Federal Real Property: Performance Goals and Targets Needed to Help Stem GSA's Reliance on Lease Extensions and Holdovers
Published: 2015-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Overreliance on costly leasing is one reason that federal real property has remained on GAO's High-Risk List. More than half of the leases in GSA's portfolio will expire in the next 5 years. When leases expire before a long-term solution can be finalized, GSA may pursue short-term extensions, or if GSA and a private lessor cannot come to agreement prior to expiration, the lease may go into holdover status—where a federal tenant occupies space without a contractual agreement. Extensions and holdovers may limit GSA's ability to obtain favorable contract terms. GAO was asked to review GSA's lease expirations and holdovers.
This report examines (1) the extent to which GSA's lease holdovers and extensions occur and the potential effects and (2) why some expiring leases are extended or go into holdover and what actions GSA has taken to address this issue. GAO reviewed regulations, GSA's guidance, and plans; analyzed GSA's leasing data from fiscal years 2012 through 2014; and interviewed GSA officials, federal agency officials, and lessors responsible for these leases.
section_title: What GAO Found
paragraphs: Lease holdovers and extensions were common in the General Services Administration's (GSA) lease portfolio from fiscal years 2012 through 2014, with a variety of effects. While leases in holdover or extension represented 27 percent of the overall portfolio, of the long-term leases set to expire over this time period, approximately 54 percent experienced a holdover or extension, or both—totaling 1,455 leases. Of these 1,455 leases, over half experienced only an extension, about 20 percent experienced only a holdover, and the remaining leases experienced both a holdover and an extension (see fig.). In addition, 1,603 leases in GSA's portfolio were in holdover or extension at the beginning of fiscal year 2012. Holdovers and extensions occurred throughout all of GSA's 11 regions and across the government, resulting in a number of potential effects. For example, while the cost impact is difficult to estimate, the short-term nature of holdovers and extensions creates uncertainty for GSA, tenant agencies, and lessors, which can make it challenging for GSA and federal tenant agencies to plan and budget for space needs and difficult for lessors to secure financing.
Holdovers and extensions occur for a variety of reasons, including challenges finalizing space requirements and the duration of the leasing process. GSA officials noted that extensions can also be used strategically, such as to align varying lease-expiration dates across multiple leases when consolidating space into a single lease. To reduce holdovers and extensions, GSA has undertaken initiatives to improve lease planning, to begin the leasing process earlier, and to improve communication with agencies. For example, GSA has provided new guidance to its regions to begin the leasing process earlier. In addition, GSA has established goals, targets, and measures—such as for lease planning and costs of extensions—it believes will reduce the need for holdovers and extensions and help track potential effects. However, GSA lacks specific, current goals and targets to assess its actual performance in avoiding holdovers and extensions. Leading practices in performance management show that a fundamental element in an organization's efforts to manage for results is its ability to set meaningful goals for performance and to measure progress toward those goals. Specific, relevant goals and targets related to what happens to GSA's leases when they expire and expected outcomes could provide GSA with valuable information to identify any actions needed to support its ongoing efforts, and allow for greater transparency and accountability to GSA's stakeholders.
section_title: What GAO Recommends
paragraphs: GAO recommends that GSA identify performance goals and targets for measures related to the use of holdovers and extensions for expiring leases that take into account the frequency with which holdovers and extensions occur and GSA's expected outcomes for expiring leases. GSA agreed with the recommendation.

section_title: Letter
paragraphs: GAO has identified the federal government’s real property portfolio as a  high-risk area due to long-standing problems in managing federal real  property, including an overreliance on costly leasing. As the federal  government’s principal civilian landlord, the General Services  Administration (GSA) acquires and manages real property—including a  significant amount of leased space—for many federal agencies. As of  fiscal year 2013, the most recent year for which GSA published portfolio  information, GSA had close to 195-million rentable square feet in its  inventory, across 7,435 properties leased from the private sector— including office buildings, laboratories, and other structures. GSA is  authorized to enter into lease agreements for up to 20 years to  accommodate federal agencies’ need for space.
The leases of more than half of GSA’s leased portfolio will expire in the  next 5 years. However, little is known about the proportion of expiring  leases without long-term lease solutions in place. When leases expire  before a long-term solution can be finalized, GSA may pursue short-term  lease extensions. While short-term extensions may be appropriate under  certain circumstances, GSA generally characterizes lease extensions as  a lease action of last resort because they may limit the negotiating power  of the federal government to secure favorable contract terms and rental  rates. If GSA and a private lessor cannot come to agreement prior to a  lease’s expiration, the lease may go into holdover status—where a  federal tenant occupies space without a contractual agreement with the  lessor. According to GSA, lease holdovers are risky for the federal  government and should be avoided because, among other things,  holdover tenancies can create an adversarial relationship between GSA  and a private lessor.
You asked us to assess the extent to which GSA leases expire without a  long-term lease solution in place, including how often GSA’s leases  expire into holdover. This report examines (1) the extent to which GSA’s  leases went into holdover or extension from fiscal years 2012 through  2014 and the potential effects and (2) why some expiring leases are  extended or go into holdover and what actions GSA has taken to address  this issue.
