Federal Real Property: Greater Transparency and Strategic Focus Needed for High-Value GSA Leases
Published: 2013-09-19T00:00:00

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. GAO's work has shown that building ownership often costs less than leasing, especially for long-term space needs. For leases with a net annual rent above a threshold--$2.79 million in fiscal year 2012--GSA is required to submit a prospectus, or proposal, to Congress. GAO was asked to review these high-value leases. This report (1) identifies their characteristics and what GSA has done to reduce their cost and (2) assesses the extent to which GSA's capital-planning approach supports informed leasing decisions. GAO reviewed GSA data for all 218 active high-value leases as of November 2012 and selected 12 leases for case studies based on expiration dates, locations, and tenant agencies. GAO reviewed relevant legislation and guidance, interviewed agency officials, and compared GSA actions to leading practices.
section_title: What GAO Found
paragraphs: The General Services Administration's (GSA) 218 high-value leases GAO reviewed represented only about 3 percent of the total number of GSA leases, yet made up about one-third of its leased portfolio in terms of cost and size. GSA has reduced the costs of its high-value leases in line with the administration's goal to reduce real property costs. GSA's efforts include helping agencies improve space utilization. However, for leases nearing expiration, GSA and tenant agencies have faced challenges in funding space renovations and moving costs. This lack of funds has contributed to delays and some cases in which GSA continues to occupy space after the lease expires.
GSA officials stated that for most high-value leases, federal ownership would be more cost effective over the long term, but GSA did not have the funding available to purchase, renovate, or construct a building. GAO found that GSA's capital-planning approach lacks transparency and a strategic focus that could support more informed decision making in this area. Specifically, GSA does not follow capital-planning practices involving alternatives evaluation, project prioritization, and long-term capital planning:
GSA's lease prospectuses do not discuss the length of time of the space need or alternative approaches to meeting it--which are key to understanding whether leasing or owning would be more cost-effective. Twenty-seven of the prospectuses (for leases expiring from 2012 through 2027) contained an analysis that showed potential savings of over $866 million if the spaces were owned rather than leased. GSA and OMB have decided the analysis is no longer necessary in light of the lack of capital funding for acquisitions and construction. GAO's case studies highlighted long-term, mission critical space needs, such as a lease for the Environmental Protection Agency in Seattle for space it has occupied for over 40 years. Another high-value lease is for the State Department's diplomatic security bureau in Virginia. State invested at least $80 million in security upgrades into a facility that GSA leased for 10 years.
Further, GAO found that nine ongoing high-value leases did not go through the prospectus process. For example, GSA mistakenly did not prepare a prospectus for a 10-year Los Angeles lease for the U.S. Army Corps of Engineers. GSA did not notify Congress of these leases, further limiting transparency.
GSA has not systematically prioritized which space needs currently in high-value leases it would be most beneficial to move to federally-owned solutions. GSA has not incorporated space needs that are the highest priority for ownership investment into a long-term capital plan.
This lack of information on the long-term consequences, including costs and risks, of high-value leases could inadvertently contribute to the federal government's overspending on long-term space needs. In contrast, a strategic vision incorporating leading practices for capital decision making could better position the government to save money over time. Increased transparency could promote collaboration with decision makers, which could help GSA address challenges and identify cost savings opportunities as leases expire.
section_title: What GAO Recommends
paragraphs: GSA should enhance the transparency of decision making for high-value leases by (1) including more information in the prospectus to Congress, such as the agency's prior and future need for the space, major investments needed, and an appropriate analysis of the cost of leasing versus the cost of ownership; (2) reporting to congressional committees about certain leases without a prospectus; and (3) prioritizing potential ownership solutions for current high-value leases to help create a long-term strategy for targeted ownership investments. GSA concurred with the recommendations.

section_title: Letter
paragraphs: Overreliance on costly leasing is one of the major reasons that federal  real property management remains on GAO’s high-risk list. Under certain  conditions, such as fulfilling short-term needs for office space, leasing  may be a lower-cost option than ownership. However, our work over the  years has shown that building ownership often costs less than operating  leases, especially for long-term needs for space. In a series of reports  since 1995, we found that for 67 of 89 General Services Administration  (GSA) leases we examined, the government could have saved almost $1  billion if it had constructed rather than leased space for federal agencies.
As we have examined only a small number of GSA’s total leasing actions  since 1995, the potential savings from construction rather than leasing is  likely to have been even higher. Recently, we found that the federal  government owns facilities that are underutilized in locations where it also  leases space. In some cases, space within these government-owned  properties could be occupied by other government agencies.
Some agencies have their own independent leasing authority. leases, which we have termed “high-value” leases. This report (1)  identifies the characteristics of GSA’s high-value leases and what actions,  if any, GSA has taken to reduce their cost; and (2) assesses the extent to  which GSA’s capital planning approach promotes informed decision  making about leasing versus ownership.
To address these objectives, we analyzed data provided by GSA from its  Real Estate Across the United States (REXUS) database to determine  the number of active leases as of November 30, 2012, including those  with a net annual rent at or above the fiscal year 2012 prospectus  threshold of $2.79 million. We determined that 218 of GSA’s leases met  these criteria. We defined these 218 leases as our universe of high-value  leases. We reviewed the prospectuses of these leases and selected a  non-generalizable sample of 12 to examine more closely. For these 12  high-value lease case studies, we also reviewed analyses that  accompanied the prospectuses, the lease contracts, and other  documentation; conducted site visits; and interviewed local GSA officials,  tenant agencies, and lessors. For the 12 case studies, we selected leases  that were nearing expiration or had recently been entered into and  provided space for 14 different federal tenants. Because about 60 percent  of high-value leases are located in GSA’s National Capital Region, we  selected six of the leases from that region. We selected the other six from  the Northwest/Arctic, Pacific Rim, and Greater Southwest Regions for  geographical diversity. While not generalizable to the universe of high- value leases, the information obtained from our case studies provides  examples of broader issues faced by GSA in managing its high-value  lease portfolio. In addition to our case study work, we reviewed relevant  legislation, regulations, Office of Management and Budget (OMB)  guidance, our prior work, GSA guidance, and industry reports and studies  and interviewed GSA headquarters officials and private sector officials  with experience leasing to GSA. We identified leading practices for  making capital investment decisions from GAO’s Executive Guide and  OMB’s Capital Programming Guide, and assessed GSA’s efforts to  incorporate such leading practices into its decision making on leasing  versus ownership. We conducted this performance audit from September  2012 to September 2013 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. For  more information on our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Within the vast 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. Although some agencies have independent  authority related to real property, many rely on GSA for much of their real  property needs. GSA’s federally-owned and leased assets include office  and warehouse space and courthouses. GSA charges rent to federal  tenant agencies occupying federally-owned and -leased space at rates  that are approximately the same as commercial rates for comparable  space and services. According to GSA’s most recent State of the Portfolio  publication, as of fiscal year 2011, GSA had a total of 374.6 million  rentable square feet in its inventory, of which 192.7 million—slightly more  half—were leased. In this State of the Portfolio, GSA states that its  overarching goal for its portfolio is to maximize the use of its government- owned inventory while reducing the GSA-managed real estate footprint  overall. GSA must also follow federal requirements in implementing its  leasing program. Federal management regulations specify that when  seeking to acquire space for an agency, GSA is to first seek space in  government-owned and government-leased buildings. If suitable  government-controlled space is unavailable, GSA is to acquire space in  an efficient and cost effective manner.Management is responsible for establishing the strategies and policies for  GSA’s real property portfolio, while GSA’s 11 regional offices are   GSA’s Office of Portfolio  generally responsible for conducting day-to-day real property  management activities, including leasing, in each of its regions.
