Federal Real Property: Leases with Purchase Options Are Infrequently Used but May Provide Benefits

GAO-16-536R Published: Jun 21, 2016. Publicly Released: Jul 06, 2016.
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What GAO Found

In the early 1990s, scorekeeping rules on how federal agencies are to budget for leasing public buildings were adopted to ensure Congress and the General Services Administration (GSA) more clearly evaluated the full costs of acquiring a building at the time such decisions were made. These rules affected the treatment of lease-purchases—which include leases having a “discounted” purchase option giving the government a choice to buy a leased building for a price that is, at the time the lease is signed, lower than the expected future fair market value. Prior to these rules, agencies that had negotiated a lease with a discounted purchase option were only required to record the lease payments (plus any cancellation costs) on an annual basis for budgeting purposes. Following the adoption of these rules, agencies that signed a lease with a discounted purchase option were required to assume the option would be exercised and budget for the full estimated costs of renting and purchasing the building, including total rent costs and the purchase price. As a result, officials stated that GSA has been reluctant to include purchase options in leases.

GSA rarely includes purchase options in leases, especially discounted purchase options, but has realized financial benefits in some instances from their use. Of the approximately 18,600 leases GSA entered into from 1992 to 2014, GAO identified 17 that included a purchase option. These leases were generally for relatively large spaces (exceeding 100,000 square feet) with annual rents greater than $1 million. GSA has exercised purchase options on 3 of these leases to acquire buildings at costs that were collectively $80 million below their fair market values at the time the options were exercised. GSA chose not to exercise the purchase options on 2 of these leases, and options on the remaining 12 leases cannot be exercised until future dates.

GSA officials and lessors GAO spoke with generally viewed purchase options as favoring GSA over lessors. These stakeholders cited benefits to GSA that included retaining the right to take ownership of unique buildings that meet specific tenant needs and taking advantage of market conditions to save the government money. Stakeholders also said that while the lessor community views GSA as an attractive tenant, from a lessor’s perspective, purchase options can result in the loss of annual cash flow, potentially lead to a loss on the sale of a building, and may result in higher financing costs.

Why GAO Did This Study

GAO has found that in general, buying a building often costs less than entering into a long-term lease, but GSA typically lacks the budget authority needed to purchase buildings outright. One mechanism for potentially reducing costs is to include a purchase option in a lease, which gives the government a future choice to buy the building from the lessor. The use of purchase options is influenced by the scorekeeping process. GAO was asked to provide descriptive information on budget scorekeeping rules and the potential costs and benefits of entering into leases with purchase options. This report examines (1) the adoption ofbudget scorekeeping rules in the early 1990s, and the effects of these rules on the use of leases with purchase options; (2) theextent to which GSA has been able to capture any financial benefits from exercising purchase options; and (3) selected stakeholders’ views on the use of lease purchase options, including potential advantages and disadvantages. GAO reviewed scorekeeping guidance and congressional testimony, identified 17 examples of GSA leases with purchase options, and interviewed knowledgeable officials.

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GAO is not making any recommendations. GSA provided technical comments that were incorporated, as appropriate.

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