GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

United States General Accounting Office

Washington, DC 20548

June 5, 2001

Senator James M. Inhofe

Senator John McCain

United State Senate

Subject: Acquisition of Leased Space for the U.S. Patent and Trademark Office

This letter responds to your requests for a review of the data, assumptions, and conclusions

reached by the General Services Administration (GSA) and the Patent and Trademark Office

(PTO) relating to the acquisition of about 2 million square feet of leased space for the

consolidation of PTO activities. This build-to-suit lease, valued at approximately $1.2 billion

over its 20-year term, was signed in June 2000. According to GSA officials, the lease can be

terminated without penalty to the government only if the lessor fails to perform.

As agreed with you, the objective of our work was to respond to allegations and questions

from two public interest groups about the PTO lease acquisition. One public interest group

made the following allegations concerning the procurement process for the lease: (1) GSA

improperly awarded the lease to an offeror who had not complied with the solicitation’s

stated requirements, (2) GSA failed to compete the construction of the interior finishes phase

of the project as required by the Competition in Contracting Act of 1984 (CICA), and (3) GSA

used an illegal cost-plus-a-percentage-of-cost contract.1

 The second public interest group

asked (1) whether the requirements in GSA’s Solicitation for Offers (SFO) for the PTO lease

transformed the lease from an operating lease to a capital lease under Office of Management

and Budget (OMB) Circular A-11; (2) whether the new facility will be able to house all PTO

employees and contractors throughout the lease term because the staff may grow, 2 including

whether this growth invalidates the potential cost savings from consolidation; (3) whether

some of the standard requirements of the lease, such as a day care center and a fitness

center, are essential to providing adequate office space for PTO; (4) whether the cost

estimates for the tenant improvement allowance and furniture costs are excessive; and (5)

whether constructing the PTO facility would have been less costly than leasing it. The

methodology we used to respond to these allegations and questions is discussed in

enclosure II.

 1

We consolidated all their allegations into three allegations.

2

PTO’s workload is projected to grow 116 percent between 2000 and 2005.
2 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

Results in Brief

In response to the first public interest group’s allegations, we found nothing improper in

GSA’s award of the lease for the PTO facility. This procurement has also been reviewed by

the Department of Commerce’s (DOC) Inspector General and later in litigation in federal

court. None of these reviews resulted in a conclusion that the procurement activities had

been conducted improperly.

In response to the questions from the second public interest group, we found that GSA acted

in accordance with OMB’s and its own guidance in determining that the PTO lease was an

operating lease.3

 It is currently unknown whether PTO’s new space will meet all of its future

housing needs. A number of different dynamics could mitigate the need for additional space

in spite of the anticipated growth in workload, such as PTO’s efforts to automate its

increasing workload and allow greater use of telecommuting by its staff, and its success or

failure in hiring and retaining staff. Although the cost of housing future staff growth is

unknown, it is a moot point because any future housing needs would be incurred under the

PTO consolidated and unconsolidated scenarios. Further, PTO’s estimates of substantial

savings from consolidation seem reasonable. Features such as day care and fitness centers

are either authorized by law or governmentwide policy and PTO had a justification that

appeared reasonable. None of the information available at this time indicated that the funding

planned for tenant improvements was excessive, and the competitive procurement for

furniture is aimed at achieving the best value for the money. GSA’s tenant improvement

allowance for the PTO facility exceeds its normal standard tenant improvement allowance

because it includes additional necessary cost elements.4

 Lastly, as we have previously

reported, construction of the PTO facility would be less costly than leasing; however, that

was not a viable alternative at the time GSA made the decision for the PTO facility because

funds were not available to provide for government ownership. The issues are discussed in

more detail in enclosure I.

Background

Since the 1960s, PTO has been in leased space in the Crystal City area of Arlington, VA.

Currently, PTO has 33 leases occupying all or portions of 18 buildings in Crystal City.5

 Its

annual rent for these spaces is about $58 million to house the current 6,400 PTO employees.6

PTO fully occupies 5 buildings and shares the other 13 with other government and private

sector tenants.

 3

If a GSA lease, being self-insured, is determined to be an operating lease, then the yearly rent is scored

against GSA’s budget authority 1 year at a time. If a GSA lease is determined to be a capital lease, then

the net present value of the entire cost of the full term of the lease is scored against GSA’s budget

authority in the year the lease becomes effective. For example, because GSA is considered to be selfinsuring, PTO’s yearly rent of $62 million would be scored against GSA’s budget authority for each of

the next 20 years as an operating lease. If it was a capital lease, the net present value of the $1.2 billion

in total lease costs would be scored against GSA’s fiscal year 2003 budget authority. Also see footnote

12.

4

The standard tenant improvement allowance is the financial allotment that GSA gives an agency for

finishing and customizing the space to the agency’s specifications. The PTO tenant improvement

allowance includes this finishing and customizing plus installation of all branch and secondary

distribution systems for mechanical and electrical services.

5

PTO also has three warehouse locations that are not being consolidated into the new facility.