GSA is required by statute to provide a prospectus, or proposal, for real  property leases above the prospectus threshold to House and Senate  authorizing committees for their review and approval. The prospectus  should include 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. While these items are  required by law to be in the prospectus, GSA is not prohibited from  including other information in the lease prospectuses, and at various  times has incorporated additional information. For example, prior to the  mid 1990s, GSA routinely included an analysis that compared the long- term costs of leasing versus ownership. At times, GSA includes  information on space utilization rates (i.e., the number of usable square  feet per person). By statute, GSA is also required to provide authorizing  committees a prospectus for each proposed capital project over the  prospectus threshold, including both new construction and repair and  alteration projects. Typically, 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  OMB prior to being provided to congressional authorizing committees— the Senate Committee on Environment and Public Works and the House  Committee on Transportation and Infrastructure.
GAO-03-122 and GAO-13-283. generally the least expensive ways to meet agencies’ long-term space  needs, GSA relied heavily on operating leases to meet new long-term  needs because it lacked funds to pursue ownership. Budget scorekeeping  rules were established based on the Budget Enforcement Act of 1990.  The purpose of these rules is to ensure that the House and Senate  Budget Committees, the Congressional Budget Office, and OMB measure  the effects of legislation consistently and meet specific legal  requirements. They are also used by OMB for determining amounts to be  recognized in the budget when an agency signs a contract or enters into  a lease. Upfront funding is the best way to ensure recognition of  commitments embodied in budgeting decisions and maintain government- wide fiscal control. Under these rules, for a construction or purchase  project or a capital lease, the full cost of the project must be recorded in  the budget in the year in which the budget authority is to be made  available. Operating leases were intended for short-term needs, and thus,  under the scorekeeping rules, only the amount needed to cover the first  year’s lease payments plus cancellation costs needs to be recorded in the  budget. For operating leases funded by GSA’s Federal Buildings Fund  (which is self-insuring), only the budget authority needed to cover the  annual payments is required to be scored. GSA does not have to include  cancellation costs. Thus, an operating lease may potentially appear  “cheaper” in the budget than a construction or purchase project, or a  capital lease, even though it may cost more over time. Using an operating  lease—or successive operating leases—for a long-term space need may  result in resource allocation decisions for which the budgeting process  may not have considered the full financial commitment over the full length  of time the space need exists. Consequently, costly operating leases may  be preferred over less-costly alternatives such as major construction or  renovation projects that must compete for full funding.
A number of OMB-defined criteria must be met for a lease to be  considered an operating lease. Among other things, the lease must  “score” as an operating lease rather than a capital lease, meaning that  the present value of the minimum lease payments over the life of the  lease does not exceed 90 percent of the fair market value of the asset at  the inception of the lease. Because the scoring seeks to compare a  present day fair market value to the value of minimum lease payments  made over time, a discount rate must be used in calculating the total cost  of the minimum lease payments over the lease term. GSA uses the  discount rates determined annually by OMB, rates that vary depending on  the length of time being considered in the calculation. For example, if the  fair market value of an asset is $1 million, and the lease has a minimum  annual lease payment of $100,000 with a term of 7 years, then the  calculation of the total value of the minimum lease payments over the 7  years (applying OMB’s 2012 7-year discount rate of 0.7 percent) would be  about $680,000. This total value of $680,000 is 68 percent of the fair  market value of $1 million—which, at less than 90 percent, would result in  the lease being scored as an operating lease. However, if the lease term  was 20 years, the calculation of the total value of the minimum lease  payments of $100,000 over the 20 years (applying OMB’s 2012 20-year  discount rate of 1.7 percent) would be about $1.7 million. Since $1.7  million is more than 90 percent of $1 million, the score would exceed the  90 percent threshold and result in the lease being scored as a capital  lease.
If the project scores as a capital lease, the net present value of the total  cost of the lease is recorded in the budget in the year the lease is entered  into by the federal government. In the above examples, the 7-year  operating lease with a minimum annual rent of $100,000 would result in  $100,000 being scored against GSA’s budget authority for each of the  next 7 years. For the capital lease, the net present value of the total lease  costs (about $1.7 million) would be scored against GSA’s fiscal year  budget authority in the year lease payments began.
Over the years, we have reported on numerous examples of operating  leases that GSA and the U.S. Postal Service entered into even though  they were more costly over time than ownership. For example, in 2008,  we found that in 10 GSA and U.S. Postal Service leases, decisions to  lease space that would be more cost-effective to own were driven by the  limited availability of capital for building ownership and other  considerations, such as operational efficiency and security. We found  that for four of the seven GSA leases GAO analyzed, leasing was more  costly over time than construction—by an estimated $83.3 million over 30  years. At that time, we stated that while the administration had made  progress in addressing long-standing real property problems, efforts to  address the leasing challenge had been limited. Some alternative  approaches had been discussed by various stakeholders, such as the  President’s Commission to Study Capital Budgeting and us, including the  approach of scoring operating leases the same as capital leases, which  would make them comparable in the budget to direct federal ownership,  but none had been implemented. In 2008, we recommended that OMB, in  conjunction with other stakeholders, develop a strategy to reduce  agencies’ reliance on leased space for long-term needs when ownership  would be less costly. OMB generally agreed with our report and  recommendation and stated that it would be useful to consider how to  identify instances where operating leases are most likely to be to the  government’s long-term financial detriment. While OMB did not develop  the strategy we described, OMB staff said that they have emphasized in  guidance issued over the past several years that agencies should reduce  space needs, including for leased space, through increases in space  efficiency.
Presidential Memorandum—Disposing of Unneeded Federal Real Estate—Increasing  Sale Proceeds, Cutting Operations Costs, and Improving Energy Efficiency, 75 Fed. Reg.  33987 (June 16, 2010). 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.  This  memorandum clarified that agencies were not to increase the total square  footage of their domestic office and warehouse inventory compared to a  fiscal year 2012 baseline. It also directed agencies to use various  strategies to accomplish this goal, including consulting with GSA about  how to use technology and space management to consolidate, increase  occupancy rates in facilities, and eliminate lease arrangements that are  not cost or space effective.
section_title: High-Value Leases Are about One Third of GSA’s Net Annual Rent Costs, and GSA Has Worked with Agencies to Reduce Their Costs
paragraphs: As of November 2012, GSA’s 218 high-value leases had a total net  annual rent of over $1.5 billion—36 percent of the approximately $4.2  billion net annual rent of GSA’s leased portfolio. In recent years, GSA has  taken steps to reduce the costs of its high-value leased portfolio. For  example, GSA has helped agencies reduce their space needs and  consolidate space as high-value leases expire. Challenges related to  reducing lease costs include a lack of funding to renovate space and  delays that can result in costly short-term extensions or “holdover”  situations, in which the agency remains in the space past the lease’s  expiration date without a new lease agreement.
subsections: section_title: Characteristics of High- Value Leases
paragraphs: As of November 2012, GSA’s 218 high-value leases represented only  about 3 percent of the total number of GSA leases, yet made up about  one-third of GSA’s leased portfolio in terms of cost and size. Together,  these 218 leases have a net annual rent of over $1.5 billion, or 36 percent  of the roughly $4.2 billion total net annual rent of GSA’s leased portfolio.  Similarly, the 218 leases include over 54 million rentable square feet, or  almost 30 percent of the roughly 188 million rentable square feet in GSA’s  leased portfolio. (See fig. 1.)
