[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                       CREDIT CRUNCH: EFFECTS ON
                    FEDERAL LEASING AND CONSTRUCTION

=======================================================================

                               (110-158)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
    ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY MANAGEMENT

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 30, 2008

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure



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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York             VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida               STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California               FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas         JERRY MORAN, Kansas
GENE TAYLOR, Mississippi             GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland         ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California        HENRY E. BROWN, Jr., South 
LEONARD L. BOSWELL, Iowa             Carolina
TIM HOLDEN, Pennsylvania             TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington              TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington              SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts    BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York          JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine            SHELLEY MOORE CAPITO, West 
BRIAN HIGGINS, New York              Virginia
RUSS CARNAHAN, Missouri              JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado            MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            TED POE, Texas
NICK LAMPSON, Texas                  DAVID G. REICHERT, Washington
ZACHARY T. SPACE, Ohio               CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii              JOHN R. `RANDY' KUHL, Jr., New 
BRUCE L. BRALEY, Iowa                York
JASON ALTMIRE, Pennsylvania          LYNN A WESTMORELAND, Georgia
TIMOTHY J. WALZ, Minnesota           CHARLES W. BOUSTANY, Jr., 
HEATH SHULER, North Carolina         Louisiana
MICHAEL A. ARCURI, New York          JEAN SCHMIDT, Ohio
HARRY E. MITCHELL, Arizona           CANDICE S. MILLER, Michigan
CHRISTOPHER P. CARNEY, Pennsylvania  THELMA D. DRAKE, Virginia
JOHN J. HALL, New York               MARY FALLIN, Oklahoma
STEVE KAGEN, Wisconsin               VERN BUCHANAN, Florida
STEVE COHEN, Tennessee               ROBERT E. LATTA, Ohio
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland

                                  (ii)




 Subcommittee on Economic Development, Public Buildings, and Emergency 
                               Management

           ELEANOR HOLMES NORTON, District of Columbia, Chair

MICHAEL H. MICHAUD, Maine            SAM GRAVES, Missouri
JASON ALTMIRE, Pennsylvania          BILL SHUSTER, Pennsylvania
MICHAEL A. ARCURI, New York          SHELLEY MOORE CAPITO, West 
CHRISTOPHER P. CARNEY,               Virginia
Pennsylvania, Vice Chair             CHARLES W. DENT, Pennsylvania
TIMOTHY J. WALZ, Minnesota           JOHN R. `RANDY' KUHL, Jr., New 
STEVE COHEN, Tennessee               York
JAMES L. OBERSTAR, Minnesota         JOHN L. MICA, Florida
  (Ex Officio)                         (Ex Officio)

                                 (iii)

                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................    vi

                               TESTIMONY

Chessen, James, Chief Economist, American Bankers Association....     3
DiPrinzio, Raymond, Managing Director, Head of Project Finance, 
  CIFG Assurance North America, Inc..............................     3
Grigg, Steven A., President and Chief Executive Officer, Republic 
  Properties Corporation, Representative DCBIA...................    24
Purtell, Richard D., Chair and Chief Elected Officer, Building 
  Owners and Managers Association International..................    24
Rudy, Kenneth, International Director of Corporate Capital 
  Markets, Jones Lang LaSalle....................................     3
Winstead, David, Commissioner, Public Buildings Service, U.S. 
  General Service Administration.................................    24

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Cohen, Hon. Steve, of Tennessee..................................    49
Graves, Hon. Sam, of Missouri....................................    50
Norton, Hon. Eleanor Holmes, of the District of Columbia.........    54
Oberstar, Hon. James L., of Minnesota............................    57

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Chessen, James...................................................    59
DiPrinzio, Raymond A.............................................    68
Grigg, Steven A..................................................    71
Purtell, Richard D...............................................    73
Rudy, Kenneth....................................................    79
Winstead, David L................................................    96

                       SUBMISSIONS FOR THE RECORD

Winstead, David, Commissioner, Public Buildings Service, U.S. 
  General Service Administration, responses to questions from the 
  Subcommittee...................................................   101


