Federal Real Property: GSA Could Decrease Leasing Costs by Encouraging Competition and Reducing Unneeded Fees
Published: 2016-01-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: More than half of GSA's 377 million square feet of space were leased from the private sector as of 2014. While GSA strives to match or beat private sector leasing rates, it is important to identify any opportunities to increase efficiency and reduce costs.
GAO was asked to review GSA's leasing costs. This report examines (1) the extent to which GSA's leases achieve market rates and how overall federal leasing costs could be reduced and (2) how GSA's cost estimates for selected leases compared with the actual costs of leasing paid by federal tenants. GAO determined the extent to which the rates of a sample of 714 GSA leases compared to market rates; analyzed selected leases for office space across all 11 GSA regions in more detail; and interviewed officials from all GSA regions and 2 GSA tenant agencies, as well as private sector real estate representatives. GAO contracted with a real estate consultant for the market rate analysis.
section_title: What GAO Found
paragraphs: GAO found that the General Services Administration's (GSA) lease rates exceeded comparable market rates for many of 714 leases reviewed. Specifically, a review of these leases from 2008 through 2014 determined that about half exceeded their local market's average private sector rate for similar space by 10 percent or more. According to officials from all 11 GSA regions and private sector stakeholders, GSA is unable to more consistently achieve lower rates because competition among private lessors for these leases is limited; this limited competition is due to factors including tenant agencies' requested geographic areas and specialized building requirements, as well as the length of GSA's leasing process. For example, an agency's initial requested geographic area may be so restricted that it does not include any buildings that meet all tenant requirements, resulting in increased costs and time as GSA explores alternatives.
In addition, overall federal leasing costs increase when tenants finance needed improvements to newly leased space—called tenant improvements—over time. GSA tenants routinely amortize these costs over the term of their leases and pay interest rates of up to 9 percent to the building's owner. Because GSA's tenants lack sufficient upfront capital, they chose to amortize their tenant improvements for all nine of the leases GAO studied that included those costs. In total, these 9 leases will incur $15 million in interest fees to be paid to private owners—nearly 40 percent of the total paid for these tenant improvement costs. GSA manages a fund—the Federal Buildings Fund, which pays rent and other real property costs—with sufficient unobligated balances to loan tenants enough funds to cover tenant improvement costs and avoid paying private sector interest, but GSA does not have budget authority to fund such costs. GSA also requires most of its tenants to sign cancelable occupancy agreements, which permit tenants to vacate leased space under certain circumstances in exchange for a higher fee paid to account for the risk of GSA's possibly having to find a new tenant for the space. However, the importance of routinely including this built-in flexibility for short term leases is questionable, as it is not often exercised. Allowing tenants the option of choosing non-cancelable agreements would reduce tenant fees.
The actual leasing costs paid by tenant agencies exceeded GSA's estimates for 7 of the 11 leases finalized from 2000 to 2014 that GAO reviewed in more detail. Seven of those leases were “standard” leases (costing less than $2.85 million in annual rent, as of fiscal year 2014) and four were “high value” (costing more than $2.85 million). For 4 of the 7 standard leases tenants' actual leasing costs exceeded GSA's estimates by more than 10 percent. Inaccurate estimates complicate tenant agencies' planning, but tenant agencies often have to accept increases in GSA's cost estimates because some lack authority to independently lease space. GSA officials said that the lack of competition for GSA leases and changes to tenant agencies' space needs during the leasing process contribute to cost growth. Conversely, GAO found GSA's initial cost estimates for 4 high-value leases to be more accurate than those for standard leases. High value leases, which represent only 4 percent of leases but more than 40 percent of GSA's leasing costs, are subject to congressional authorization, which may help control cost growth.
section_title: What GAO Recommends
paragraphs: GSA should (1) enhance competition by encouraging tenant agencies to modify their geographic and building requirements; (2) explore seeking authority to use Federal Building Fund balances to reduce interest fees; and (3) give tenants the option to reduce fees by choosing non-cancelable occupancy agreements. GSA agreed to increase competition and determine if it can use Fund balances to pay tenant improvement costs but disagreed with allowing tenant agencies to choose non-cancelable occupancy agreements. GAO believes GSA should provide this option as a potential cost-saving measure.

section_title: Letter
paragraphs: The federal government’s management of real property remains on  GAO’s high-risk list due to complex and long-standing issues, including  an overreliance on leasing of privately-owned space in situations wherein  ownership for stable agency needs would be more cost efficient in the  long run. Although some agencies have independent authority related to  the leasing of real property, the others lease space through the General  Services Administration (GSA)— the federal government’s primary civilian  real property management agent. As of fiscal year 2014, the most recent  year for which GSA published portfolio information, GSA had a total of  377 million rentable square feet in its inventory—slightly more than half of  which were leased from the private sector. One of GSA’s key strategic  goals is to procure leased space from the private sector at or below  industry market rates. To this end, GSA has recently embarked on two  rounds of leasing reform; however, there may be additional opportunities  to improve federal leasing practices and save money. Further, leases are  likely to be a stable or growing part of an agency’s portfolio due in part to  capital limitations. Thus, it is important to understand the GSA’s leasing  process and identify any opportunities that could increase its efficiency  and result in federal cost savings.
You asked us to assess the financial implications of GSA’s leasing  program. This report examines (1) the extent to which GSA achieves  market leasing rates for its leases and how overall federal leasing costs  could be reduced, and (2) how GSA’s cost estimates for selected leases  compared with the actual costs of leasing paid by federal tenants.
To address these objectives, we took a number of steps. To assess the  extent to which GSA achieves market leasing rates for its private sector  leases, we contracted with a real estate consulting firm chosen through a  competitive process to compare a sample of 4,285 GSA leases executed  between 2008 and 2014 with private sector leases of similar location,  size, and quality in the same major markets during the same period. From  the full GSA data set, a sample of 714 GSA leases across all of the  agency’s regions was selected from markets with sufficient information.  The GSA data were abstracted and compared with data from published  brokerage reports in specific markets and submarkets to determine the  extent to which GSA received a comparable private-sector market rent for  its leases. To assess how GSA’s cost estimates compare with the actual  costs of leasing paid by federal tenants, we selected and analyzed  documentation for 11 GSA leases—one from each of GSA’s regions. We  selected these leases based on criteria including property type, most  recent lease action, and rental rate per square foot using GSA data. Our  non-generalizable sample of 11 GSA leases—comprised of 7 standard  leases and 4 high-value leases that became effective between 2000 and  2014—included properties designated as office space across all GSA  regions and among 6 federal tenant agencies. Further, we reviewed  documentation, analyzed the leasing process, estimated the actual costs  over the active term of the 11 leases selected and interviewed key GSA  staff for all selected leases. We also reviewed GSA leasing policies and  guidance and interviewed officials from GSA headquarters about the  lease procurement process. Finally, we interviewed officials from all 11  GSA regional offices, as well as the two tenant agencies with the most  leases in our sample—the Department of Justice (DOJ) and Social  Security Administration (SSA)—regarding their experiences with the GSA  leasing process. For more information on our scope and methodology,  see appendix I.