To address these objectives, we analyzed data provided by GSA from its  Real Estate Across the United States (REXUS) database to determine  which leases in its portfolio experienced a holdover or extension from  fiscal years 2012 through 2014. Based on our review of the data,  relevant documentation and discussions with GSA officials responsible for  the data, we determined that the data were sufficiently reliable for the  purposes of examining the prevalence and general characteristics of  leases in GSA’s portfolio that experienced holdovers and extensions  during this time period. From these data, we selected a non- generalizable sample of 10 leases for case studies. We selected leases  that were listed as having had a holdover or extension, or both, from fiscal  years 2012 through 2014 and that provided space for five different federal  tenants with an annual rent of $500,000 and above. Because about half  of these leases are located in the National Capital Region, we selected  five leases from that region. We selected the other five leases from the  Northeast and Caribbean, Southeast Sunbelt, Great Lakes, Greater  Southwest, and the Pacific Rim Regions for geographical diversity. For  these 10 lease case studies, we reviewed lease contracts and related  documentation and interviewed local GSA officials, tenant agency  officials, and lessors. While not generalizable to the universe of leases  that experienced a holdover or extension, the information obtained from  our case studies provides examples of broader issues faced by GSA in  managing its lease portfolio. In addition to our case study work, we  reviewed relevant statutes, regulations, Office of Management and  Budget (OMB) guidance, our prior reports, and GSA’s guidance,  performance reports, and strategic plan. We also interviewed GSA  headquarters officials and private sector officials with experience leasing  to GSA. We identified GAO guidance on leading practices for agencies to  manage for results, including defining desired outcomes, measuring  performance, and using performance information as a basis for decision  making. We also reviewed federal standards for internal controls—plans,  methods, and procedures used to meet missions, goals, and objectives— that are key to helping agencies better achieve their missions and desired  program results. We assessed GSA’s efforts to set goals and achieve  desired results for lease holdovers and extensions against this guidance.  For more information on our scope and methodology, see appendix I.
We conducted our work from October 2014 through September 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: GSA’s Public Buildings Service (PBS) manages real property for many  federal agencies and has a large portfolio of federally owned and leased  properties. This portfolio includes office buildings, courthouses, land ports  of entry, warehouses, laboratories, childcare facilities, and parking  structures. As of fiscal year 2013, the most recent year for which GSA  published portfolio information, GSA had a total of 377.9-million rentable  square feet in its inventory, of which 194.9 million—slightly more than  half—were leased from the private sector.
The Administrator of GSA is authorized by law to enter into lease  agreements, not to exceed 20 years, on behalf of federal agencies. The  administrator delegates leasing authority to GSA regional commissioners,  who further delegate authority by issuing leasing warrants to lease  contracting officers. GSA manages its inventory via 11 regional offices  and the central office, located in Washington, D.C. (See fig. 1.)
In fiscal 2014, PBS had 5,502 full-time equivalent (FTE) employees—who  accounted for roughly half of GSA’s total FTEs that fiscal year. According  to GSA, agency-wide staffing levels have declined over time, with PBS  experiencing a nearly 16 percent reduction in FTEs from fiscal years 2012  through 2014. More specifically, GSA officials noted that the number of  lease contracting officers has declined from 811 in 1995 to 301 in 2014.
The process for acquiring leased space, as outlined in the PBS Leasing  Desk Guide, begins when GSA receives a request for space from a  federal agency. GSA then works with an agency to obtain the specific  requirements for a lease, such as the amount of space needed and the  preferred geographic area. According to GSA, developing and finalizing  agency space requirements should take anywhere from 2 to 8 months,  depending on the complexity of the tenant agency’s space needs. After  this stage, approximately 18–24 months is needed to procure new leased  space prior to lease expiration for a typical lease acquisition, according to  GSA. During this time, according to the PBS Leasing Desk Guide, GSA  typically takes a number of steps to complete a lease acquisition (see fig.  2).
In addition, for leases with a net annual rent above a specific  threshold—$2.85 million in fiscal year 2014—GSA is required to submit a  prospectus, or proposal, to the House and Senate authorizing committees  for their review and approval. Given these requirements, the PBS  Leasing Desk Guide suggests the lease acquisition process for  prospectus-level leases begin 36 to 60 months prior to lease expiration.
In cases in which GSA is unable to complete a long-term leasing action  prior to a lease’s expiration, lease extensions may be used. A lease  extension is a negotiated agreement between the lessor and the  government allowing the tenant agency to continue to occupy its current  location for a short term. In a lease extension, terms of the original lease  remain in effect unless otherwise agreed upon. According to GSA, while  extensions can perform an important function in filling a short-term gap or  avoiding a holdover, extensions should not be considered standard  practice, as they may limit the government’s ability to secure favorable  lease terms, rents, or other conditions. In cases in which neither a long- term solution or extension is agreed upon prior to lease expiration, a  lease may enter into holdover—where a federal tenant agency continues  to occupy space beyond the expiration date of the lease term. In these  cases, the government has no contractual right to occupy the premises  but is continuing to do so. During a holdover, it is GSA’s policy to continue  to make monthly rental payments at the current rental rate stated in the  expired lease. According to the PBS Leasing Desk Guide, holdovers  should be avoided.
REXUS is the primary tool used by PBS to track and manage the  government’s real property assets and store inventory data, building data,  customer data, and lease information. GSA provides monthly lease  inventory snapshots from REXUS on its website, which is available to the  public. These snapshots include information such as lease number,  location, rent, and lease status—including whether a lease is in holdover  or extension when the snapshot is taken. REXUS is a real-time database  and data is overwritten as lease information changes from day to day. For  details on how we analyzed GSA’s available data, see appendix I.
OMB has emphasized in guidance issued over the past several years that  agencies should reduce space needs, including for leased space.  Specifically, in June 2010, the President directed agencies to achieve $3  billion in real property cost savings by the end of fiscal year 2012 through  a number of measures, including reducing leasing through consolidations  and increased space utilization. In May 2012, OMB issued a  memorandum directing agencies not to increase the size of their civilian  real estate inventory, stating that increases in an agency’s total square  footage must be offset through consolidation, co-location, or disposal of  space from the inventory of that agency. This policy became known as  “Freeze the Footprint.” In March 2013, OMB issued a memorandum  establishing implementation procedures for its “Freeze the Footprint”  policy, which specified that agencies should not increase the total square  footage of their domestic office and warehouse inventory compared to a  fiscal year 2012 baseline. In March 2015, OMB issued a memorandum  further directing agencies to reduce the total square footage of their  domestic office and warehouse inventory, similarly referred to as “Reduce  the Footprint.”