[GRAPHIC] [TIFF OMITTED] 43848.001

[GRAPHIC] [TIFF OMITTED] 43848.002



 HEARING ON CREDIT CRUNCH: EFFECTS ON FEDERAL LEASING AND CONSTRUCTION

                              ----------                              


                        Wednesday, July 30, 2008

                   House of Representatives
    Committee on Transportation and Infrastructure,
Subcommittee on Economic Development, Public Buildings, and 
                                      Emergency Management,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 1:10 p.m., in 
Room 2167, Rayburn House Office Building, the Honorable Eleanor 
Holmes Norton [Chair of the Subcommittee] presiding.
    Ms. Norton. Good morning. I welcome the witnesses to 
today's Subcommittee hearing concerning the tightening credit 
market, which originated in the subprime mortgage crisis, and 
on other factors affecting Federal leasing and construction in 
the commercial marketplace.
    GSA is perhaps the largest customer for office space in the 
real estate market in the United States. GSA leases slightly 
more space than it owns, approximately 176 million square feet 
of leased space, housing over 700,000 employees compared with 
175.5 million square feet of owned space, providing office 
space for 640,000 Federal workers. The Federal inventory ranges 
from 2500 square foot border crossing stations to a million 
square foot courthouse complexes in major metropolitan areas. 
GSA's stake in maintaining its strong position in the 
marketplace is high, particularly in the leasing market, in 
light of the continuing shift to Federal agency leased space.
    At this hearing, we seek to learn how developers, building 
owners, lenders, and construction companies, who are accustomed 
to unimpeded access to credit, position themselves in today's 
puzzling market. We have concerns, even though the strictly 
competitive system for Federal contract awards guarantees that 
only the most creditworthy need apply or need compete. When I 
began talking with experienced developers and building owners 
as the subprime mortgage crisis worsened, their strong credit 
standing with lenders and the lengthy time frames and lead time 
for construction and leasing left them pretty much unworried.
    However, since then, seven banks have closed, particularly 
IndyMac, which had significant home ownership loans. It seems 
doubtful that a departure as unprecedented as a mountain of 
bad, securitized subprime mortgages sold in an unregulated 
global market, can be contained. Today, a year after the 
housing crisis became full blown, even the largest banks, whose 
customers also significantly include commercial real estate, 
are showing record profit losses.
    Although many of the players in today's commercial 
marketplace remain untouched for now, experts say that today's 
crisis is unmatched since the Great Depression. The Nation's 
largest bank, the Bank of America, has experienced a large 
increase in bad small business-related loans and recently took 
a 41 percent reduction in profit. Some analysts have raised the 
possibility that commercial loans could be a ``ticking bomb.'' 
Some also predict that this quarter may mark a turning point, 
with lending flat, down from record highs.
    However, the best evidence that something that cannot be 
ignored is afoot are recent actions by the Federal Reserve and 
Congress, who have moved to quell the perfect storm of a 
housing downturn on which economic growth, although housing has 
been the basic source of our economic growth, double-digit 
increases in many basic food products, and indeterminate gas 
increases. Driven by the economy itself, rather than by any 
piece of it, President Bush has thought better of his threat to 
veto the most far-reaching housing bill in decades.
    This Subcommittee has an obligation to look now at whether 
there is or could be a metastasis of the housing crisis and 
other economic problems that could surface in the commercial 
sector and what, if anything, could be done about it when it 
comes to Federal leasing and construction.
    A credit crunch typically refers to factors that lead 
lenders to reduce the available credit by declining to make 
loans or doing so only at increased costs or with special 
terms, even for those who are creditworthy. The uncertainty 
about the losses from the subprime mortgage crisis still 
playing out with mortgage lenders has caused the credit markets 
to shrink considerably.
    Although Federal leases and construction contracts might be 
said to be worth their weight in gold, private sector 
competitors don't have that assurance when they compete for a 
lease or construction contract. If credit becomes too difficult 
or costly, commercial office space available to the Federal 
Government could diminish or allow too few to take the risk of 
competing, raising costs to taxpayers.
    GSA's reliance on the commercial office space market to 
house Federal agencies ties the agency directly to commercial 
market conditions. The agency must begin to use its prime 
position in the commercial marketplace by leveraging its buying 
power and capturing its great potential for reduced costs to 
taxpayers. For example, in the last three years, fiscal year 
2005 to 2008, the FBI presented this Subcommittee with 23 
leases, the largest group of long-term leases.
    As a result, the Subcommittee has indicated that it wants 
GSA to look very closely at a comprehensive lease package for 
agencies like the FBI, which have long-term viability in 
metropolitan areas. Almost all the FBI leases will be built-to-
suit the agency, but already GSA has seen a reduction in 
competitors for these FBI leases. We must discover why this is 
so and whether it constitutes the beginning of a trend.
    In today's atmosphere of soaring budget deficits and rising 
costs for all concerned, GSA also must work collaboratively 
with the private sector to reduce the cost of acquiring 
commercial office space. By working with our private sector 
partners to achieve the vision and the know-how necessary to 
cut costs across the board, together we have the potential to 
help stimulate the local and national economy while addressing 
the needs of the Federal Government. Today, we are very pleased 
to hear from the GSA, from financial and economic experts on 
the commercial markets and office development who are before us 
and have prepared testimony.
    The Ranking Member had very much wanted to be here and had 
asked that we change the day of the hearing so he could, but 
something has come up as we near the end of the session, so I 
am inserting his remarks in the record by unanimous consent.
    We want to begin by figuring out where we are. We are not 
going to get to the remedy unless we have a fix on what is 
happening in a very puzzling economy. It has fascinated me from 
the beginning, just as a general matter, and even more so as it 
has progressed with all of the unknowns that we are having to 
deal with for the first time.
    Therefore, I am pleased to welcome panel one, James 
Chessen, the Chief Economist of the American Bankers 
Association; Raymond DiPrinzio, Managing Director and Head of 
Project Finance at CIFG Assurance North America, Inc.; and 
Kenneth Rudy, International Director of Corporate and Capital 
Markets, Jones Lang LaSalle.
    Actually, you may testify in whatever order you feel like. 
I have no preference, since you are not Government officials 
and there is no protocol.
    Mr. Chessen, of the American Bankers Association.

 TESTIMONY OF JAMES CHESSEN, CHIEF ECONOMIST, AMERICAN BANKERS 
  ASSOCIATION; RAYMOND DIPRINZIO, MANAGING DIRECTOR, HEAD OF 
   PROJECT FINANCE, CIFG ASSURANCE NORTH AMERICA, INC.; AND 
   KENNETH RUDY, INTERNATIONAL DIRECTOR OF CORPORATE CAPITAL 
                  MARKETS, JONES LANG LASALLE