We conducted this performance audit from August 2014 to January 2016  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: The federal government’s civilian real property holdings include hundreds  of thousands of buildings and permanent structures across the country  that cost billions of dollars annually to rent, operate, and maintain. Within  this portfolio of government owned and leased assets, GSA plays the role  of broker and property manager to many civilian agencies of the U.S.  government. 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 its central office, located in Washington, D.C. While  GSA’s Office of Portfolio Management is responsible for establishing the  strategies and policies for GSA’s real property portfolio, its regional  offices are generally responsible for conducting day-to-day real property  management activities, including leasing, in their region.
Federal management regulations specify that when seeking to acquire  space for an agency, GSA is to first seek space in government-owned  buildings and vacant space already under lease to the government. If  suitable government-controlled space is unavailable, GSA is to acquire  space in an efficient and cost-effective manner. As shown in figure 1, the  square footage of property leased by GSA has steadily increased in  recent years while the amount of federally owned space held by GSA has  remained steady.
The process for acquiring leased space, as outlined in GSA’s Public  Building Service Leasing Desk Guide, begins when GSA receives a  request for space from a federal agency. Using this guide—which  provides guidance on implementing federal property regulations—GSA  officials then work with an agency to fulfill the specific requirements for  the space, including the square footage and any geographic limitations.  According to GSA guidance, developing and finalizing these details  should take anywhere from 2 to 8 months, depending on the complexity  of a tenant agency’s space needs. After this initial stage, the Leasing  Desk Guide estimates that approximately 18 to 24 months are needed to  procure new leased space. During this time, GSA takes a number of  steps to complete a lease acquisition (see fig. 2). During the lease  acquisition process (‘leasing process’), GSA compiles and shares  iterative estimates of the leasing costs with tenant agencies pursuing  space. Prior to the advertisement step, GSA and each tenant agency  involved sign a draft occupancy agreement detailing the estimated costs  associated with a lease. At the conclusion of the process—when the  actual costs of leasing a specific space are known, following the “build-out  and acceptance” step—GSA and the agencies execute a final occupancy  agreement associated with a specific lease, which allows agencies to  budget for future payments.
GSA is required to take additional action for prospectus leases—in 2014,  those new leases with a net annual rent above $2.85 million. For these  leases—also known as ‘high-value’ leases—GSA must submit a  prospectus, or proposal, to the House and Senate authorizing committees  for their review and approval. Given this additional requirement, GSA’s  Leasing Desk Guide suggests the lease acquisition process for high- value leases begin 3 to 5 years prior to lease expiration. The prospectus  should include the purpose and location of the lease, as well as basic  information about the space to be leased including the location, an  estimate of the maximum cost to the government of the space, and a  statement of rent currently being paid by the government for federal  agencies to be housed in the space. This information assists Congress in  overseeing GSA’s management of its real property portfolio. Typically,  these prospectuses are drafted in the GSA regional offices and reviewed  and approved by GSA’s Office of Portfolio Management. The  prospectuses are then reviewed and approved by the Office of  Management and Budget prior to being provided to congressional  authorizing committees—the Senate Committee on Environment and  Public Works and the House Committee on Transportation and  Infrastructure. In 2013, we reported that there were 218 active GSA high- value leases, which accounted for about one-third of GSA’s net annual  rent costs; GSA’s overall lease inventory included more than 8,300 leases  as of August 2015, 4 percent of which had current annual rents above the  $2.85 million threshold.
Once GSA executes a lease on behalf of a tenant agency and an  occupancy agreement with the agency, that agency is required to pay  rent to GSA for the space they occupy. Rent payments are deposited into  the Federal Buildings Fund (FBF), which is a fund established by the  Public Buildings Act Amendments of 1972. Congress provides annual  limits on the amount GSA may obligate to provide a range of real property  services. As of February 2015, the FBF had an unobligated balance of  $3.6 billion.
Included in federal agencies’ monthly rent is a monthly fee to GSA for its  services related to leased space; as of 2015, tenants paid 5 or 7 percent  of their lease value in a fee to GSA based on the level of flexibility the  agency had in canceling the agreement. Depending on the extent to  which leased space must be altered for an agency to fulfill its mission, the  costs of the improvements necessary (“tenant improvements”) are paid by  the tenant to the lessor through GSA. Tenant improvement costs include  changes to walls, electrical outlets, telephone lines, and secure rooms  that need to be made by the lessor between the time that GSA executes  the lease and the point when the tenant agency takes occupancy. GSA  officials said that it is standard practice for tenant agencies to amortize  these costs over the lease term and noted that this approach is similarly  utilized in the private sector. GSA assigns each tenant to one of 6 tiers,  which equate to the standard improvements that tend to be required to  prepare a space to support the mission and activities of a particular  agency.
In late 2009, GSA began to reform its leasing by simplifying the lease  acquisition process, among other changes. For example, for leases below  $150,000 in annual rent, GSA introduced a ‘simplified lease’ model to  allow a more efficient way to process documents customized for lower- value leases. GSA included this and other reforms in its Leasing Desk  Guide of policies and procedures, which was introduced in April 2011.
section_title: GSA Could Better Achieve Market Rates and Reduce Tenant Costs for Its Leases by Fostering Competition and Reducing Fees
subsections: section_title: About Half of Recent New GSA Lease Rates Have Exceeded Comparable Market Rates
paragraphs: While GSA’s fiscal year 2015 budget request stated that one of the  agency’s strategic objectives is to procure leased space on behalf of  federal tenants at or below market rates, our analysis of recent GSA  office leases across all regions performed for this report found that about  half of the rates negotiated in recent years exceeded market rates at the  time the leases were executed. Although GSA analyzes its lease rates  against market rates over the full term of the lease, we chose to limit our  assessment to the point in time the leases were executed, as this is the  moment at which actual market rates were known. In doing so, the review  of 714 new GSA leases finalized between 2008 and 2014 found that  about half exceeded their local market’s average rate for similar space by  10 percent or more. This phenomenon varied across the 11 GSA  regions, with some regions performing better than others. In general,  three GSA regions were in line with market values for rents, five GSA  regions executed leases that were on average at or below market, and  three GSA regions had rates that exceeded local market rates on  average. Specifically, figure 3 shows how the rates negotiated by GSA  regional offices compared to relevant market rates in the years the leases  were executed. GSA officials across all regions stated that they utilize a  number of tools to establish a range of market rental rates for each lease,  including a report specifically tailored for each transaction with market  information, analysis, and insight regarding the relevant location.
