lawyer by background, but I will tell you that if some of 

the financing arrangements on these major landmark buildings, 

private sector buildings in downtown have to be refinanced with 

the impact of the credit crunch, and new financing terms that 

might be imposed on these building owners, we might see rental 

rates, because of that, them being forced, you know, for them to go 

up. 

So we might see that under current credit and financing rates for 

these buildings they structure the deal with us based on a rent 

that we committed in contract to pay. If they are having to refinance these buildings at a time in which cap rates are going up 

and at a time in which leasing terms are more restrictive, they 

might find themselves less competitive for our leases. 

Ms. NORTON. Let me take an analogy from the real crisis in the 

housing market. The marketplace knows how to respond when it 

is down, and if you take the worst place in the marketplace, they 

are all but giving away the house. But they don’t want to do that, 

so you have heard fantastic things— obviously, real estate isn’t in 

the same position, but it makes my point—if you buy this house, 

we will give you gas for a year, for example, because they see that 

one of the major problems with where homes are located today is 

something we really can’t do anything about, and that is gas prices 

are going up with nothing except pricing, frankly, to bring it down. 

Okay, we speak of concession packages. I think you spoke about 

them in your last testimony. Give me an example of a concession 

package that might be asked for by the Federal Government if it 

wanted to acquire space in Downtown Washington. 

Mr. WINSTEAD. Well, obviously, we would be looking for the factors under our credit lease structure deal with right of assignment, 

34 

looking at tenant fit-out, looking at casualty and termination 

rights, looking at rental offsets for maintenance and services. 

I mentioned earlier in my testimony—— 

Ms. NORTON. So some changes in these clauses. 

Mr. WINSTEAD. That is correct. I mentioned earlier that under 

the credit tenant lease that we are applying to large prospectus 

leases, which you know a lot about and we have seen a lot come 

before this Committee—the bigger deals, not the 80 percent under 

20,000 square feet, the large prospectus leases—we are, under this 

CTL, acknowledging that we do need to attend and are relaxing 

and modifying the casualty and termination rights under that kind 

of CTL lease approach, also the rental offset rights for maintenance 

and service. So we are acknowledging and are negotiating and applying—— 

Ms. NORTON. And those you are using with CTL. 

Mr. WINSTEAD. That is correct. 

Ms. NORTON. Is it the GSA now committed to using CTL wherever it can? 

Mr. WINSTEAD. Madam Chair, on the large prospectus leases we 

are. The last two were obviously DOT and PTO and others, but we 

are looking at this and talking with the industry. Actually, yesterday—this came up in a lease construct workshop that I mentioned 

that we had in early June. Yesterday, our team was sitting down 

with financial experts as a result of the current market conditions 

and looking at the credit tenant lease and looking at how we can 

modify those clauses without damage to the Federal Government 

and our obligation, but to get better deals, to allow some flexibility 

in those two areas where a potential offeror or lessor could in fact 

get better financing terms and thus get better rates for us, as well 

as reflect the issues that Mr. Grigg mentioned that are in the market. 

Ms. NORTON. This Subcommittee does not intend to press the 

GSA to put the Government at any substantial risk. We are very 

open to hearing why the GSA doesn’t leverage some of these—it 

has got them now. We know industry hates it. Why it doesn’t leverage that to at least get a better price by making modifications 

where there may be no history of needing, for example, clauses as 

strict as some of those. So risk might be said to be rather insubstantial. We don’t want to ever put the Government in the position 

where anybody takes its thinking of risk, but the way in which— 

well, let me ask Mr. Grigg and Mr. Purtell. 

Surely there are private sector businesses whose business is of 

a kind that they need certain kinds of protections when they move 

into a building, and they have the same financial pressures that we 

are speaking about in this hearing. What I am really interested in 

is how somebody who has—and I recognize the Government would 

be at the highest level—has to, let’s say, lease a building that may 

be outside of the norms of what you might expect in particular 

clauses to accommodate this particular business and its lease. I 

mean, you might truly have such in this region, but I am talking 

about private businesses now. 

I am trying to get some idea of how the business, let’s say, would 

negotiate in order to offset its cost without substantial increase in 

risk where it knows it is almost using boilerplate language—beVerDate Aug 31 2005 17:43 Jul 07, 2009 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 P:\DOCS\43848 LINDS
35 

cause that is what the Government is doing—for many of these 

clauses, how some kind of accommodation would be reached between the business, which knows it needs something somewhat different from the average tenant, and the owner. 

What kinds of things would they feel they could negotiate and 

how would that be structured? What kinds of exchanges of winwins, whatever you like to call it, do you think might be structured 

in that kind of situation, where you really do need something extra 

but you really don’t need the kind of standard clauses that they 

could get out of a book and, for that matter, GSA gets out of its 

play book? 

Mr. Grigg? 

Mr. GRIGG. Well, I think that the simple answer to that question 

is if you can make Government leases more consistent with the private sector, then you would gain some advantages. There are examples that deal with the reimbursement for tax increases, which are 

essentially, by lease, are phased many, many months beyond what 

a private tenant would have. 