    Mr. Chessen. I would be happy to begin, Madam Chairwoman.
    Madam Chairwoman and Members of this Subcommittee, my name 
is James Chessen. I am the Chief Economist of the American 
Bankers Association, and I very much appreciate the opportunity 
to testify on the current state of funding for commercial real 
estate, including properties leased by the Federal Government. 
Our Nation is certainly facing difficult economic conditions, 
one that affects all businesses, including banks. We have gone 
through these periods before and have emerged much stronger as 
a result.
    I want to emphasize one basic point: the core business of 
banking is lending. That is what banks do. Banks will continue 
to be a source of financial strength in their communities in 
both good times and bad. Even in a weak economy, there are 
strong borrowers, including developers and owners of government 
leased property, that merit bank funding.
    I am also very positive about the banking industry. Before 
turning to my main points, many of you may be wondering about 
the health of the banking industry in light of the several 
recent failures that you mentioned, Madam Chairwoman. Let me 
assure you that the industry remains fundamentally sound. Banks 
entered this period with a very strong capital base and banks 
have continued to build capital over the last several quarters.
    In fact, 99 percent of the banks are classified as ``well 
capitalized,'' which is the highest designation that can be 
given by bank regulators. Simply put, the industry has the 
capital and reserves to continue to make loans that are so 
vital to our communities.
    Let me now turn to commercial real estate lending. Like all 
specialized forms of lending, loans for construction, 
development, long-term funding of government leased properties 
have unique risks. These risks exist regardless of the economic 
cycle. The weak economy, however, does add an extra element of 
risk that affects the availability and price of credit. Against 
this backdrop, it is only reasonable and prudent that banks 
exercise caution in making new loans. Bankers are asking more 
questions of their borrowers and our regulators are asking more 
questions of the banks that they examine. This does mean that 
some higher risk projects that might have been funded when the 
economy was stronger may not be funded today.
    A very important factor affecting the volume of lending is 
the ability to sell loans on the secondary market, something 
that you mentioned, Madam Chairwoman. Even though problems in 
commercial real estate loans are low by historical standards, 
investors reacted to the problems in housing and have shunned 
new commercial mortgage-backed securities. As you mentioned, 
this has the consequence of reducing funding and raising the 
cost of new commercial real estate loans.
    Certainly, just as too much risk is undesirable, a 
regulatory policy that discourages banks from making good loans 
to creditworthy borrowers also has serious consequences. We are 
very concerned that a regulatory over-reaction could quickly 
convert a credit caution to a credit crunch. We witnessed just 
such a regulatory-induced credit crunch following the 1991 
recession, and we are hopeful that regulatory reason will win 
the day this time.
    However, we hear reports from our bankers that examiners 
are demanding costly new appraisals on properties and forcing 
banks to write down collateral values even though the bank is 
not relying on collateral for the repayment of the loan. These 
unnecessary appraisals and write-downs will discourage banks 
from lending on similar projects.
    Fortunately, the bank agency heads seem to be sensitive to 
this potential problem and have pledged to avoid a repeat of 
the 1990s. The great challenge, however, may be to ensure that 
that message from those agency heads reaches the regulatory 
personnel examining banks in the field.
    To achieve our mutual goal of a safe and strong financial 
system, it is extremely important to remember the vital role 
played by good lending in restoring economic health, and not to 
allow a credit crunch to stifle the economic recovery.
    Thank you again, Madam Chairwoman, for the opportunity to 
present the views of the American Bankers Association at this 
hearing today. I would be happy to answer any questions that 
you have.
    Ms. Norton. Thank you very much, Mr. Chessen.
    Who would like to go next? Mr. DiPrinzio?
    Mr. DiPrinzio. Sure. Thank you.
    Good morning, Madam Chairperson, Members of the Committee. 
My name is Raymond DiPrinzio. Thank you for the opportunity to 
address the Committee on the impact of the current credit 
crisis on the development and financing of Federal real estate. 
I am currently head of Project Finance for CIFG, a financial 
guaranty firm headquartered in New York.
    Financial guaranty providers are essential proxies for 
retail and institutional investors in the capital markets, or 
lenders in the case of the bank loan market, since under the 
terms of their guaranty or credit protection contracts they are 
obligated to make principal and interest payments to investors 
and lenders in the event the borrower fails to do so. In this 
capacity, I am responsible for underwriting all forms of 
project financings for infrastructure, including 
transportation, energy, environmental and public use real 
estate facilities, such as office buildings, military and 
student housing, stadiums, and arenas.
    Federal project financing is a subset of the larger 
infrastructure market, a sector that has enjoyed unprecedented 
levels of interest from institutional investors across the 
globe due to the deep levels of demand for financing 
infrastructure in the United States which is in need of 
replacement or for new facilities which must be built to 
accommodate growth. In my 24 years working as a finance 
professional, I have had the opportunity to work on Federal 
projects as a financial advisor and investment banker to 
Federal agencies, as well as a provider of credit protection to 
investors in the capital markets.
    I have worked on financings for Energy, Justice, Veterans 
Administration agencies in both GSA form, as well as what I 
would refer to as direct agency leases. Given my background, I 
am speaking today with the perspective of a practitioner in the 
capital and bank markets, and more specifically one who has the 
perspective of both the borrower as well as the lender.
    The current difficulties in the financial market are 
unprecedented in both the breadth and depth of its reach, and 
it should come as no surprise that the market for Federal lease 
transactions has not escaped unharmed. I should mention I am 
looking really from the perspective here of the lease 
construction market, the types of financings that GSA and 
agencies enter into that require a build-to-suit and, more 
specifically, the raising of capital in either the bank market 
or the capital markets.
    While real estate projects involving Federal tenants under 
long-term leasing arrangements are viewed more favorably 
relative to their commercial counterparts, the overall 
reduction in liquidity, repricing of risk, and either the 
unavailability of credit protection from monoline bond insurers 
or the market's diminished view of the value they bring, has 
led to delays in completed financings, tighter credit terms 
and, most importantly, dramatically increased credit spreads, 
i.e., higher borrowing costs. Indeed, higher borrowing costs 
are making many transactions impossible to complete as it 
translates to rental rates outside of approved levels.
    More specifically, financings that were able to get credit 
protection and complete a transaction saw spreads widen to 70 
to 100 basis points over previous levels compared to the pre-
credit crisis. Without credit protection, spreads have widened 
200 to 300 basis points, levels never seen in markets for 
credit for Federal leasing.
    What can be done? In my prepared testimony, I have laid out 
a number of recommendations, but I think I would like to just 
touch on them briefly.
    What is striking to me, as an investment banker and a 
lender, is how unknown this market truly is to the wider 
capital markets. I have been struck by its obscurity, the lack 
of understanding of these transactions given the depth and the 
role the Federal Government plays in the real estate market, 
and the needs of the GSA. In many ways, Federal financing has 
significant untapped potential which, if properly harnessed, 
can result in broader market acceptance, higher levels of 
investor interest, lower borrowing costs, and ultimately lower 
rental costs.
    In this regard, I offer the following areas for 
