Why This Area Is Important

In fiscal year 2012, the General Services Administration (GSA) received approximately $5.2 billion in new obligational authority[1] to provide 193 million square feet of rental space to federal agencies in privately owned buildings in cases where federally owned space was not available. GAO’s work has shown that building ownership often costs less than leasing, especially for long-term space needs. However, GSA relies heavily on costly operating leases to meet new long-term needs because it typically lacks the upfront funding needed to purchase buildings or space. Overreliance on costly leasing is one reason that federal real property has remained on GAO’s high-risk list.[2]  

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 the House and Senate authorizing committees for their review and approval. The prospectus is to provide basic information on the proposed lease—including the purpose, location, and cost—to assist Congress in overseeing GSA’s management of its real property portfolio.  As of November 2012, prospectus-level, or high-value leases, represented only about 3 percent of the total number of GSA leases, but made up about one-third of its leased portfolio in terms of cost and size.

What GAO Found

GAO reported in September 2013 that GSA’s capital planning approach lacks transparency and a strategic focus that could support more informed decision making related to its high-value leases. 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 pursue ownership solutions.  However, GAO found that GSA does not follow leading capital-planning practices as identified by GAO’s Executive Guide and the Office of Management and Budget’s (OMB) Capital Programming Guide involving evaluating alternatives, prioritizing projects, and planning for long-term capital needs.[1] The resulting lack of information on the long-term consequences of high-value leases, including costs and risks, could inadvertently contribute to the federal government’s overspending on long-term space needs. For example:

• Evaluating alternatives: GSA’s lease prospectuses do not discuss the length of time  the space is needed or alternative approaches to meeting this need—which are key to understanding whether leasing or owning would be more cost-effective. Twenty-seven of the 218 leases in our review had prospectuses that contained an alternatives analysis of the comparative costs of leasing versus owning over 30 years. These analyses showed potential savings of over $866 million if the spaces were owned rather than leased. The remaining 191 leases in our review did not contain an alternatives analysis, which are currently not required by GSA or OMB in light of the lack of capital funding for acquisitions and construction.  As a result, decision makers did not have information on whether there were more cost-effective options.
  
  With regards to alternatives analysis, GAO also found that nine ongoing high-value leases did not go through the prospectus process, in most cases either because GSA mistakenly did not provide a prospectus for the lease (3 leases) or because the lease started below the prospectus threshold, but over time grew in size and cost to surpass the prospectus threshold (4 leases). The lack of a prospectus on these leases further limits 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. Although these nine high-value 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.
   
• Prioritizing projects: GSA has not systematically prioritized which space needs currently being met through high-value leases would be most beneficial to move to federally-owned solutions. GSA’s current capital plan does not prioritize all of its proposed capital projects in the same list—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. In addition, GSA's current capital plan does not clearly explain why projects selected are the best alternative.  Moreover, 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.

By adopting leading practices for capital decision making in managing its high-value lease portfolio, such as evaluating alternatives and prioritizing projects, GSA could help the government potentially save millions of dollars by working to convert costly leases to ownership. GAO’s case studies at 12 locations illustrated how a lack of these practices has resulted in high-value leases in cases where ownership could have potentially been considered. For example, one high-value lease for the Environmental Protection Agency in Seattle is for space in a building the agency has occupied for over 40 years. Another high-value lease is for the Department of State’s diplomatic security bureau in Virginia. The department invested at least $80 million in security upgrades into a facility that GSA leased for 10 years. When an agency makes a significant investment into a leased facility, there is a risk that when the lease expires, the agency may have to move and reinvest time and money into replicating the investment in a different facility—or the lessor may ask for a higher rent in the next lease knowing that any competitor will have to incorporate the costs of replicating the investment into its offer.

The current lack of alternatives analysis and other critical information in the lease prospectuses—such as 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—limits decision makers’ ability to assess the costs of continuing to handle long-term needs through leasing rather than ownership. Moreover, cases in which high-value leases lack a prospectus further reduce the transparency of GSA’s full portfolio.