Ms. NORTON. Federal tax increases? 

Mr. GRIGG. No, real estate tax increases. I didn’t mean income 

tax. Essentially what that does is it requires the landlord to carry 

those payments as a balance over an extended period of time. The 

increases for Consumer Price Index have recently not been competitive. The increases in power and in wages haven’t matched the 

published price indexes for years. There is some question as to 

what the Consumer Price Index means in general and who manipulates it, and that is beyond maybe the discussions today, but, from 

a cost standpoint, that represents essentially a phantom loss that 

one has to absorb in a way that you wouldn’t in most private 

leases. 

Ms. NORTON. And you think that negotiating with these items 

you have mentioned would reduce cost to the Government ultimately? See, the question is the Government is going to look and 

say, well, this is going to increase. It is going to do a straight line 

look at it. 

Mr. GRIGG. Well, you have to look at it not in an individual moment of the next 12 months or two years, but you have to look over 

a long-term basis. 

Ms. NORTON. Well, over, for example, the lease. You think over 

the lease itself, over the time of the lease itself. What are they, 10 

year leases, usually? Ten or 15 year leases themselves. You think 

a case can be made for that? 

Mr. GRIGG. I would think the average Government lease is actually somewhere about five to seven years, but they could—— 

Ms. NORTON. Mr. Winstead, are they really only five to seven? 

Mr. WINSTEAD. Madam Chair, most of these smaller leases that 

I mentioned, 80 percent of the portfolio are shorter term leases, 

they are smaller, more flexible uses, under 20,000 square feet. So 

I think Mr. Grigg is correct. 

Mr. PURTELL. I can speak, maybe, to that. I am from Cincinnati, 

Ohio and I have recent experience in this area with the Department of Energy on a lease of about initially 40,000 feet, and it was 

a five-year lease—actually, a ten- year lease with a five-year cancellation, which causes some issues. 

36 

Mr. NORTON. Is that good or bad for the private sector? 

Mr. PURTELL. Probably a negative, if we have to be prepared for 

that lease to be cancelled after five years. But I would echo some 

of the things that have been said regarding flexibility and previous 

testimony—— 

Ms. NORTON. Excuse me. 

Mr. Winstead, why are the leases five to seven years, so I can 

understand? 

Mr. WINSTEAD. Well, again, they are based on our leased tiering 

approach and agencies’ needs, and basically the term of the housing giving their tenancy and also getting the best deal on the market for the Government. I mean, this may not be the best deal for 

the offeror, but for the Government. That is what we negotiate for. 

Ms. NORTON. So a long-term lease would not be the best? 

Mr. WINSTEAD. Well, the DOT lease, which is, as I said, a CTL 

lease, a credit tenant lease, we did get a longer 20- year term, and 

you are well aware of the size, 1.2 million square feet. 

Ms. NORTON. But you think that is appropriate only for larger 

leases? 

Mr. WINSTEAD. Well, what in fact we do see is that the larger 

leases, the longer leases than the shorter leases, more flexibility 

under lease tiering approach that we are doing. We are looking to 

agency changes. We are having consolidation of the IRS. The Social 

Security Administration has wanted smaller, more rural offices because the demographics of retirees are changing, so they are going 

to where the retirees are. It is a constant flow. 

And what I did mention in the June hearing is like we have on 

the portfolio side, with portfolio restructuring and using section 412 

authority to access under—we are now applying the same sort of 

lease tiering approach so that we can predict when these leases are 

expiring, when we need to have notice, clear the housing plan with 

the agency and get back in the market to test the best deal, and 

that is really why those lease terms are structured to be short or 

long. 

Ms. NORTON. I am sorry, I didn’t want to interrupt you, Mr. 

Purtell, I was trying to understand. 

Mr. PURTELL. That is all right. One thing we did in this lease, 

which is a fairly recent lease, we did take out the property tax 

issue, and that is a separate issue with this lease now, in that we 

have direct pass-through on property taxes. We still do not 

have—— 

Ms. NORTON. Was this a lease with the Government? 

Mr. PURTELL. Yes, it was, it is a GSA lease, and worked with the 

Chicago office on this document. 

Ms. NORTON. So you sat and simply negotiated that. 

Mr. PURTELL. Yes. Yes. That was part of the negotiation, to have 

the direct pass-through on property taxes, because it is an uncontrollable expense which typically, with all the other leases, is the 

way it works. 

But we still have issues, and I think to be more competitive, from 

your perspective, if there is more flexibility there—because when 

bidders are bidding on leases, they are protecting themselves by 

covering these items that they have to allow for certain increases. 

For example, one of the biggest ones right now is utilities. To have 

37 

to cover utilities and have that built in to the lease for a 10- year 

period is a real challenge for a landlord. 

Ms. NORTON. Yes, Mr. Grigg. 