6

This rate cannot be projected out 20 years because the rents are not fixed as in the new lease and may

rise or fall over this period.
3 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

In 1989, PTO began working with GSA on approaches to meet its long-range space

requirements. In August 1995, OMB authorized GSA to seek congressional approval to

consolidate PTO operations at a single location in new leased space.

By resolutions, the appropriate Senate and House committees approved the prospectus for

the lease procurement in October and November 1995, respectively.7

 The resolutions

authorized the competitive procurement of a 20-year operating lease for about 2 million

square feet for the purpose of consolidating PTO in an area between the Potomac River and

Dulles International Airport in Northern Virginia.

On June 26, 1996, GSA issued the SFO for the lease. The procurement was to be conducted in

two phases. In Phase I, the offerors were to provide basic information about their sites,

development plans, qualifications of design teams and developers, preliminary financial

information, and a phase 1 environmental assessment and questionnaire. In Phase II, selected

offerors were to provide more detailed information regarding the site, proposed design of the

facility, the interior architect, the development schedule, and the operations and maintenance

firm. On December 23, 1996, GSA received six offers. On March 11, 1997, four of the offerors

were invited to proceed to Phase II of the procurement. After a bid protest to GAO and

litigation concerning this procurement, on June 1, 2000, GSA signed a 20-year lease with

LCOR Alexandria L.L.C. for approximately 2.2 million rentable square feet,8

 which are to be

built to suit GSA/PTO needs and to house 7,100 staff at the Carlyle site in Alexandria, VA. The

lease is valued at $1.24 billion over 20 years, plus operating expenses and taxes.

The City of Alexandria, which is presently reviewing the design of the project, must approve

the design before the lessor can proceed. According to PTO’s Administrator for Space

Acquisition, it anticipates that LCOR will be able to begin construction of the five-building

complex in October or November 2001. PTO plans to begin moving into the complex in late

2003.

Agency Comments

In May 2001, we received written comments from the Acting Under Secretary of Commerce

for Intellectual Property and Acting Director, PTO. We received oral comments from OMB’s

Branch Chief for GSA and Justice and GSA ‘s National Capital Region Assistant Regional

Administrator, Public Buildings Service. The PTO official concurred with our report and

provided additional, clarifying, or updated information, which has been included in the

report. GSA concurred with our report without comments, and OMB had no comments.

We conducted our review at GSA and PTO between September 2000 and April 2001 in

accordance with generally accepted government auditing standards.

- - - - -

 7

A prospectus, which is a justification for a proposed project, includes information on the size, cost,

location, and other features and is submitted to the appropriate House and Senate authorizing

committees.

8

Rentable square feet is a term used in the commercial real estate market that includes occupiable

square feet plus the tenants’ proportional share of common building areas, such as rest rooms, exit

stairways/fire corridors, and lobbies. Occupiable square feet is a term used by the government to

identify the square footage of space that can actually be used to house agency operations.
4 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

We are sending copies of this letter to Senators Ted Stevens, Robert Byrd, Orrin Hatch,

Patrick Leahy, Bob Smith, Harry Reid, Judd Gregg, Ernest Hollings, Ben Nighthorse

Campbell, Byron Dorgan, Peter Fitzgerald, and Max Baucus; and Representatives C. W. Bill

Young, David Obey, Jim Sensenbrenner, John Conyers, W. J. Tauzin, Don Young, James

Oberstar, Cliff Sterns, Edolphus Towns, Steven LaTourette, Jerry Costello, Frank Wolf, Jose

Serrano, Ernest Istook, and Steny Hoyer in their capacities as Chairmen or Ranking Members

of committees and subcommittees with jurisdiction over GSA, Commerce, and PTO activities;

the Honorable Dick Armey, House Majority Leader; Mr. Nicholas Godici, Acting Director,

Office of Patents and Trademarks; the Honorable Thurmond Davis, Acting Administrator of

GSA; the Honorable Donald Evans, Secretary of Commerce; and other interested parties. The

letter will also be available on GAO’s home page at www.//gao.gov.

Key contributors to this letter were Ronald L. King and Thomas G. Keightley. If you have any

questions, please contact me or Ron King on (202) 512-8387.

Bernard L. Ungar

Director, Physical Infrastructure Issues
Enclosure I

5 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

Detailed Information on the Questions

GSA’s Award of the Lease Appears Proper

One public interest group had questioned whether the General Services Administration

(GSA) improperly awarded the lease to LCOR because the offeror had not complied with the

solicitation’s stated requirements. We found nothing improper in GSA’s evaluation and

selection of LCOR’s offer. According to the public interest group, LCOR did not meet the

Solicitation for Offers’ (SFO) minimum requirement that the offeror have the necessary

zoning and master land-use plan approval for the required amount of office space and for the

above-grade parking garages LCOR proposed to build at the site. The public interest group

believed that LCOR was improperly allowed to correct these deficiencies after it was

awarded the lease when, as a result of the City of Alexandria changing its land-use plans,

LCOR’s design received the necessary approvals. The public interest group essentially

maintains that GSA should have instead eliminated LCOR from the competition and that GSA

otherwise provided LCOR with a significant competitive advantage by allowing it to obtain

the approvals after the award.