section_title: Lack of Competition for GSA Leases Is Driven by Multiple Causes
paragraphs: GSA could more consistently achieve market rates or better if there were  more competition for its leases. The Federal Management Regulation  requires that federal agencies acquire leased space at rates consistent  with prevailing market rates through full and open competition. As we  reported in 1995, this is designed to ensure that all responsible sources  are allowed to compete and serves as the government’s primary price  control mechanism. At a June 2015 hearing, a top GSA manager stated  that GSA’s ongoing lease reform effort includes plans to reduce costs by  increasing competition. However, according to our interviews with  officials across all GSA regions as well as private sector stakeholders,  competition among private lessors is currently limited by the following  factors:  Restricted geographic area: GSA regional officials said that tenant  requirements for the location of a leased space reduced the number of  buildings that qualify, thereby limiting competition for GSA leases. In  some cases, an agency’s requested geographic area may be so  restricted that it does not include a single building that meets all the  tenant’s requirements. For example, for one lease we reviewed, a  tenant agency was forced to twice widen the geographic areas it initially  requested in order to find the space ultimately leased. GSA officials from  this region said that these starts and stops necessitated by the narrow  geographic area requested by the tenant resulted in repeating steps of  the leasing process, increasing related costs and the overall schedule.  Although officials from GSA’s central office told us that GSA has not  typically questioned the appropriateness of an agency’s location  limitations, GSA regional officials said that broadening the area deemed  suitable for potential properties—while still ensuring that the agency can  pursue its mission—is one of the best ways to increase competition for a  lease. In September 2015, an internal GSA memo to all regions detailed a  renewed policy through which GSA is taking the initiative to suggest  geographic areas to tenant agencies. This memo states that GSA will  consult with regional officials on several factors in order to designate  geographic areas and, when agencies submit future space requests to  GSA, this policy will help to enhance competition.
Specialized building requirements: GSA regional officials said that  competition for GSA leases is further limited by federal agencies’ specific  building requirements. These requirements—including things such as  parking spaces, ceiling heights, or security setbacks—affect the number  of qualifying properties left in a position to bid for the GSA lease. GSA  regional officials said some property owners do not want to make the  investment in their building to meet a tenant agency’s security  requirements when they can choose to lease their space to a non-federal  tenant. In the previously mentioned case wherein a tenant agency was  forced to twice widen the geographic areas it initially requested to find  space, the tenant agency’s space request included elevators and a large  square amount of footage on the first floor, which played a key role. GSA  could not meet these requirements in the original geographic area  requested, and alternatives including strip malls or warehouses were not  viable for the agency. As a result, GSA had to look more broadly across  the market to identify a qualifying space that met all of the agency’s  requirements.
Presence of unique clauses: Private sector leasing representatives and  regional GSA officials also said that clauses in GSA leases not found in  private industry leases make them less competitive. For example, private  sector officials we spoke with told us that the substitution clause—which  gives GSA the unilateral right to substitute any other tenant for the  original intended tenant—deters some landlords that do not want to risk  the possibility that the replacement agencies may not be compatible with  the existing tenants. At a workshop hosted by GSA in June 2015, GSA  officials said that they were considering changes to the substitution  clause, which they said causes risk with lenders and financiers. However,  in October 2015, GSA officials told us that they would not consider  changes to the clause without proof that it increases costs or harms  building owners. Regardless, the flexibility which such a clause is  designed to offer GSA and its federal tenants is not regularly exercised,  according to GSA data. Further, officials from one GSA regional office  explained that, while compliance with state laws also exists in a private  sector environment, they also have to comply with policies specific to  federal buildings. Other clauses mentioned by GSA regional officials as  being unique to GSA leases include federal energy efficiency and  conservation clauses; private sector representatives also cited GSA’s fire  and casualty clause, which immediately terminates a GSA lease if a  building in which space is located is totally destroyed by fire or other  casualty. The presence of these additional requirements could also make  renting to private sector tenants more desirable for some property  owners.
Lengthy leasing process: The lengthy GSA leasing process—when  compared to the private sector—also has the potential to reduce  competition for GSA leases. From the date of GSA’s initial cost estimate  to the point when an agency took occupancy, the 11 GSA leases we  reviewed took, on average, almost 4 years to complete, with some taking  as long as 6 to 8 years. GSA took more than 2 years to complete the  leasing process for 10 of the 11 leases we reviewed, and building owners  receive no rent during this protracted process, causing some owners drop  out of the competition and others to likely choose not to bid knowing the  long time frames involved. Officials from GSA headquarters told us that it  is important to note that the amount of time to execute a lease is only one  of several variables for assessing GSA performance and shorter lease  execution timeframes are not always better; it could, for example, reflect a  rushed, poorly planned process. However, the extent of GSA’s  administrative obligations and paperwork can cause delays. For example,  a regional GSA official said that the time required for federal tenants to  approve architectural drawings often exceeds that for private sector  tenants and, while some more sophisticated lessors will include the costs  of these delays in their price, this can deter some potential lessors from  even submitting a bid.
Officials from GSA’s central office said that although GSA’s goal is to  meet or beat private sector leasing rates, federal leases are different than  private sector leases and some of the differences can make it difficult to  compete with private sector leasing rates. Specifically, these officials  stated that:
GSA must procure leases based on specific award factors governed  by federal law, a process that can discourage competition for these  leases or cause lessors to price their risk accordingly; decisions  related to private sector leases are more flexible and could be based  on individual preferences alone, thus making them less cumbersome  and more desirable to some property owners.
For a federal lease, a property owner must sign a GSA-drafted lease  document and abide by its requirements; conversely, the contractual  instrument used in private sector lease is provided by the owner and  crafted according to its terms.
While a private sector tenant generally must leave a property when a  lease expires, federal agencies often continue to occupy leased space  after the expiration of a lease term, often in holdover status without  the contractual right to occupy the space if the government and lessor  are working out details or disagree.
GSA officials told us that as a result of these differences, federal leases  are often more complex than private sector leases for some property  owners, and the pricing of that complexity and business risk for private  owners can subsequently translate into greater expense for federal  agencies.
section_title: GSA Has Opportunities to Reduce Federal Tenants’ Leasing Costs
subsections: section_title: GSA’s Focus on Longer Lease Term May Not Result in Cost Savings but Could Offer Other Benefits
paragraphs: GSA officials said that increasing the term of GSA leases is a key part of  GSA’s efforts to reduce leasing costs, but our analysis found that longer  terms do not necessarily lead to lower costs in the first year of leases.  Based on our analysis of the agency’s data, GSA typically negotiates  relatively short-term leases—that is, those with guaranteed terms fewer  than 5 years in length. While GSA considers 80 percent of the 4,258  leases we reviewed to be 10-year leases or longer, many of these leases  have a 5-year guaranteed (“firm”) term followed by an optional (“soft”)  term. The private sector views leases structured in this way as 5-year  leases because that is the only part that is guaranteed. Figure 4 shows  that 70 percent of the new GSA leases we analyzed, finalized from 2008  through 2014, had firm terms of 5 years or less. Conventional wisdom— according to both GSA officials and private sector real estate  professionals—holds that shorter term leases are typically more costly.
However, based on our sample, it is not clear that GSA leases with  shorter firm terms actually do cost more than those with longer firm terms.  In the last year, GSA has been encouraging agencies to obtain longer  leases with a 10-year firm term where appropriate and, in June 2015, a  GSA manager testified that GSA plans to extend lease terms to 10 years  or longer in order to reduce costs. However, our analysis of new GSA  leases executed on behalf of federal agencies from 2008 through 2014  found no direct financial benefit based on the length of the firm term of a  lease in the base year that the leases were signed.  This lack of cost  savings is attributable, in part, to greater tenant improvement costs that  are more prevalent in longer-term leases.