Mr. GRIGG. I think in answer to an earlier question that you 

asked Mr. Winstead, how would you change the pattern, I think 

that from a portfolio standpoint, in an environment where there is 

a great vacancy that is available in a marketplace, the answer is 

that GSA should be leasing more rather than less, instead of selfbuilding. And when there isn’t much vacancy in the marketplace 

and it is essentially having to compete increasingly with that, it 

should use its buying power by building more buildings which—— 

Ms. NORTON. What do you mean, self-building? They don’t build 

much, Mr. Grigg. They build to suit. 

Mr. GRIGG. Right. 

Ms. NORTON. So they are leasing most of the time. Now, they 

build to suit on these cross border stations. That is the FBI, of 

course. Their FBI stations are going to be built from the ground up, 

of course. 

Mr. GRIGG. Well, you were describing the Homeland Security 

headquarters or cluster at Saint Elizabeths. 

Ms. NORTON. But how could that—I mean, they own the land 

there, and that is the only reason it is being built on the West 

Campus of Saint Elizabeths, is that finally we own the land, we 

can build on our own land. And guess what? We act as if we didn’t, 

because we are building in the same way we would in Downtown 

Washington. So I am not sure that Homeland Security provides us 

with an opportunity, since we don’t have to purchase the land, at 

least, in order to build there. 

Mr. GRIGG. Well—— 

Ms. NORTON. So if that is what you think should happen, I think 

it is happening and, thus, I am far more interested in the leasing 

market than I am in the construction market, because I don’t see 

the Government coming up—particularly with the way in which we 

pay for construction—for a courthouse. If we are going to build a 

million square foot courthouse complex, which is usually a courthouse and an office building with it, we have to get the appropriation up front, and there is no capital budget here. If that sounds 

stupid, it is. 

But that means that forces the Government into the leasing market and, therefore, I am looking for savings, for partnerships with 

the leasing market to save each money that is being spent because 

GSA makes it and, therefore, the taxpayers get left holding the 

bag. This is the big leasing territory for the Federal Government. 

Mr. GRIGG. Well, certainly, the National Capital Region is that 

and Washington, D.C. But I think then I go back to my previous 

response, and that is to the extent the Government can make its 

performance more like the private sector, it will probably be able 

to negotiate the best economic terms on a long-term basis. 

That is not to say in specific instances that it can’t drive a harder bargain in the short-run, but the long-term benefits to the Government would be better served by modifying its standard practices 

to be more consistent, and those involve payment approvals, timing 

of reimbursements, term provisions, might include escalation of 

38 

costs over a period of time instead of demanding flat leases, and 

the like. 

Ms. NORTON. Oh, well, this is an important point. We can’t depend on, assuming we could get a better deal in this market, who 

would want this market. 

So we have to assume that this is, I think, something more than 

cyclical, but we have to assume that it has real cyclical aspects to 

it and, if it does, that it is going to get better and it always does 

get better. If so, then we are left with the same procedures that 

we had before, and then we are robbed of whatever leverage we 

thought we had during a time of downturn. 

Mr. PURTELL. I would comment that the full, as I said in my testimony, the full impact may not be felt for a couple years, and I 

think the timing of this hearing and what you are doing has well 

positioned GSA to prepare for the opportunities I think that are 

out there for any expiring leases or any new lease opportunities. 

Ms. NORTON. Mr. Winstead, let me ask you, how are you preparing for that? We have many leases expiring. Indeed, you have 

leases that you are sitting on or using the condemnation notion or 

holdover notion. 

Mr. WINSTEAD. Madam Chair, I think continue both with our existing landlords and successive offerors to look ahead to both space 

requirements and when those lease expirations are occurring. 

I did state on the June 6th hearing that I was very concerned. 

I do not see a national trend in some of the holdover issues we discussed. 

I know Mr. Grigg commented about rent payment, and we are 

committed to paying rent on time, and we are committed to paying 

our construction bills on time. I did mention at great length, I 

think in June, what we are doing to trying to ensure that. 

Ms. NORTON. Are you saying, Mr. Purtell, holdovers, Federal 

holdovers are condemnation use by GSA? 

Mr. PURTELL. I, personally, haven’t witnessed that. 

Ms. NORTON. Mr. Grigg, do you know of any? 

Mr. GRIGG. Yes. 

Ms. NORTON. In this region, for example? 

Mr. GRIGG. Yes. 

Ms. NORTON. What does a building owner do when these procedures are used? 

Mr. GRIGG. Vote every couple years. 

Ms. NORTON. Does what? 

Mr. GRIGG. Votes every couple years. There isn’t a lot that the 

building owner and the government—— 

Ms. NORTON. You can’t vote the GSA in or out if you notice that, 

and my great frustration is that I see no difference between Republican and Democratic administrations. You need a sea change in 

this agency. 

Mr. GRIGG. Although I have been guilty on commenting on GSA 

at various times, I don’t think this is really a product of GSA’s actions or inactions of and by themselves. They are providing services 

to tenant agencies. They have budget issues associated with the annual budgets. It is a big complex system that we all operate in. 