We found that under the SFO, LCOR was not required to have all the necessary planning and

zoning approvals in place prior to award of the lease. Further, according to GSA, LCOR

provided it with sufficient assurances that it could obtain the necessary approvals and meet

the planning and zoning requirements to enable GSA to determine that LCOR had the

capability to provide the required office space and the proposed parking facilities at the

Carlyle site.

In this regard, the SFO required LCOR to submit a legal opinion describing in detail the site’s

compliance with land-use and zoning restrictions and confirming that the planning and

zoning for the site had been completed in a manner sufficient to meet the SFO’s

requirements. Further, GSA amended the SFO during the competition to allow an offeror to

be considered compliant with land-use restrictions even if it had not completed and received

all the necessary site plan approvals. An offeror without all the necessary approvals prior to

award could thus compete as long as the jurisdiction’s normal approval process would permit

construction of the required amount of office space and completion of a facility meeting all

requirements of the SFO. Here, LCOR obtained the necessary approvals in conformance with

the government’s schedule.

We also found that GSA was not required to hold a separate competition for the construction

of the interior finishes phase of the project. Under the SFO, the construction of the interior of

the buildings is not a separately competed phase of the project; it is to be performed by the

selected developer following the construction of the exterior shell of the buildings.

We believe that GSA’s approach for the interior construction phase seems reasonable. The

public interest group appeared to be concerned that the lack of a detailed design and cost

ceiling for the interior phase of the project may increase costs because the developer would

be in a “sole-source” position. However, it appears that GSA has addressed these concerns,

and we have no basis on which to disagree with GSA’s response. Specifically, according to

GSA, the interior construction phase is designed to minimize the risks to the government and

the developer. These risks result from the fact that several years may elapse between the

award of the lease and the completion of all constructed space, during which the space

requirements of the government may change. This approach gives GSA and the Patent and

Trademark Office (PTO) design flexibility and the ability to defer final design decisions until
Enclosure I

6 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

closer to the occupancy date, reducing the probability of change orders and the need to

accommodate reengineered space layouts that may be required during this interval. The SFO

establishes a tenant improvement allowance for interior finishes that, with any additional

funds provided by PTO, GSA considers a cost ceiling for this phase of the project. GSA stated

that it will closely manage this phase of the project and that the SFO establishes several

measures (such as budgets and subcontract competition) that should control costs incurred

by the developer in completing the interior of the buildings. GSA believes that alternative

measures, such as detailed specifications and pricing prior to lease award, would subject the

government to a higher degree of risk than the measures provided in the SFO. We agree that

GSA’s approach seems reasonable in that change orders can be very costly.

We also do not believe that the interior construction phase of the procurement results in a

prohibited cost-plus-a-percentage-of-cost contract.9

 The lease agreement itself is simply not a

cost-plus-percentage-of-cost contract. Rather, the lease provides for, in addition to the tenant

improvement allowance discussed previously, a fixed lease payment by the government

(subject to certain adjustments) to the contractor that is to include the contractor’s fee

(profit). Thus, the lease does not allow the contractor to base its fee on the percentage of

costs it incurs.

We note that the Department of Commerce (DOC) Inspector General’s earlier review of this

procurement had found the initial interagency memorandum of agreement between GSA and

PTO to manage the project (not the lease agreement itself) was similar to a prohibited costplus-percentage-of-cost contract.10 The Inspector General found that under the initial

arrangement, GSA had little incentive to monitor costs or rein in overdesigning or

overbuilding by PTO. According to the Inspector General, GSA would receive a percentage

fee for its services based on the costs incurred by PTO to accomplish the design and

construction of the interior of the buildings, and these costs had not been capped under the

lease agreement. GSA and PTO have since addressed the Inspector General’s concerns in a

Memorandum of Understanding between the agencies that limited the fee that GSA could

receive. Further, the lease agreement established several cost control measures, such as

requiring the lessor to identify cost control methods and explain how selecting alternative

options, cost estimating, and monitoring will be done, to ensure that the interior finishes are

delivered within the allowance established for this work plus any additional funds provided

by PTO for interior finishes.

As previously mentioned, this procurement has also been reviewed by the DOC Inspector

General and later in litigation in federal court.11 None of these reviews resulted in a

conclusion that the procurement activities had been conducted improperly.

 9

41 U.S.C. 254(b) prohibits such contracts because they provide a contractor an incentive to increase

costs to the government by basing its fee on the percentage of costs incurred.

10The Inspector General did not actually conclude that the agreement between GSA and PTO was a

prohibited cost-plus-percentage-of-cost contract but that the agreement presented a similar risk of

increased costs.

11In December 1998, a competitor for the lease, the Charles E. Smith companies, filed a lawsuit in U.S.

District Court, Eastern District of Virginia, alleging that the SFO’s requirements overstated the

government’s minimum needs. Specifically, Smith alleged that it was disadvantaged in the competition

because its proposal to renovate existing buildings was uniquely affected by the excess requirements.

On July 29, 1999, the court ruled in favor of the government, and this ruling was affirmed on appeal.

