GSA Could Better Achieve Market Rates and Reduce Tenant Costs for Its Leases by Fostering Competition and Reducing Fees

		About Half of Recent New GSA Lease Rates Have Exceeded Comparable Market Rates

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. 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. 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. GSA Has Opportunities to Reduce Federal Tenants’ Leasing Costs

			GSA’s Focus on Longer Lease Term May Not Result in Cost Savings but Could Offer Other Benefits

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. 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. GSA Requires Agencies to Pay More for Flexibility They May Not Need

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. 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. GSA’s cost estimates for standard leases have limited oversight  mechanisms. GSA’s Cost Estimates Are Better Aligned with Actual Costs for Selected High- Value Leases, Which Require Congressional Authorization

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. Both GSA officials and these results suggest requiring congressional  authorization for high-value leases may help control cost growth for these  leases. 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. 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

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. The Federal Buildings Fund (FBF) has unobligated  balances that, with sufficient controls, could help fund tenant  improvements. 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. 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. 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. Appendix I: Objectives, Scope, and Methodology

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 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. The tenant in the lease pays these costs as a pass- through, as well as a management fee to GSA.
Why GAO Did This Study

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.

What GAO Found

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.

What GAO Recommends

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.