Chairmen and Ranking Minority

Members, House Committee on

Appropriations and House Committee

on Transportation and Infrastructure

United States General Accounting Office

GAO

August 2001 BUDGET SCORING

Budget Scoring

Affects Some Lease

Terms but Full Extent

Is Uncertain

GAO-01-929
Page 1 GAO-01-929 Budget Scoring

August 31, 2001

The Honorable C.W. Bill Young

Chairman

The Honorable David Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Don Young

Chairman

The Honorable James L. Oberstar

Ranking Democratic Member

Committee on Transportation and Infrastructure

House of Representatives

This report responds to House Report 106-756, on the Treasury, Postal

Service and General Government Appropriation Act, 2001, for a review of

the effects that the current budget-scoring rules have had on the General

Services Administration’s (GSA) lease program.1

 The report expressed a

concern that budget-scoring restrictions were forcing GSA to rely on

shorter term leases that increase the costs to the Federal Buildings Fund

because their per-square-foot costs are greater than longer term leases.

This report said that this reliance on shorter term leases was hampering

GSA’s ability to fund other important programs such as repairs for

maintaining the integrity of the federal building inventory and critically

needed new construction.

As agreed with your offices, the objective of our work was to determine

the impact of budget-scoring rules on the lease term and identify other

factors that influence the lease term. We agreed to have GSA (1) identify

whether all 39 prospectus-level lease projects, which GSA submitted to the

appropriate House and Senate committees for fiscal year 2000 and 2001

 1

Budget scorekeeping is the process of estimating the budgetary effects of pending and

enacted legislation and comparing them with limits set in the budget resolution or

legislation. Scorekeeping tracks data such as budget authority, receipts, outlays, the

surplus or deficit, and the public debt limit.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-929 Budget Scoring

were affected by budget scoring,2 have GSA’s 11 regional offices identify

any other leases whose term was influenced by scoring, and review active

lease files to see if we could determine the effects of budget scoring from

the lease files; (2) determine, if possible, the monetary impact of budget

scoring on the lease term; and (3) identify other factors that influence the

lease term. Further, as agreed, we limited our review to only the budget

scoring criteria that were concerned with the term of the lease. These

criteria specify that in order for a lease to be scored as an operating lease,

the lease term not exceed 75 percent of the estimated life of the asset and

the present value of the minimum lease payments over the life of the lease

not exceed 90 percent of the fair market value (FMV) of the asset at the

beginning of the lease term.

During our review, we learned that the Security and Exchange

Commission (SEC), which has independent leasing authority, entered into

a lease for a new headquarters building that we identified as being affected

by budget scoring. Other than the SEC lease, we did not review leases or

lease projects of other agencies that use their own authority to lease space

independent of GSA.

The way in which budget-scoring rules were implemented affected the

lease or lease project term of at least 13 federal agency leases.3

 In addition

to the SEC lease, which we identified, GSA regions identified 12 leases or

lease projects whose terms were affected by budget-scoring rules.4

Additionally, other GSA leases or lease projects may have been affected by

budget-scoring rules, but a number of factors hampered the identification

of all such leases or lease projects. According to GSA officials, budgetscoring rules are affecting an unknown number of leases. For example, at

the beginning of a lease acquisition, staff often assume or believe that a

project will be affected by budget-scoring rules. Therefore, they reduce the

lease term to one that they think will be scored as an operating lease

versus a capital lease to avoid the higher up-front scoring associated with

a capital lease. Further, when a lease is actually scored, the term may have

 2

A prospectus, which is a justification for a proposed project is required when its cost

exceeds a legislatively established threshold and includes information on the project’s size,

cost, location, and other features; it is submitted to the appropriate House and Senate

authorizing committees. All other leases are known as nonprospectus leases.

3

A lease project is a project on which GSA is trying to obtain a lease.

4

As of August 2000, GSA had more than 7,000 active leases.

Results in Brief
Page 3 GAO-01-929 Budget Scoring

to be reduced in order for it to be an operating lease. Also, as of October

1998, GSA’s regional offices were to score and document the scoring of

both prospectus- and nonprospectus-level leases, according to officials.

However, the officials said that the files will contain only the final scoring

sheets and not preliminary runs that might identify situations where a

lease term was adjusted in order for the lease to score lower.