CESC Plaza Ltd. Partnership v. U.S. Dept. of Commerce, No. 99-2432, 2000 U.S. App. LEXIS 12823 (4th

Cir. June 8, 2000) (per curiam). An earlier bid protest filed at GAO by Smith against certain
Enclosure I

7 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

GSA Followed OMB’s and Its Own Guidance in Scoring the Lease as an Operating

Lease

The public interest group questioned whether the requirements in GSA’s SFO for the PTO

lease transformed the lease from an operating lease to a capital lease under Office of

Management and Budget (OMB) Circular A-11.12 The public interest group contends that

contrary to OMB’s criteria for an operating lease,

• the lease term would exceed 75 percent of the asset’s estimated economic life,

• the facility would be special purpose,

• there would be no private sector market for the PTO facility, and

• the present value of the minimum lease payments would exceed 90 percent of the fair

market value (FMV) of the asset at the beginning of the lease term.

To qualify as an operating lease, a lease must meet six OMB criteria set forth in Appendix B

of OMB Circular A-11.13 Before analyzing these factors, we discussed them with OMB to

better understand its interpretation of these criteria. Table 1 shows OMB’s six criteria and

our analysis of whether the PTO lease met the criteria.

 requirements of the SFO was dismissed by GAO as untimely. The Charles E. Smith Companies, B277391, Sept. 25, 1997, 97-2 CPD ¶ 88. Smith and other plaintiffs had also sought to prevent the

consolidation of the PTO facilities in Alexandria on the basis that the government failed to comply

with environmental law requirements. The U.S. District Court, District of Columbia, decided this case

in favor of the government in Young v. General Services Administration, 99 F. Supp. 2d 59 (June 1,

2000). On December 14, 2000, the DC Circuit Court affirmed the ruling.

12If an agency’s lease is determined to be an operating lease, budget authority is required for the

estimated total payments expected to arise under the full term of the contract or, if the contract

includes a cancellation clause, an amount sufficient to cover the lease payments for the first year plus

an amount sufficient to cover the costs associated with cancellation of the contract. In a limited

number of cases, where funds are self-insuring under existing authority, only the amount of budget

authority needed to cover the annual lease payment is required to be scored. If an agency’s lease is

determined to be a capital lease, budget authority will be scored in the year in which the authority is

first made available in the amount of the net present value of the government’s total estimated legal

obligations over the life of the contract. For both operating and capital leases, outlays will be scored

over the lease term equal to the annual lease payments. For example, since GSA is considered to be

self-insuring, PTO’s yearly rent of $62 million would be scored against GSA’s budget authority for each

of the next 20 years as an operating lease. If it was a capital lease, the net present value of the $1.2

billion in total lease costs would be scored against GSA’s fiscal year 2003 budget authority.

13According to OMB officials, OMB reviews the scoring of a lease only when the prospectus is

prepared. OMB considers it the agency’s responsibility to score the lease when it is ready for signature.
Enclosure I

8 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

Table1: Comparison of OMB’s Six Criteria to the PTO Lease

OMB’s six criteria for determining an operating

lease

GAO Analysis of GSA lease for PTO facility

Ownership of the asset remains with the lessor during

the term of the lease and is not transferred to the

government at or shortly after the end of the lease

term.

Ownership of the asset remains with the lessor.

The lease does not contain a bargain-price purchase

option.

Although the lease does contain a provision providing

the right to purchase the facility, we saw no evidence

that the option to purchase at about $821 million at 20

years or the FMV at 20 years is a bargain-price

purchase option. According to an OMB official, the

purchase price has to be equal to or near the FMV of

the property to meet this criterion.

The lease term does not exceed 75 percent of the

estimated economic life of the asset.

The 20-year term of the lease is not greater than 75

percent of the expected 30-year or more economic life

of the building. Both OMB and GSA officials said the

expected life of the building applies to the exterior

structure itself, not its systems. The SFO required that

the exterior structure be built to last at least 50 years.

The asset is a general-purpose asset rather than being

for a special purpose of the government and is not built

to unique specifications of the government lessee.

On the basis of interviews with GSA and OMB officials,

our review of the SFO, the program of requirements,

the independent appraisal, and the location of the

property and its proximity to public transportation and

major connector roads, we concluded that this is a

general-purpose asset. Both OMB and GSA officials

said that special-purpose assets refer to such items as

border stations and courthouses but generally not to

office building requirements such as PTO’s. Although

some of the features of the buildings are being built to

meet PTO’s needs, they do not appear to be of the

type that would preclude other tenants from occupying

the space. Also, GSA’s Inspector General concluded in

its review that this was not a special purpose asset.

There is a private sector market for the asset. There is no evidence that there would not be a private

sector market for the facility given its basic design and

the location of the buildings. The lease allows the

government to purchase all or a designated portion of

the facility. If the government does not buy the

property, the lessor could sell the five buildings

separately, thus making the buildings easier to market.

Also, GSA’s Inspector General concluded in its review

that there is nothing in the design that would diminish

future marketability.