While it may not reduce costs directly, increasing the number of leases  with longer firm terms, as GSA plans to do, could offer other benefits to  GSA. While GSA officials in the regions said that leases with firm terms of  5 years or less provide flexibility to tenant agencies that may not need the  space for long periods, few agencies take advantage of the flexibility of  the 5-year lease. The average length of time that federal agencies  remained in space leased through GSA was more than 23 years— possibly through multiple occupancy agreements—for the GSA leases  that expired between 2001 and 2014. In addition, given GSA’s lengthy  leasing process, short-term leases cause challenges for GSA and tenant  agencies. For the 11 leases we reviewed in depth, the average time  needed to complete a GSA lease was nearly 4 years (an average of 3  years for standard leases and more than 5 years for high-value leases),  ranging from more than one year to more than 8 years. Further, this  process may soon take longer: GSA officials said one aim of GSA’s  ongoing lease reform is to begin the process even earlier—at least 36  months before the expiration date for standard leases. This would mean  beginning the process shortly after the start of an agency’s initial  occupancy of a space for a 5-year lease.
section_title: Financing Agencies’ Needed Improvements to Leased Space over Time Increases Federal Leasing Costs
paragraphs: As stated earlier, new leases often involve costs related to the  customization of the space known as tenant improvements, which are  usually amortized over the term of the lease. Tenant agencies can fund  these costs in two ways: (1) pay for the improvements at the outset, prior  to moving into the space, when negotiations between GSA and a property  owner permit or (2) amortize the costs of the improvements over time  during the lease financed by the building owner. GSA regional officials  said that nearly all tenants choose to amortize their basic tenant  improvements over the firm term of the lease, and the analysis of GSA  leases performed for this report supports this assertion. Nearly 60 percent  of leases in our full data set of 4,285 leases involved tenant improvement  costs—all of which opted to amortize at least some of these costs over a  period during the lease. Both GSA and commercial real estate firms tend  to amortize the costs needed to prepare a leased space for tenant  occupancy over the firm term of the lease and ask landlords to assume  the risk—GSA doing so on behalf of its tenant agencies—of customizing  a space according to specific requirements. Because private owners that  lease to the federal government assume this responsibility and obtain the  resources required to construct, operate, and maintain real property over  the course of its lifecycle, federal agencies then pay private sector  interest rates as they pay for their improvements over the firm term of  their GSA lease.
The overall cost of leasing office space increases considerably when  agencies opt to amortize their tenant improvement costs over time  instead of paying them at the outset. When agencies amortize their tenant  improvements during their lease, they pay substantial sums to private  lessors in the form of interest based on the rates GSA negotiates with  private lessors on agencies’ behalf. In this approach, tenant agencies pay  not only the sum of the principal and interest, but also additional GSA  fees—either 5 percent if they are in a non-cancellable occupancy with  GSA or 7 percent if they are in a cancellable agreement—typically over  the firm term of the lease. Nine of the 11 leases we reviewed had tenant  improvement costs and more than one-third of the costs related to these  improvements were directed toward interest, as all 9 cases amortized  these costs. These 9 leases incurred an average of $1.7 million in interest  costs related to tenant improvements. In total, these 9 leases incurred a  total of $39 million in tenant improvement costs, of which nearly 40  percent ($15 million) was due to interest paid to private lessors. For  example, in one lease we reviewed, the tenant agency chose to amortize  its $2.1 million of tenant improvement costs over the life of a 15-year  lease at a 9 percent interest rate, which will ultimately cost $4.0 million  after including both the $1.7 million to be paid in interest charges and  GSA’s 5 percent fee on those charges. The agency could have saved 45  percent, more than $1.8 million, over the term of its GSA lease if these  costs had been paid at the outset. Additional examples from our analysis  are illustrated in figure 5.
Although agencies typically lack the resources to fund improvements at  the outset of a lease according to GSA officials, there may be  opportunities to reduce overall federal leasing costs by identifying funds  to reduce the amount of interest paid to private lessors. The Federal  Management Regulation states that the basic real estate acquisition  policy is to acquire real estate in an efficient and cost-effective manner.  We have previously reported that lack of capital to finance real property  investments, including tenant improvements, has been a long-standing  challenge for GSA and other federal agencies. However, identifying  sources of capital to fund tenant improvement costs at the outset would  reduce federal agencies’ leasing costs. One possible option to reduce the  costs paid by tenant agencies could be to provide budget authority for  GSA to finance the capital needed for tenant improvements to be paid at  the outset of a new lease and have the tenant pay it back over the term,  without the interest charges a tenant agency currently pays. For example,  it is possible that GSA could use available balances from the Federal  Buildings Fund (FBF) to fund tenant improvement costs, with sufficient  controls in place, at the outset of a lease. The FBF is administered by  GSA and was established in 1972 as the primary source of funds for  operating and capital costs associated with federal space. GSA collects  rent from tenant agencies, deposits it into the FBF, and uses that  money—as authorized by Congress—to fund real property acquisition,  operation, maintenance, and disposal. The FBF has contained  unobligated balances for several years and, as of February 2015, the  fund had an unobligated balance of $3.6 billion. However, GSA does not  currently have the budget authority to use the unobligated balances in the  FBF to fund tenant improvements. GSA officials said that the concept of  funding agencies’ tenant improvements using unobligated FBF balances  has potential, but also said that GSA has not formally considered this  approach. They said that applying unobligated balances in this way has  the potential to save substantial amounts money on interest charges that  are currently passed onto federal tenants, but that the risks and  opportunities would need to be fully studied.
section_title: GSA Requires Agencies to Pay More for Flexibility They May Not Need
paragraphs: GSA also requires most tenants to sign cancelable occupancy  agreements, which can also increase federal leasing costs for agencies  and may not be needed. GSA regularly requires tenant agencies to sign  cancelable occupancy agreements that allow them to vacate the leased  property under certain circumstances. Non-cancelable tenant agreements  require the tenant agency to pay rent on the leased property for the entire  firm-term of the lease. GSA charges more in administrative fees (7  percent of total rent instead of 5 percent) for cancelable tenant  agreements to account for the higher risk of having to replace a tenant  before the end of a lease. However, according to GSA’s Pricing Desk  Guide, GSA does not allow agencies to decide whether the cancelable  agreement warrants the higher fee; rather, GSA reviews each leased  space and determines whether to designate its agreement as cancelable  or non-cancelable. Officials from GSA headquarters told us that their  regional officials determine whether or not an agency’s agreement should  be non-cancellable and, further, these regional officials do so based on  whether they think they will be able to find a replacement tenant, not on  the tenant’s likelihood of canceling. For example, GSA officials  hypothesized that it may be difficult to find a replacement tenant for a  Transportation Security Administration leased space located beyond the  security line at an airport, thus the tenant’s agreement with GSA would  likely be non-cancelable.