The average size of the 218 leases is 249,000 rentable square feet,  ranging from about 57,000 rentable square feet for a lease for the  Department of Justice in Miami, Florida, to the largest and most  expensive of the high-value leases—a Department of Commerce lease in  Alexandria, Virginia, that is about 2.4 million rentable square feet and has  a net annual rent of $60 million. The average net annual rent for the high- value leases is about $7 million. About 60 percent of the high-value  leases are located in GSA’s National Capital Region—which includes  Washington, D.C., and portions of Northern Virginia and suburban  Maryland. The rest are spread throughout the United States, with  concentrations in other major urban areas such as New York, Seattle,  and Dallas. (See fig.2.)
High-value leases house a microcosm of the federal tenants for whom  GSA provides leased space. The tenants of these leases include 41  federal agencies and departments. The Departments of Justice, Treasury,  and Commerce have the largest amount of space among the 218 high- value-leases. For example, the high-value leases include 9.4 million  rentable square feet for the Department of Justice, representing 17  percent of the over 54 million rentable square feet in the 218 leases. (See  fig. 3).
Most of the high-value leases have lease terms of at least 10 years. The  majority—55 percent—have lease terms of more than 10 years, and 31  percent, or 68 leases, have lease terms of 20 years. While lease  expiration dates ranged from 2012 through 2032, over 60 percent of the  leases will expire by 2018. For instance, FAA officials told us that they  have several high-value leases in their Southwest, Northwest Mountain,  and Southern regions—providing space for about 1,500 employees at  each location—that expire from 2013 through 2017. Employees at these  regional headquarters work for various FAA lines of business, such as  Aircraft Certification, Flight Standards, and Air Traffic Organization.  According to GSA’s leasing program officials, these upcoming lease  expirations provide opportunities to help meet administration goals for  cost savings through reducing costly leases—via space consolidations or  moving from leased to owned space—although as discussed later in this  report, GSA and tenant agencies may face funding and other challenges  in doing so.
section_title: GSA’s Efforts to Reduce Costs of High-Value Leases
paragraphs: GSA has taken steps to reduce the costs of its high-value leased portfolio  in recent years in line with administration goals to reduce real property  holdings. First, GSA officials stated that, as required by regulation, GSA  always looks first to federally owned or existing leased space to fill space  needs. GSA officials stated that all of GSA’s high-value leases represent  space needs that could not be accommodated in existing federally owned  space and that they review the federally owned inventory as high-value  leases expire to see if there is any new potential to move the federal  tenant into an owned situation. For example, a regional GSA official  stated that GSA currently has 127,000 rentable square feet of vacant  space in a Los Angeles federal building. Among other options, GSA is  considering the potential to move the Army Corps of Engineers in Los  Angeles from a high-value lease with a net annual rent of $3.2 million in  which the Army Corps is occupying about 118,000 rentable square feet  into this federal space when the lease expires in 2016. However,  according to GSA officials, GSA often does not have large enough vacant  spaces in federally owned buildings to meet agencies’ high-value space  needs—particularly without major, costly renovations.
Another way in which GSA has worked in recent years to reduce costs of  high-value leases is through efforts to help agencies reduce the amount  of space they occupy. Among other things, GSA has worked with OMB  and agencies to reduce the amount of space per employee (the space  utilization rate) in recently submitted lease prospectuses—including at  times, revising draft prospectuses to decrease the space utilization rate  and thereby the overall amount of space requested. For example, OMB  officials stated that they noticed that a recent draft prospectus for a law  enforcement agency’s field office—an environment in which many staff  are away from their desks much of the time—had the same proposed  utilization rate as a space request from an administrative agency in  Washington, D.C., where most employees work at their desks. OMB and  GSA worked with the law enforcement agency to come to an agreement  on a reduced utilization rate before submitting the prospectus to the  congressional authorizing committees.
Furthermore, GSA officials stated that GSA and tenant agencies have  worked in recent years to reduce the square footage of new leases even  when a larger amount of space had already been approved through the  prospectus process. For example, in 2008, GSA submitted a prospectus  for a new FAA lease to consolidate FAA’s Northwest Mountain Region  headquarters in the Seattle suburb of Renton, Washington, from multiple  leases into one lease of up to 519,000 rentable square feet. The  prospectus was approved by Senate and House authorizing committees  in 2008 and 2009, respectively, prior to the 2010 presidential  memorandum and 2013 OMB memorandum focusing on reducing space  needs. According to GSA and FAA officials, the subsequent push to  reduce space needs led GSA and FAA to reduce the lease proposal by  about 40 percent. According to agency officials, for the most part, FAA  plans to adapt its needs to this smaller space by improving space  utilization through greater use of open office space and increased  teleworking, although it will also maintain some additional small  warehouse leases it had initially hoped to consolidate. GSA worked  closely with FAA to help FAA plan for improved space utilization— including having FAA staff tour GSA’s regional and local offices in the  area, both of which have been redesigned with open floor plans that can  accommodate more staff per square foot. (See fig. 4.)
According to GSA officials, another way that GSA has worked to reduce  lease costs is through improved customer real-property portfolio planning.  According to GSA’s fiscal year 2011 annual performance report, customer  portfolio plans have been completed for three of GSA’s top 20 customers,  including the Department of Health and Human Services (HHS), and GSA  expects to have an additional 9 completed by the end of fiscal year 2014.  The customer portfolio plans attempt to optimize real property portfolios  by agency, including cost savings and space reductions. For example, the  September 2012 HHS customer portfolio plan describes GSA’s efforts to  optimize its suburban Maryland portfolio for HHS, which includes a  combination of high-value and smaller leases. According to the plan, GSA  negotiated for more than 1.2 million rentable square feet in suburban  Maryland with an estimated annual lease cost reduction for National  Institutes of Health (an Operating Division within HHS) of $4.4 million.  The plan also describes planned consolidations into, and improvements  to, a high-value suburban Maryland lease that would improve HHS’s  utilization rate and increase the number of staff in the space by about 50  percent—and that has estimated savings of over $10 million in annual  rent through lease terminations. Future opportunities described in the  customer portfolio plan include efforts to implement these types of  consolidations and cost savings in other properties in HHS’s portfolio.
section_title: Challenges Related to Reducing Lease Costs
paragraphs: GSA also faces challenges related to reducing lease costs by shrinking  the leased footprint through changes in space allocated to individuals— i.e., through reducing the number of square feet per person. Most of  these challenges stem from broad funding issues faced by agencies  government-wide, as agencies with shrinking budgets struggle to  determine how to fund costs associated with moving or retrofitting space  in order to improve space efficiency. In most cases, as the expiration date  for an existing lease approaches, GSA issues a call for competitive bids  for a new lease, for which the existing lessor can compete along with  other lessors. Because a goal of the competitive process is for GSA to get  the best deal for the new lease, agencies must commit to moving after  their current lease expires if GSA determines that a different location will  be less expensive over the term of the new lease. Agencies therefore  must budget for potential moving costs in their annual budgets. Moving  costs may include funds for the physical move, telecommunication  network services and other technology needs, security features, new  furniture and cubicle divisions, relocation management, and special  consulting services.
Even if an agency remains in the same location, reducing space by  increasing space efficiency is likely to incur costs from technological and  material build outs, such as new technology, furniture and cubicle walls.  These costs must be paid up front from the agency’s annual budget  rather than being rolled into the monthly lease costs. According to GSA  officials, in the past few years, agency uncertainty about future needs and  a lack of funding to pay for moving costs or costs associated with  reducing the square feet per person in the same location have at times  made it difficult for GSA to get a commitment from an agency for a future  space requirement. According to GSA officials, GSA typically begins  planning for the next space need for a high-value lease 3 to 5 years  ahead of the expiration date. They noted that this should provide GSA  sufficient time in which to work with the tenant agency to understand its  future space needs, draft the prospectus, have the prospectus reviewed  and approved by OMB and congressional authorizing committees, and  enter into a new lease. However, in recent years, agencies’ delays due to  a lack of funding to commit to a new space requirement sometimes led to  the need for short-term extensions or—if the landlord is unwilling to meet  GSA’s negotiations—”holdovers.”