The present value of the minimum lease payments

over the life of the lease does not exceed 90 percent of

the FMV of the asset at the beginning of the lease

The present value of the minimum PTO lease

payments over the life of the lease does not exceed 90

percent of the FMV of the asset at the beginning of the
Enclosure I

9 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

term. lease term. GSA used data from the lease and

calculated the FMV on the basis of government

construction costs. Further, to ensure that the lease

was an operating lease, GSA determined the FMV

using another method and had the FMV determined by

an appraisal. These figures were inserted in the

appropriate formula, and in both cases the calculations

resulted in an operating lease.

Source: OMB Circular A-11, GSA and GAO

To determine whether the present value of the minimum lease payments over the life of the

lease would not exceed 90 percent of the FMV of the asset at the beginning of the lease term,

GSA has a scoring formula that has been reviewed by OMB. According to OMB officials, they

used the same formula when they initially scored the lease on the basis of the prospectus in

1995. For scoring the PTO lease prior to signing it in June 2000, GSA used Appendix C, valid

through the end of January 2001, of OMB Circular A-94 to determine the discount rate of 6.2

percent.14 We confirmed that GSA calculated the other appropriate figures for the formula

from the lease—occupiable square feet (OSF), lease award date, effective date of the lease,

rent per OSF, operating cost per OSF, taxes and insurance per OSF, and lessor management

costs per OSF. The last figure needed to complete the formula is the FMV of the leased

property.

We confirmed that GSA followed its General Construction Cost Review Guide for Federal

Facilities in making its determination of the FMV by reviewing its estimate. 15 According to a

GSA official, the FMV for the PTO facility was estimated on the basis of the review guide’s

cost to construct the facility. This guideline provides data and calculation procedures to

establish planning phase cost estimates for new construction projects. According to GSA

officials, this is the standard guidance used for estimating the construction of federal

facilities. An OMB official verified that this guidance was the appropriate guidance for

estimating federal construction costs. This figure was used in the scoring formula, which

showed it was an operating lease.16 The OMB guidance in effect at the time that GSA scored

the lease prior to signing it did not specifically indicate how the FMV should be calculated.

Further, according to a GSA official, to ensure that the lease was an operating lease, GSA

determined the FMV using another method and had the FMV determined by an appraisal. For

the other method, he obtained the FMV by inflating the 1995 FMV to reflect increased

construction costs that have occurred since the original estimate. Using either this figure or

the appraisal figure for the FMV in the scoring formula resulted in an operating lease.

In July 2000, after the lease was signed, OMB issued new scoring guidance that more

specifically addressed how the FMV should be calculated. Because no asset existed, as of the

date the lease was signed, OMB’s new guidance says:

 14The guidance provides 10-year and 30-year discount rates, 6.1percent and 6.3 percent, respectively.

OMB officials said that for 20 years one should interpolate the difference between the 10-year and 30-

year rates, which would be 6.2%.

15General Construction Cost Review Guide for Federal Facilities, Oct. 1999, Office of the Chief

Architect.

16We have not discussed the specific figures used in the calculation because certain information, such

as operating expenses and management expenses per OSF, are proprietary information of the lessor.
Enclosure I

10 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

“...the fair market value of the proposed asset should be calculated based on the Government’s

estimate of the cost to construct a facility equal in size and other characteristics to the amount

of space to be leased. The estimate should include consideration of the Government’s total

direct and indirect costs of the facility, including land, design, site improvements and

management costs.”

This is the same method GSA used to score the lease in June 2000.

For the purpose of this review, we assessed GSA’s conformance with existing OMB and GSA

guidance relating to scoring the PTO lease. However, we did not independently assess the

government’s criteria and guidance related to scoring proposed facility acquisitions. We plan

to include such an assessment in a broad review we have initiated on the government’s

overall approach to acquisition, management, and disposal of real property.

It Is Unknown Whether PTO’s New Space Will House All Future Space Needs

The public interest group believed the new facility will not be able to house all PTO

employees and contractors throughout the lease term because it believes PTO staff could

grow to 9,000, which is 1,900 higher than the planned occupancy, by the occupancy date of

about 2003. Further, the group believed that this growth would diminish or eliminate the

potential cost savings from consolidation.

It is unknown whether PTO’s new space will meet all of its future housing needs. A number

of different dynamics could mitigate the need for additional space in spite of the anticipated

growth in workload, such as PTO’s efforts to automate its increasing workload and allow

greater use of telecommuting by its staff, and PTO’s success or failure in hiring and retaining

staff.

Whether the projected $72 million in savings from consolidating is realized or not, PTO would

still have to pay for housing increased staff under either a consolidated or unconsolidated

scenario. Also, there are other benefits from consolidation, such as improved security and

compliance with current fire, life safety, and accessibility codes and requirements, that are

not available in all of the buildings where PTO staff currently work.

PTO is trying to automate and reengineer its operations, such as automating all of its files and

testing a pilot work-at-home program for trademark attorneys. These efforts could result in

reduced staffing needs and/or decreased space needs in the future. It is clear that PTO’s

workload is growing, but it is impossible to predict the long-term effects on PTO’s

employment levels because of PTO’s automation and reengineering efforts, its difficulties in

hiring employees in today’s competitive market, and the possibilities of a broadly applied

work-at-home program and/or the use of satellite sites located closer to the source of the

workload.