consideration, and they are basically, I would say, four areas: 
market education, a more programmatic approach, addressing OMB 
rules that impact the structure of these transactions, and the 
consideration to enhance use leasing potentially for GSA 
agencies.
    On the market education front, my point basically is I 
think GSA and the other agencies could take a more 
comprehensive approach to educating both the bankers and 
advisors, as well as the rating agencies on the operation of 
the Federal Government in Federal financing.
    With respect to a programmatic approach, what is striking 
to me is how decentralized the approach to financing the 
Federal Government is in these markets, and an effort to bring 
together a more comprehensive programmatic approach to the 
market would go a long way, I think, to addressing these 
issues.
    OMB, quite rightly, guards the Federal budget process and 
balance sheet, but consideration should be given to revising 
the rules with an eye to an appropriate level of risk 
allocation between Federal agencies and private sector 
developers and financial participants, as well as the ultimate 
impact on financing structure and costs.
    In summary, while the current crisis in the credit markets 
is taking its toll on all players, including Federal agencies, 
the dislocation in market coupled with unprecedented levels of 
demand for properly structured infrastructure investments also 
provides an opportunity for the Federal Government going 
forward in its approach to financing real estate and other 
essential infrastructure. Steps should be taken to broaden the 
level of understanding of the Federal role as a user of 
facilities critical to the operation of government, streamline 
its approach to the market, and address the rules and 
regulations which govern its role while maintaining a careful 
eye on the impact on risk and return.
    Thank you, and I am happy to answer any questions.
    Ms. Norton. Thank you, Mr. DiPrinzio.
    Mr. Rudy?
    Mr. Rudy. Good morning, Madam Chairwoman. Thanks for having 
me. I am Kenneth Rudy, and I am President of Jones Lang 
LaSalle's Capital Markets organization in the Americas. I have 
been a practitioner for about 25 years. Our group tends to 
serve private sector investors, owners, and occupants on 
capital strategies dealing with the capital markets in the 
United States.
    I hope you had a chance to read my prepared testimony, so 
at this time I will just take the opportunity to summarize and 
reflect on some of the things that have already been said.
    With your opening remarks, Madam Chairwoman, you talked 
about the subprime mess and how it has spread to larger 
markets, so I think it is good to level-set and understand 
where we are so we can predict where we might be going. With 
that, there is the recognition that real estate has always 
operated in cycles; it is a very cyclical asset class subject 
to lots of volatility, lots of swings because it is a 
complicated asset class subject to debt, supply, demand, 
confidence, and other economic fundamentals. As a result, it 
will swing. In my career, I am in my fifth real estate cycle of 
significance, and this one is a very significant one.
    So when you try to predict where we are going to go, why we 
are where we are today, and principally it is overflow from the 
massive amounts of capital that was chasing real estate 
investments both on the commercial and residential side. We all 
know what has happened with the abundance of mortgage debt and 
the origination of debt for less worthy creditors and 
borrowers.
    In the residential markets, that has led to an oversupply 
of product, as well as defaults for people who can no longer 
afford to pay their mortgages. What has happened now is those 
very same lenders, who are having trouble with their balance 
sheets because of the mortgage mess from the residential side, 
are also restricted from providing loans on the commercial 
side.
    You mentioned also earlier you don't think that the 
commercial mortgage mess has spread, or there is such a mess 
yet, and that is true; the default rates on commercial 
mortgages are very low today. That is because on the commercial 
the fundamentals, meaning the supply and demand that creates 
value in commercial real estate, has largely been in balance 
since the last cycle.
    However, as a lot of these commercial loans are coming due, 
especially the acquisition loans that were made during this 
last cycle peak, it may be difficult for a lot of owners to 
refinance these loans. That, coupled with the overall scarcity 
of acquisition debt in the commercial markets, makes the 
investment cycle or the market pricing of assets very 
difficult, and therein lies the conundrum.
    A market is determined by buying and selling activity, or 
by two parties coming together. When transaction activity has 
hit the levels that it has hit today, which is nearly down 70 
to 80 percent from years prior, it is difficult to come up with 
a market clearing price for asset values, commercial asset 
values. There is a big gap between the bid and ask, as they 
say. And when that occurs, the lending markets who help finance 
these acquisitions, they themselves have difficulty determining 
the value of the underlying asset as they are considering 
granting loans to commercial developers or investors buying 
real estate.
    So the whole pricing process is in disarray. And whenever 
there is disarray, uncertainty goes up and risk goes up, and 
risk is reflected in higher pricing of capital, both on the 
debt and on the equity side. For occupiers of leased or 
investment real estate, that translates into higher occupancy 
costs or greater challenges in doing deals.
    So this is where we are today. People often ask where are 
we going in the future, and the only thing I can assure you is 
that--again, this is a cliche being in the real estate 
business--the only constant in real estate is change. You can 
be certain that it will improve, we will find a new bottom, but 
most economists will tell you you don't know when you are there 
until you are looking in our rearview mirror, until you have 
already passed that bottom.
    Right now there is a great deal of uncertainty. Just this 
week you read that Merrill Lynch finally sold what was a 
portfolio of $30 billion of CDOs to a private investor that 
they had previously marked down to $11 billion, and they sold 
it for $5.8 billion. That gives you an indication of the great 
deal of uncertainty that there is in pricing securities and 
assets associated with real estate.
    Also in my written testimony I showed you the drop-off in 
the CMBS market, which is the amount of securitization of 
commercial loans that are available in the market. It is 
running at nearly 10 percent of where it was at the last market 
peak. So the scarcity of capital is creating difficulty for 
borrowers and investors and speculators in real estate. Again, 
we won't know where the bottom is until we are passed it and 
there has been a market clearing price for real estate assets.
    What does that mean to the Federal Government? Well, for 
the Federal Government it represents the best credit out there, 
and there is still money available, as you heard in the prior 
testimony. Real estate is still a valued investment asset 
across the world. It is in a balanced portfolio for most 
investors and it will continue to remain so, and there are 
lenders that are available.
    The difference between today and yesterday is now the 
lenders are primarily balance sheet lenders who do sound 
underwriting, sound credit analysis, as opposed to what you 
have heard in the residential market, the covenant-light, no 
dock loans. That occurred in the commercial market too, where 
there was a covenant-light commercial mortgages. That doesn't 
exist any more.
    What it means when you have covenants in underwriting is 
the lenders and equity sponsors need to be able to pay back the 
loans more quickly, have lower amount of loan relative to the 
overall value of the asset--and that value is still 
undetermined in this marketplace today--and other sort of more 
restrictive terms. The Government can play well in that market 
because it can promise the equity sponsor and the lenders 
better ability to have that loan repaid, provided that the 
documents that are securing that income flow to that property 
are what we would call market conforming, or at least have 
market conforming sort of provisions to allow the equity 
sponsor and the lender to underwrite that risk, to know what 
they are getting when they make a loan on a commercial 
property.
    So I have provided in my written testimony a list of 
potential clauses and other features of GSA leases which, when 
made market conforming, have the effect of reducing borrowing 