According to GSA, holdovers are risky for the government because the  government continues to occupy space to which it has no contractual  rights. According to several private sector officials we spoke to, holdovers  are problematic for the lessor because often a lessor’s financing  agreement for the building’s mortgage depends upon having a signed  lease, and the uncertainty of having a lease in holdover status can make  it difficult or impossible to secure needed financing for the building.  Several real estate experts we spoke with stated that if a private tenant  goes into holdover status, the tenant must pay a substantial rent  increase—such as a 200 percent increase in the rental rate during the  period of time the lease is in holdover status—as a penalty. Typically, the  federal government does not pay such a penalty. In several specific  cases we inquired about, GSA was continuing to pay the rent as stated in  the expired lease without penalties. We found that 14, or 6 percent, of the  218 high-value leases were in holdover status as of November 2012.
GSA attempts to avoid holdovers by getting short-term extensions in  place when it cannot move forward with a new long-term lease. However,  at times, GSA and the lessor cannot reach agreement on a short-term  extension, and the lease enters into holdover status. The three leases  among our 12 case studies that were in holdover status illustrate some of  the interrelated challenges that can lead to holdovers. While all of the  tenant agencies in these three cases plan to remain in the same location  and GSA is paying the same rental rate as it did during the lease term,  various combinations of factors—many of them external to GSA— precipitated and exacerbate the holdovers. For example, in one case, the  lease initially entered holdover because GSA was awaiting congressional  approval of a prospectus, but remained in holdover because of protracted  negotiations with the landlord over lease term and price. In another case,  it appears that GSA’s attempt to execute separate leases for agencies  that had once been in a combined lease was a factor in the holdover,  while difficult negotiations with the lessor over the terms of the new lease  lengthened the period of time the lease remained in holdover status. GSA  officials stated 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 situation with no easy solutions. In this  challenging environment, GSA, in its role as the manager of real property  for many civilian agencies, has the opportunity to set forth a vision and  strategy for federal real property that encompasses the needs of multiple  federal agencies and balances real property priorities across the civilian  federal government—a vision that could help mitigate these complex  challenges over the long-term. The next section of this report explores  GSA’s long-term capital planning approach for its high-value leased  portfolio, which could be used to communicate such a vision to federal  decision makers.
section_title: GSA’s Capital- Planning Approach Does Not Promote Informed Decision Making about Leasing versus Ownership
paragraphs: Although GSA officials stated that for most high-value leases,  constructing federally-owned space would be more cost effective over  time than continuing to lease, GSA’s capital planning approach lacks a  strategic focus that addresses its reliance on high-value leases. We  identified three leading practices that characterize sound capital  investment decision making and pertain to GSA’s high-value leased  portfolio: (1) alternatives evaluation, (2) project prioritization, and (3)  creating a long-term capital plan. We found that GSA’s lease  prospectuses lack transparency on key information that would help  decision makers understand the extent to which these high-value leases  are the best alternatives to meet agencies’ long-term space needs. GSA  also has not systematically prioritized which high-value leases have the  most cost-saving potential if they were instead pursued as capital  projects. Furthermore, GSA has not incorporated those high-value leases  that should be the highest priority for ownership into a long-term capital  plan.
subsections: section_title: According to GSA Officials, Most High-Value Leases Are for Space Needs that Should Be In Federally-Owned Property
paragraphs: According to our work on leading practices in capital decision making,  vision and leadership are crucial to the success of leading organizations’  capital-planning efforts. Many headquarters and regional GSA officials,  including assistant commissioners in GSA’s leasing program, stated that  the optimal way to manage GSA’s high-value lease portfolio in line with its  long-term portfolio goals would be to transfer many of the housing needs  that are currently in high-value leases into federally owned property. This  transfer could be accomplished either by shifting personnel into existing  federally owned space—a shift that could, however, often require major  renovations—or by purchasing or constructing new space. GSA officials  stated that some high-value leases represent short-term or unstable  space needs—such as a 5-year lease providing space for an agency that  plans to move into a federally-owned space when renovations are  completed. In such cases, leasing is the most appropriate solution.  However, officials concurred that most of the high-value leases consist of  long-term, relatively stable, mission-central needs for federal agencies— space needs that in many cases are likely to exist for longer than 20  years—and that in these cases, ownership is the most cost-effective  solution over time. However, GSA officials stated that limited availability  of existing federal space and funding for its capital program have given  GSA no choice but to continue to lease space for these government  needs—including some space needs that have existed for the past 40  years or more and have been met by leasing through multiple competitive  procurements.
section_title: Lack of Transparency in Lease Prospectuses Limits Alternatives Analysis
paragraphs: Although many of the high-value leases are candidates for ownership,  GSA does not include any analysis of such alternatives in its lease  prospectuses. According to capital-planning principles, alternatives  evaluation should be done for all major capital assets, including leases.  The lease prospectuses also lack other information that could help  decision makers consider the wisdom of continuing to lease and better  inform their decision making. In addition, we found that nine high-value  leases did not go through the prospectus process.
OMB’s Circular A-94 requires that all leases of capital assets must be  justified as preferable to direct government purchase and ownership; for  major acquisitions, this should be done through an analysis of the costs  over time of leasing versus owning the asset. The purpose of this  requirement is to promote efficient resource allocation through well- informed decision-making by the federal government. Because the  prospectus is to be reviewed and approved by both OMB and  congressional authorizing committees prior to GSA’s entering into the  lease, it is a key document for communicating GSA’s decision-making  process. GSA is not required by law to include the results of these  analyses in the prospectus; however, according to GSA officials, GSA  includes the results of an alternatives analysis in its prospectuses for  capital construction and renovation projects but does not do so in its  prospectuses for leases. In the 1980s and early 1990s, GSA did include  such an analysis in its lease prospectuses. However, in the mid-1990s,  according to GSA officials, these analyses were discontinued for lease  prospectuses in the context of the limited availability of funding for most  construction or purchase alternatives to leasing.
OMB staff stated that they advised GSA officials to stop including the  results of a lease versus purchase analysis in lease prospectuses  because OMB had determined that the scoring analysis—in which, for an  operating lease, it is shown that the present value of the minimum lease  payments over the life of the lease does not exceed 90 percent of the fair  market value of the asset at the inception of the lease—was sufficient  information to demonstrate that leasing was the most cost effective option  over the term of the lease. GSA officials stated that there was also a  sense that in an environment of scarce capital resources for purchase or  construction, there was no benefit in performing a lease versus purchase  analysis—which often showed that ownership would be more cost  effective than leasing over 30 years—since GSA did not expect to receive  funding for capital construction or acquisition. GSA officials stated that in  light of a significant decline in funding for new federal construction, even if  a lease versus purchase analysis showed that ownership was less  expensive, the lack of availability of funding for construction meant that  GSA considered this a non-viable alternative.