In addition, we reviewed the June 10, 1999, Business Case Analysis of Space and Facilities

Management prepared by DEVA and Associates, PC (DEVA report), which identified the $72

million in savings over a 20-year period for housing 7,108 staff.17 This report presented the

potential economic differences between remaining unconsolidated and consolidating into

one location. DEVA identified 24 cost areas for analysis, including basic rent, dual rent,

security, security upgrades, shuttle cost, and lost production time. DEVA attributed the bulk

 17The original DEVA report done in May 1998 was updated in June 1999 in response to a request by the

Chairman, Subcommittee on Economic Development, Public Buildings, Hazardous Materials and

Pipeline Transportation, House Committee on Transportation and Infrastructure. It was updated to

reflect comments made in an Arthur Andersen LLP review of the initial report.
Enclosure I

11 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

of the potential savings to reducing nonproductive travel time among PTO sites and rent for

space for staff increases from 6,400 to 7,100. The methodology and assumptions used to

identify the cost savings seemed reasonable.

At our request, DEVA updated its report in November 2000 to reflect recent increases in rent

costs. The update showed that the consolidation now has the potential for cost savings of $98

million over 20 years. The cost savings are estimates, and it is not yet certain how much will

actually be saved through the consolidation.

Further, even if no savings occur, the consolidation would enable PTO to provide better

security for its staff and meet fire, life safety, and accessibility standards for federal facilities.

In June 1995, the Department of Justice (DOJ) issued a report recommending specific

minimum security standards, such as controlled parking facilities and use of security

according to building occupancy, size, contact with the public, and mission of the agency.

PTO currently occupies eight buildings that according to DOJ standards, should have

controlled parking facilities and security guards, which, according to a PTO official, are not

currently available. The six facilities we visited had limited or no security for the staff housed

there and had underground parking to which the public had unrestricted access.18 In addition,

according to GSA, three buildings currently occupied by PTO do not comply with current fire,

life safety, and accessibility codes and standards. The new facility, which will be a complex

of five interconnected buildings, will allow PTO to implement new security features and

ensure that the buildings meet all fire, life safety, and accessibility codes and standards.

Some Building Features, Such as Fitness and Day Care Centers, Have Become

Important Recruitment Tools

One public interest group believed that some of the features being proposed for the new PTO

facility, such as a health care unit, fitness center, day care center, auditorium, and dual power

source capability, although desirable, may not be essential to providing adequate office space

for PTO.Because final specifications for the new PTO facility were not completed at the time

of our work, we could not assess all the details concerning the features, such as a health care

unit and day care and fitness centers, the public interest group has questioned. Nevertheless,

these types of features are not unique to PTO and appear to us to be reasonable because

these three features have been authorized by law or governmentwide policy for government

buildings. Furthermore, the justifications for the other features appeared reasonable because

there are a large number of people to be located at the new facility, and the features should

help PTO with its mission and in hiring and retaining employees.19

In keeping with its integrated workplace initiative, GSA is providing PTO, as well as other

agencies, tools it will need to develop a workplace that will serve the needs and work

practices of its employees and enhance the government’s ability to recruit and retain

employees. The goal of this initiative is to identify and promote a more comprehensive

approach to providing leading-edge workplaces that will assist federal agencies in creating

cost-effective, flexible, efficient office environments that enhance productivity and assist in

attracting and retaining a quality workforce.

 18We toured six of PTO’s current buildings. We found key-card access devices at one location for

access to office space, but no such devices at the other five locations. The parking for all the sites was

under the buildings and was not restricted by key-card devices or guards.

19As of March 22, 2001, the City of Alexandria had not yet approved the design of the building.
Enclosure I

12 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

PTO’s new facility is to provide a number of features, such as a health care unit, fitness

center, day care center, auditorium, and dual power source capability. Some of these types of

features, such as the health care unit, fitness center, and day care center, are authorized by

law or governmentwide policy. Furthermore, according to PTO officials, these features are

important because PTO is having difficulty recruiting and keeping employees, and the

features may help to alleviate this problem.

Congress has supported health care programs to promote and maintain the physical and

mental fitness of government employees since 1946, when it passed the first law authorizing

the head of government agencies to spend federal funds for health service programs.20 Under

this law, agencies established health units for employee use. Since then, through

governmentwide policy, the federal government has supported and encouraged physical

fitness and other preventive health care programs as essential elements of an agency’s health

service program for workers. Further in 1985, Congress authorized federal agencies to

establish child care facilities for federal employees.21 Currently, GSA has 110 child care

centers operating in 32 states and the District of Columbia.

Many organizations, including the Office of Personnel Management, GSA, PTO, and us,

believe that such features are important in helping federal agencies recruit and retain

employees in a competitive market and help contribute to employee morale and productivity.

Further, we found 100 private local buildings plus other federal buildings that provide some

of these types of features.

We found that PTO had justified the inclusion of several other building features that one

public interest group believed were unnecessary. For example, according to a PTO official,

the auditorium is needed to hold large staff meetings, briefings for the public, and other

conferences, and meetings that cannot be handled by a conference room. Without the

auditorium, PTO would have to rent space to hold these various meetings, as it does now.