However, the importance of routinely including the right to cancel in short- term leases is questionable and we believe that tenant agencies are in  the best position to decide how to best meet their consolidation  objectives. As mentioned earlier, the Federal Management Regulation  states that the basic real estate acquisition policy is to acquire real estate  in an efficient and cost-effective manner. GSA officials said that most  agencies agree to pay the additional 2 percent in management fees in  exchange for the flexibility that it gives them to have a cancelable  agreement. However, officials from two GSA tenant agencies we  interviewed said that this built-in flexibility can be useful, but they also  said that they rarely exercise the right to cancel their agreements with  GSA. Officials at GSA headquarters also said that tenants rarely exercise  their right to cancel their occupancy agreements; as one official at a GSA  tenant agency explained, this is often because their agency usually  considers its space requirements when they are already nearing lease  expiration. Moreover, according to GSA, 83 percent of GSA leases were  connected to at least one cancelable agreement as of July 2015 while  about 70 percent of the more than 4,200 GSA leases considered in our  broader analysis have a firm term of 5 years or fewer. Based on GSA’s  policy of starting the leasing process from 18 months (standard) to 5  years (high-value) before a lease expires, an agency seeking to cancel its  agreement would need to spend a substantial portion of a 5 year period  working to arrange their move to a different space, reducing the likelihood  that they would cancel early.
section_title: GSA’s Cost Estimates for Selected Leases Were More Accurate for High-Value Leases, Which are Subject to Congressional Approval
subsections: section_title: Federal Agencies’ Actual Costs Generally Exceeded GSA’s Estimates for Selected Standard Leases
paragraphs: The actual costs of selected standard leases we reviewed generally  exceeded GSA’s initial cost estimates. The reasons for these overruns,  discussed later in this section, included lack of competition for GSA  leases and changes in agencies’ space needs during the leasing process.  As shown in the figure, six of the seven standard leases we reviewed  exceeded their initial rent per square foot cost estimates and four of these  exceeded their estimates by more than 10 percent; overruns ranged from  6 percent to 90 percent greater than the estimates GSA provided to its  tenant agencies.
GSA’s cost estimates for standard leases have limited oversight  mechanisms. Regional GSA officials indicated that the primary  requirement for increasing the estimated leasing costs is updating the  occupancy agreement with the tenant agency. Officials from the two GSA  tenant agencies we interviewed said that GSA’s initial estimates often  vary from the final cost; officials from one of these agencies told us that  GSA’s early cost estimates are usually significantly lower than true  market leasing rates. This can complicate agencies’ ability to effectively  plan their budgets and identify other sources of funding after making  decisions based on GSA’s initial leasing cost estimates. However, the  officials also said that they are unable to pursue other options, as they do  not have independent leasing authority to procure similar leases without  the assistance of GSA.
section_title: GSA’s Cost Estimates Are Better Aligned with Actual Costs for Selected High- Value Leases, Which Require Congressional Authorization
paragraphs: Among the 11 GSA leases we reviewed in-depth, GSA’s initial cost  estimates were more accurate for high-value leases that require a  prospectus subject to congressional authorization than the cost estimates  were for standard leases. In fact, as figure 7 shows, agencies’ actual  leasing costs per square foot were within 10 percent of GSA’s initial  estimates for 3 of the 4 high-value leases that we reviewed.
GSA regional officials said that the prospectus process required for high- value leases requires congressional authorization, which increases their  accountability for developing accurate initial estimates because if actual  costs were to substantially exceed the estimated costs approved in the  prospectus, GSA would have to obtain additional budget authority from  Congress. The actual costs of three of the four high-value leases we  reviewed were slightly below GSA’s estimates. While the final rental rate  for one of the high-value leases exceeded GSA’s per square foot  estimates by about 20 percent, GSA kept the total cost of the project  within authorized costs by reducing the overall amount of space it  leased. Nonetheless, requests for additional budget authority from  Congress for high-value leases remain rare. GSA officials said that the  agency does not track the number of amendments made to authorized  high-value leases or how many have been resubmitted to Congress since  2000, only noting that it has rarely, if ever, happened.
Both GSA officials and these results suggest requiring congressional  authorization for high-value leases may help control cost growth for these  leases. The congressional approval requirement may be more  appropriate for high-value leases because of the larger dollar amounts  involved. Although just 4 percent of GSA’s overall lease inventory had  current annual rents above the $2.85 million threshold as of August 2015,  they account for 44 percent of GSA’s total net annual leasing costs.
section_title: Similar Factors to Those That Drive Up Costs of Leases—Lack of Competition and GSA’s Lengthy Leasing Process—Can Cause Actual Leasing Costs to Exceed Initial Cost Estimates
paragraphs: According to both GSA regional officials and representatives of GSA  tenant agencies, factors similar to those that played a role in causing  higher rates for GSA leases can also cause costs to exceed GSA’s initial  estimates:
Officials from GSA regional offices stated that a lack of competition for  GSA leases can directly contribute to variations between initial cost  estimates and actual leasing costs. As stated earlier, limited numbers  of qualifying properties and the reluctance of some building owners to  bid for GSA leases can limit competition. When fewer offers are made  by owners of appropriate space, GSA regional officials said that initial  cost estimates are less likely to align with actual leasing costs. For  example, officials from one GSA region told us that the time when  offers come in from the market after the solicitation is when rental  rates fluctuate the most—and is when the ultimate rental rate could  fall on either end of the range set forth in the initial estimates.
The lengthy GSA leasing process also leaves GSA and federal  agencies vulnerable to increased leasing costs. As stated earlier, the  11 GSA leases we reviewed took almost 4 years from the point the  lease acquisition process started to completion on average, with some  standard leases taking from more than 3 years to nearly 6 years for  GSA to fulfill all agency requirements to ready the space for  occupancy. The longer this process lasts, the more local lease  markets and inventory can change, reducing the reliability of initial  estimates. Officials from one GSA tenant agency said that the leasing  process can be made longer in some cases because GSA is currently  limited to seeking existing space on behalf of agencies. These officials  suggested that also allowing the consideration of new construction  could increase competition for GSA leases and potentially reduce the  need to re-advertise lease requests on agencies’ behalf.
Changes to agencies’ space needs during the GSA leasing process  can also negatively affect the accuracy of initial cost estimates and  hinder GSA’s negotiating power. According to GSA’s leasing guide,  each tenant agency is obligated to plan and budget for its upcoming  space needs 18 to 36 months before the space is needed, further  lengthening the period of time over which agencies’ needs can  change. For example, officials from a GSA tenant agency said that  their staffing levels and rental requirements can fluctuate during the  typical 24 to 36 months of GSA’s lease acquisition process and that  such changes can increase space requested and increase costs. GSA  also uses federal agencies’ initial leasing specifications to estimate  tenant improvement costs, but the actual prices are negotiated after  the lease is awarded. As a result, GSA regional officials said that  unanticipated, tenant-driven changes can add time and increased  costs to a project even after a lease is awarded. Officials from that  tenant agency said that GSA’s leasing cost estimates prove to be  more accurate for projects that do not experience any significant  delays or changes in scope.