The decision to halt a formal lease versus purchase alternatives analysis  for high-value leases has limited the transparency of the prospectus  process. First, the lack of a lease versus purchase analysis in the  prospectus means that government decision makers do not have  information on the extent to which the proposed lease is more costly than  owning over the long-term. When GSA did perform the 30-year-net- present-value analysis for lease prospectuses, there were times when the  analysis showed that leasing was the most cost effective option. For  example, in our case studies for this review, 30-year present value  analyses were completed for two 20-year FAA leases, which became  effective in 1989 and 1992. In one instance, the analysis estimated it  was more cost effective to lease (a $3.3 million savings in Washington  state). The other analysis estimated that it was more cost effective to own  (a $2.1 million savings in Texas). Of the 218 leases in our review, 27 had  prospectuses that included a 30-year-net present value analysis of  leasing versus owning. Overall, across these 27 prospectuses, we found  that over 30 years, the government would spend an estimated additional  $866 million by leasing instead of owning, or approximately 18 percent of  the total expected cost. While these prospectuses were all developed  from 1986 through 1993, when GSA was regularly including such  analyses in the prospectuses, due in part to some gaps of several years  between the prospectus and the date the related lease became effective,  the related leases have expiration dates ranging from 2012 to 2027.  Without such information on more recently proposed high-value leases,  GSA and federal decision makers, including Congress, lack information  on the long-term cost consequences of decisions to lease rather than own  that were proposed after GSA stopped including such an analysis in  prospectuses.
To perform this scoring analysis, GSA uses established criteria to determine the fair  market value of the asset at the inception of the lease and then compares this amount to  annual lease payments multiplied by the number of years in the lease term. term—such as 5 or 10 years—for a high-value lease for operational  flexibility, such as when GSA is working on renovating federal space that  it plans to move the personnel occupying the lease into when the  renovations are complete. However, GSA officials stated that at times,  GSA has had to negotiate shorter lease terms primarily because that will  ensure that the lease will score as an operating lease—regardless of how  long the agency expects to need the space. As a result, while the lease  term established represents the legal responsibility of the government to  pay for the lease, it may not reflect the length of the need for the space or  therefore the true cost of long-term leasing. Furthermore, some GSA and  private sector officials stated that, at times, limiting the length of a lease  term to ensure that the lease will score as an operating lease can be  costly. For example, because lessors prefer the certainty of a long-term  lease, they may be willing to negotiate lower annual payments for longer  terms. In another example, in cases when the commercial real estate  market is struggling, GSA may not be able to take advantage of economic  conditions by locking in a low annual rent for as long as possible.
In addition to the limitations of the scoring analysis for analyzing whether  leasing is the best alternative, prospectuses are developed as a  “snapshot” in time, covering one lease term, and do not indicate the  extent to which the agency has had a history in the current location or the  expected duration of the agency’s space need. As a result, decision  makers have no context with which to make fully informed decisions  regarding the most cost effective way for the space need to be  addressed. According to GSA officials, when there is a short-term need  for a high-value lease, GSA may know how long the agency will need the  space, and in those cases, may have included this information in the  prospectus.  However, GSA officials stated that in many cases neither  GSA nor the agency knows how long the agency will need the space, as  changes to an agency’s mission and technology over time can affect  space needs.  Nevertheless, in our review, we found that 9 of our 12 case  study leases included space for long-term or mission critical space needs  for tenant agencies. Some of the tenant agencies in these leases have  been housed in successive operating leases far longer than GSA’s  maximum 20-year lease term—situations that would lend themselves to  an analysis of the extent to which it would be more cost effective for the  government to own rather than lease. For example:
One high-value lease we examined provides space for the  Environmental Protection Agency’s (EPA) 10th Region headquarters  in Seattle, Washington. EPA was the first tenant in the building when  it was constructed over 40 years ago. At the time of our review, GSA  was negotiating a new 10-year lease in the same space. However, the  prospectus provides no indication of how long EPA has been in the  building or EPA’s expected future need for the space. The new lease,  if completed, will therefore result in 50 years of continuous occupation  of this leased space in downtown Seattle—with no analysis of the cost  implications of doing so and no recent consideration of the alternative  of constructing owned space. According to GSA officials, there is no  federally-owned vacant space in Seattle that would meet EPA’s  needs.
Another high-value lease we examined provides space for HHS in  Rockville, Maryland. According to GSA officials, the building was built  for HHS in 1970 and has been continuously occupied by HHS for over  40 years. A new 15-year lease for the same building begins in July  2015 and will expire in 2030—at which point HHS will have occupied  the same building for close to 60 years. The new lease results in a  space reduction at that location of about 28 percent. In this case, the  lessor’s most recent proposal, which GSA selected for the new lease  through a competitive bid process, included a complete renovation of  the existing building. GSA officials stated that the financing of  renovations in a leased building is the lessor’s responsibility.  According to several private sector officials, one advantage of GSA’s  leasing rather than owning is that the private sector can often finance  major renovations for which the public sector would have difficulty  securing funding. In the case of the HHS building, the renovation is  currently ongoing with plans to be completed in 2016. According to  the lessor, in this case, the major renovations were financed based on  the strength and security of the lessor having a long-term government  lease. The challenge of funding renovations of federally owned space  is something we have discussed in previous work. However, GSA  officials noted that generally, a lessor’s investments into building  renovations—including financing costs—are passed on to the  leaseholder through the cost of the monthly lease payments over  time—and the financing costs are likely to be higher than the costs to  the government of borrowing money from the Treasury.  Considerations of such trade-offs could be factored into an analysis of  whether the government should own or lease such high-value space  needs, but the prospectus for this lease did not consider alternatives  to continuing to lease this long-term space need.
This lease was authorized in legislation and so was not accompanied by a prospectus. in Rosslyn. The building was constructed to State’s security  specifications, including a hardened lobby and exterior and extra  security features in the parking garage. In addition, according to State  officials, State invested an additional $80 to $100 million in secure  technology and conference rooms with technologically advanced  security features. However, GSA signed this as a 10 year lease,  mostly, according to GSA officials, so that it would score as an  operating lease. In this case, a 10 year lease scored at 83 percent of  the fair market value—and, according to GSA officials, was the  longest term GSA could get for the lease without risking that the lease  would score as a capital lease. As the 10-year lease’s expiration  came up in 2012, GSA initially opened the competition for this  requirement to a wider geographical area than Rosslyn. However, due  to State’s concerns about potentially having to move farther away  from State’s headquarters—which State sees as compromising to its  mission—plus the difficulty and expense of replicating all of the  security-related technology invested in this building, State asked that  the competition be canceled. In June 2013, GSA renewed this lease  for 5 years, with an option to purchase the building at a market rate  after the 3rd year. According to State officials, the 5-year extension  with purchase option will provide the government time to find and  evaluate government-owned solutions to this long-term requirement.  GSA officials agreed that the government should consider ownership  when a large investment is required to move or replicate the current  space.
In another example, a high-value lease for two smaller agency  headquarters—the Federal Maritime Commission and the National  Archives and Records Administration, in Washington, D.C., took up  much of an entirely federally-leased building across the street from  the Government Printing Office. As the January 2013 expiration date  for this lease approached, GSA decided that going forward, each  agency would have its own lease, each of which would be below the  prospectus threshold. However, both agencies ended up staying in  the same building. According to GSA officials, because the National  Archives and Records Administration communicates remotely via  laser links with the Government Printing Office in order to complete a  mission-required activity of daily printing of The Federal Register, it  needed to remain within a half mile of the Government Printing Office.  When the lease came up for expiration, GSA did a competitive bidding  process within a very narrowly defined geographical area that resulted  in no satisfactory offers from anyone other than the current landlord— resulting in difficult renegotiations with the landlord to remain in the  same building at a rate GSA considered acceptable.