We could not determine the overall monetary impact of budget scoring on

the lease term. GSA officials told us that they do not generally seek

comparisons of long-term versus short-term leases in the solicitation

process. However, we did identify three isolated cases that had

comparisons of long term versus short-term leases in the solicitation

process. Two were GSA leases that were not identified as being affected

by scoring, and the SEC lease, which was affected by scoring. GSA had

requested as part of the bidding process 10-year and 20-year lease costs, in

one case, and 15-year and 20- year lease costs, in the other case. Our

review of these two leases showed that for the winning offers, the longterm cost per net useable square foot (NUSF) was slightly lower than the

shorter term offers cost per NUSF—3.24 percent, and 5.56 percent lower,

respectively.5

 Further, GSA also provided a consultant’s report that

showed the estimated annual lease costs per square foot for a Federal

Bureau of Investigation (FBI) building in Texas were 32 percent less

expensive for a 20-year lease than for a 10-year lease. While GSA officials

agreed that a 20-year lease usually has lower annual cost than a 10- or 15-

year lease, they could not estimate the potential amount saved by using a

20-year lease versus a 10- or 15-year lease.

SEC had requested as part of the bidding process that offers range

between 10 and 20 years. Our review of SEC lease files showed that for the

successful offer, the 20-year lease cost and the 15-year lease costs were

the same per rentable square foot (RSF).6

GSA officials stated that (1) if GSA has a justifiable need for a 20-year

lease, (2) the space requirement is large enough, and (3) it is located in an

appropriate market, then, in most cases, GSA should build rather than

 5

Net useable square feet is the term used by the government to identify the square footage

of space that can actually be used to house agency operations.

6

Rentable square foot is a term used in the commercial real estate market that includes net

useable square feet plus the tenants’ proportional share of common building areas, such as

rest rooms, exit stairways/fire corridors, and lobbies.
Page 4 GAO-01-929 Budget Scoring

lease because construction is generally less expensive than a long-term

lease. We have previously reported that for long-term needs, construction

is less expensive than leasing. Also, we have previously reported that the

budget scoring rules have the effect of favoring 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 or construction.7

 We recently initiated a

broad governmentwide review of real property management and plan to

address the effects of budget scoring on real property acquisition, as well

as other actions, as one part of this effort.

According to GSA officials, while budget scoring affects the term of some

leases, the term of most leases is determined by various factors, either

individually or in combination, such as rental market condition, location,

and the term desired by the agency.

We received written comments from both GSA and SEC. GSA basically

agreed with our report and provided additional comments supporting the

effect of budget scoring on leasing. SEC provided clarifying information,

which has been included in the report.

Budget-scorekeeping rules were developed by the executive and

legislative branches in connection with the Budget Enforcement Act of

1990. These rules are to be used by the scorekeepers to assure compliance

with budget laws.8

 Their purpose is to ensure that the scorekeepers

measure the effects of legislation consistent with scorekeeping

conventions and specific legal requirements. The rules are reviewed

annually and revised as necessary to achieve that purpose. Leases may be

of two general types—operating and capital. The Office of Management

and Budget (OMB) identifies six criteria that a lease must meet in order to

be considered an operating lease rather than a capital lease.

• 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.

 7

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

June 5, 2001).

8

The scorekeepers are the House and Senate Budget Committees, the Congressional

Budget Office, and the Office of Management and Budget.

Background
Page 5 GAO-01-929 Budget Scoring

• The lease does not contain a bargain-price purchase option.

• The lease term does not exceed 75 percent of the estimated economic life

of the asset.

• 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.

• There is a private sector market for the asset.

• 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 term.

If a lease does not meet all six criteria above, it must be treated as a

capital lease for budget-scoring purposes. For a capital lease, the net

present value of the total cost of the lease is scored as budget authority in

the year budget authority is first made available for the lease. For GSA

operating leases, only the budget authority needed to cover the annual

payment is required to be scored.9

 As we previously reported, in general,

capital facilities should be funded up front at the time the federal

government enters into the commitment.10

In June 1991, GSA wrote to OMB generally describing the policies and

procedures it would follow to ensure the proper implementation of the

new budget scoring rules. These rules were incorporated in OMB Circular

A-11. Appendix B of the circular contains the scoring rules for leasepurchases and leases of capital assets. In March 1992, GSA wrote to OMB

 9

According to an OMB official, the self-insuring part of the following definition applies to

GSA because GSA is considered to be self-insuring for budget-scoring purposes. If 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, a 20-year lease with a yearly rent of $10 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 $200 million in total lease costs would be scored

against GSA’s fiscal year budget authority in the year lease payments began.

10Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5, Nov. 12, 1996).
Page 6 GAO-01-929 Budget Scoring

saying that after reviewing its nonprospectus inventory, as well as OMB

policies and procedures, GSA concluded that nonprospectus leases should

be considered operating leases for scoring purposes without the necessity

of a case-by-case determination. In this letter, GSA stated that there was

no practical way to implement a policy of determining whether each

nonprospectus lease met the criteria for being considered an operating

lease without severely damaging its ability to meet client-agency needs.

GSA considered this view consistent with OMB’s intent, as well as an

operational necessity. In April 1992, GSA issued guidance on lease scoring

in which it stated that all nonprospectus leases are to be considered

operating leases unless the lease is a lease-purchase, the lease contains a

nominal or bargain purchase price, or the lease is on government-owned

land.11 All nonprospectus leases that met one of these exceptions were to

be scored as capital leases by the regions. All prospectus-level leases were

to be scored at GSA’s central office.

In October 1998, GSA announced it was no longer following the policy of

considering most nonprospectus leases as operating leases. Since then,

according to GSA officials, GSA has required regional offices to apply the

appropriate criteria to all prospectus and nonprospectus leases and that

copies of the resulting scoring be retained in the regionally maintained

lease file. GSA headquarters is to review the scoring of all prospectus-level

leases.

Two of the six scoring criteria used to determine an operating lease

concern the term of a lease: that the lease term not exceed 75 percent of

the estimated economic life of the asset and that the present value of the

minimum lease payments over the life of the lease not exceed 90 percent

of the FMV of the asset at the beginning of the lease term. According to

GSA officials, GSA’s leases generally meet the first of these two criteria. If

GSA rents new space, it meets this criterion because it only has 20-year

leasing authority and tax law specifies that a new building’s economic life

is longer than 30 years (30 yrs. times 75% = 22.50 yrs.). If GSA rents older

space, it generally requires it to be upgraded, which extends the building’s

estimated economic life, thereby meeting this criterion. Thus, the

remaining criterion that could affect the lease term is that the present

value of the minimum lease payments over the life of the lease not exceed

 11Lease-purchase is an agreement between a lessor and lessee in which the lessee agrees to

lease a building for a specified length of time and then takes title to the building at the end

of the lease period.
Page 7 GAO-01-929 Budget Scoring

90 percent of the FMV of the asset at the beginning of the lease term. For

example, if a lease has a 20-year term whose present value of the minimum

lease payments exceeds 90 percent of FMV then by reducing the 20-year

term, the present value of the minimum lease payments is reduced while

the FMV of the asset remains the same. This lowering of the percentage

relationship between present value of the minimum lease payments and 90

percent of FMV allows a lease to meet this scoring criterion. However, if a

lease does not meet any one of the other four scoring criteria, the lease

would be a capital lease no matter what the term.

Six of GSA’s 11 regions identified 12 projects or leases for which the

scoring process had affected the term of the lease. In one other region,

according to a GSA official, GSA thought that the term of about eight other

leases had been affected in the last 2 years but they could neither identify

those leases nor the impact of budget scoring on the lease term. GSA

officials from the other four regions said they could not identify any

projects affected by budget scoring. Only 2 of the identified 12 projects—a

lease for the Immigration and Naturalization Service and a lease for the

Secret Service—were among the 39 prospectus-level projects reviewed,

and none came from the 102 lease files we reviewed. According to GSA

officials, other factors, such as the agency or the market, determined the

term of these other leases. Table 1 lists the leases or lease projects that we

or GSA identified as being affected by scoring.

Budget Scoring

Impacts Some Leases,

But Full Extent Is

Unknown
Page 8 GAO-01-929 Budget Scoring

Table 1: Leases or Lease Projects Whose Term Was Affected By Budget Scoring12

GSA

region Agency

Rentable

square feet How budget scoring affected the lease

2 FBI 15,000 Term reduced from 20 to 10 years.

3 Social Security

Administration

(SSA)

824,563 Term reduced from 20 to 10 years.a

3 FBI 131,169 Term reduced from 16 to 10 years and

agency only wanted a 10-year lease.