Officials from one GSA tenant agency told us that when leasing costs  exceed GSA’s initial estimates, it creates budgeting challenges—not only  because it can force them to identify additional sources of funding when  costs are greater than initially anticipated, but also because there is not a  reliable pattern in terms of variance between GSA’s estimates and their  actual leasing costs. However, as stated earlier, tenants contribute to  some of the causes that result in actual leasing costs exceeding GSA’s  initial estimates.
section_title: Conclusions
paragraphs: Leasing has comprised a growing share of GSA’s portfolio over the last  15 years and will likely continue to remain a significant part of the federal  property management system. While it is preferable to own property if an  agency has stable rather than variable needs requiring flexibility, it is also  important to reduce leasing costs. GSA’s goal is to lease space at or  below local market rates, but we found that GSA paid rates 10 percent or  more above market rates in the first year about half of the time from 2008  through 2014. GSA has taken steps to reform leasing—and those efforts  continue. As part of its ongoing leasing reform efforts, GSA hopes to  reduce its lease rates by increasing the length of the terms of its leases,  but increasing the competition for GSA leases may yield more benefits.  GSA regional officials who negotiate the agency’s leases said that  increasing competition for GSA leases is key for achieving market rates,  but circumstances often combine to drive down competition. Factors such  as a tenant agency’s need for space in restricted geographic areas and  specialized building requirements can limit the number of properties that  qualify. Reducing barriers to competition, where possible, could increase  the number of property owners bidding on GSA leases and, in turn,  contribute to GSA more consistently obtaining lease rates at or below  market rates.
GSA could also reduce the costs federal tenants pay for their leases.  GSA tenants often pay high interest charges—up to 9 percent, among  leases we reviewed—to finance their finishes, known as tenant  improvements. Identifying sources of capital to allow tenants to fund  tenant improvements at the outset of their leases could reduce these  specific costs related to leasing by a third—saving millions of dollars for  some leases. The Federal Buildings Fund (FBF) has unobligated  balances that, with sufficient controls, could help fund tenant  improvements. However, further study of the risks and opportunities are  needed before GSA seeks additional budget authority from Congress to  use FBF balances in this way. GSA could also reduce leasing costs for its  federal tenants by allowing them to the option of committing to stay in  their space for the full term of their agreement in exchange for a lower  fee, particularly for short leases. Currently, GSA requires most tenants to  sign cancelable occupancy agreements. However, it takes tenants years  to plan and budget for a move, and more than two-thirds of the GSA  leases we reviewed have firm terms of 5 years or less, reducing the  likelihood of their canceling occupancy agreements early.
section_title: Recommendations to GSA Administrator
paragraphs: As part of its lease reform efforts and to increase possible cost savings,  we recommend that the GSA Administrator take the following steps:  1.  Fully explore strategies to enhance competition for GSA leases by  encouraging tenant agencies to broaden their allowable geographic  areas and to limit their specialized building requirements to those  justifiably unique to the federal government.  2.  Seek to reduce leasing costs for federal agencies by:
Exploring, with relevant stakeholders, the possibility of loaning  unobligated Federal Buildings Fund balances to agencies to cover  tenant improvement costs that would otherwise have to be financed  for new leases. If GSA finds that, with sufficient controls in place,  tenant improvements can be safely funded this way, it should  participate in the development of a legislative proposal to request that  Congress make the necessary budget authority available.
Allowing tenant agencies the option of choosing non-cancelable  occupancy agreements with lower administrative costs, particularly for  leases with firm terms of 5 years or less.
section_title: Agency Comments and our Evaluation
paragraphs: We provided a draft of this report to GSA for review and comment. We  also provided a draft of this report to two GSA tenant agencies that we  spoke with during our review: the Social Security Administration (SSA)  and the Department of Justice (DOJ). GSA provided written comments  that are reprinted in appendix II. SSA provided a letter, reprinted in  appendix III, stating that it had no comments on our report. DOJ provided  technical clarifications, which we incorporated where appropriate.
GSA agreed with the recommendation to fully explore strategies to  enhance competition for leases by encouraging tenant agencies to  broaden their allowable geographic areas and limit their specialized  building requirements to those justifiably unique to the federal  government. GSA stated that it has been working aggressively to  maximize competition in its leasing program and is increasing national  oversight and support for lease planning, project management, and  procurement activities. With regards to our recommendation to seek to  reduce tenants’ interest costs by exploring the possibility of loaning  unobligated FBF balances to agencies to cover tenant improvement costs  that would otherwise have to be financed for new leases, GSA agreed to  evaluate its existing authorities to determine if the FBF could be used to  fund tenant improvements.
GSA did not agree with the recommendation to allow tenant agencies the  option of reducing administrative fees by choosing non-cancelable  occupancy agreements, particularly for leases with firm terms of 5 years  or less. GSA stated in its letter that it is responsible for assigning and  reassigning space to support agency space requirements, balancing risk  and flexibility to manage the leased portfolio. GSA’s letter also noted that  having the flexibility to return underutilized space is an important tool in  meeting the administration’s objective to consolidate space and reduce  the federal real property footprint. We agree that agencies should  consolidate space as appropriate and contribute to meeting this objective.  However, as our review and analysis show, this flexibility costs tenant  agencies an additional two percent of the value of the lease, although  tenant agencies rarely use it. Even if a tenant agency exercises its right to  return space to GSA before the end of a lease, it may be particularly  difficult to realize savings for leases with firm terms of 5 years or less;  GSA’s 3 year process to plan and execute leases severely limits the  extent to which tenants could cancel leases of 5 years or less and any  savings would likely be offset by the higher GSA fees these agreements  require. Further, in such situations, tenant agencies are given no say in a  decision that requires them to pay additional fees. Ultimately, we believe  tenant agencies are in the best position to decide how to meet their  consolidation objectives. Thus, if agency officials determine that their  agency may benefit from the flexibility to cancel all or part of an  agreement before the end of the lease, they should be able to choose to  pay for that flexibility, rather than being required to do so.
We are sending copies to the appropriate congressional committee and  the Acting Administrator of GSA. In addition, the report will be available at  no charge on GAO’s website at http://www.gao.gov.
If you or your staff have any questions about 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. GAO staff who made major contributions to this report  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to assess: (1) the extent to which the General  Services Administration (GSA) achieves market leasing rates for its  leases and how overall federal leasing costs could be reduced, and (2)  how GSA’s cost estimates for selected leases compared with the actual  costs of leasing paid by federal tenants.
To determine the extent to which GSA achieves market leasing rates for  its leases, GAO contracted with a professional services real estate firm,  selected through a competitive process based on previous experience  and cost, to analyze data on GSA and private sector real property leases.  The scope of data considered for this objective included information on  both private sector and GSA leases commencing between calendar years  2008 through 2014, which were compared and analyzed to determine any  differential in lease payments attributable to specific differences in the  leases, based on their financial performance. GSA provided GAO with a  data set that included all of its active leases from its multiple data  sources, which was aggregated using GSA’s unique lease identifiers. The  data provided by GSA were reviewed by the contractor for  inconsistencies and discussed during interviews with knowledgeable  agency officials to assess the appropriateness of their use. GAO also  reviewed the contractor’s report, including the steps taken to assess the  reliability of the GSA data used and the types of analysis conducted, and  found them to be sufficiently reliable. Incomplete and inconsistent data,  as well as outliers, were excluded, though accuracy of the individual lease  data points provided by GSA was not independently verified. The  analysis conducted was consistent with how GSA currently handles  leases, uninfluenced by agency practices and policies no longer in effect.  For example, revisions to processes from the National Broker Contract,  Advanced Acquisition leases, and industry outreach sessions have  affected GSA practices, thus impacting how leases were negotiated and  executed.
