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Highlights

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.

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.

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Recommendations

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.

Recommendations for Executive Action

Agency Affected Recommendation Status
General Services Administration As part of its lease reform efforts and to increase possible cost savings, the GSA Administrator should 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.
Closed - Implemented
Heavy reliance on costly leasing contributes to federal real property management presence on GAO's High Risk List. In a 2016, GAO reported that the General Services Administration's (GSA) could more consistently achieve market rates or better if there were more competition for its leases. GSA lease rates exceeded comparable market rates for many of 714 leases GAO sampled for reviewed. According to GSA regional officials and private sector stakeholders, GSA was unable to consistently achieve lower rates because competition among private lessors for these leases was limited. Limited competition was due, in part, to factors including tenant agencies' requested geographic areas and specialized building requirements. For example, an agency's 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 explored alternatives. Although officials from GSA's central office told GAO that GSA had not typically questioned the appropriateness of an agency's location limitations, GSA regional officials said that broadening the area deemed suitable for potential properties-while still ensuring that the agency can pursue its mission-is one of the best ways to increase competition for a lease. Therefore, GAO recommended that GSA enhance competition by encouraging tenant agencies to modify their geographic and building requirements. In 2020, GAO confirmed that GSA had implemented this recommendation as part of its lease coast avoidance plan. Recognizing that restrictive geographic and building requirements were limiting competition and causing higher lease costs, GSA officials are successfully working with tenants to expand the geographic areas and limit specific building requirements. GSA officials said that the agency's efforts are working and will continue; Under GSA's Lease Cost Avoidance Plan-which aggregates cost-savings from several efforts, including negotiating leases below market rates-the agency has already avoided billions of dollars in lease costs and expects the rate of savings to increase as GSA negotiates more leases over the coming years.
General Services Administration
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
As part of its lease reform efforts and to increase possible cost savings, the GSA Administrator should seek to reduce leasing costs for federal agencies by exploring, with relevant stakeholders, the possibility of loaning unobligated Federal Buildings Fund balances to agencies to cover tenant improvement costs that would otherwise have to be financed for new leases. If GSA finds that, with sufficient controls in place, tenant improvements can be safely funded this way, it should participate in the development of a legislative proposal to request that Congress make the necessary budget authority available.
Closed - Implemented
Heavy reliance on costly leasing contributes to federal real property management presence on GAO's High Risk List. In a 2016 report, GAO reported that the General Services Administration's (GSA) lease rates exceeded comparable market rates for many of 714 leases reviewed. Adding to these costs, GSA tenants routinely amortize the costs of needed improvements to newly leased space-called tenant improvements. The nine leases GAO reviewed would incur $15 million in private-sector 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. However, GSA did not have budget authority to fund such costs. GSA officials said that the concept of funding agencies' tenant improvements using unobligated FBF balances has potential, but also said that GSA has not formally considered this approach. They said that applying unobligated balances in this way has the potential to save substantial amounts money on interest charges that are currently passed onto federal tenants. Therefore, GAO recommended that GSA explore seeking authority to use Federal Building Fund balances to reduce interest fees. In 2020, GAO confirmed that GSA has sought the authority make such loans using two potential approaches. First, GSA developed a proposal to use existing authorities to makes such payments. Second, GSA commented on draft legislation that would grant the agency explicit authority to make such payments on a pilot basis. If either of these approaches are approved, GSA will save millions of dollars in private-sector interest fees
General Services Administration As part of its lease reform efforts and to increase possible cost savings, the GSA Administrator should seek to reduce leasing costs for federal agencies by 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.
Closed - Not Implemented
In an August 2020 letter to GAO responding to all of the recommendations in GAO-16-188, GSA stated that after careful consideration and analysis of this recommendation, it believed that reducing the fee would increase GSA's losses on lease transactions further, and would not benefit the federal agencies or their budgets. GAO continues to believe GSA could reduce leasing costs for its federal tenants by allowing them to the option of committing to stay in their space for the full term of their agreement in exchange for a lower fee, particularly for short leases. However, given GSA's position and the length of time that has passed since this recommendation was made, GAO is closing this recommendation as not implemented.

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