Another element that represents a risk for the government and may be  relevant in considering which of the high-value leases would be the most  cost-effective to target for ownership but that is not explored in the  prospectus process is the extent to which GSA is leasing entire buildings.  We found that almost half of GSA’s high-value leases are either for an  entire building or almost an entire building, or are in buildings where GSA  has other leases so that GSA is effectively leasing the entire building.  Specifically, 48 percent of these leases are in buildings that are 90  percent or more federally leased, and almost 60 percent are in buildings  that are at least 75 percent federally leased. For example, GSA currently  leases an entire building of about 300,000 rentable square feet in Ft.  Worth, Texas, for two agencies—FAA occupies the majority of the space  and the FBI occupies the rest. Both agencies have occupied this space  for the past 20 years. As the expiration date for this lease approached,  FAA indicated a requirement for increased square footage in order to  consolidate staff into this lease from other nearby leased locations. As a  result, GSA, through a competitive bidding process, has selected a  developer to build a facility to meet FAA’s needs that GSA has agreed to  lease for 20 years and that FAA plans to fully occupy.
According to GSA officials, the prospectuses typically provide information  only on the space needs for the particular lease (or in some case, leases)  being proposed in the prospectus, and do not include information on any  other leases that may be ongoing in the same building, or on the  percentage of the entire building that GSA is leasing. Without this  disclosure, decision makers have no way to fully assess the investment  GSA is proposing. For example, for one of our case study leases in  Washington, D.C., the prospectus proposed a replacement lease for up to  294,000 rentable square feet for several agencies currently located in a  number of leases in one building—without mentioning that another GSA  lease was also in that same building. The prospectus also did not include  the information that together these two leases covered about 65 percent  of the entire building, which is in a prime location in Washington, D.C.,  near the White House. According to our analysis of GSA data, in 6 other  cases, high-value leases are in a building with either one or two other  GSA leases so that altogether GSA’s leases encompass over 90 percent  of the building’s occupancy. The lack of this contextual information in the  prospectus further reduces the transparency with which GSA presents its  leasing portfolio to government decision makers.
Most of the 218 high-value leases had a prospectus or separate  legislative authority indicating congressional committees’ approval of the  lease. However, for 9 of these leases—involving a total net annual rent of  about $50.2 million—GSA officials could not provide documentation  showing congressional committees’ approval or legislative authority.  According to GSA officials, in three of these cases, GSA mistakenly did  not provide a prospectus to Congress. For example, one of our case  study leases, a 146,000 square foot lease in Los Angeles that houses the  U.S. Army Corps of Engineers, has a 10-year term (from May 3, 2006  through May 2, 2016) with a net annual rent of $3.2 million, thus over the  fiscal year 2012 prospectus threshold of $2.79 million. However, GSA did  not submit a prospectus for this project prior to the beginning of the lease  term or otherwise notify or obtain approval from the congressional  authorizing committees. According to GSA officials, GSA’s regional office  in San Francisco, California, did not take the proper steps in analyzing  lease costs to determine whether a prospectus was needed for the  project. Since 2006, GSA headquarters has substantially revised and  standardized its guidance on prospectus-level leases, a revision that GSA  officials in three regions told us was helpful in preventing such mistakes.
In four cases, the lease started below the prospectus threshold, but over  time new space was added in supplemental lease agreements that put  the lease over the prospectus threshold. GSA officials stated that this  occurred due to subsequent expansion to meet unforeseen agency  needs. For example, this occurred with three of the Washington, D.C.,  metro area high-value leases. When this occurs, GSA officials stated that  generally, GSA does not go back to Congress with a prospectus for  approval until the lease approaches expiration. At that point, if the  continuing space need is over the prospectus threshold, GSA will provide  a prospectus to Congress. The result of these situations is a further  limitation on the transparency of the prospectus process in providing  decision makers information on the full scope of GSA’s high-value leased  portfolio—information that could be used to analyze the extent to which  leasing is the best alternative in these cases. Not submitting a prospectus  for congressional approval hinders the ability of the appropriate  congressional committees to fulfill their oversight responsibilities for all  prospectus-level leases. According to GSA officials, although violations of  process and policy are relatively rare, GSA plans to enhance its internal  controls to reduce instances of prospectus-level leases not going through  the proper process in the future. Table 1 provides a summary of the high- value leases we identified that did not have a prospectus or other  legislative approval.
Without evaluating alternatives to continuing to lease its high-value  leases, GSA does not have information that it could use to prioritize  potential capital projects for those space needs currently in high-value  leases for which it would most benefit the federal government to own  rather than lease. According to our and OMB’s analysis of leading capital  planning practices, leading organizations have processes in which  proposed capital investments are compared to one another to create a  portfolio of major assets ranked in priority order. In our July 2012 report  on GSA’s Federal Buildings Fund, we found that GSA’s project  prioritization process for its capital program partially met leading practices  but that it lacked transparency in that we were unable to determine how  GSA used its criteria to prioritize major projects. We recommended that  GSA document in its annual budget request to OMB how it uses its  prioritization criteria to generate its annual and 5-year lists of prioritized  projects to ensure that Congress understands the rationale behind the  prioritized project lists and that GSA is maximizing return on Federal  Buildings Fund investments. According to GSA officials, GSA is currently  working to develop a document that will accompany its new capital plan  and clarify its prioritization process for decision makers.
GSA officials told us that, with regard to high-value leases, GSA  addresses its portfolio on an asset-by-asset basis. While it has not  performed a systematic analysis to determine which space needs  represented by high-value leases would be most beneficial to move to  federal ownership—or prioritized these space needs for ownership  accordingly—in some cases, GSA has turned leased space into federally- owned space. For example, GSA determined it would be more cost- effective to purchase rather than continue leasing the Columbia Plaza  Building, which is occupied by State in Washington, D.C. A purchase  option had been included in the 1992 lease at the request of Congress,  and when exercised, it allowed GSA to purchase the building for about  $100 million, well below the 2006 appraised value of $190 million. In  2009, Congress made funds available from the Federal Buildings Fund  for the purchase. GSA officials stated that pursuing this purchase was  clearly beneficial to the federal government, since the high-priority tenant  was already in residence and committed to a long-term occupancy,  leasing elsewhere would be costly, and the building would immediately  become an income-generating asset. These types of considerations could  be appropriate criteria for GSA to use in considering which of the agency  space needs currently occupying high-value leases should be prioritized  for a federally-owned solution. However, without a portfolio approach in  which high-value leases are systematically evaluated to determine which  space needs should be the highest priority for transferring to federal  ownership, GSA has no documentation to help it or government decision- makers determine how best to invest limited capital funds.
Two elements further limit the vision and comprehensiveness of GSA’s  strategic capital planning process—GSA’s lack of consideration in its  capital-planning process of the extent to which the existing high-value  leases should be targeted for ownership and the lack of criteria to analyze  and prioritize these projects among the other projects GSA considers for  capital funding. Without a transparent prioritization of all major projects  that would be more cost effective to own than to lease over the long term,  GSA’s analysis of its portfolio is incomplete and is lacking core  information to help decision makers work with GSA to manage its portfolio  in a cost effective manner.
section_title: GSA Has Not Incorporated High-Value Leasing into a Long-term Capital Plan
paragraphs: Both OMB and GAO guidance emphasize the importance of developing a  long-term capital plan to guide the implementation of organizational goals  and state that making informed capital investment decisions requires full  information about an agency’s current and long-term needs, alternative  courses of action, and how potential projects compare among each  other. Without having taken these steps for high-value leases, GSA has  not incorporated the high-value leases that should be the highest priority  for ownership into a long-term capital plan. Since 1991, we have reported  that GSA would benefit from a comprehensive capital plan, stating that a  capital plan could provide information on the potential benefits and cost  savings of competing capital projects and provide a better context for  making capital investment decisions. Recently, in our 2012 report on  GSA’s Federal Buildings Fund, we found that GSA’s long-term capital  plan minimally conformed to leading practices in that it did not incorporate  the following: a baseline needs assessment including where there might  be gaps in what GSA’s real property portfolio provides; an explanation of  why projects selected are the best alternative; and alternatives to meeting  project goals.