Per the data provided by GSA, there were 8,499 GSA leases in effect as  of December 31, 2014. Of this population, 5,160 leases commenced after  January 1, 2008, and were initially considered as part of the analysis  period. We considered only GSA operating leases—not prospectus level  (“high value”)—as well as how the data were dispersed among regions,  how many leases are full service versus not full service, how many leases  were added to the region per year, and to identify outliers; the result was  4,285 remaining leases matching the following criteria for analysis:  classified as 100 percent office space, full service rents, and executed  within the dates of analysis (2008 to 2014). These 4,285 leases  comprised the universe of leases upon which all analysis was performed.  These leases were then broken down into subsets for specific analysis.  The pool of leases analyzed for each of the clauses and actions varies  based on the compliance of those leases to the criteria for that pool.  There was symmetry in the dispersion, again indicating a valid sampling  of leases. Misclassified properties were identified within this data set, and  outliers were not analyzed or included in the subsequent data sets. The  rental rates per square foot analyzed were all-inclusive.
The collection of private sector lease data for markets nationwide for each  year of the analytical period included the collection and consideration of:
Quarterly and annual published market reports for 151 markets and  submarkets nationwide, collected from 58 national and regional  brokerage companies and used to summarize market rent based on  actual leases and listings in each market and submarket.
Fifteen private sector office leases for national companies, often  publically traded and viewed as credit-worthy tenants by brokers and  landlords who were parties to the lease.
Office building operating expenses with detailed line item breakdown  for 90 commercial business district and suburban submarkets from  the Institute of Real Estate Management (IREM), for urban and  suburban buildings of 40,000 to 99,999 square feet and 100,000 to  250,000 square feet.
Typical lease structures, including base term and options with  corresponding tenant improvement allowances and commission  structures compiled from broker interviews.
This private sector lease information provided the foundational knowledge  of the quantified and qualified performance of private sector office  markets in each market over the analysis period. To assess the  appropriateness of the private sector data, the contractor reviewed  brokerage reports from several sources for each market and conducted  interviews with 35 private sector real estate brokers nationwide using a  semi-structured interview protocol, which covered topics such as typical  years of a lease, market practices, and responsibility for various expense  and service fees. In addition, GAO reviewed the source of the broker  market reports and clarified analytical steps with the contractor, including  comparability of tenants between the private sector leases and GSA  leases. As a result of these steps, the private sector lease data were  found to be sufficiently reliable. Grouping of the private sector lease data  occurred in several analyses:
City and submarket analysis to identify a single market rental rate for  Class A and for Class B office rents for each year of the analysis for  comparison against GSA base year rates.
Matching of private sector markets within the Top 50 Metropolitan  Statistical Areas (MSAs), as defined by the Office of Management and  Budget, and markets covered by IREM to identify the portion of rent  typically for rent, operating expenses and tenant improvement costs.
Identification of IREM operating expenses for the same year as the  GSA lease base year for comparison between GSA negotiated  operating expenses and market operating expenses.
Identification if GSA leases were equivalent to market, above or below  market in each region and each year.
For this analysis, the contracted firm compared the base year contract  rent for a GSA lease to the market rent cited from brokerage reports as of  the date of lease commencement. The number of leases incorporated  into each of the data points for GSA leases was a weighted average of  the actual rental rates for each lease signed in that year. There were four  parts of the data GSA provided that, when added together, resulted in the  rental rate paid by GSA: shell rent, general tenant improvements, custom  tenant improvements, and operating expenses. The analysis for  comparative performance of GSA leases and private sector leases  involved: abstracting GSA leases based on GSA data, disaggregated to  differentiate between shell rental rate, general tenant improvements,  custom tenant improvements, and operating expenses;  considering the net present value of the GSA leases, using the total  cost of the lease and payments each year, discounted back at the  Office of Management and Budget (OMB) discount rate of 2.80  percent (nominal 10 year rate);  considering nominal total cost of lease for both GSA and private  sector leases; and plotting GSA lease and private sector lease performance in each  market (such as by size, location, year executed) to identify any  variations based on lease terms.
From the full data set, a sample of 714 GSA leases was selected from the  MSAs from which we had an abundance of market and operating  information, across all GSA regions, to be compared with data from  published brokerage reports in specific markets and submarkets to  determine the extent to which GSA received a comparable private-sector  market rent for its leases. These leases were selected based on the  locations within the counties identified within each MSA. The match to  MSA was to capture the significant published market data available to  benchmark. The specific submarket and building class of each lease were  matched from the brokerage report, and the difference in rent was  calculated between GSA contract rent and the brokerage report market  rent. The market rent for each MSA was researched at the city and the  submarket level and then further refined for Class A and Class B  properties.
Matched pairs of GSA leases were also analyzed for cases in which all  factors of leases were highly comparable, except for the length of the  term. The characteristics by which leases were matched include the  commencement year of the lease, the submarket, building class, and  square footage. This analysis involved the isolation of specific lease  terms, such as length of term or period of amortization of tenant  improvement costs, to determine differentials from the net effective rent,  then capturing any variation in the isolated terms. By isolating the single  factor and term, differences attributable to this factor would be apparent  as all other factors were the same. There were 96 leases matched in  groups of two and three for locations nationwide. In the matching  analysis, termination rights for both 5- and 10-year leases were in place  and rental rate was broken out by shell rent, general tenant improvement  costs, and custom tenant improvement costs. The first portion of this  analysis was based on the base year contract rent against base year  contract rent for each pair. As the leases were in the same submarket  and of the same size, the premise was that the two properties were  competitive and comparable to each other and that the only differentiator  was the term of the lease. The second portion addressed the net present  value over the full term of the lease, assuming that termination rights  were not exercised and that the leases were intact for the complete term.  This analysis enabled the reduction in rent after the firm term to be  recognized for those leases with amortized tenant improvements.
Further analysis was performed where the firm 10-year term was isolated  and compared against a 10-year lease with a 5-year termination right  (i.e., a 5-year firm term with a subsequent 5-year soft term). The data was  sorted by lease year, then square footage, region and shell rent. The  leases were viewed to analyze the difference in net present value (NPV)  when the 10-year firm and 10-year with soft term leases were compared,  and also when the two leases begin with approximately the same dollars  in shell rent or have equivalent shell rent, tenant improvement costs, and  operating expenses. A breakdown was created for the leases by region  for the number of firm five/soft five versus firm 10-year term for the 10- year leases. The analysis reviewed the entire data set for termination  rights and extracted leases with 3-, 5-, and 10-year terms to compare  total costs and the discounted net present value of total costs. Further  analyses were performed where the firm 10-year term was isolated and  compared against a 10-year lease with a 5-year termination right. The  leases were viewed to analyze the difference in NPV when 10-year firm  leases and 10-year lease involving a soft term were compared and when  two leases begin with approximately the same dollars in shell rent or have  equivalent shell rent, tenant improvement costs, and operating expenses.