But holdovers are major features, and the consequences of those 

holdovers or passive condemnations, whatever you want to call 

39 

them, and the imposing of terms on landlords, it is a tension that 

impacts landlords and others in the business market that could be 

avoided. 

Ms. NORTON. Let me ask you this, what effect does that have on 

costs and on competition? If you know that holdovers occur, does 

that get built into the cost of doing business with the government? 

Mr. GRIGG. It has an impact on the whole business plan depending on the individual buildings. 

Ms. NORTON. Yes, that is what I mean. 

Mr. GRIGG. It has impacts on the marketplace. You know you 

have the benefit of government occupancy as any other benefit of 

having occupants. 

It is the only situation where a tenant gets an opportunity to 

stay where they are and pay an indeterminate amount of rent for 

an indeterminate amount of time with really no mechanism that is 

particularly palatable except going to the court of claims or whatever to kind of seek relief, and one doesn’t get reimbursed for that 

or relief as opposed to private lease. 

If a tenant holds over, the tenant is going to pay the cost, all the 

cost of that action including the cost of being made whole through 

the courts. 

I am not suggesting here we try and restructure the whole relationship between the government as a tenant and the landlords in 

general, but as one would move that bar closer to a businesslike 

setting, the government will get long-term benefits. 

It is necessary that the government be able to operate, and it has 

superior powers because of the nature of it being a government. 

But to the extent you can remove those and balance things out, the 

system will work better, more equitably, and eventually the government will get the benefit of the bargain. 

Ms. NORTON. Let me ask all three of you this question. I am still 

enamored from my days as a full-time professional lawyer to 

hypotheticals to make me understand things. That is how people 

understand law school. You give them a real life example. So you 

have seen what my ever present real life example is. It is Saint 

Elizabeths. 

Mr. Winstead’s testimony says, and I think he is right, that in 

general the GSA has not felt the impacts now, as of when we 

speak, and he submits some evidence to that effect. 

Then he says, however, one thing—is this him? No, sorry. This 

was Mr. Purtell’s testimony. 

I am reading from page two, although I must say Mr. Winstead 

agrees with you about the general effect now. But you said that it 

was becoming increasingly difficult to acquire capital for new 

projects and renovations for public buildings. That is your testimony. 

Now let’s assume, obviously, the Federal Government is committed to a new headquarters for the Homeland Security Department. Obviously, none of that is happening now. They have to 

clean up, and you know how long these things take. 

I am not now assuming CTL or advanced. I am just assuming 

that it will be built in the ordinary way. How else can I proceed 

because we have an appropriation coming down, we hope? It has 

40 

been in the President’s budget for the last three years to build the 

thing. 

So if you were to look up the time scale, time frame, you wouldn’t 

see anything happening there in terms of groundbreaking competition for how long, Mr. Winstead? 

Mr. WINSTEAD. Madam Chair, as you know, the House and Senate just approved 300 and 180 million. So we now have funding in 

2009 and looking at 2010 as well. We are looking at 2016 for a 

build-out of that. 

Ms. NORTON. You are looking at what? Talk directly into the mic. 

Mr. WINSTEAD. I am sorry. We are looking at 2016 for build-out 

of that four million square feet of space. 

I know the St. Elizabeths situation, based on both panels, does 

provide the earlier finance panel looking at options and better approaches, Mr. Grigg’s approach and a more private sector lease approach that is more conforming to the private sector. We looked at 

all those alternatives, as you know, the GAO study as well as our 

response to this Committee. 

If you looked at the 30-year cost for the reason you mention, 

Madam Chair, the acreage we have up there at no cost to the taxpayer, it is a $2 billion project for us, $1 billion for DHS. Over 30 

years, the net present value savings to the Federal taxpayers is 

three-quarters of a billion dollars. 

Now, the prospectus, we sent—— 

Ms. NORTON. Now you are counting the savings from what? 

Mr. WINSTEAD. I am sorry? 

Ms. NORTON. Savings based on? 

Mr. WINSTEAD. If you look at that lease approach for St. Elizabeths, we looked at the enhanced use lease approach. We looked at 

the Federal program. 

Ms. NORTON. Is it enhanced use? Where is the 30-year? 

Mr. WINSTEAD. No, no, no. The 30-year, three-quarters of a billion dollars savings is if we took that four million square feet, 

wherever we could find it, and I assure you it would be pretty far 

out, and we were to lease that under a standard. 

Ms. NORTON. Yes. In other words, you are saying instead of leasing where we are leasing now. 

Mr. WINSTEAD. That is correct. 

Ms. NORTON. Okay. 

Mr. WINSTEAD. That is correct. So our savings, looking at that 

project, looking at the free ground. 

Ms. NORTON. Well, that is the savings that has nothing to do 

with building the project except we won’t be paying other than we 

don’t own. I am talking about on building the project, Mr. 

Winstead. 

Mr. WINSTEAD. In terms of the lease construct projects themselves? 