In a 2013 report on GSA’s prospectus-level—also known as high-value— leases, we found that GSA was working to help agencies reduce their  space needs and consolidate space as their leases expire. However, as  part of our work for this report, GSA officials said the agency has faced  challenges in helping tenant agencies to reduce their space needs. For  example, officials said that the current environment of reduced funding  government-wide, and expectations that agencies will work to reduce  space needs without necessarily having the funding to reconfigure their  space, has resulted in a challenging situation. Also, in our 2013 report on  high-value leases, we found that GSA, in its role as manager of real  property for many civilian agencies, had an opportunity to set forth a  vision and strategy for federal real property that encompassed the needs  of multiple federal agencies and balanced real property priorities across  the federal government that could help mitigate challenges over the long  term. According to our most recent high-risk update, since federal real  property was placed on GAO’s High Risk List in 2003, the federal  government has made progress in demonstrating leadership commitment  to improving real property management, however significant challenges  remain in demonstrating progress and achieving tangible results.
section_title: Lease Extensions and Holdovers Are Common in GSA’s Real Property Portfolio, and Effects Vary
subsections: section_title: Lease Extensions and Holdovers Are Common, but Incidences of Holdovers Have Declined
paragraphs: From fiscal years 2012 through 2014, lease holdovers and extensions  were a relatively common occurrence—3,058 out of 11,457 leases we  identified in GSA’s portfolio, or 27 percent of all active leases, went into  holdover, extension, or both over the 3-year period. However, in  analyzing month-to-month trends, we found that incidences of holdovers  declined over time. The percentage of leases in holdover on a monthly  basis decreased, from about 3 percent of all leases in GSA’s portfolio at  the beginning of fiscal year 2012 to about 1 percent by the end of fiscal  year 2014. There was no appreciable change in the rate of extensions  over the same time period. The proportion of leases in extension— relative to all leases in GSA’s portfolio on a month-to-month basis— remained relatively steady at about 15 percent of the entire portfolio.
However, comparing the number of holdovers and extensions against  GSA’s entire lease portfolio reveals only part of the picture. While this  analysis compares the number of holdovers and extensions against all  leases in GSA’s portfolio at a given time, it does not provide insight into  the outcomes of leases that were set to expire during the review period— in other words, those leases that had the opportunity to enter into an  extension or holdover. In the next section, we will discuss the proportion  of expiring leases that experienced a holdover, extension, or both during  our 3-year review period.
section_title: Over Half of GSA’s Expiring Leases Experienced a Holdover or Extension
paragraphs: Of the 2,719 long-term leases set to expire in fiscal years 2012 through  2014, approximately 54 percent experienced a holdover, extension, or  both—totaling 1,455 leases. Of these 1,455 leases, more than half  experienced an extension and roughly 20 percent experienced a  holdover. However, 25 percent of these leases experienced both a  holdover and an extension over the review period we examined. (See fig.  3.)
In addition to the 1,455 long-term leases set to expire that experienced  extensions and holdovers described previously, 1,603 leases were  already in holdover or extension at the beginning of fiscal year 2012. Of  these, most—1,382 leases (86 percent)—were in extension at the  beginning of the time period, with the remaining 221 leases (14 percent)  in holdover. Moreover, similar to the long-term lease expirations  described previously, many of these leases experienced both holdovers  and extensions during the course of the 3-year period. Specifically, of the  1,382 leases that were in extension at the beginning of fiscal year 2012,  309 leases—or approximately 22 percent—also experienced a  holdover. Similarly, of the 221 leases that were in holdover at the  beginning of fiscal year 2012, 92 leases—or approximately 42 percent— would also experience an extension over the following three years.
section_title: Holdovers and Extensions Vary in Duration and Are Spread Across Geographic Regions and Agencies
subsections: section_title: Duration
paragraphs: According to our analysis of GSA’s data, holdovers and extensions in  GSA’s portfolio vary in duration. Since GSA’s monthly lease inventory  snapshots do not capture the specific date a holdover or extension  begins, these data provide limited information about the duration of  holdovers and extensions. However, we determined the data were  sufficiently reliable in estimating some information about duration,  including the number of months GSA leases spent in holdover status from  fiscal years 2012 through 2014 and the planned duration of leases that  entered into extension from fiscal years 2012 through 2014.
During the course of the 3-year period from fiscal years 2012 through  2014, we estimated that the median duration for holdovers was 3  months. About half of all holdovers remained in this status for 3 months  or less, as shown in figure 4. However, since some holdovers may have  begun prior to fiscal year 2012 and lasted beyond fiscal year 2014, the  durations of these holdovers may be longer.
The median planned duration of an extension was 1.4 years, with about  60 percent of all extensions expected to last for 2 years or less, as shown  in figure 5.
During the 3 fiscal years in our review period, incidences of holdovers and  extensions in GSA’s portfolio occurred in all 11 GSA regions. Specifically,  4 of GSA’s 11 regions—the Southeast Sunbelt, National Capital Region,  Greater Southwest, and Northeast and Caribbean—together accounted  for approximately 70 percent of all holdovers that occurred from fiscal  years 2012 through 2014, while correspondingly accounting for 46  percent of all leases in GSA’s portfolio during this same time period. (See  table 1.) Similarly, 5 of GSA’s 11 regions—the Greater Southwest,  Southeast Sunbelt, Pacific Rim, Great Lakes, and National Capital  Region—collectively accounted for approximately 70 percent of all  extensions while accounting for 65 percent of all leases. As of fiscal year  2013, the National Capital Region, which includes Washington, D.C., as  well as portions of Northern Virginia and suburban Maryland, had the  largest share of leased space in GSA’s portfolio, as measured by rentable  square feet, at 29 percent. In addition to managing the largest portion of  GSA’s leased space, the National Capital Region also manages the  majority of the agency’s high-value leases. Specifically, in our previous  work on high-value leases, we found that 60 percent of the prospectus- level leases were located in GSA’s National Capital Region, with the rest  of the high-value leases spread throughout the United States, with  concentrations in major urban areas.