5 Secret Service 76,200 Term reduced from 15 to 10 years.

5 FBI 126,912 Term reduced from 20 to 10 years.

7 Federal

Emergency

Management

Agency

82,017 Term increased from 10 to 15 years with

right to cancel after 10 years. This is a

build-to-suit lease. Since the agency is

generating the market, by going to a 15-

year lease the lessor could get better

financing thus reducing the lease costs.

10 Immigration and

Naturalization

Service

125,000 Term reduced from 20 to 10 years.

11 Department of

Transportation

1,350,000 Term reduced from 20 to 15 years.

11 National Science

Foundation

2,023bTerm reduced from 11 to 8 years.

11 Drug

Enforcement

Agency

49,692 Term reduced from 20 to 18 years and

loading dock dropped from project.

11 Federal Drug

Administration

25,196 Term reduced from 5 years with 2-year

options to 5 years only.

11 Department of

Defense

16,675 Term reduced from 5 years with a 5-year

option to 5 years only.

N/A SEC 650,000 Term reduced from 20 years to 14 years.

Legend: N/A=Not Applicable.

a

The lessor has submitted an unsolicited proposal to extend the lease by 15 years at lower rent if

GSA will renew the lease now rather than waiting until lease expiration in September 2003. This is

why it shows up on the Fiscal Year 2001 Capital Investment Plan.

b

This is in net useable square feet.

Source: GSA and GAO.

According to GSA officials, during the planning for the Department of

Transportation lease, it was realized that due to the rental rates in the

District of Columbia, a 20-year lease would probably not satisfy the 90

 12Either we or GSA identified these projects as ones that the lease term was affected by

budget scoring criteria. This list includes leases that have not yet been awarded and leases

and supplemental leases that have been awarded, as well as the SEC lease.
Page 9 GAO-01-929 Budget Scoring

percent scoring criterion. In order to address this issue, GSA reduced the

lease term to 15 years, estimating that the present value of the minimum

lease payments for a 15-year lease would not exceed 90 percent of the

FMV. For the SSA lease, according to officials, it was originally submitted

as new construction but not approved. GSA then decided to do it as a 20-

year build-to-suit lease,13 but when reviewed it was determined that it

would be a capital lease because it did not satisfy the 90-percent scoring

criterion. At OMB’s direction, the lease was awarded as a 10-year lease

because OMB thought that SSA space needs might be reduced in the

future because of automation.

Four factors limited the identification of leases affected by budget scoring,

according to GSA officials. First, GSA did not begin determining whether

each nonprospectus lease met the scoring criteria for being considered an

operating lease until about October 1998. GSA issued guidance in 1992 that

stated there was no practical way to implement a policy of determining

whether each nonprospectus lease met the criteria for being considered an

operating lease without severely damaging its ability to meet client-agency

needs. Nonprospectus leases were to be considered operating leases

unless the lease was a lease-purchase, the lease contained a nominal or

bargain purchase price, or the lease was on government-owned land. Thus,

it is unknown if nonprospectus leases would have been affected by scoring

between 1992 and 1998. Second, prospectus-level leases were scored in

headquarters until September 1998, and scoring records were not kept in

the lease files that are maintained by GSA’s regional offices. Third, GSA

headquarters does not maintain documentation on whether the scoring

process affected the lease term. According to a headquarters official,

although GSA kept copies of scoring for prospectus leases, the records do

not show whether the term was directly affected by scoring. Fourth,

according to GSA officials, budget-scoring rules affect an unknown

number of leases because if staff believe a project will be affected by

budget-scoring rules, they reduce the term to avoid the potential scoring

conflict. However, they do not formally score the lease and do not use the

scoring rules as a tool to identify the best term. As of October 1998, GSA’s

regional offices were to score and document the scoring of both

prospectus and nonprospectus leases, according to officials. However, the

officials said that the files will contain only the final scoring sheets and not

 13Build-to-suit refers to leased buildings that are constructed to meet a specific need of a

GSA client-agency.

Factors Limiting the

Identification of Lease

Term Influenced By

Scoring
Page 10 GAO-01-929 Budget Scoring

preliminary runs that might identify situations where a lease term was

adjusted in order for the lease to score as an operating lease.

We could not determine the actual monetary impact of reducing the lease

term. However, we found two leases in which GSA requested 10-year and

20-year and 15-year and 20-year lease costs. GSA provided a consultant’s

report showing the difference between 10- and 20-year lease costs for

another project and the SEC lease had 15- and 20-year lease costs. GSA did

not identify these two lease terms as being affected by budget scoring.