Further, PTO believes that the auditorium supports GSA’s policy under the Public Buildings

Cooperative Use Act of 1976 to support the surrounding community by providing a facility for

arts and community use.22

Also, a PTO official told us that PTO wants dual power source capability from separate

substations to support its automation efforts. PTO has begun to accept patent and trademark

applications over the Internet and has plans to maintain the official copies of these

applications on computers rather than retain paper copies. Therefore, a loss of power could

bring PTO’s operations to a halt and prevent it from serving its customers in a timely manner.

Having an alternative power source should reduce the possibility of this occurring. Further,

in its review of the record in a civil action concerning PTO, a federal court confirmed PTO’s

need for dual power on the basis of the Court’s review of the administrative record.23

 205 U.S.C. 7901.

2140 U.S.C. 490b.

2240 U.S.C. 601a.

23U.S District Court for the Eastern District of Virginia, Civil Action #98-1.
Enclosure I

13 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

Funding Planned for Tenant Improvements Did Not Appear Excessive and a

Competitive Furniture Procurement Appears to Offer the Best Value

The public interest group believed that the standard tenant improvement allowance and

planned furniture acquisition are excessive. It also suggested that there may not be a cap on

the amount that can be spent on interior finishes in the new PTO facility. GSA has provided

an $88 million tenant improvement allowance for PTO’s new facility, and PTO plans to spend

another $29 million for above-standard improvements. The combined $117 million in tenant

improvement allowance does not seem excessive. The public interest group apparently

misunderstood what comprises GSA standard tenant improvement allowance. PTO also plans

to spend, if appropriated, $64 million for furniture. Although the final details for these items

had not been completed, the information currently available on the types of items PTO plans

to buy and the fact that it is a planned competitive procurement do not support the

conclusion that the planned expenditures are excessive. PTO considers the amount to be

spent on interior finishes for the PTO facility to be capped at $29 million.

Tenant Improvement Allowance

We found that the public interest group had apparently misunderstood what comprises GSA’s

tenant improvement allowance when it said the allowance was excessive. First, the group

identified $125 million as the amount established for the standard tenant improvement

allowance. We were able to identify only $117 million—GSA’s $88 million tenant

improvement allowance plus the $29 million to be funded by PTO directly for its specific

needs—for items that are typically considered tenant improvements.24 Although PTO does

plan to spend additional funds for its consolidation over and above what GSA is providing

under the lease, these costs are not part of GSA’s or PTO’s “tenant improvement allowance.”

25

Second, GSA’s standard tenant improvement allowance, which is generally used to convert

existing space to a new tenant’s needs, provides funds for such items as floor coverings,

interior partitions, ceilings, and interior doors. PTO’s $88 million allowance—$44.24 per

OSF— provides funds (about $38.30 per OSF) for these same finishes plus funds (about $5.94

per OSF) for all branch and secondary distribution systems for mechanical and electrical

services through the office areas and joint use space.26 According to a GSA official, the cost

for mechanical and electrical services usually ranges from $10 to $15 per OSF. Consequently,

one could reasonably expect the per OSF allowance to be between $48 to $53; thus, the

 24 We believe that the $8 million comes from the $135 million in space consolidation costs, but we

could not identify a specific item with which to associate it.

25PTO’s planned space consolidation costs total about $135 million. In addition to PTO’s $29 million

tenant improvement allowance, these space consolidation costs include $64 million for furniture, $17

million for information technology and signage, $7.8 million for dual rent, $6.9 million for program

management, $5.5 million in moving expenses, and $5 million in security upgrades. The figures do not

total to $135 million because of rounding. PTO reports quarterly to its Senate appropriations

subcommittee on the status of all of its space consolidation costs.

26The standard tenant improvement allowance is calculated using the base rate of $31.92 per usable

square foot (approximately equal to an occupiable square foot) for the Washington, D.C., area for fiscal

year 2000. This amount is then multiplied by a specific factor on an agency-by-agency basis. In this

case the PTO factor is 1. 2. This results in a standard tenant improvement allowance for PTO of $38.30.

It is unclear how the public interest group obtained the figure $36.69 for the standard tenant

improvement allowance.
Enclosure I

14 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

$44.24 allowance does not appear to be excessive. According to GSA officials, it is the

lessor’s responsibility to provide all the agreed-upon standard improvements for $88 million.

Third, the $29 million in above-standard tenant improvements is not part of GSA’s standard

tenant improvement allowance. PTO has prepared a written justification for the types of

additional items it wants in the facility. The $29 million represents funds for what are known

as above-standard finishes, which, in PTO’s case, include such items as slab-to-slab partitions

with a sound transmission coefficient of 45 for sound control and security; locks on office

doors; upgraded carpets in public areas; and special heating, ventilating, and air conditioning

for the conference rooms. Agencies often seek separate funds from Congress to pay for these

above-standard items as well as for other space consolidation-related costs, such as moving

expenses, that are over and above GSA’s standard tenant improvement allowance. PTO told

us that the above-standard improvement allowance for the PTO facility is capped at $29

million. At the time we did our fieldwork, the detailed specifications for the above-standard

items were not completed.