Ms. NORTON. Whatever. First of all, I want to break my question 

down. 

Mr. WINSTEAD. Okay. 

Ms. NORTON. When would you expect, let’s say, because this 

would assume the competition had occurred, ground to be broken? 

I know this is a guesstimate. Assuming all went well, we got the 

appropriation out this time, you have already begun to clean up, 

41 

what is the earliest you would expect ground to be broken on the 

headquarters for the first building? 

Mr. WINSTEAD. Well, right now, as you know, we got the funding 

for the Coast Guard headquarters where a master plan is in process right now with ultimate action, we hope, by the beginning of 

the year, and I do think next year would be when we start seeing. 

We had done restoration, but we would start seeing design and 

moving to construction of that first facility. I think end of fiscal 

year. 

Ms. NORTON. So by next year? 

Mr. WINSTEAD. By the end of fiscal year 2010, I would assume, 

yes. 

Ms. NORTON. By the end of next year? 

Mr. WINSTEAD. During fiscal year 2010. 

Ms. NORTON. Sorry? 

Mr. WINSTEAD. During fiscal year 2010. 

Ms. NORTON. During fiscal year 2010. 

Now looking toward fiscal year 2010 and assuming we are talking about the usual GSA processes—they have done the competition, they are breaking ground—what would you imagine will be 

the state of affairs for whoever gets that or wins that competition 

as it goes into the credit market at that time to build that first 

building? 

Mr. WINSTEAD. Madam Chair, I do think—and I would look to 

our BOMA colleagues and others—the commercial, the construction 

market is in fact not financed. It is largely bank financed in terms 

of construction loans. We are not seeing a major impact on shortage of financing our construction projects. 

Ms. NORTON. Right now? 

Mr. WINSTEAD. Right now. 

Ms. NORTON. We had testimony, earlier testimony about something that has been apparent for some time, and that is construction costs have escalated. Put that on the table first. Even if the 

economy were to come back, construction costs have tended to go 

up. 

I am just trying to get a sense of whether you think we will be 

back to normal when ground is broken. 

Mr. WINSTEAD. Well, I think that is more of an economic question for an AGC or BOMA. 

But I would suspect that when we are ready, after this master 

plan, as you well know, gets approved and going out for the Coast 

Guard construction design effort, that there will be plenty of interest. There is no lack of interest. 

Ms. NORTON. It is Mr. Purtell who says it is becoming increasingly difficult to acquire capital for new projects and renovations 

for public buildings. 

I am trying to understand whether you think that is purely cyclical based on what we are going through now. Obviously, it has 

huge cyclical aspects to it such that when you break ground and 

when you go for what you see right up the road, you think that cost 

of capital for new projects for public buildings will be such that the 

government will not be surprised. 

Mr. Purtell? 

42 

Mr. PURTELL. Clearly, it has been cyclical. To answer how long 

it will last, I think is a good guess. 

But you touched on, a minute ago, something that we really 

didn’t talk about that I think is important to this whole process, 

the construction costs. In the market I am in and the market that 

I understand, construction costs for tenant improvements alone 

have increased probably as much as 20 to 30 percent on steel products in the last year. 

Ms. NORTON. I don’t expect that to go down. 

Mr. PURTELL. That is not going to go down. So that is my point. 

Ms. NORTON. Given demand around the world. 

Mr. PURTELL. And that is not going to change. So that is, obviously, a big impact on any project you are undertaking. 

Mr. WINSTEAD. Madam Chair, again, I think the market. I totally 

agree. 

I don’t think that the material cost increases we are experiencing 

now, fiscal year 2009, are as high as they were back when we were 

costing out the L.A. courthouse, for example. I think they are moderating down, but they are going to be ever increasing because of 

development around the world and material needed for the kind of 

growth we are seeing in other countries as well. 

But I think our efforts, as you know and I think I testified to earlier, we are having difficulty—I have provided evidence of that—in 

estimating and benchmarking these costs in these markets in 

terms of material available, in terms of the cyclical demand. 

We know that in L.A. and San Diego, there are billions of dollars 

of public procurement going on in addition to ours. The L.A. School 

District and in San Diego, there is major development. All of that 

competes for material. 

Ms. NORTON. As your testimony indicated, the Detroit FBI building, you said it was derailed due to tight credit? 

Mr. WINSTEAD. Well, it was tight credit, and it was cost and materials. I mean both, both Charlotte and Detroit. 

Our lease issues in Detroit were basically that back last October, 

October of 2007, nine months ago, the offeror there actually had 

difficulty getting financing for the project— part of the issues I 

raised earlier in terms of the credit crunch—but we also saw increased costs in terms of land that was available in that part of Detroit. I think we were requiring 10 acres. The combination made 

that deal unsupportable, and that is why we are back in the market. 

Ms. NORTON. You see that is what scares me here. 

Well, how many competitors did you see for the FBI border crossing building that some of them have apparently been competed already? 