Instead, among other things, in July 2012, we found that GSA did not  rank all of its proposed projects together—instead ranking courthouse  and land port-of-entry projects in their own list—making it difficult to  compare GSA’s prioritization of projects across its portfolio. We found that  a comprehensive long-term capital plan could further GSA’s ability to  make informed choices about long-term investment decisions and  recommended that GSA (1) document in its budget submission how it  prioritizes capital investments and (2) develop and annually submit a 5- year long-term capital plan to OMB and Congress. GSA agreed with our  recommendations. As of May 2013, GSA officials stated that GSA was  undertaking a major revision of its capital plan to implement these  recommendations.
Just as GSA’s current capital plan does not prioritize all of its proposed  capital projects in the same list or clearly explain why projects selected  are the best alternative, GSA does not have a documented analysis of  which, if any, of its high-value leases should be targeted for ownership  and how such ownership might compare cost-wise to other capital  projects it has included in its capital plan or budget request. The leasing- related strategic documents that GSA provided to us focus on optimizing  the portfolio at the agency level through GSA’s recent customer portfolio  planning effort. While this effort may improve GSA’s leased portfolio, it  does not allow decision makers to compare the financial implications of  GSA’s high-value leases portfolio-wide—across agencies and against  capital projects. This lack of information on the long-term consequences  of high-value leases could inadvertently contribute to the federal  government’s overspending on agencies’ long-term space needs—even  as the federal government tries to trim costs through reducing its leased  footprint. In contrast, a strategic vision for these leases that incorporates  leading practices of capital decision making could better position the  federal government to save money over time. Such a vision could take  into account agencies’ current efforts to reduce space needs. For  example, in considering the potential to move an agency division currently  occupying leased space into federally owned space, GSA could  incorporate into its analysis the extent to which additional leases,  particularly smaller leases for the same agency in the same area, could  be brought into newly constructed facilities if space needs continued to  contract over time. Increased transparency could also promote  collaboration with decision makers and better position GSA and tenant  agencies to address funding and other challenges that are impeding  progress in GSA’s efforts to reduce the federal real property footprint  through improved space utilization as leases expire.  According to GSA  officials, GSA would welcome the opportunity to convert some of its high- value leases to federal ownership, stating that its reliance on costly  operating leases has increased in recent years as a result of constraints  on the Federal Buildings Fund and the budget scoring of leases.
section_title: Conclusions
paragraphs: By focusing on cost savings through limiting the federal real property  footprint, GSA’s efforts to proactively work with federal agencies to  consolidate high-value and smaller leases as they expire, to move some  high-value leases into government-owned space, and to help agencies  increase space efficiency through such efforts as more open floor plans  and increased telework have had some positive results. GSA’s work to  optimize federal agency real property portfolios through better planning is  also a step in a right direction. So far, these efforts are done for the most  part on a lease-by-lease or agency-by-agency basis. Our work on leading  practices in capital decision making has emphasized that vision and  leadership are crucial to the success of leading organizations. GSA, in its  role as manager of real property for many civilian federal agencies, has  the potential to set a vision and strategy for federal real property that  addresses needs and priorities across federal agencies. However, with  regard to high-value leases, which include space needs for over 40  federal agencies and departments and represent about one-third of  GSA’s total net annual rent for leased facilities, GSA lacks a strategic  focus for determining which should be converted to ownership.
Indeed, as agencies work to shrink their footprint through increased  space efficiency and telework, it could be an ideal time to make carefully  targeted investments into owned facilities that would help move the  federal government out of long-term, high-value leases and into efficient,  federally owned space with lower long-term costs. However, the lack of  transparency in GSA’s lease prospectuses means that Congress may not  fully understand the length of an agency’s space needs and the costs of  continuing to handle these long-term needs through leasing rather than  ownership. In addition, if the transparency of the prospectuses is  improved, Congress would still be considering each leasing action  separately; to strategically manage these leases, it is important to  consider them in the context of GSA’s entire real property portfolio,  whether at the regional level for space planning or the national level for  considering where to invest scarce federal funds. GSA lacks analysis of  the effect of these long-term leases on its portfolio and on the tenant  agency in line with capital-planning principles—and it therefore cannot  share this information with Congress, for example, by incorporating  proposals for those space needs currently housed in high-value leases for  which it would be most beneficial to transfer to an ownership solution into  the capital plan we recommended that GSA develop in 2012.
Moreover, cases in which high-value leases lack a prospectus further  reduce the transparency of GSA’s full portfolio. Although these leases  have been in effect for several years, it is nonetheless important that  information on them be submitted to the appropriate committees to  maintain GSA’s accountability to Congress in this area and allow the  committees to exercise their oversight responsibility. Such information  would provide GSA, OMB, and congressional decision makers with  critical, transparent information on how to strategically manage GSA’s  real property portfolio.
section_title: Recommendations
paragraphs: To enhance transparency and allow for more informed decision making  related to the appropriate role of leasing in GSA’s real property portfolio,  we recommend that the Administrator of GSA take the following three  actions:  Include in the lease prospectus a description of the length of time that  an agency estimates it will need the space, an historical account of  how long the agency has been in the particular building it is occupying  at the time of the prospectus, and any major investments the agency  will have to make to the leased space to meet its mission. For those  spaces for which the agency has a long-term projected need, also  include an appropriate form of cost-to-lease versus cost-to-own  analysis.
Report to the appropriate congressional committees any leases above  the prospectus-threshold that did not follow the congressional  prospectus process.
Develop and use criteria to rank and prioritize potential long-term  ownership solutions to current high-value leases among other capital  investments. Use this ranking to create a long-term, cross-agency  strategy that facilitates consideration of targeted investments in  ownership. This strategy could be incorporated initially as a separate  but related part of the capital plan we previously recommended that  GSA develop in 2012, or integrated into the capital plan itself.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for review and comment to GSA and  OMB.  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 EPA, HHS, the U.S.  Department of Agriculture (USDA), Department of Defense (DOD),  Department of Justice (DOJ), and Department of Transportation (DOT).   GSA concurred with our recommendations and provided technical  clarifications, which we incorporated as appropriate.  GSA’s comments  are discussed in more detail below.  GSA’s letter is reprinted in appendix  II.provided technical clarifications, which we incorporated where  appropriate.  EPA, HHS, USDA, DOD, DOJ, and DOT did not provide  comments on the draft report.