Three tenant agencies—the Department of Homeland Security, the Social  Security Administration, and the Department of Justice—together  accounted for about half of all holdovers and extensions, respectively.  Correspondingly, these three tenant agencies accounted for about half of  GSA’s entire lease portfolio during this time period. (See table 2.) As of  fiscal year 2013, the 10 agencies named in table 2 were also among  GSA’s largest customers in its leased inventory, as measured by rentable  square feet.
section_title: Holdovers and Extensions Have a Variety of Effects on GSA, Tenant Agencies, and Lessors
paragraphs: Although holdovers and extensions represent two distinct situations, they  can have similar effects on all parties involved in the federal leasing  process, according to GSA officials, tenant agency officials, and lessors  we interviewed. These stakeholders told us that leases experiencing  holdovers and extensions have a variety of effects, as described below.
Uncertainty: The short-term nature of holdovers and extensions create  uncertainty for tenant agencies and lessors; such uncertainty can make it  challenging for federal tenant agencies to effectively plan and budget for  the long term. For private lessors, the uncertainty caused by lease  holdovers and extensions may hinder opportunities to secure other long- term tenants or sell a property due to the short-term nature of the  tenancy. Lessors may also face challenges securing financing for  properties in holdover or extension. Specifically, several lessors noted  that the negotiated terms of loans used to finance buildings often align  with the lease terms, or duration of the lease agreement. In instances of  lease holdovers or extensions, lessors may have difficulty securing  adequate financing from a bank because of the short or uncertain  duration of the tenancy. In one GSA-leased building, the lessor told us  that its mortgage expired while the lease was in holdover status and a  new mortgage could not be negotiated without a lease agreement in  place. As a result, the lessor paid a non-refundable fee to the bank to  extend the loan terms until a long-term lease agreement could be  reached. In another example, a lessor cited the short-term nature of an  18-month lease extension as a primary reason why tenant-requested  improvements for GSA-leased space could not be funded. Specifically,  the lessor noted that in the absence of a long-term lease agreement, the  lessor was unable to refinance its building loan and secure funding for  tenant improvements without significant expense. According to several  lessors, the prevalence of holdovers and extensions and their associated  effects have prompted concerns about GSA’s portfolio management and  caused some private lessors to voice their hesitancy to lease space to the  federal government. GSA officials acknowledged that while short-term  lease extensions and holdovers may create uncertainty for the lessor and  tenant agencies, the uncertainty created by extensions and holdovers is  often a result of budget and tenant agency requirement uncertainty.  We  will discuss budget uncertainty and tenant agency requirements later in  this report.
GSA workload: According to GSA regional officials, incidences of  holdovers and extensions create additional work for GSA staff, increasing  what some officials described as an already full workload for agency  employees. Specifically, negotiating extensions and resolving holdovers  require time and effort from GSA personnel that is in addition to the time  required to finalize longer-term space solutions for tenant agencies, and  any other duties they may have. GSA has also stated that in addition to  increasing GSA’s workload in the short-term, this workload is  compounded and expanded as leases extended in prior years expire and  add to the current year’s expiring leases. However, GSA’s central and  regional-office officials also noted that, when used strategically,  extensions can be a valuable tool to bridge a gap between an old or new  lease, to allow time to renovate a new building for occupancy, or to  consolidate multiple leases with differing expiration dates into a single  lease. We will discuss GSA’s strategic use of extensions later in this  report.
Potential costs: While some of our case study leases experienced  increased rental rates for GSA and tenant agencies, the direct financial  costs of holdovers and extensions across GSA’s portfolio are difficult to  estimate given the information currently available. GSA has stated that  some extensions may carry higher rental rates due to their shorter lease  terms, although lessors and GSA officials also noted that the rental rate of  an extension or lease following a holdover is affected by a variety of  factors, including the overall condition of the commercial real estate  market when a lease expires. In order to better understand the financial  cost of extensions, GSA officials said they are beginning to track the cost  of some lease extensions relative to market rates in fiscal year 2015 and  is including this information as part of annual performance reporting.
Effect on physical space: Holdovers and extensions may also delay the  completion of general maintenance and tenant alterations. For example,  tenant agency officials from the Department of Homeland Security noted  that when one of the agency’s leased spaces expired into holdover, the  only elevator in the building remained out of service for an extended  period of time, forcing employees to climb several floors each day to the  agency’s top-floor office space. According to these agency officials, this  situation arose because the private lessor lacked the incentive to spend  money repairing an out-of-service elevator when a signed lease  agreement was not in place. In another example, tenant agency officials  from the Social Security Administration told us that during a lease  extension, the agency faced challenges working with the lessor to  upgrade its physical space, including high-traffic areas used to serve the  general public.
section_title: Myriad Factors Contribute to Holdovers and Extensions; GSA Has Taken Steps to Address Challenges, but Lacks Goals and Targets to Assess Progress
subsections: section_title: A Range of Factors Contribute to Holdovers and Extensions
paragraphs: GSA and tenant agency officials identified a variety of factors that  contribute to holdovers and extensions, as described below.
Finalizing agency space requirements: For 9 of the 10 leases we  reviewed, GSA regional officials stated that changes to or delays in  developing and finalizing space requirements contributed to a holdover or  an extension. For example, in one lease we reviewed that provided space  to an agency of the Department of Health and Human Services (HHS),  tenant agency officials provided their anticipated space requirements to  GSA in 2011, 2 years in advance of the lease’s expiration date. However,  in March 2013—9 months before the lease was set to expire—the tenant  agency revised its requirements and requested significantly less space  than initially anticipated. GSA regional officials stated that while agency  changes in requirements are not unusual, the timing of the change  contributed to a holdover for this lease, as GSA had to restart the  procurement process to accommodate the revised space requirements.  Furthermore, according to GSA headquarters officials, regional staff, and  tenant agency officials we interviewed, in recent years, agencies’ efforts  to reduce space under the Freeze the Footprint policy have contributed to  delays in finalizing agency space requirements. For 4 of the 10 leases we  reviewed, GSA officials noted that when the policy was announced, GSA  slowed acquisitions for long-term leases and used extensions to provide  tenant agencies and GSA with more time to modify requirements to  comply with the Freeze the Footprint policy. Similarly, tenant agency  officials we interviewed stated that this policy caused them to re-assess  long-term requirements. For example, officials from the Social Security  Administration (SSA) stated that the agency’s efforts to freeze and reduce  its leased space in accordance with the Freeze the Footprint policy have  contributed to some delays in finalizing agency requirements and have  sometimes necessitated the use of extensions, including for one of the  SSA-occupied GSA leases we reviewed.