Planned Furniture Acquisition

PTO plans to use a competitive procurement to obtain its furniture needs, which should

result in the best price for the quality. The public interest group believed that the furniture

expected to cost about $64 million identified in the DEVA report may be overpriced.

Although PTO had not yet made final decisions on all of its planned furniture acquisition

when we completed our fieldwork, the process it was going through to select and acquire the

furniture generally appeared to be aimed at achieving the best value for the government.

According to a PTO official, furniture costs are capped at $64 million.

Because of the amount of furniture needed, such as office furniture and workstations for a

potential 7,000 staff, and in an effort to obtain the best value possible, PTO has decided to

compete the requirements rather than buying directly from the GSA Furniture Schedule. PTO

issued a Request For Information on furniture costs and received 24 responses from furniture

manufacturers. PTO then decided to create a showroom to have manufacturers display their

products for staff review and comment.27 Thirteen manufacturers participated, and PTO

evaluated the responses to an employee survey on the various products. According to a PTO

official, as of April 10, 2001, PTO has finalized its specifications for a Request for Proposal

(RFP) and would like to conduct the furniture procurement on a best value basis so that both

quality and cost can be considered. PTO officials believe that a competitive procurement will

allow them to obtain both high quality and a good price.

However, prior to issuing the competitive RFP, PTO will have to seek and obtain a waiver,

which it is in the process of doing, from Federal Prison Industries (FPI), from which federal

agencies are required to purchase products if they meet the buying agencies’ requirements

and the prices charged do not exceed current market prices. If PTO does not receive a waiver

from FPI, it is not known whether FPI can provide the best value; however, PTO would be

required by law to purchase the furniture from FPI.28 PTO has identified 19,347 items, or 13

percent of its inventory, suitable for relocation on the basis of condition and ergonomic

quality. PTO has received some initial funding for furniture but plans to ask for most of the

 27When PTO revised its cost analysis in June 2000, it showed furniture costs rising to about $67 million.

According to a PTO official, this was a result of updating information in the model without adjusting

the model to reflect furniture costs being capped at about $64 million.

2818 U.S.C. 4124
Enclosure I

15 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

funding in the next 2 fiscal years—$16 million in fiscal year 2002 and $42.9 million in fiscal

year 2003.

Construction of the PTO Facility Would Have Been Less Costly but Was Not a Viable

Option

We have stated in reports issued in 1997 and 1999 that construction would have been an

estimated $48 million less costly than leasing space for PTO.29 The public interest group says

that GSA should have constructed the PTO facilities with appropriated funds because it

would be less costly to the government. However, according to PTO’s Administrator of Space

Acquisition, at the time of the prospectus, the administration and PTO’s appropriation

committees agreed that a competitive lease was the only viable option because neither user

fees nor taxpayer funding were available to construct or purchase a new PTO facility.

We have previously reported that the budget scoring rules favor leasing and that one option

for scorekeeping that could be considered would be to recognize that many operating leases

are used for long-term needs and should be treated on the same basis as purchases.30 This

would entail scoring up front the present value of lease payments covering the same time

period used to analyze ownership options. Applying the principle of up-front full recognition

of long-term costs to all options for satisfying long-term space needs—purchases, leasepurchase or operating leases—is more likely to result in selection of the most cost-effective

alternative than the current scoring rules would.

 29Space Acquisition Cost: Comparison of GSA Estimates of Three Alternatives (GAO/GGD-97-148R,

Aug. 6, 1997). General Services Administration: Comparison of Space Acquisition AlternativesLeasing to Lease-Purchase and Leasing to Construction (GAO/GGD-99-49R, Mar. 12, 1999).

30Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings (GAO/T-AIMD-94-189,

Sept. 20, 1994.)
Enclosure II

16 GAO-01-578R Leased Space for the U.S. Patent and Trademark Office

Scope and Methodology

To address the allegations concerning the procurement process, we reviewed the SFO, laws

and court cases addressing the PTO lease, and GSA and DOC Inspector General reports. For

the concerns about the lease itself, we reviewed the SFO; Program of Requirements; the

lease; the independent appraisal; the facility’s location; GSA IG reports; OMB’s guidance on

scoring a lease (Circular A-11 Appendix B, and Circular A-94); GSA’s construction cost

estimating guidance; GSA’s calculation of FMV of the property; and GSA’s scoring of the

lease. Also, we interviewed both OMB and GSA officials concerning this issue. For the

concerns about space needs, we reviewed various documents PTO prepared concerning

staffing, workload, automation, and reengineering; visited six of PTO’s office locations;

reviewed the DEVA report and its assumptions; reviewed two consultant reports that

reviewed the DEVA report; and interviewed PTO staff. Further, we had DEVA update the

report to reflect current changes in the rent. For the concern about nonessential

requirements in the lease, we reviewed laws, searched CoStar, a computerized listing of all

commercial space in GSA’s National Capital Region, and interviewed PTO and GSA officials

concerning the issue. For the concerns about the tenant allowance and furniture costs, we

reviewed the laws, SFO, Request for Information, and various other documents concerning

furniture needs and interviewed GSA and PTO officials. For the concern about building

versus leasing, we reviewed prior GAO products and the lease.

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