costs and, therefore, equity yields and, therefore, occupancy 
costs for the Federal Government when they do leases. But the 
money is there for good projects, good sponsors, and good 
tenants.
    Thank you.
    Ms. Norton. Thank you very much, Mr. Rudy.
    Now, let me see if we can get some of the basics. This is 
very, very compelling testimony.
    Let me ask you, Mr. Chessen. You warned about the so- 
called 1991 overreaction and the reaction today. Do you 
consider what the Fed is doing, what the Congress is doing, do 
you reconsider that within the realm of reaction or 
overreaction?
    Mr. Chessen. I think, Madam Chairwoman, that was a very 
good reaction to try to stop what could eventually become a 
bigger credit problem. So I congratulate you and the Members of 
Congress for moving forward on that plan.
    My concern is what happened in the 1990s was that the 
regulators were looking over banks' shoulders for every type of 
loan they made, and the message back then from Congress, as 
well as the regulators, was make no mistake in lending; and 
that has a chilling effect on the willingness of banks to get 
out and make any type of loans.
    Just to give you a recent example of that, Madam 
Chairwoman, we had a big meeting with 300 bankers and a banker 
from New York came up to me and he said they had examiners in 
his bank, and he has a lot of capital, never got into the 
problems with the housing, and he is anxious to lend, and he 
was describing to the examiner a loan that he wanted to make on 
a commercial property, and the examiner said why on earth would 
you want to make this type of loan in this environment, and he 
was stunned by that.
    He is a bank that is out there, willing to lend, he has the 
capital, doesn't have the problems that are out there, and his 
regulators are saying, whoa, wait, I am not sure that is going 
to be a good loan a year from now. That is what we worry about.
    Ms. Norton. His Federal regulators were saying that?
    Mr. Chessen. Yes, ma'am.
    Ms. Norton. And you do not believe this was a risky loan?
    Mr. Chessen. I don't know the details of the loan. He 
believed that this was a loan that met his underwriting 
standards and he was comfortable in making.
    Ms. Norton. And if he was comfortable, one would wonder why 
the regulator was not. I don't know the particulars there, but 
I must say to second-guess somebody, unless there is some issue 
for the Federal Government, is an interesting notion for a 
regulator.
    Mr. DiPrinzio, you mention on page two of your testimony 
properly harnessing--these are your words--properly harnessing 
Federal financing. I wish you would elaborate that and describe 
some of the benefits that you think this harnessing would bring 
to the Federal Government.
    Mr. DiPrinzio. What I am getting at, really, is that the 
role of the Federal Government in the capital markets as a user 
of financing, if you will, a borrower, is not very well 
understood. There is a very small subset of practitioners out 
there who really understands how Federal leasing contracts work 
either at the GSA level and certainly at the agency level.
    It is striking to me how decentralized the financing of 
real estate for Federal properties is, and I have been doing it 
now for a number of years, so I have kind of seen it from time 
to time. If you look at other examples of the Federal 
Government approaching the market comprehensively, military 
housing, the privatization of family military housing is a 
great example of where a comprehensive approach was taken, 
legislation was put into place in 1996 and private capital has 
come in in droves. I think the numbers are roughly $20 billion 
has been raised over time.
    Ms. Norton. What are they doing with military housing 
compared with what they were doing before?
    Mr. DiPrinzio. Essentially, the Federal Government got out 
of the role of providing housing for military families.
    Ms. Norton. So what, did it contract to get it before and 
now what does it do?
    Mr. DiPrinzio. And now basically money is raised in the 
capital markets; bonds are sold, either with bond insurance or 
without bond insurance, or privately placed to investors and 
the Federal Government is essentially allowing the BAH, the 
basic allowance for housing, to be used as a source of 
repayment for those bonds.
    The point being, not to get into the specifics of that 
program, but that it was a comprehensive approach. While there 
are differences among the services, Army versus Navy versus Air 
Force--they do things slightly differently, they have 
maintained the flavor of the different services in their 
approach to the market--there are broad rules and understanding 
as to what the intent of the Defense Department is in bringing 
in private capital, and it has worked really well. The rating 
agencies understand it and the market has accepted these 
transactions.
    Ms. Norton. I am trying to analogize to the GSA, where I 
take it the lease payment would be the analogy.
    Mr. DiPrinzio. That is correct.
    Ms. Norton. How is the VA in the picture, then?
    Mr. DiPrinzio. How is VA in the picture?
    Ms. Norton. How is VA in the picture?
    Mr. DiPrinzio. Right. Among the agencies, VA probably has 
the most sophisticated program and approach, and is probably 
one of the more well known agencies to the market. Again, it 
does things differently; it has its own approach to how it 
wants financings done. But as a practitioner, as a lender or 
finance professional, I recognize how the VA has been----
    Ms. Norton. I am sorry, I said VA. I meant DOD. DOD. I am 
trying to see if essentially the housing is given over to the 
private sector to build.
    Mr. DiPrinzio. That is right.
    Ms. Norton. What role does DOD play in the process?
    Mr. DiPrinzio. Well, essentially, the Government is deeding 
the property over, it is conveying the property to a private 
entity under a 50 year development contract. At the end of 50 
years, the property comes back to the agency. So unlike a 
project where you have nothing from scratch, you are basically 
going into the market with an existing group of housing that 
service members are living in, and the Defense Department or 
the services themselves convey that property and then basically 
enter into a development agreement with a private developer who 
is raising financing in the capital markets to either renovate 
or construct new housing for military family members and 
operate that housing over the course of a 50-year period.
    Ms. Norton. I am searching for whether or not we have done 
anything like this. We have often spoken of the DOD and the VA 
and what looks like a one-time transaction, because I haven't 
been able to spread it. We were able to do that at the 
Southeast Federal Center when I was tired of not being able to 
get a Federal agency to move down there and put in a bill, 
which essentially has allowed that to happen, and look what is 
happening; they are building on the property.
    This was one of the most valuable properties in the 
Country. When I tried to say there must be similar property 
across the Country, why don't we do it elsewhere, we were met 
with the notion, well, it scores. How can it score if it didn't 
score here? I still haven't been able to find that out.
    But this notion of scoring may be familiar to all of you. I 
don't know if it was you, Mr. DiPrinzio, but one of you 
mentioned in your testimony scoring. I wish I could say that 
something would happen to change it. The worst times get, the 
more I think we won't. The waste of it sends us up the wall, I 
can tell you. The willingness to spend money, billions of 
dollars because something scores, and especially because real 
estate is treated as if it were like any other commodity.
    I wonder if you have any notions about how to encourage the 
Federal Government to understand how distinctly different real 
estate is from other goods and services that are scored, 
because if we go with scoring generally, we obviously get 
pushed back, and we find that scorers have almost no 
understanding of real estate, and this is very threatening to 
us. We just got a bill, I had to do a bill--shouldn't have had 
to do a bill, but because I had to do a bill because OMB 
wouldn't move on the Old Post Office, this priceless heirloom 
at 12th and Pennsylvania Avenue.
    Obviously, no cost to the Government and we have a perfect 
example to prove it, and that is the old Tariff Building, which 
is now the Hotel Monaco, and the scorers scored it. Susan 
Britta here was tasked with somehow beating them back and she 
beat them back, frankly, because she knew a whole lot more 
about real estate than they did, number one, and, two, the 
