Use of Escalation Clauses for Operating Costs on All GSA Leases
LCD-78-340: Published: Nov 13, 1978. Publicly Released: Nov 13, 1978.
- Full Report:
The General Services Administration (GSA) is responsible for locating suitable space to meet agency needs, negotiating and awarding leases, and ensuring that lease terms are met. In November 1973, because of increased inflation, GSA directed its regions to use escalation clauses for building operating costs in long-term leases of 5 years or more. The purpose of the clauses was not to reimburse lessors for actual building operating costs but to provide lessors, through the process of averaging cost increases, some protection against excessive increases in major costs such as real estate taxes, utilities, maintenance, and janitorial services.
The administration of escalator clauses is complicated by the variety of clauses, by different escalatable cost items, and by payment restrictions. The regional offices did not maintain current or accurate lists of leases with escalator clauses, rental readjustment dates, base years, or payment dates. The administration of escalation clauses is costly, involving additional negotiations and the collection, verification, and analysis of the lessors' cost information. The best guarantee of a fair and reasonable rental rate, with or without escalation clauses, is adequate competition by landlords with space suitable for GSA's needs. Escalation clauses should be limited to space requirements that are: for leases not drawing much competition, for lease periods of at least 3 years or more, and of sufficient size to justify additional administrative costs. The Consumer Price Index is not an appropriate standard for determining adjustments to building operating costs.
Recommendation for Executive Action
Comments: Please call 202/512-6100 for additional information.
Recommendation: The Administrator of GSA should direct the Public Buildings Service to: cancel April 1978 instructions requiring use of the Consumer Price Index for calculating annual operating cost adjustments, reconsider the circumstances under which escalation clauses may benefit the Government when negotiating fair and reasonable rental rates, redraft a standard escalation clause for use under specified circumstances, and monitor the regions' implementation of escalation clause instructions in order to minimize the effects that result from noncompliance or unallowed deviations from basic instructions. The Administrator should also direct the Regional Administrators to maintain adequate control over escalation clauses included in all leases in order to eliminate the necessity to rely on the memory of the realty specialist or to wait for lessors to initiate escalation procedures.