To determine how GSA’s cost estimates compare with the actual costs of  leasing paid by federal tenants, we analyzed GSA’s leasing process,  reviewed lease documentation, and interviewed key GSA staff for  selected leases. We also conducted interviews with officials from all 11  GSA regional offices, as well as the two tenant agencies with the most  leases in our sample—the Department of Justice and Social Security  Administration—regarding their experiences with the GSA leasing  process. In addition, we reviewed GSA leasing policies and guidance  and interviewed officials from GSA headquarters about the lease  procurement process. Further, we analyzed documentation and estimated  the actual costs over the active terms of 11 selected GSA leases—one  from each of GSA’s regions. To begin, we reviewed GSA’s publicly  available inventory of leased property to understand what data were  easily accessible and to determine which criteria were available for  consideration. After downloading the October 2014 version of this GSA  data file on November 20, 2014, we reviewed related documentation and  interviewed relevant GSA officials to assess the appropriateness of this  data and found them to be sufficiently reliable. We then identified criteria  for selection of leases for inclusion, ensuring that we had a range of  leases with different characteristics from the overall lease population of  8,510 leases that would serve as a useful sample of GSA leased  properties for this engagement. These initial criteria were:  type of property identified as 100 percent office space;  latest lease action identified as “New” or “New/Replacing”;  current annual rent of either (a) equal or greater than the 2014  Prospectus threshold of $2.85 million (“high value” leases) or (b)  greater than $500,000 and less than $2.85 million (“standard leases”);  lease effective date of either (a) between January 1, 2000 and  December 31, 2005 or (b) between January 1, 2010 and October 31,  2014;
GSA regional office overseeing lease; and  current annual rent divided by rentable square footage.
After identifying the criteria for selection of leases for analysis, we used  the criteria to categorize the GSA data into four sets: high-value leases with lease effective date between January 1, 2000  and December 31, 2005 and current annual rent equal to or greater  than $2.85 million;  standard leases with lease effective date between January 1, 2010  and October 31, 2014 and current annual rent greater than $500,000  and less than $2.85 million; high-value leases with lease effective date between January 1, 2000  and December 31, 2005 and current annual rent equal to or greater  than $2.85 million; and  standard leases with lease effective date between January 1, 2010  and October 31, 2014 and current annual rent greater than $500,000  and less than $2.85 million.
For each GSA region in each of these four data sets, we then identified  the GSA lease with the highest cost per square foot for potential further  cost analysis. Using information requested and received from GSA on  the 40 remaining leases, we identified the tenant agencies for which GSA  has leased the properties. To finalize the list of 11 GSA leases—one from  each GSA region—to be analyzed, we took steps to apply additional  criteria to be applied to the list of 40 leases. This step was taken to  ensure (1) that the final list included at least 5 high-value leases and at  least 5 standard leases, (2) that the leases ultimately selected were not  concentrated in only a few federal agencies or departments, and (3) that  the final list was broadly representative of GSA leases in general. In  addition, we considered the inclusion of leases with and without  termination rights to ensure that leases with the active possibility of the  invocation of these rights were included. The final list of 11 GSA leases  analyzed—which are spread among 6 federal agencies— is shown in  table 1. After identifying the 11 leases to be analyzed, we requested  relevant documentation on each of them from GSA, which we reviewed to  develop specific questions for regional GSA officials knowledgeable about  the history and details of each individual lease.
In addition to developing questions for regional GSA officials on each of  the 11 leases after receiving lease documentation from GSA, we  determined which lease cost milestones were appropriate points of  comparison to analyze estimates over the GSA leasing process. To  determine how GSA’s lease cost estimates change over time, we  interviewed GSA officials from all 11 regions in February and March 2015  to determine when in the lease procurement process cost estimates are  developed and when cost estimates are provided to the tenant agency for  review. In these discussions, GSA regional representatives identified  three milestone points in the leasing process when written estimates of a  particular lease’s costs are provided to the tenant agency. These  milestones are (1) the end of requirements development phase, when  tenant agencies authorize GSA to move forward with lease procurement;  (2) at lease signing, when the tenant agency agrees to the terms of the  lease; and (3) when the tenant agency takes occupancy of the leased  space and when GSA accepts the space and rent payments begin. GSA  regional representatives told us that an occupancy agreement detailing  estimated lease costs and lease terms is shared with a tenant agency at  each of these points, and we contacted officials from each of GSA’s 11  regions to request copies of all of the occupancy agreements associated  with each of the 11 leases being analyzed. The GAO team reviewed  these agreements to determine which were associated with each of the  three milestone points and, when the documentation did not include all  three of the milestones identified as key points of the process, we also  utilized information in supplementary lease documentation to identify cost  estimates made at the three milestone points and associate each with the  related agreement. For example, regional GSA officials were unable to  provide copies of agreements from the initial requirements development  phase for 5 of the 11 leases. For these cases, we identified the estimates  included in either a lease’s acquisition plan or the prospectus  documentation for high value leases as alternative cost estimates or  milestones. For leases with multiple occupancy agreements associated  with a single GSA lease, we considered the circumstances based on  conversations with regional officials. In one case, we examined the costs  estimates based on weighted average costs, on a rent per square foot  basis, for the entire lease. In another case, we ensured that we did not  include cost estimates that included additional space that was not  considered in the crafting of initial cost estimates because GSA could not  reasonably have anticipated the tenant agency’s desire for additional  space or the availability of adjacent space in the market.
To analyze federal agencies’ leasing costs over time, we compared the  terms and costs for the 11 selected leases across the three milestone  points: the initial cost estimate, the cost estimate at the time of lease  execution, and the final cost when the agency takes occupancy of the  space. GSA’s occupancy agreements with tenant agencies identify a  “charge basis” on each agreement, which is the total rentable square feet  associated with the agreement and, because this number is the square  footage metric that GSA presents to its tenant agencies, we used this as  well. In order to compare leases with different terms, the rent per rentable  square foot for the first stabilized year of occupancy for each lease was  calculated. This calculation allows a lease estimate that began in January  to be compared to a lease estimate that began in June; both were  compared on a 12-month, annualized, basis. The line items that are  included in our review of cost estimates included shell rent, amortized  tenant improvement costs—both general and custom—and operating  costs. Real estate tax costs were also considered, if applicable. The total  amount of tenant improvement costs paid by tenant agencies was  calculated using the data on these costs and the interest rate information  provided by GSA regional officials. For the purposes of this analysis,  GAO has considered the lease costs that are paid by GSA to the private  sector landlord monthly during the lease. Although lease payments are  due monthly, the stated rent per square foot is the total annual cost of the  monthly payments. The tenant in the lease pays these costs as a pass- through, as well as a management fee to GSA. However, the  management fee is not considered in our analysis of GSA’s cost  estimates because it is determined by GSA policy.
We conducted this performance audit from August 2014 to January 2016  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 Social Security Administration
section_title: Appendix IV: GAO Contact & Staff Acknowledgments
subsections: section_title: Contact
section_title: Acknowledgements
paragraphs: In addition to the contact named above, Keith Cunningham, Assistant  Director; Chad Williams, Analyst-in-Charge; Alex Lawrence; Mary Pitts;  Amy Rosewarne; Crystal Wesco; Terence Lam; Josh Ormond; and  Elizabeth Wood made key contributions to this report.