Tariff Building was an example of how it works.
    But anything the three of you have to say on scoring, we 
would particularly pleased to hear. For example, does the DOD 
approach meet any scoring problems? How are they able to do 
that? I can't imagine doing that on this side.
    Mr. Rudy. I am moderately----
    Ms. Norton. Maybe it is the 50-year, because it comes back 
to the Government and, of course, we could do that as well. The 
Government still owns the property. You put it in the hands of 
the developer long enough so that he can in fact benefit, even 
though he doesn't own it. I can see that.
    Could we do something like that approach, Government 
property in that way? For example, at Saint Elizabeths we are 
about to build the Department of Homeland Security. This 
Department, GSA has never built anything like this. It is not 
like building a building; it is building a half dozen buildings 
and putting them in one place. It is a compound. If you were 
tasked with that, what approach would you use? How would you do 
it? And keeping in mind some of the issues we have in the 
Federal Government.
    I am taking some of my cues from this 50-year military 
housing approach. How would you do it other than the way we do 
it now, which is building by building, essentially direct 
appropriation? The ownership of the property is the--the ground 
is ours, but the building belongs to the person who puts it up 
there. How would you do it if somebody said, okay, for the 
first time--because this really is--if we have any chance, we 
have it now, because we have never done anything like this. 
Even the Pentagon wasn't like this. That is the biggest one, 
maybe.
    This, by the way, will probably be the second biggest, but 
it won't be one building. So you could argue that precisely 
because you know exactly what you are going to do. There had to 
be a plan for what agencies, how many, exactly where they are 
located on federally owned property. Brand new situation for 
the Government. What would you do?
    Mr. Rudy. Madam Chairwoman, I want not remind you that my 
perspective and my history is servicing the private sector, 
which is I think why you asked me to testify, to bring private 
sector ideas to questions like you just asked. So I run the 
risk, when giving you some analogies, that I may not have a 
perfect analogy, whether it is to the DOD program or how you 
may want to build out Saint Elizabeths, but a real quick 
comment on the DOD program.
    My company is heavily involved in helping the Department of 
Defense with Army and Air Force housing. There were some 
different objectives there. Clearly, it was to keep the 
Department of Defense from using its war fighting dollars on 
housing and to bring in private sector capital----
    Ms. Norton. There is no different objective. This is awful. 
This uses what is unheard of in real estate. We are now waiting 
to get out $300 million for the Coast Guard building, over $300 
million for one building. Direct appropriation means here is 
the money.
    Mr. Rudy. You are right. Money is----
    Ms. Norton. So I understand that you can understand that is 
for war fighting, but most of it doesn't go into war fighting. 
So they are using taxpayer dollars, and instead of handing the 
money over in one lump sum to build this housing, ----
    Mr. Rudy. Well, they actually did it a positive way. They 
didn't hand any money over, they attracted capital, and they 
attracted it because they needed the capital and the management 
and development expertise to upgrade the housing and to 
modernize it and maintain it in a very nice fashion for the 
soldiers. So it has been a successful program.
    You asked about Saint Elizabeths, what would you do with 
Saint Elizabeths. I am setting aside whatever scoring rules or 
other rules of engagement there are and just saying, if it was 
a clean sheet of paper, what would you do. One of the things 
the private sector certainly would be interested in is some 
sort of a public-private arrangement where the Government owns 
the land--it is very valuable land, it is a terrific location--
the Government has the occupancy demand with the agencies that 
want to be there, and these are permanent agencies, if there is 
such a thing as permanent. They could provide a very long-term 
commitment to be housed in buildings to be built.
    So what does the private sector wants? The private sector 
wants what they wanted with the DOD, they want a reasonable 
rate of return to provide their own capital, both debt and 
equity, to build buildings to house the Federal Government, 
with the recognition that maybe at some point in the future 
there could be some risk out there of the Government no longer 
needing those buildings and them still having some financial 
responsibility for what is remaining on those buildings. So 
building a market conforming asset, one that physically could 
have adaptive reuse; designing the campus in a way where it is 
flexible, yet still meets the needs of the Government.
    So instituting some of the private sector disciplines in 
terms of asset value creation and financing, and on the 
financing side they would need to be able to secure whatever 
debt financing and equity yields by the lease structure that is 
in place; and that goes back to some of the market conforming 
comments I made in my written testimony. And the Federal 
Government is already experienced with those sort of lease 
forms.
    There is a form I am not that familiar with, called 3517X, 
which is essentially a financially optimized lease structure 
that the Government has used that enables the private sector to 
understand and underwrite the cash flow streams and separate 
cash flows between retiring debt or paying operating expenses 
and utilities and other sort of features that reduces the risk 
of those investors and allows them then to commit capital to 
get these sort of assets built. So there are tools out there 
that are available.
    I could elaborate more if you have questions.
    Ms. Norton. That distinction you were just making, does GSA 
do that, does the Government do that?
    Mr. Rudy. This lease form is a Federal Government lease 
form, yes.
    Ms. Norton. Do you have any ideas as well, Mr. DiPrinzio, 
on the Saint Elizabeths opportunity for the Federal Government?
    Mr. DiPrinzio. Yes, thank you, Madam Chairperson. I think 
what I would add to Mr. Rudy's testimony is that with a 
situation like Saint Elizabeths, the problem you are going to 
run into is if you have multiple buildings in a campus-like 
environment, in some ways that is an ideal situation for 
attracting private capital. The problem that you are going to 
have is to the extent that you allow the Government to walk 
away from one building, but not another, addressing that risk 
is always going to be a problem.
    Where the private sector gets most comfortable is when we 
see the Federal Government coming in and taking a large amount 
of space. If you go back and you look at the lease renewal 
statistics for GSA, the biggest campus-like transactions are 
the ones that have the least amount of risk for the private 
sector. Again, the problem here would be to the extent you have 
multiple buildings and one can be cherry-picked, if you will, 
over the course of a 10, 20, 30-year period, that is going to 
cause a concern.
    So an all or nothing approach I think is something that you 
consider. If there is some way that the renewal of the leases 
are not building-specific, but across the entire campus, that 
may not be possible, but that is going to be probably the 
biggest issue that you grapple with.
    Ms. Norton. I am sorry, the biggest issue will be what 
again?
    Mr. DiPrinzio. To the extent that a Federal agency within 
that complex can decide to not renew the lease on a particular 
building, versus the entire whole, if you can cherry-pick one 
building off of another, that is going to diminish the ability 
of the capital markets or the bank markets to finance the 
entire project.
    Ms. Norton. I must say, when you consider--I am interested 
that you say that. I could understand if this were a finite--
this is Federal property.
    Mr. DiPrinzio. Right. I understand.
    Ms. Norton. So the last group that can afford to just take 
the risk of the building that nobody will be in the building 
would be, of course, the Federal Government. Now, we are also 
putting out there maybe six agencies out of how many? There may 
be twice as many agencies there. We can't find any one place to 
house them all and to get them all. They are headquarters 
agencies, so they have to be there. So I am interested in your 
notion that an agency might walk away.
    Mr. DiPrinzio. Individually. I think----
    Ms. Norton. Of course, they can't just walk away, they 