Duration of the lease acquisition process: For 7 of the 10 leases we  reviewed, tenant agency or lessor officials stated that holdovers and  extensions in these leases were the result of an acquisition process that  did not provide GSA or the tenant agency with enough time to complete a  long-term leasing action. According to the PBS Leasing Desk Guide, GSA  staff should begin reaching out to tenant agencies 24 months prior to  lease expiration, and between 36 and 60 months prior to expiration for  prospectus-level leases. In practice, we found that GSA first contacted  the tenant agencies 17 to 63 months in advance of expiration of the  lease. In 8 out of these 10 leases, GSA contacted the tenant agency at  least 24 months in advance of expiration. While we found the lease  acquisition process was initiated well in advance, and within the general  time frames recommended in the PBS Leasing Desk Guide for most of  our case studies, tenant agencies and lessors stated that there was still  not enough time to complete a long-term leasing action. GSA has begun  an initiative to improve the timing of its leasing process, which we discuss  later in this report.
GSA workload and staff turnover: For 9 of the 10 leases we reviewed,  the tenant agency or lessor officials noted that GSA may have lacked the  realty and contracting staff to finalize new long-term leases and avoid the  use of an extension or holdover. For example, for two leases we  reviewed, GSA officials told us they used extensions as a tool to manage  their workload and to provide more time for long-term leasing actions to  be completed. Officials in one GSA region told us that regional staff used  extensions to reduce their overall workload because the region lacked the  resources to complete all of its leasing actions before leases expire.  Furthermore, these regional officials stated that they had generally  negotiated extensions with a 5-year term to help manage their workload,  which then provides more time to complete a longer-term lease action.  GSA headquarters officials acknowledged that GSA faces workforce  challenges, specifically in hiring, training, and retaining lease contracting  officers, and that the agency is working to increase the number of lease  contracting officers. These officials noted that there is high turnover  among lease contracting officers, which both tenant agency and GSA  officials noted contributes to delays in completing follow-on leasing  actions when leases are transitioned to other contracting officers.  Tenant agency or lessor officials associated with 7 of the 10 leases we  reviewed also stated that GSA provides limited information and updates  during the lease acquisition process, and in several cases, tenant agency  officials indicated that this lack of communication resulted from GSA staff  turnover and workload. GSA’s efforts to improve communication are  discussed in more detail later in this report.
Agency budget challenges: GSA regional officials stated that an  extension or a holdover may occur when agencies lack the financial  resources to sign a new lease or move to a new space. We have  previously found that agencies with shrinking budgets struggle to  determine how to fund moving or retrofitting space to improve space  efficiency. As part of the effort to address this challenge, the President’s  fiscal year 2016 budget request for GSA proposes that Congress provide  $200 million in obligational authority from the Federal Buildings Fund to  assist GSA and tenant agencies with space consolidation and to reduce  the government’s real property footprint, among other things. Officials  from GSA and tenant agencies noted that the timing of the budget  process affects the ability to avoid holdovers and short-term extensions.  For example, both GSA and some tenant agency officials stated that the  use of short-term continuing resolutions and delays in receiving full-year  appropriations often creates uncertainty for government agencies, which  in turn makes those agencies hesitant to commit to a long-term leasing  action. Moreover, GSA officials noted that under a typical continuing  resolution, GSA can enter into a new lease by law, but GSA requires  assurances that the tenant agency will have the budget to cover the lease  costs. Officials stated that in some cases, GSA may have to delay a  lease’s procurement in cases in which a tenant agency is reluctant to  commit to a lease until a continuing resolution is resolved.
Prospectus project review and approval: In addition, the time it takes  to review and approve prospectus-level leases may slow the leasing  procurement process. More specifically, for each of the four prospectus- level leases we reviewed as part of our case studies, the length of the  review process was cited as a factor contributing to incidences of  holdovers and extensions. For example, for a GSA lease we reviewed  that was set to expire at the end of October 2011, GSA officials stated  that the holdover was primarily the result of the length of the prospectus  review and approval process. Specifically, while the lease was submitted  to the relevant congressional committees for approval in December  2010—nearly a year before lease expiration—the prospectus was not  approved until July 2012—nearly 9 months after the lease’s expiration at  the end of October 2011. Both GSA officials and tenant agency officials  stated that GSA should have submitted the prospectus to Congress  earlier to avoid a delay in approval. According to the PBS Leasing Desk  Guide, the process for pursuing a prospectus-level lease may need to  commence up to 5 years before a lease’s expiration. According to GSA  headquarters officials, this lead-time is essential in finalizing the tenant  agency’s requirements, developing the prospectus, getting approval from  OMB, and finally submitting the prospectus to the House and Senate  committees for approval.
Negotiation impasse: GSA regional officials stated that holdovers  sometimes occur as a result of an impasse in negotiations for a long-term  succeeding lease with lessors. In these cases, GSA officials said that  holdovers are preferable to negotiating disadvantageous terms for the  government. For example, in one lease we reviewed where GSA acquired  space for the Department of Justice, GSA and the incumbent lessor were  unable to agree on a rental rate for an extension or a follow-on lease, as  the rates proposed by the lessor substantially exceeded the prevailing  local market rate for commercial real estate. As a result, the GSA’s  contracting officer determined that completing an extension would not be  possible, and the lease moved into holdover status for nearly a year while  GSA and the lessor worked to negotiate an extension. In this particular  lease, the contracting officer stated that the use of a holdover was  preferable to committing GSA to a lease with terms that were unfavorable  to the government. While GSA headquarters officials noted that the use of  a holdover is not preferable and a last resort during a lease procurement,  they also said that some holdovers may not be avoidable when an  impasse occurs between GSA and a lessor.