Mr. WINSTEAD. Yes, ma’am. We have actually had, if you look, 

we have had 34 of these construct projects completed. We have 38 

FBI offices. Eight or I guess seven are going to be Federally owned, 

like the new one in Houston, but 31 are going to be leased. 

We are seeing, obviously, some difficulty in the Charlotte situation and in the Detroit situation because of material cost increases, 

because of the financial situation that the former panel described. 

The deals, the prospectus approval rental rate and the financial 

43 

terms that were constructed as a result of that authority, the offeror could no longer essentially make work in the current market. 

So what we are trying to do is we are recompeting these problem 

projects. Now there are only three some that we have completed. 

We are value-engineering the projects to see whether costs could 

be taken off so that the financing pro formas work for those 

projects. 

We are validating the financial aspects, working with, and obviously these are being recompeted but making sure they are viable 

under the prospectus limits, and we are reviewing all lease construct projects nationwide now because the impact we have seen 

with these three problem projects. So we are trying to react to it. 

It is a subset of our overall. I mean the lease construct is still 

not the 170 million square feet. It is a small subset of that group, 

but it has all the issues. 

Ms. NORTON. It is a subset, but I am trying to see what it tells 

us about the leasing market where, of course, you all have heavily 

leveraged. 

What concerns me is that though we are experiencing a cycle, 

parts of the cycle are not going to go away. The parts that I mentioned, for example, are the construction costs which are going up 

continually. Even when we have had our much better circumstances, demand for these same materials has only increased. 

So I am trying to analogize. It is not so much the build to suit 

but to the leasing market and to the government being in that 

market for an ever increasing need. 

The cycle comes back, but certain kinds of costs— energy, materials—do not. I am trying to understand what GSA will find in that 

market when it has to deal not with cyclical change but with these 

rather indeterminate, seeming permanent increases because we are 

not to the end of them yet. 

Mr. Grigg? 

Mr. GRIGG. Well, I think the simple answer is that the private 

market in the case of these build to suit FBI field offices might be 

viewed as a canary, if you like, if the analogy is in a mine situation. 

Ms. NORTON. That is what I am afraid of. 

Mr. GRIGG. The cost of operating the buildings as well as the cost 

of delivering those buildings, when weighed against the long-term 

projections that were made by the builder-lessor to the government 

in an underwriting situation, became too risky or the margin 

wasn’t left that was originally projected. 

So the simple answer is that the cost of building the major facilities for Homeland Security and so forth will probably escalate more 

than people anticipated, unless they were sufficiently protective. 

As well, the cost of operating those facilities and maintaining 

them over an extended period of time is going to be a lot higher 

than probably people anticipated if they were using historical 

measures for how things increase. We don’t expect to see a rebound 

in the cost of power. We expect it to be growing not at the CPI but 

at some multiple of the CPI. 

Historically, when we were in a regulated energy environment, 

because of regulation and because oil prices frankly weren’t growing faster than CPI, the cost of those elements were really within, 

44 

everything was in a balance. We don’t view that in a long-term 

basis as happening really in the conceivable future. 

Energy prices are going to increase at some multiple of what we 

call the CPI, and we are going to have to live with that reality. 

Steel prices, unless production changes or technology changes, 

which we don’t anticipate, we are into that being in a similar situation. 

So costs are going to escalate, and we have been through this 

cycle before. In the past, because the underlying material costs rebounded, you had a different circumstance. I don’t think that is 

going to happen again. 

I think the reality is that we have seen a change in that and the 

change, as Mr. Winstead pointed out, is probably external to us as 

a Country and as an economy. We just need to be mindful of that. 

Mr. WINSTEAD. Madam Chair, you know, obviously, our own 

clauses give us the authority on increasing the CPI, and Steve has 

certainly alluded to the fact it isn’t going away. I mean I was horrified, reading some market data of energy costs, preparing for this 

hearing and predicting that next winter we are going to see maybe 

30 percent higher electric bills. 

So the landlords like Mr. Grigg, we are going to have to be very 

attentive to the increases that we provide in our lease largely 

through the O&M clause provisions. Undoubtedly, we are going to 

be paying higher rates through our lease negotiations. 

Ms. NORTON. I am going to ask just a couple more questions. 

There are some limitations on what we can do with these external factors, these costs that we have never seen go up and not go 

away. Everybody is experiencing those, but they don’t have the 

same constraints the Federal Government has. 

I have to ask you, Mr. Winstead. You seem to understand that 

we are in a wholly different environment. What is GSA doing to 

accommodate itself for the near certainty of the kinds of costs we 

were just talking about, not cyclical costs or the kinds that most 

disturb me? Energy costs, cost of material, for example. 

I don’t know how the Agency is positioned. Do you have regular 

meetings even with the private sector on the availability of space, 

on how this market is affecting them? 

How are you positioning yourself for costs that you know the government has not taken into account? 

I can tell you without fear of contradiction that we didn’t take 

it in account when the President put the money in the budget for 

the Coast Guard building. I am trying to see how you are going to 

build that building now. He has had that in his budget for almost 

four years. 