would have to come through--it would have to be an awfully good 
reason, maybe growing. Let me give you your hypothetical. Maybe 
it just grows--normally, as you may know in this region--so it 
gets an asset somewhere else for where it grows. The FBI has 
grown, so it is also going up to NoMa. So one wonders.
    Maybe I should go to Mr. Chessen. Is that a risk from the 
point of view of a bank who is lending the money? What is the 
risk you see at Saint Elizabeths at the Homeland Security?
    Mr. Chessen. Well, I don't claim to know a lot about Saint 
Elizabeths. I can tell you, though, that protection of 
collateral for a bank is extremely important. So, as was 
described here, any danger that might undermine that-- 
separating out that collateral, having that become vacant, not 
being able to lease that again--does pose a risk to that 
lender. So I think anything that reduces the risk to that 
lender is going to lower the price of that loan.
    Ms. Norton. Do you think that the Government, if that is a 
risk with a cost, should seek to reduce that risk by--I hate to 
use the word guarantee_by some assurance that would be given to 
the owner?
    Mr. DiPrinzio. I think to the extent that your objective is 
the lowest cost of financing and the lowest rental rates, some 
mechanism that groups together the multiple properties at Saint 
Elizabeths and the multiple rental streams from the different 
agencies that will be occupying those properties would go a 
long way to allowing you to approach the market with a 
comprehensive larger revenue stream to raise the most amount of 
dollars at the lowest rate.
    That is really the issue. It is very hard to--it is not 
easy to do. We saw one situation, I believe, with the Energy 
Department----
    Ms. Norton. The rental streams do not come individually 
from the agency, they come to one agency. That is one thing the 
Government has done right; it has a real estate arm.
    Mr. DiPrinzio. So you wouldn't have a GSA lease for all of 
it on a comprehensive basis.
    Ms. Norton. Well, no, whether it will be for all of them is 
the--the point is that it is all GSA construction, it all comes 
out of GSA. There may be individual agencies. What intrigues me 
about you was the notion of rental stream. It is one agency. 
How come all the rental streams--the existing rental streams, 
albeit paid over to GSA----
    Mr. DiPrinzio. Will there be a single GSA lease for the 
entire campus or will it be multiple GSA leases?
    Ms. Norton. The way it is now--and this is what, of course, 
I rebel against--it is done as if GSA was building, let's say, 
six different buildings in six different places, without 
leveraging the benefit of having a compound where you could say 
look at all of these.
    Now, you might want to compete them differently, especially 
since it is not being built at the same time, but the notion of 
not regarding this, when, in order for the authorization to 
occur, you have to have indicated what it is you intend to do 
over the time; and then to kind of forget that and to go back 
to what you always do, building by building, is what I am 
trying to find a way out of.
    Of course, we are dealing with not only the way it has 
always been, but within an entire Federal Government who has no 
knowledge and not much interest in real estate unlike the DOD, 
which is spread all over the world and has far more of its 
dollars going to real estate.
    I don't even know how the VA got--I am not sure whether the 
VA has more of its dollars going, but you mentioned the VA -- I 
think it was Mr. DiPrinzio--which has its own authority and 
apparently deals with building various kinds differently from 
GSA. Would you speak about their enhanced authority?
    Mr. DiPrinzio. Well, the VA, quite rightly, Madam 
Chairperson, does have its own leasing authority, and it also 
has enhanced use leasing authority, which it has been utilizing 
in recent years to reduce its cost, ultimately of----
    Ms. Norton. So speak about what do you mean by enhanced 
leasing authority?
    Mr. DiPrinzio. Enhanced use leasing authority allows the VA 
to basically take excess space--that may not be the proper 
term, but basically space that is not currently at the highest 
level of priority--and allow a private developer to develop 
that excess space in return for providing the VA with a lower 
cost of overall occupancy at say, for instance, a separate 
facility. There is a lot of interest in that.
    Obviously, it depends upon the particular property at hand. 
In Cleveland, the VA is vacating one facility and basically 
allowing the developer to take control of the land at that 
particular facility that it is vacating in return for a lower 
rental rate on a new facility that it is building at Louis 
Stokes. So, in that instance, the EUL, the enhanced use lease, 
basically allows the VA to lower the cost of financing to a new 
build-to-suit building that is being put in place at Louis 
Stokes. Very powerful.
    The Defense Department is attempting to do similar things 
using its own EUL authority.
    It is striking to me, if I am not mistaken, GSA does not 
have its own EUL authority, and I would think, just based on my 
understanding, that there would be a lot of opportunities to 
better utilize and bring in private capital for space that is 
either deemed excess or not at the highest priority.
    Ms. Norton. We attempted to give GSA what we call Section 
412 authority, which bit off a piece of that, and they not only 
sat on it, but OMB has kept them from using it, and I am going 
to try to--with the change in administration-- loosen this up, 
make somebody understand how much money we are losing in the 
OMB; and OMB tends to have a say. If you have to go to OMB for 
everything, then, of course, you are really dealing with people 
who are outside of the whole real estate conundrum, dealing in 
another world, and yet they make rules that have to do with 
real estate.
    I am trying to find out how does the GSA lease? Because we 
build a lot of stuff. We are not going to build a lot more 
stuff, and that is why the Homeland Security is so important to 
me. But the Federal Government continues to grow, even in this 
climate. We always think, because there is so much competition 
in this region for a GSA lease, that that is the gold standard. 
How is the GSA lease viewed in terms of risk?
    Mr. Rudy. Let me try that one. If you don't mind, can I 
just circle back and put an exclamation point on the Saint 
Elizabeths scenario?
    You have been asking how to compare it to the DOD. I think 
there are actually a lot of great analogies. What I think the 
Federal Government is trying to accomplish with Saint 
Elizabeths is to get a commitment from private sector capital 
and development capabilities that extends beyond one asset but 
goes over a period of time. Because in a cavernous environment, 
you are going to be building for quite a long time. And the DOD 
has been successful in arranging those sort of structures in 
exchange for all the right documents, the right risk 
assessment, risk assignment between the parties, deeding land 
or buildings or improvements to the private sector, then 
allowing the private sector to compliment with their own 
capital and get a good rate of return.
    For Saint Elizabeths, again, a similar structure could be 
thought about, where you already own the land, so the cost 
basis of that land does not have to be embedded in the overall 
project cost once a building goes up. So now a developer has 
the ability, using whatever the private sector cost of capital 
is, with a good lease structure--you have asked about leases. 
You said the gold standard.
    Maybe there is a gold standard of a lease structure out 
there that an investor could get their arms around and 
underwrite along with their lending partners, and provide not 
only capital for one building, but a forward commitment for 
multiple buildings over a period of time. And if that lease has 
the right assignment and allocation of risk between the Federal 
Government and the developer in terms of design, delivery, 
long-term maintenance and occupancy costs that the private 
sector is accustomed to, you will get very low cost capital 
commitments and a lot of interest in delivering that sort of 
real estate to the Federal Government to be occupied. And these 
20-year leases are sufficient to get ample amortization of 
debt, so when the debt is nearly fully paid off or reduced to a 
significant amount, it really almost doesn't matter whether the 
Government decides to renew or not.
    I would suggest that that campus environment, there is a 
story to be told about it that private investors understand 
when they do real estate deals, and that is there is a 