Strategic leasing decisions: According to GSA officials, some  extensions are used to align lease expiration dates as part of strategic  efforts to consolidate space and leases. Specifically, in 2 of the 10 leases  we reviewed, an extension was used to align multiple lease-expiration  dates. For example, as part of a consolidation of multiple leases into a  single space for an HHS agency, GSA’s contracting officers negotiated  short-term extensions to align the varying expiration dates of these leases  with the first day of the term of the lease for the consolidated space.  According to GSA’s most recent data, the use of extensions for strategic  purposes, such as for consolidations, represented about 11 percent of all  extensions in that month. GSA headquarters officials also stated that as  tenant agencies continue to implement the Freeze the Footprint policy,  GSA contracting officers may increase the use of extensions to align  expiration dates as part of space consolidation efforts.
section_title: GSA Is Working to Improve Its Management of Expiring Leases
paragraphs: GSA headquarters officials stated their commitment to reducing the  number of holdovers and extensions, and noted a variety of recent  initiatives designed to improve planning and begin the leasing process  earlier and improve communication with tenant agencies. According to  GSA officials, these initiatives represent a proactive, strategic approach to  anticipating and resolving incidences of holdovers and extensions.
Improve planning: GSA headquarters officials stated that they have  taken steps toward reducing holdovers and extensions by focusing on  improving planning and initiating the leasing process earlier. For example,  since 2011, GSA has worked in collaboration with tenant agencies to  develop clients’ portfolio plans at the national level, a process that allows  GSA to analyze its leasing inventory on an agency-by-agency basis and  strategically plan for future procurements, while identifying opportunities  for consolidations and cost savings. According to GSA officials, GSA uses  the client portfolio-planning process to, among other things, manage its  workload and prevent staff and other resource limitations from forcing the  use of short-term extensions and holdovers. According to GSA’s fiscal  year 2016 annual performance plan and report, client portfolio plans have  been completed for 12 of GSA’s clients, and GSA expects to have an  additional 6 completed by the end of fiscal year 2016. In addition, GSA  officials stated that, in fiscal year 2015, the agency began to implement a  lease portfolio-planning initiative, which is designed to proactively  manage upcoming expiring leases in each region and ensure adequate  leasing plans are in place prior to lease expiration. The initiative focuses  on leases expiring in the next 3 years and is to track the progress of these  procurements nationally, according to GSA officials. In addition, GSA is  providing new guidance to regional offices to begin the leasing process  earlier. As part of this effort, GSA is developing a formal, standardized  expiration notification process, which is to instruct regional offices to notify  agencies beginning 3 years prior to a lease’s expiration for standard  leases and 5 years prior to expiration for prospectus-level leases. GSA  officials stated this initiative will help to ensure that tenant agency officials  begin considering future space requirements well in advance of a lease’s  expiration and that GSA leasing specialists will have adequate time to  complete the lease acquisition process prior to lease expiration. In the  event of a non-response by the tenant agency, GSA has developed  specific guidance for its regional offices to escalate the issue to senior  members of the agency’s leadership team to encourage agency action.  This guidance was disseminated to GSA regional offices in July 2015.
Improve communication: GSA is taking steps to improve  communications with its tenant agencies. For example, GSA officials  stated that its Service Delivery Excellence initiative is exploring ways to  ensure that GSA regions and agencies communicate with each other in a  consistent, regular, and comprehensive manner. The initiative, which was  rolled out to GSA regions in June 2015, aims to improve communication  at the very beginning of the leasing process to give GSA time to plan for  any complications that may arise, including those associated with  obtaining tenant space requirements. In January 2015, GSA published a  lease management customer guide to help facilitate effective  communication between GSA and the lessor and between GSA and  tenant agencies. Specifically, the guide identifies the GSA staff who will  serve as the tenant agency’s advocate, the information that will be  provided to lessor and tenant agency’s officials, and the roles and  responsibilities of all parties involved in the leasing process.
section_title: GSA Is Using Several Measures to Track Its Use of Holdovers and Extensions
paragraphs: GSA regional officials we spoke to stated that the agency’s focus on  reducing holdovers and extensions has been clearly communicated to  regional offices and has been reinforced by the central office’s efforts to  track the number of holdovers and extensions and provide this  information monthly to regional offices. Since October 2011, GSA has  used information from its REXUS database to develop and distribute a  monthly internal report on holdovers and extensions, which includes  information on the number of leases with holdovers and extensions  compared to the total number of active GSA leases per region, and an  analysis of holdovers and extensions by region and by tenant agency.  GSA officials said they have used this information to monitor the use of  holdovers and extensions in each region over time, which informs internal  decision making. In addition, GSA officials said that they are tracking and  monitoring a number of measures over the lease acquisition life cycle in  order to assess the agency’s progress in reducing holdovers and  extensions. These measures include:
Lease portfolio planning: As previously mentioned, GSA has  created a lease portfolio planning measure and set an internal  target, beginning in fiscal year 2015, that a planned follow-on  action is in place for at least 90 percent of leases expiring over the  next 3 fiscal years. GSA considers this a proactive measure that  should help to alleviate the need for short-term extensions and  holdovers by ensuring appropriate plans are in place and being  executed prior to lease expiration.
Expiring lease replacement: GSA has an internal measure,  called the expiring lease replacement measure, which tracks the  number of leases up for expiration on a monthly basis and  provides information to GSA’s regional offices on the outcomes of  these leases (e.g., new lease, extension, holdover, etc.). While  GSA currently tracks this measure on a monthly basis, and has  done so for the past decade according to GSA officials, GSA has  not set specific targets for this measure for fiscal year 2015.