However, the SEC lease term was affected by scoring. According to GSA

officials, GSA does not generally seek comparisons of short- and long-term

lease costs in the solicitation process. Also, GSA officials stated that the

use of a 20-year lease is only appropriate in certain situations, such as if

the agency has a long-term need and the federal presence is large enough

in the market to backfill the space with other federal employees if the

needs of the requesting agency change over time. Also, they pointed out

that in most cases it would be less costly to construct a federal facility to

meet a long-term need than it is to lease. We previously reported that

construction was usually the least costly approach for meeting long-term

space needs.14 Further, GSA pointed out that other factors, such as market,

location, and the agency’s desires, affect the selection of the lease term.

While reviewing files, we identified two leases for which GSA had solicited

offers for both 10- and 20-year and 15- and 20-year leases. The first lease

was for a 20-year lease structured as either a 10-year lease with a 10-year

option or a 20-year lease.15 The 20-year lease term was 3.24 percent less

expensive per NUSF than the 10-year lease that was awarded. This lease

was awarded as a 10-year lease with a 10-year option because the agency’s

long-range plans were unknown. Eight final offers showed that the 20-year

lease ranged from 0 to 12.9 percent less expensive per NUSF than the 10-

 14Space Acquisition Cost: Comparison of GSA Estimates of Three Alternatives

(GAO/GGD-97-148, Aug. 6, 1997, and General Services Administration: Comparison of

Space Acquisition Alternatives—Leasing to Lease-Purchase and Leasing to Construction

(GAO/GGD-99-49R, Mar. 12, 1999).

15In analyzing the lease, the 10-year option is included in the analysis. Also, other factors

such as free rent or a cash allowance that may be made by offerors have not been included

in the analysis. We have calculated the cost differences based on cost per square foot.

Further, GSA may use technical factors such as expandability and space efficiency along

with cost in determining the best offer.

Overall Monetary

Impact of 10-Year

Leases Versus 20-Year

Leases Is Not Known
Page 11 GAO-01-929 Budget Scoring

year lease.16 However, for two other final offers the 20-year lease ranged

from .06 percent to 1.19 percent more expensive per NUSF than the 10-

year lease. The second lease was for a 20-year lease structured as a 20-year

lease with cancellation rights at 15 years or a 20-year lease. The 20-year

lease term was 5.56 percent less expensive per NUSF than the 20-year

lease with cancellation rights at 15 years for the offer selected for award.

The contract was awarded as a 20-year lease with cancellation rights at 15-

years. It is not clear from the file why this option was chosen. Four final

offers showed that the 20-year lease ranged from 5.56 percent to 7.75

percent less expensive per NUSF than the 20-year lease with cancellation

rights at 15 years. However, for two other final offers the 20-year lease was

5.99 percent and 7.97 percent more expensive per NUSF than the 20-year

lease with cancellation rights after 15 years. Furthermore, a consultant’s

report on locating an FBI building in Texas showed that a 20-year lease

was 32 percent less expensive per square foot than a 10-year lease. The

consultant pointed out that the cost difference might be due to the

specialized nature of the FBI building.

The SEC lease project had offers ranging from 10 to 20 years.17 For the

successful offer, the 20-year lease costs and the 15-year lease costs were

the same per RSF.18 Three other final offers showed that the 20-year lease

costs ranged from 1.3 percent to 4.1 percent less expensive per RSF than

the 15-year lease costs. One final offer included 10-year lease costs. This

offer showed that 20-year lease costs were 8.8 percent less expensive per

RSF than 10-year lease costs per RSF. Further, 15-year lease costs were 7.4

percent less expensive per RSF than 10-year lease costs per RSF. The

difference identified between terms and costs in these three examples are

not projectable to other leases because other factors such as market

condition (whether rental rates are high or low) affect the cost of a lease.

 16We dropped three other final offers because two had been withdrawn, and the data for

the other one could not be clearly interpreted.

17The SEC Solicitation for Offers (SFO) allowed offers up to 650,000 RSF. The SFO allowed

joint offers or allowed SEC to combine offers. We have included in our discussion only the

four of eight final offers that ranged from about 546,000 RSF to 650,000 RSF. We did this to

keep costs as comparable as possible.