Finally, even with this additional information in the prospectuses, Congress would still be considering each leasing action separately. GSA lacks analysis of the effect of these long-term leases on its portfolio 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 its capital plan. To strategically manage these leases, it is important to consider them in the context of GSA’s entire real property portfolio.

Actions Needed

To enhance transparency and allow for more informed decision making related to the appropriate role of leasing in GSA’s real property portfolio, GAO recommended in September 2013 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 alternatives analysis to facilitate the evaluation of these alternatives.
• 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.

GSA could potentially save millions of dollars by improving its capital planning through incorporating a strategy for targeted investment into ownership solutions for some space needs that are currently in high-value leases. Such a strategy could help GSA work with OMB and Congress to make available more funds for the upfront costs of renovating, constructing, or acquiring a building in cases in which these alternatives present a significant potential for cost savings.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the products in the related GAO products section. 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 interviewed officials from GSA, tenant agencies, lessors, and other private sector officials with experience leasing to GSA.

Table 13 in appendix IV lists the programs GAO identified that might have opportunities for cost savings.

Agency Comments & GAO Contact

In its comments on the 2013 report, GSA stated that it agreed with the recommendations, and would take action to implement them. GSA also commented that it had concerns about some of the information GAO recommended be provided in prospectuses. For example, GSA stated that some information may not be included in prospectuses due to requirements of GSA’s competitive real estate procurement process. In GAO’s response to the agency comments, GAO agreed that GSA must adhere to the requirements of its competitive procurement process in carrying out the prospectus process but stated that the additional information GAO recommended be incorporated into prospectuses, 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.

GAO provided a draft of this report section to GSA for review and comment.  In contrast to its comments on the 2013 report, in an email received on January 30, 2014, an official from the audit liaison’s office stated that GSA only partially agreed with the report’s first and second recommendation and fully agreed with the third recommendation.  Regarding the first recommendation, GSA stated that it does not always know all of the information GAO recommended be included in the prospectuses—for example, it may not know how long an agency will need the space or which building an agency will occupy, which could affect the level of investment an agency may need to make in the space to meet its mission. Even so, GSA stated that to implement this recommendation, it plans to include in lease prospectuses the recommended information in cases where this information is known, such as a cost-to-lease versus cost-to-own analysis for long-term projected space needs.  While acknowledging that there may be cases in which GSA does not know all of the information GAO recommended be included in prospectuses, GAO maintains that GSA should include as much of this information as possible, in order to provide valuable information to Congress that could help inform its decision making in this area. 

Regarding the second recommendation, GSA stated that it only partially agreed with the recommendation because in most cases, the leases GAO identified as being above the prospectus threshold did not have nor were required to have a prospectus at lease inception, as the net annual rent did not exceed the prospectus threshold until subsequent expansion took place.  GSA therefore stated that to implement the recommendation, it will inform the appropriate congressional committees of the three prospectus-level leases that did not follow the proper procedures because the net annual rent exceeded the threshold even at lease inception.  Further, GSA said it will enhance its internal controls to reduce instances of such leases (where net annual rent exceeds the threshold at inception) not going through the proper process.  However, GAO maintains that GSA should inform appropriate congressional committees about any leases above the prospectus threshold even if the leases reached the threshold after lease inception. This information, along with additional information in the prospectuses and the cross-agency strategy that GAO recommended, could significantly increase the extent to which congressional decisionmakers have critical, transparent information needed to strategically manage GSA’s real property portfolio.  GSA itself recognizes the need to share such information with its authorizing committees, stating in its leasing guidance that its relationship with its authorizing committees is “paramount” and that “as a matter of comity” it will honor the expectations of the authorizing committees.[1]  For these additional reasons, GAO continues to recommend that GSA inform the committees of those leases that exceed the prospectus threshold but did not go through the prospectus process, whether that occurred before or after inception.

Regarding the third recommendation, GSA continues to agree with GAO and said it will develop and implement criteria to prioritize space needs to determine the most beneficial capital investment solutions.

For additional information about this area, contact David Wise at (202) 512-2834 or wised@gao.gov.

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