Lease cost relative to market: As previously mentioned, in order  to better understand the financial cost of extensions, GSA officials  said they are beginning to track the cost of some lease extensions  relative to market rates in fiscal year 2015, and are including this  information as part of their external annual performance reporting.  GSA also reports this measure internally on a monthly basis, and  for fiscal year 2015, GSA established a target that the agency  award leases at 7 percent below the prevailing market rate,  including lease extensions.
section_title: Additional Goals and Targets to Assess Progress in Reducing Holdovers and Extensions Would Be Beneficial
paragraphs: GSA has established goals, targets, and associated measures—such as  for lease planning and costs of extensions—it believes will reduce the use  of holdovers and extensions and help keep track of potential impacts.  GSA officials stated that the agency’s strategy for measuring holdovers  and extensions is currently focused on proactive measures with an  emphasis on goals and targets related to early planning for leases that  are scheduled to expire in the near future. GSA officials stated that they  are focused on forward-looking goals, targets, and measures as part of a  strategic decision to incentivize and track planning actions that will reduce  the occurrence of holdovers and extensions in the future. Similarly, GSA  officials stated that the goals and targets GSA has set for the agency’s  lease cost relative to market measure will incentivize GSA staff to seek  the best value for leases, which would favor the use of long-term leasing  solutions over short-term extensions and holdovers, and thereby reduce  the overall number of extensions and holdovers.
While GSA has taken these important steps, it lacks specific, current  goals and targets for assessing its actual performance in negotiating  replacement leases on time, thereby avoiding holdovers and extensions.  More specifically, GSA’s lease replacement measure indicates the extent  to which the agency is using holdovers and extensions when leases  expire. However, GSA did not have documented goals or targets for this  measure, either in its strategic plan or other planning documents for fiscal  year 2015, and GSA stated that targets and goals it had developed for  this measure from fiscal year 2014 are generally still applicable. In  addition, GSA officials said that the agency is reluctant to establish such  goals and targets because of uncertainty about what would be an  acceptable level of holdovers and extensions, and concern that arbitrary  goals could create other negative consequences, such as not capitalizing  on a situation where an extension would be beneficial.
While we understand GSA’s rationale and acknowledge the complexity  involved in setting goals and targets for the expiring lease replacement  measure, leading practices in performance management show that a  fundamental element in an organization’s efforts to manage for results is  its ability to set meaningful goals for performance and to measure  progress toward those goals as part of its strategic-planning efforts.  Further, such performance measurement allows organizations to track  progress in achieving their goals and gives managers crucial information  to identify gaps in program performance and plan any needed  improvements. In addition, according to Standards for Internal Control in  the Federal Government, managers need to compare actual performance  against planned or expected results and analyze significant differences.  In the case of GSA, having such goals and targets for the existing  expiring lease replacement or other similar measures could be beneficial  given that executing leases efficiently and effectively is at the core of the  agency’s mission. Further, it would allow GSA to continue to demonstrate  progress in this area, where it has made a public commitment to reduce  holdovers and extensions, and acknowledges such actions are not ideal  and often have negative effects on tenant agencies and lessors. We  should note that GSA has documented goals and targets for timeliness in  delivering construction projects for tenant agencies, a measure that is  comparable in concept to the lease replacement measure. Furthermore,  specific, relevant targets related to what happens to GSA’s leases when  they expire (i.e., whether they enter into holdover, extension, or a long- term solution) and GSA’s expected outcomes for expiring leases could  provide GSA with valuable information to support its ongoing efforts to  reduce lease holdovers and extensions, as well as allow for greater  transparency and accountability to GSA’s stakeholders, including  Congress, tenant agencies, and taxpayers.
Regarding GSA’s concern about designating an acceptable level of  holdovers and extensions, establishing incremental goals for reducing  holdovers and extensions may actually help GSA identify such  benchmarks. That is, as its other management efforts take root, the  remainder of holdovers and extensions could potentially be those where  this outcome is unavoidable, acceptable, or even desirable. GSA  headquarters officials acknowledged that some holdovers are  unavoidable and may be preferable to unfavorable terms with a lessor.  Furthermore, as discussed previously, the agency has noted that  extensions may also be appropriate in certain cases, as when GSA is  consolidating space among various agencies and needs to align the  expiration date of multiple properties or when a tenant agency occupying  space has encountered delays in planning for a potential relocation to  other federally controlled space due to documented organizational,  financial, or other uncertainties. We also note that GSA tracks whether  extensions are executed for strategic reasons, and these data could  complement its efforts to determine acceptable or tolerable levels of this  activity.
section_title: Conclusions
paragraphs: While GSA has used holdovers and extensions in certain circumstances  to help the agency navigate complex leasing transactions, GSA’s use of  holdovers and extensions has prompted concerns about GSA’s portfolio  management and created uncertainty for relevant stakeholders, including  for federal tenant agencies and lessors that lease space to the  government. In addition, the prevalence of holdovers and extensions has  caused some private lessors to voice their hesitancy to lease space to the  federal government. GSA faces barriers to avoiding the use of holdovers  and extensions in its role as the federal government’s landlord, including  limitations of available resources, for both GSA and its tenant agencies,  and challenges reaching agreement with multiple stakeholders on long- term leases for space. Nevertheless, GSA has stated its commitment to  reducing the overall number of holdovers and extensions within its  portfolio, and has efforts under way to improve its management of  expiring leases to avoid these outcomes, as well as assess the potential  costs of lease extensions. Many of these efforts are in the early stages of  implementation, however, and it is too soon to determine the effect these  efforts will have.
While GSA has taken a number of important steps to address lease  holdovers and extensions, including tracking and monitoring several  measures over the life cycle of the lease acquisition process, a next step  would be to identify specific, current goals and targets, either in its  strategic plan or in other planning documents, to assess the agency’s  actual performance in avoiding holdovers and extensions. While some  extensions can be used for strategic purposes, and some holdovers are  unavoidable, the variety of negative effects that holdovers and extensions  can have on the federal government and private lessors makes it  imperative that GSA not only continue its strong leadership commitment  to reducing these outcomes, but also develop additional goals, targets,  and associated measures to fully assess the outcomes of its efforts.  Furthermore, performance targets coupled with meaningful measures for  assessing the frequency with which holdovers and extensions occur when  a lease expires, either using the existing expiring lease replacement or  other similar measures, would provide GSA with a clearer picture of  whether its efforts are helping to meet, exceed, or fall short of what it  could determine is an appropriate level of holdovers and extensions.  Such goals and targets would also help provide GSA with crucial  information to identify any gaps in program performance and actions  needed to support ongoing efforts to reduce lease holdovers and  extensions.