Mr. WINSTEAD. Madam Chair, I will tell you that our people in 

the OCA, the Office of Chief Architect, are looking very carefully. 

We have four national contractors that we updated and recompeted, that are really advising us on every project at every stage 

of development of the project on benchmarking of the cost of that 

project. We do our best to determine as we go through, from the 

authorization process through final opening of a facility, to make 

sure that we are building in the actual costs. 

45 

And, I agree with you. I think there has been a benchmark shift 

in the last three or four years. We have seen it in gas. We have 

seen it with steel costs. We will continue to see it. 

It really is incumbent upon us to make sure we are getting the 

most accurate estimating information about material costs, that we 

are having benchmark verification during both the design cycle and 

the construction cycle on the viability and the competency of those 

estimates to be delivered on, and we have to hold our vendors, our 

contractors and our lessors accountable to our best judgment on behalf of the taxpayer of what those costs will be and what the best 

deal for the public will be. 

But I will tell you the former panel talked about, which was interesting to me, about engagement of GSA and partnering. We will 

continue to do that. I think we are. 

DCBIA, that Mr. Grigg represents, we have ongoing liaison with 

them, with BOMA. I sit on the National Advisory Council with 

BOMA. We are constantly working with them to try to anticipate 

where building operating costs are going and making sure we are, 

for own inventory, reacting to that as well as new construction or 

lease construct projects. 

So it has been a very troubled market. I think we have good 

counsel. I think we have good contractors to give us the best estimates. 

But the market is very volatile, and it is a difficult assignment. 

You saw it with the L.A. courthouse doubling in cost. You have 

seen it with the San Diego courthouse. 

Ms. NORTON. Mr. Grigg, the canary is out of the coal mine. He 

just named two projects, FBI and the L.A. courthouse, way out of 

the mine. 

I am asking Mr. Winstead questions which are not under his control, and some that I have asked you are not under your control, 

certainly the uncontrollable costs. 

But I tell you what, I know what the appropriation is that is 

coming out of here, and I know they are going to start building 

with that appropriation, and I know that somehow I am going to 

have to go back to the government and say we don’t have enough 

money. That bothers me to no end, and one thing I know I can’t 

do anything about is the amount of money in the appropriation. 

So then I have to look at GSA and say now maybe the lesson will 

be learned from what is happening in the first building. You have 

heard me say I am going to try to get some enhanced authority of 

some kind. Of course, GSA has some authority at its disposal, some 

of which it hasn’t even used. 

But when you look at where the wiggle room is, what bothers me 

is when the economy returns, I just don’t understand where the 

wiggle room is, if it is more money from here or the more obvious 

answers. 

I guess I am quoting from Mr. Grigg’s testimony. I think GSA 

has to take it very seriously. ‘‘Space leased by the government used 

to be advantaged by steady, prompt payments for rent. The margins associated with rental income have declined as a result of 

problems in the timing and amount of reimbursements.’’ 

The operative words are things that GSA might be able to do 

something about. We know the things it can do nothing about: 

46 

‘‘timing and amount of reimbursements for increases in real estate 

pass-throughs and operating expenses.’’ 

Then it says, of course, ‘‘which are indexed to CPI increases.’’ I 

understand the problems you are under there. 

But you know one has to begin very seriously if you are in GSA’s 

position. You have already seen the colossal. Where are we on the 

L.A. courthouse, the debacle of the largest courthouse in the United 

States? 

You see few competitors or too few competitors, rather, relative 

to what we expected in the border stations. You see the failure of 

the Detroit FBI building with the city saying it wants it so bad 

that it will see what it can do to be helpful. 

Once you see that occur and you know what we are up against 

here, then it seems to me GSA has to begin to look at its, at the 

moment, rather small arsenal of tools to see what can be done to 

take the standards clauses, the standard way of operating and 

squeezing more out of it. 

I suppose what I am looking for in this hearing are examples like 

some of the examples we have had from the private sector of how 

to do that or else, frankly, I see a crisis looming up there because 

we are so heavily in the leasing market and because much of it depends upon expansion and expansion opportunities. 

Mr. WINSTEAD. Madam Chair, I certainly understand your concern and I think at the earlier hearing in June we did in response 

and I have reviewed them here briefly as to the actions we are 

going to take. So we have to be on this. We have to make sure that 

we have the right estimating crowd with us. We have to have the 

right relationship through our brokers, national brokerage contract, 

with the industry and directly DCBIA and ULI and BOMA and 

AGC and other groups. It is really incumbent on us bringing them 

in and making sure we understand how they view the market and 

their ability to compete for our business in the future. 

I think we are doing a good job of that now, but I will get the 

Committee, again, accountability of what we are doing in all these 

areas and just making sure it is very clear, so you are all aware 

of it. 

As this panel suggested ideas, we will continue. 

Ms. NORTON. Well, I think GSA needs a five-year plan looking 

ahead at costs, some costs that will remain after the cycle and indeed will continue to go up which the average homeowner can see 

and certainly GSA can see. Look for a five- year plan. 

