Federal Agencies Rely Extensively on Leasing, Especially for Office Space Needs; GSA Predicts It Will Lease More Space Than It Owns in 2008

Federal agencies rely extensively on leasing, occupying about 398 million  square feet of leased building space domestically in fiscal year 2006,  according to data from FRPP. Decisions to Lease Selected Federal Properties Are Not Always Driven by Cost-effectiveness Considerations

In the 10 leases we examined, decisions to lease space that would be more  cost-effective to own were driven by the limited availability of capital for  ownership and other considerations, such as operational efficiency and  security. We found that leasing was more costly over the long-term than  construction for four of the seven GSA leases, and these four GSA leases  were estimated to be $83.3 million more costly over 30 years than  construction. Funds for Ownership Are Limited

For GSA, limited funding for construction is exacerbated by federal budget  scorekeeping rules which require, for ownership and capital leases, that  the full cost of the government’s commitment be recorded up front in the  budget. In contrast, for operating leases, only the amount needed to cover  yearly lease payments plus cancellation costs is required to be recorded in  the budget, thereby making operating leases “look cheaper” in any given  year. This is a long-standing problem, and overreliance on leasing is one  of the major reasons we designated federal real property management as a  high-risk area. As a  result, the current real property reform initiative has lacked a  comprehensive analysis of alternatives and potential solutions to the  leasing challenge. Over the last  decade, our work has shown that GSA relies heavily on operating leases to  meet new long-term space needs and that building ownership often costs  less than operating leases, especially for long-term space needs. Appendix I: Objectives, Scope, and Methodology

Our objectives were to identify (1) the profile of domestically held,  federally leased space, including the overall amount and type of space  agencies lease, and discuss any related trends; (2) the factors that drive  agencies to lease space that may be more cost-effective to own; and (3) the  actions, if any, the administration has taken, and what alternative  approaches have been proposed, to address agencies’ reliance on costly  leased space. Postal  Service (USPS), and the U.S. Department of Agriculture (Agriculture),  which collectively hold 71 percent of domestic, federally leased space. We assessed the reliability of the leasing data  provided by the Office of Management and Budget (OMB) and GSA and  interviewed OMB officials because OMB oversees the implementation of  Executive Order 13327, which addresses real property management and  FRPP. U.S. General Services Administration Opportunities for Cost Savings in the  Public Buildings Area.
Why GAO Did This Study

In January 2003, GAO designated federal real property as a high-risk area, citing the government's overreliance on costly, long-term leasing as one of the major reasons. GAO's work over the years has shown that building ownership often costs less than operating leases, especially for long-term space needs. GAO was asked to identify (1) the profile of domestically held, federally leased space including the overall amount and type of space agencies lease, and any related trends; (2) the factors that drive agencies to lease space that may be more cost-effective to own; and (3) any actions taken by the administration and alternative approaches proposed to address this issue. GAO reviewed fiscal year 2006 Federal Real Property Profile (FRPP) leasing data and relevant documents and interviewed officials from the General Services Administration (GSA), the Office of Management and Budget (OMB), and the U.S. Postal Service (USPS). GAO also reviewed 10 building leases that were among those with the largest dollar value in 3 locations GAO visited.

What GAO Found

Federal agencies rely extensively on leasing, occupying about 398 million square feet of leased building space domestically in fiscal year 2006, according to FRPP data. GSA, USPS, and the U.S. Department of Agriculture lease about 71 percent of this space, mostly for offices, with the military services leasing another 17 percent. GSA is increasing its use of leased space and predicts that in 2008 it will, for the first time, lease more space than it owns. In the 10 GSA and USPS leases GAO examined, 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. For example, 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. Although ownership through construction is often the least expensive option, federal budget scorekeeping rules require the full cost of this option to be recorded up-front in the budget, whereas only the annual lease payment plus cancellation costs need to be recorded for operating leases, making them "look cheaper" in any year even though they generally are more costly over time. USPS is not subject to the scorekeeping rules and cited operational efficiency and limited capital as its main reasons for leasing. While the administration has made progress in addressing long-standing real property problems, efforts to address the leasing challenge have been limited. GAO has raised this issue for almost 20 years. Several alternative approaches have been discussed by various stakeholders, including scoring operating leases the same as ownership, but none have been implemented. The current real property reform initiative, however, presents an opportunity to address the leasing challenge.