section_title: Recommendation for Executive Action
paragraphs: To demonstrate the effects of GSA’s ongoing efforts to better manage  lease holdovers and extensions, we recommend that the Administrator of  GSA take the following action:  Identify performance goals and targets for existing or other measures  related to the use of holdovers and extensions for expiring leases  within GSA’s strategic plan or in another agency planning document.  GSA should ensure such goals, targets, and associated measures  fully reflect progress, by taking into account the frequency with which  holdovers and extensions occur for expiring leases within its portfolio  and GSA’s expected outcomes for expiring leases.
section_title: Agency Comments
paragraphs: We provided a draft of this report to GSA for review and comment. We  also provided a draft of this report for review and comment to several  other agencies we spoke with during the engagement because they are  tenants of GSA leases, including HHS, the Department of Homeland  Security (DHS), Internal Revenue Service (IRS), Department of Justice  (DOJ), and SSA. In commenting on a draft of this report, GSA concurred  with our recommendation and provided technical comments, as well as  additional information on the performance measures, goals, and targets  GSA is currently using to address holdovers and extensions. We  incorporated the technical and clarifying comments that we received from  GSA, as appropriate, and GSA’s letter is reprinted in appendix II. DHS  and SSA generally agreed with our findings and provided written  comments, which appear in appendixes III and IV. HHS, IRS, and DOJ  did not provide comments on the draft report.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 14 days from the  report date. At that time, we will send copies to the Administrator of GSA,  the Secretaries of Health and Human Services and Homeland Security,  the Commissioners of the Internal Revenue Service and Social Security  Administration, and the Attorney General. In addition, the report is  available at no charge on our Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-2834 or wised@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) the extent to which the General  Services Administration’s (GSA) leases went into holdover or extension  from fiscal years 2012 through 2014 and the potential effects and (2) why  some expiring leases are extended or go into holdover and what actions  GSA has taken to address this issue.
To examine the extent to which GSA’s leases went into holdover or  extension from fiscal years 2012 through 2014, we analyzed leasing data  provided by GSA from its Real Estate Across the United States (REXUS)  database. REXUS is a real-time database, and data are overwritten as  lease information changes from day to day; therefore, GSA captures  monthly lease inventory snapshots of selected variables in REXUS on the  final day of each month, to provide a historical record. These snapshots  include information such as lease number, location, rent, and lease  status—including whether a lease is in holdover or extension when the  snapshot is taken. For our analysis, we used unique lease numbers to  string together 36 monthly snapshots—one for each month beginning  October 2011 through September 2014—to provide information on lease  holdovers and extensions from fiscal years 2012 through 2014. We  found that 3,058 leases during our 3-year review period experienced a  holdover, extension, or both. We also used REXUS data provided by  GSA on tenant agency and matched this information with the data from  the monthly lease inventory snapshots using unique lease numbers. We  analyzed data on all leases that experienced a holdover or extension, or  both, from fiscal years 2012 through 2014, including the current annual  rent, square footage, tenant agency, region, and lease expiration date. To  determine whether these data were of sufficient reliability for our analysis,  we reviewed the paperwork associated with the leasing database and  discussed various data elements with GSA staff responsible for the data.  We also conducted our own electronic testing to check the consistency of  the data and to reconcile the accuracy of certain lease numbers and  statuses. We did not attempt to evaluate or test all of the aspects of the  GSA data files, but instead focused on leases in holdover or extension  status. As a result of our review and discussions, we determined that the  data in the files provided by GSA were of sufficient reliability to be used in  our analysis examining the prevalence and general characteristics of  leases in GSA’s portfolio that experienced holdovers and extensions from  fiscal years 2012 through 2014.
To inform both objectives, we selected a non-generalizable sample of 10  leases from the 3,058 leases we identified that experienced a holdover,  extension, or both from fiscal years 2012 through 2014 to examine more  closely as case studies. In selecting these 10 case studies, we selected  leases that provided space for five selected federal tenants with an  annual rent of $500,000 and above. Since roughly half of holdovers and  extensions in GSA’s portfolio during our review period were located in the  National Capital Region, we selected five case study leases from that  region and one each from the Northeast and Caribbean, Southeast  Sunbelt, Great Lakes, Greater Southwest, and the Pacific Rim Regions.  These regions were geographically diverse and had a relatively large  portfolio of leases that experienced holdovers and extensions. For these  case study leases, we reviewed numerous documents, including the  lease contract, supplemental lease agreements, occupancy agreements,  price negotiation memorandums, and prospectuses, as applicable. We  also interviewed officials most knowledgeable about these leases from  GSA regional offices and from the tenant agencies. In addition, we  reached out to the lessors and, to the extent that they were willing,  interviewed them about their experience working with GSA on the lease.  Our findings from these case studies cannot be generalized to the  universe of leases that experienced a holdover or extension, or both, from  fiscal years 2012 through 2014. However, they illustrate examples of  broader challenges GSA faces in managing its portfolio of expiring leases  as well as the effects of allowing expiring leases to enter into holdover or  extension. In addition, we reviewed relevant statutes, regulations, Office  of Management and Budget (OMB) guidance, our prior reports, and  GSA’s guidance, performance reports, and strategic plan. We also  interviewed GSA headquarters officials and private sector officials with  experience leasing to GSA. We identified GAO guidance on leading  practices for agencies to manage for results, including defining desired  outcomes, measuring performance, and using performance information  as a basis for decision making. We also reviewed federal standards for  internal controls—plans, methods, and procedures used to meet  missions, goals, and objectives—that are key to helping agencies better  achieve their missions and desired program results. We assessed GSA’s  efforts to set goals and achieve desired results for lease holdovers and  extensions against this guidance.
We conducted our work from October 2014 through September 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the General Services Administration
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: Comments from the Social Security Administration
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, David Sausville (Assistant  Director), Melissa Bodeau, Bryan Bourgault, Jean Cook, Terence Lam,  Joshua Ormond, Minette Richardson, Kelly Rubin, Matt Voit, Amelia  Michelle Weathers, and Crystal Wesco made key contributions to this  report.