If I were GSA, I would say: Look, Congress, this is what I see. 

You are heading for a crisis because you are in the leasing market, 

and this is what the private sector you depend upon is experiencing. We need some relief. 

I mean who is in the best position to do this, of course, is GSA 

itself. 

I leave you with a name, one of Norton’s common, ordinary examples that don’t apply here but ought to indicate how the private 

sector begins to deal with problems like this, particularly in real 

estate. 

You will say what does Starbucks have to do with the rental of 

office space? I don’t know how much of what Starbucks was in it 

owned or how much it rented. I know this, that the first thing it 

47 

off-loaded when it recognized that people weren’t going to pay four 

bucks or whatever it is you pay for Starbucks was its real estate. 

That is the first thing it did. It is getting as much out of the real 

estate business as it can. 

It is reducing what was one of the most profitable businesses in 

the world first. Of course, it is doing it in other ways inside, and 

it is doing the kinds of things you would expect an extraordinary 

business like that to do with respect to its own product, but the 

first thing it did was to close down a whole bunch of real estate 

was eating up its profit. 

I hope you see what I am doing here. I am certainly not saying 

that rental market is like Starbucks. But guess what? It is. 

It was up against the rental market and I doubt that they owned 

much, but they may have. They were up against costs that were 

out of their control. So they looked for ways to bring them down. 

Now we see in the leasing market they are dealing with a major 

lessor, at least in this National Capital Region, who is constrained 

by an outside force, otherwise known as Federal regulation, in its 

bargaining ability. 

My concern is that without some very candid five-year notion, we 

may have to get GSA to do this. It is best to do it from the Agency, 

of what leasing will look like nationwide, frankly, using the, I will 

say, totally unforeseeable. 

I do not believe that L.A. was foreseeable. I don’t believe that Detroit was foreseeable. But now that we have seen it, it seems to me 

that everything else is foreseeable. 

Using those case examples to warn the Federal Government that 

this has to be seen as an ability to lease where necessary. You are 

in a better position to tell me what it would mean at other locations. 

Mr. WINSTEAD. Madam Chair, I would be happy to, again, set 

this out in that five-year framework that this Committee can work 

with us on or we will provide that, so we do have a clear sense of 

how we are dealing with these market fluctuations and financing 

and credit issues and how we are responsive to the private sector’s 

feedback to us. 

For example, we had a lease construct workshop on June the 

11th, and we had several feedbacks. They said we could do a better 

deal on these FBI field offices if we had a purchase option. They 

told us that it is better if GSA brings the site to the deal. They 

talked about prior to award, getting together with GSA and the 

contractor and the tenant to make sure requirements were fully 

understood and the risk allocation issue. 

So we actually are taking, as you suggest, based upon the lease 

construct program the best practices and ideas. This June 11th 

workshop was directed to that. 

Ms. NORTON. You intend to use some of those? 

Mr. WINSTEAD. Yes, and I will make sure that we get back to the 

Committee how we anticipate because it is going to be five years 

before St. Elizabeths. It is going to be five years before a lot of 

these constructs how we are responding to market conditions and 

offeror’s issues that they face to continue to get a good deal for the 

government. 

48 

Ms. NORTON. That would be very helpful. First, I would like to 

know how you are going to respond to the feedback from the private sector on the FBI type buildings. 

Mr. WINSTEAD. Right. 

Ms. NORTON. You listed four or five them. 

Mr. WINSTEAD. Right. 

Ms. NORTON. Then how are you going to respond, as you say, 

more generally to what you see up ahead and what the constraints 

are of responding? 

We know much of this is not in your hands now, and you see the 

Committee probing to find how can we find ways to convince everybody this is not only safe to do. This is what you have to do, given 

the growth in the Federal Government and its need for indispensable space. 

I think your two examples of the FBI buildings, the two FBI 

buildings make the point about indispensable space. 

Mr. WINSTEAD. Right. 

Ms. NORTON. Of course, those were being built. Both of them 

were being built to suit. 

You will not find it difficult to make the appropriate analogies 

of what you will find in the lease market where they are building 

and where you are leasing and where you are, in fact, going to be 

looking for space most of the time. 

Mr. WINSTEAD. I would be happy to get that back to you because 

I think. 

Ms. NORTON. Would you get us that? I know we would like to receive that within 60 days. 

Mr. WINSTEAD. All right. I will make sure you do. 

Ms. NORTON. It would be very instructive to us. 

If there is anything else that either of you would like to leave 

us with before I dismiss you from the table, I would be most 

pleased to hear. 

I want to thank all three of you, and I particularly thank you for 

listening to one another so that you can get a sense of the dynamic 

that we think is most helpful to the Committee. Your testimony 

has been extremely helpful to us, and I thank each and every one 

of you for the testimony you have given here today. 

Thank you, and the Committee is adjourned. 

[Whereupon, 1:00 p.m., the Subcommittee was adjourned.] 

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