18According to an SEC official, after receipt of Best and Final Offers, the offeror remaining

in the competitive range reduced its price and offered a 14-year term. Accordingly, the cost

per RSF for the 14-year lease SEC signed is not comparable to the 20-year lease and 15-year

lease costs in the prior offer of the successful offeror.
Page 12 GAO-01-929 Budget Scoring

In testimony before the Subcommittee on Public Buildings and Economic

Development, House Committee on Transportation and Infrastructure, on

May 15,1997, a private industry real estate official testified that a 20-year

lease term could have annual rental rates as much as 33 percent less

expensive than a 10-year lease and 13 percent less expensive than a 15-

year lease. Also, he testified that a 15-year lease term can be as much as 23

percent less expensive than a 10-year lease. He further stated that renewal

options in a lease are more advantageous than having to renegotiate a new

lease for the same location. While GSA officials agree that a long-term

lease generally has a lower cost than a short-term lease, they could not

quantify the difference between a 20-year lease or 15-year lease and a 10-

year lease. Also, they stated that it is generally less costly to construct a

federal facility to meet a long-term need—20 years or more—than it is to

lease. Furthermore, they pointed out that other factors such as the desires

of the agency and the market must be considered along with cost.

For nine GSA lease acquisitions, we previously reported that construction

would have been less costly in eight of the nine cases, with the range of

cost differences being from a negative $.2 million to a positive $48.1

million for construction.19 For 11 cities throughout the country, we

reported that to build a hypothetical 100,000 square foot office building

versus obtaining a 20-year lease, the estimated range of cost savings for

construction versus leasing was from $.3 million in St Louis, MO, to $14

million in Washington, D.C.20

Also, we 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.21 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, lease-purchase or operating leases—is

more likely to result in selection of the most cost-effective alternative than

the current scoring rules would.

 19The negative result is due to the low lease cost for warehouse space offered for this

acquisition.

20 GAO/GGD-99-49R, Mar. 12, 1999.

21GAO-01-578R, June 5, 2001.
Page 13 GAO-01-929 Budget Scoring

According GSA officials, while scoring does affect the term of some leases,

the term of most leases is determined by various factors other than budget

scoring, such as the type of space—existing or build-to-suit—lease term

desired by the agency, rental market condition, and location of the

structure. The importance of each variable may be different for each lease.

GSA officials said that for existing space, lease terms do not usually

exceed 10 years. This has been a standard practice for some time. If the

requirement is for build-to-suit space, then the term of the lease may have

to be longer than 10 years to accommodate the lessor’s ability to finance

the building. It is these build-to-suit leases that are most likely to be

affected by scoring because the lessor must have a longer term lease to get

financing for a new structure.

The lease term to which the agency is willing to commit is another

important factor. GSA officials stated that some agencies told GSA that the

agency only has authority to commit to a maximum of a 10-year lease.

Other agencies only want leases of 10 years or less because of the changes

occurring within the agency, such as downsizing or consolidation. An

example, according to GSA officials, is the Internal Revenue Service;

because of downsizing it does not want to sign a lease longer than 10

years.

The rental market conditions also affect a lease’s term. GSA does not want

to commit to a long-term lease when the market rent is considered high.

Conversely, if market rent is low, GSA will consider a longer term lease,

according to officials. An example is a lease for the Customs Service in

Seattle, WA, for which GSA did not want a long-term lease because the

current rental rates were high.

Location becomes an important factor because GSA is required to take

space back from an agency with only 120 days notice. So in areas with a

limited federal presence, GSA does not want to commit to leases where

the space cannot be easily back filled with other federal agency

employees, according to GSA officials. For example, in small towns, GSA

would not want to commit to a lease term longer than an agency wanted

when it is the only federal agency in the location. GSA would not be able

to find another federal tenant for this space.

Although efforts to address budget-scoring rules did result in shorter term

leases in some cases, we could not determine the total number of leases

where the term was actually affected by budget scoring because of GSA’s

Factors Other Than

Scoring That

Influence Lease Term

Selection

Conclusions
Page 14 GAO-01-929 Budget Scoring

documentation process for scoring leases. Further, while a shorter term

lease can be more costly than a longer term lease, we could not determine

the actual overall monetary impact of shorter lease terms because GSA

does not generally seek comparisons of short- and long-term lease costs in

the solicitation process. In addition to having some effect on the lease

term, our previous work has shown that budget scoring can affect the

government’s decision whether to construct or lease a facility. Also, we

have previously reported that the budget-scoring rules have the effect of

favoring 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 or

construction.