OMB did not comment on the draft report or recommendations but  GSA agreed with the report’s recommendations and stated that it will take  action to implement them.  GSA stated that it remains committed to  sharing all available client and market information with Congress in the  prospectus process.  However, GSA raised the concern that some  information may not be included in prospectuses due to requirements of  GSA’s competitive real estate procurement process and today’s uncertain  budget environment.  We agree that GSA must adhere to the  requirements of its competitive procurement process in carrying out the  prospectus process.  However, in most cases, the additional information  we recommended be incorporated into prospectuses either has been  included in prospectuses in the past—such as a lease versus purchase  analysis—or is general information.  Moreover, the information we  recommended be included, even if it was modified to some degree to  ensure adherence to GSA’s competitive procurement process, would  provide valuable information to Congress that could help inform its  decisionmaking in this area. Regarding the uncertain budget environment,  we reiterate that as agencies work to cut costs through increased space  efficiency and telework, it could be an ideal time to make carefully  targeted investments into owned facilities that wouldhelp move the federal  government out of long-term, high-value leases and into efficient,  federally owned space with lower long-term costs.  Improved  transparency in GSA’s lease prospectuses could help Congress fully  understand the length of an agency’s space needs and the costs of  continuing to handle these long-term needs through leasing rather than  ownership.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Director of the Office  of Management and Budget; the Administrators of General Services and  Environmental Protection; and the Secretaries of Agriculture, Defense,  Health and Human Services, Justice, Transportation, and State. 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, 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 key contributions to this report are listed in appendix  III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) identify the characteristics of the General  Services Administration’s (GSA) high-value leases and what actions, if  any, GSA has taken to reduce their cost, and (2) assess the extent to  which GSA’s capital-planning approach promotes informed decision  making about leasing versus ownership.
To identify the characteristics of GSA’s high-value leases, we analyzed  data provided by GSA from GSA’s Real Estate Across the United States  (REXUS) database to determine the number of active leases as of  November 30, 2012, including those with a net annual rent at or above  the fiscal year 2012 prospectus threshold of $2.79 million. We determined  that 218 of GSA’s leases met the criteria of being at or over this  prospectus threshold, and we defined these as high-value leases for  purposes of this report. We used data from GSA’s central data system  provided in building, space, lease, and rent files in our analysis to select  and characterize the population of high-value leases. To determine  whether these data were of sufficient reliability for our analysis, we  reviewed the program documentation associated with the files 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. We did  not attempt to evaluate or test all of the aspects of the GSA data files, but  instead focused on the high-value leases. 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 and for the  purposes of this report.
We analyzed data on each of these assets to describe characteristics of  these leases, including the amount of leased space, net annual rent,  rentable square footage, lease term, and tenant. We also analyzed GSA  data to determine the total number, square footage, and cost of all of its  leases. We also reviewed the prospectuses or other legislative authority  for the 218 high-value leases. For the 9 of the 218 high-value leases that  did not have a prospectus, we obtained additional clarification from GSA  officials. In addition, we reviewed GSA documents such as The State of  the FY2011 Portfolio to obtain general information on the agency’s real  property portfolio.
To inform both objectives, we selected a non-generalizable sample of 12  high-value leases from the list of 218 we had identified to examine more  closely as case studies. In selecting the 12 case study leases, we  focused on leases that were near expiration or had recently been entered  into in order to facilitate discussions with GSA on its decision-making  process for these leases. We also focused on leases that were in  holdover status, represented a variety of tenant agencies, and had a  variety of net annual rents from close to the prospectus threshold of $2.79  million to significantly above the prospectus threshold. Because the  majority of high-value leases are located in GSA’s National Capital  Region (representing Washington, D.C., and parts of Northern Virginia  and suburban Maryland), we selected six of the leases from that region.  We selected the other six leases from the Northwest/Arctic, Pacific Rim,  and Greater Southwest Regions because these regions were  geographically diverse and had a relatively large portfolio of high-value  leases. These 12 selected leases represented space for 14 different  federal tenants, with rentable square feet ranging from over 99,000 to  almost 802,000. Their net annual rent ranged from about $2.9 million to  almost $20 million. For these leases, we reviewed numerous documents,  including the lease contract and supplemental lease agreements,  prospectus, House and Senate authorizing committees’ resolutions  approving the prospectus, scoring analysis, and space plan. We also  interviewed officials most knowledgeable about these leases from GSA  regional and local 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.  We toured several of these buildings to inform our discussion of these  leases. Our findings from these case studies cannot be generalized to the  universe of 218 high-value leases we identified or to GSA’s leased  portfolio. However, they illustrate examples of broader challenges and  opportunities GSA faces in managing its high-value lease portfolio. In  addition, we reviewed relevant legislation, GSA guidance, our prior work,  and industry reports and studies related to federal leasing of real  property. We interviewed GSA headquarters officials and regional officials  in the National Capital, Northwest/Arctic, Pacific Rim, and Greater  Southwest Regions. Together, these regions have more than 70 percent  of the 218 high-value leases we identified. We also interviewed OMB  staff, GSA Inspector General Office officials, and numerous private sector  officials with experience in working with GSA on high-value leases.
To assess the extent to which GSA’s capital planning approach promotes  informed decision making about leasing versus ownership, in addition to  the above steps, we analyzed our and OMB’s work on leading practices  in capital planning. We identified leading practices for using information to  make capital investment decisions from GAO’s Executive Guide and  OMB’s Capital Programming Guide. We also drew from the National  Research Council’s research in this area. In addition, we reviewed our  recent work on capital planning in the context of GSA’s Federal Buildings  Fund. We assessed whether GSA’s guidance practices conformed to the  criteria established in these guides in the areas of alternatives evaluation,  project prioritization, and long-term capital planning. We reviewed GSA  documents, including its Leasing Desk Guide, budget requests for the 4  fiscal years, most recent capital plan (fiscal year 2011), most recent call  to regions regarding prospectus level leases—the Capital Investment and  Leasing Program (CILP plan), criteria for ranking proposed capital  projects, and GSA data and information on holdovers in 2012 and lease  losses for fiscal years 2005 through 2011. We also interviewed GSA  officials in the Office of Portfolio Management to understand GSA’s  perspective on capital planning in the context of its high-value leased  portfolio.
We conducted this performance audit from September 2012 to  September 2013 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: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, David Sausville (Assistant  Director), Carol Henn, Joshua Ormond, Kelly Rubin, Larry Thomas, Jim  Ungvarsky, Pamela Vines, Crystal Wesco, Alwynne Wilbur, and Jade  Winfree made key contributions to this report.
section_title: Related GAO Products
paragraphs: High-Risk Series: An Update. GAO-13-283. Washington, D.C. February  2013.
Federal Real Property: Improved Data Needed to Strategically Manage  Historic Buildings, Address Multiple Challenges. GAO-13-35. Washington,  D.C.: December 11, 2012.
Federal Real Property: Strategic Partnerships and Local Coordination  Could Help Agencies Better Utilize Space. GAO-12-779. Washington,  D.C.: July 25, 2012.
Federal Buildings Fund: Improved Transparency and Long-term Plan  Needed to Clarify Capital Funding Priorities. GAO-12-646. Washington,  D.C.: July 12, 2012.
Federal Real Property: National Strategy and Better Data Needed to  Improve Management of Excess and Underutilized Property.  GAO-12-645. Washington, D.C.: June 20, 2012.
Federal Real Property: Overreliance on Leasing Contributed to High-Risk  Designation. GAO-11-879T. Washington, D.C.: August 4, 2011.
Federal Real Property: Progress Made on Planning and Data, but  Unneeded Owned and Leased Facilities Remain. GAO-11-520T.  Washington, D.C.: April 6, 2011.
Federal Real Property: Strategy Needed to Address Agencies’  Longstanding Reliance on Costly Leasing. GAO-08-197. Washington,  D.C.: January 24, 2008.
Federal Real Property: Progress Made Toward Addressing Problems, but  Underlying Obstacles Continue to Hamper Reform. GAO-07-349.  Washington, D.C.: April 13, 2007.
Executive Guide: Leading Practices in Capital Decision-Making,  GAO/AIMD-99-32. Washington, D.C.: December 1998.
Real Property Management Issues Facing GSA and Congress.  GAO/T-GGD-92-4. Washington, D.C.: October 30, 1991.