Because of the overall effect budget scoring appears to be having on the

acquisition of real property, we plan to address the effects of budget

scoring on real property acquisition as part of a govermentwide review of

real property management we recently initiated.

To address identifying leases affected by scoring, we reviewed OMB’s

guidance on scoring leases (Circular A-11, Appendix B, and Circular A-94),

interviewed GSA officials in headquarters and all 11 regions, and reviewed

102 active lease files with terms from 10 to19 years and 100,000 RSF or

more in GSA regions 3, 7, 8, and 11, which were the 4 regions with the

most leases meeting our criteria of 10 to 19 years and 100,000 RSF or

more. We dropped 8 lease files from our original selection of 110 files

because the files could not be located during our visit or had been moved

to other locations prior to our visiting the region. We did not verify the

accuracy of the data used to select the lease files. To determine monetary

impact of scoring on the lease term, we reviewed congressional testimony,

previous GAO reports, 102 GSA lease files, and 8 final offers for the SEC

lease; and we interviewed officials in GSA headquarters, all 11 GSA

regions, and SEC. To identify other factors influencing lease term, we

reviewed 102 active GSA lease files and interviewed GSA headquarters and

regional officials.

We conducted our review at GSA and SEC between October 2000 and July

2001 in accordance with generally accepted government auditing

standards. We obtained comments on a draft of the report from GSA and

SEC.

Scope and

Methodology
Page 15 GAO-01-929 Budget Scoring

On August 10 and 14, 2001, we received written comments from the

Associate Executive Director, SEC, and the Commissioner of GSA’s Public

Buildings Service (PBS), respectively. The SEC official provided clarifying

information, which has been included in the report. The PBS

Commissioner basically agreed with us that budget scoring is affecting the

lease term and provided additional comments, which he believes support

this position. The first comment stated that seasoned leasing specialists

said that the use of 20-year leases had declined since the Congress passed

the Budget Enforcement Act of 1990. While this may be true, GSA did not

have documentation on the impact of budget scoring on the lease term,

other than for the cases cited. Also, it is possible that other factors, such

as market conditions, contributed to the decline in the use of 20-year

leases. Second, GSA stated that the National Capital Region sets the term

of all the above-prospectus leases it submits as part of its capital plan at

10-years, except in certain cases, to avoid budget-scoring problems. For

the fiscal year 2000 and 2001 prospectus-level leases that we reviewed, this

is accurate. However, prior to fiscal year 2000, both the Patent and

Trademark Office and the Department of Transportation leases were

submitted for longer terms, 20 and 15 years, respectively. Third, GSA said

while options to renew a lease were advantageous, it did not generally

seek them for leases with 10-year terms because options are scored as part

of the 90-percent scoring criterion and could result in a capital lease.

While GSA is correct that OMB guidance requires options to be considered

in scoring leases, there is an exception to this rule. According to OMB’s

guidance, agencies do not have to include an option for budget scoring if

exercising the option would require additional legislative action. Lastly,

GSA raised the issue of short-term leases resulting in increased rental

costs in some cases because they lead to shorter amortization periods and

higher mortgage payments for lessors who use federal leases as collateral

for financing. While the report shows that in certain cases shorter term

leases are more expensive than long-term leases, we did not look at

whether this increased cost was driven by shorter amortization periods

and higher mortgage payments. GSA also made some technical comments,

which we have reflected in the report where appropriate. We have

included GSA’s written comments in appendix I.

We are sending copies of this report to the Chairmen and Ranking

Minority Members of congressional committees with jurisdiction over GSA

and SEC. We are also sending copies to the Administrator, GSA, and the

Chairman, SEC. Copies will also be made available to others upon request.

Agency Comments
Page 16 GAO-01-929 Budget Scoring

Key contributors to this report were Ronald L. King and Thomas G.

Keightley. If you have any questions, please contact me or Ron King on

(202) 512-2834.

Bernard L. Ungar

Director, Physical Infrastructure Issues
Appendix I: Comments From the General

Services Administration

Page 17 GAO-01-929 Budget Scoring

Appendix I: Comments From the General

Services Administration
Appendix I: Comments From the General

Services Administration

Page 18 GAO-01-929 Budget Scoring (393007)
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