reasonable probability that the Government is not going to 
leave; and they are not afraid of that residual risk tail. And 
that residual risk tail is an important component of your 
overall occupancy cost.
    You said in your earlier testimony educate the consumer, 
educate the development investment community around what it 
means to do business with the Government. So educate them on 
risk of departure or renewal, educate them on the use of the 
facilities, perhaps deed the land over under a ground lease so 
it is not embedded in the building cost, write a commercially 
conforming lease, and you will attract abundant capital with 
good development expertise to get commercially viable buildings 
built for your agencies. I mean, that is a clean sheet of paper 
solution utilizing tools that I think are available to the 
Federal Government now.
    Mr. DiPrinzio. If I may, I would like to pick up on Mr. 
Rudy's point about residual or renewal risk at the end of a GSA 
lease term.
    We use the term ``essentiality'' quite a bit in the larger 
public finance markets and specifically with respect to Federal 
facilities that are being financed. To the extent that one 
educates the investor--and obviously the investment bankers and 
the advisors that are working on these transactions--of the 
essential nature of a particular facility, the essentiality of 
that facility to the Federal Government, that will go a long 
way to reducing that residual risk and that renewal risk.
    It is significant. It is probably the biggest issue that 
anyone faces in looking at a GSA financing from a credit risk 
perspective, setting aside the terms and conditions of the 
lease and how those may impact one way or the other. The 
renewal risk at the end of 20 years or 15 years, depending upon 
how it is structured, is critical.
    One of the things that the market does understand is the 
notion of essentiality as it applies to State and local 
government, we see it all the time. Appropriation risk, the 
risk of annual renewal is something that the public finance 
markets have been used to taking for State and local government 
financings.
    We are essentially applying that to Federal financings, and 
being able to communicate the essentiality of a given facility 
to an agency, to a larger campus environment is critical to 
reducing that residual risk; and taking it outside of the way 
the commercial market looks at residual risk and putting it 
more in the context of an infrastructure financing for a 
Federal agency that, quite frankly, in many instances has no 
intention of not renewing.
    So you want to get that down. You want to do a good job of 
educating the investor ultimately, and the rating agencies or 
the bond insurers, whoever it might be that is involved in the 
financing, on the essentiality of that facility.
    When we look at military housing--just, again, to touch on 
another analogy--if a military base were to close, the 
investors are taking the risk of base closure. What the DOD 
does is essentially--pardon the term--it educates the investors 
on the essentiality of that base, on the importance of that 
base overall.
    Ms. Norton. Well, that is interesting. Let's take that one, 
because I have gone through a couple of BRAC proceedings here 
and bases have closed. I think the chances of a base closing 
are perhaps greater than the chances of having an agency move 
out of Saint Elizabeths.
    Mr. DiPrinzio. I completely agree. And the market has done 
$20 billion worth of military housing financing that has base 
closure risk all over it. So the notion of Federal----
    Ms. Norton. So what happens when a base closes? So a base 
closes, nobody knows what BRAC is going to do the next time, so 
what happens to the housing then?
    Mr. DiPrinzio. Essentially, the housing converts to 
commercial housing.
    Would you like to pick up on that?
    Mr. Rudy. I would suggest that the bases that the Air 
Force, Army, and Navy have pursued in terms of the housing 
privatization, they probably started at the top of the list of 
core bases, ones that had the least amount of risk for a 
closure. They haven't rolled the program out----
    Ms. Norton. Least amount of risk because?
    Mr. DiPrinzio. They have the least amount of closure risk.
    Mr. Rudy. Closure risk for whatever reasons. I can't speak 
to the military strategy there. It may have been a very 
essential base.
    Mr. DiPrinzio. But the important point is there is an 
education effort that is put in place to let the capital 
markets and the investors understand that. Federal renewal risk 
on a lease is a similar issue, and to the extent that one 
focuses on that and you reduce that concern, especially in a 
campus-wide environment, that is in some ways at the top of the 
list of the kinds of financings that the Federal Government can 
very easily tap private capital for.
    Ms. Norton. What we struggle for and forget, frankly, is 
the ownership option, and staff always presses this, but the 
push-back is awful, and last time we did do it--before I came 
to Congress--it wasn't an ownership option. In fact, I am not 
sure when the Government has allowed that and, therefore, I 
always look for analogies.
    What strikes me, particularly since it took a statute that 
I was able to get through when I was in the minority without 
any trouble here, for the Southeast Federal Center, what 
strikes me is to take a closer look at the enhanced use 
authority, at least of the VA. Now, are they outside of the 
scoring system?
    Mr. DiPrinzio. It is always risky to venture----
    Ms. Norton. Mr. Winstead is shaking his head, so scoring--
do you think that the kind of enhanced authority you have 
described--I guess it was Mr. DiPrinzio--if that was used 
again, let's take Saint Elizabeths, Homeland Security, how 
would that work and would that reduce the risk? How would that 
improve or not things for building out there?
    Mr. Rudy. I am not an enhanced use leasing expert, but it 
seems to me--again, I go back to this financially optimized 
lease form that the Federal Government already uses. They use 
it for the PTO. So you have a campus environment, private 
sector capital, and leases that are in place that allow those 
sort of improvements to be built and leased to the Federal 
Government.
    Ms. Norton. What are you calling it? I am sorry.
    Mr. Rudy. What is called a financially optimized lease.
    Ms. Norton. What?
    Mr. Rudy. Financially optimized lease.
    Ms. Norton. Financially optimized. All right.
    Mr. Rudy. And the components of that, as I understand it, 
are components that make it more financiable, almost like a 
private sector bondable lease. It has a lot of definitions 
around where the lease cash flows go in terms of reducing debt 
service, in terms of paying for operating expenses. It has 
better assignment of risk relative to default provisions and 
capital improvements, and other sort of features that allow the 
private sector holder of that lease to get it financed.
    Ms. Norton. Goodness. If the PTO used it----
    Yes, Mr. DiPrinzio.
    Mr. DiPrinzio. Just along those lines, I think one of the 
biggest concerns that the capital markets would have is the 
ability to set off lease payments because of some degradation 
in service provided within the building. So to the extent that 
you segregate a debt service component, if you will, of the 
rental rate versus the O&M component, and the two can never 
really go against each other--I have seen that done, if I am 
not mistaken, PTO I think did have that.
    Mr. Rudy. That is a feature of this lease, it is a 
bifurcated lease stream.
    Mr. DiPrinzio. That is critical.
    The EUL authority, you had asked about that as it applies 
to Saint Elizabeths. Not knowing, frankly, enough about the 
current approach that the Government is taking at Saint 
Elizabeths, I don't want to----
    Ms. Norton. They are taking no approach. Please, the 
approach is the same approach that we used for building, I 
don't know, the ATF, all right. There is nothing different. So 
whatever you know about how the Government in fact goes about 
bidding for a new building and then moving a Federal agency in 
it, that is exactly what the Federal Government is trying to do 
here and what I am trying to get out and regard the building of 
a compound as an opportunity, at least for the compound, to get 
out of.
    Mr. DiPrinzio. Let me just put one possibility out there 
that might be helpful in the context of a campus like Saint 
Elizabeths. At Fort Detrick, where the national interagency bio 
defense campus is being developed, enhanced use leasing 
authority allowed the Defense Department to take a parcel of 
land, give that parcel of land under an enhanced use lease to a 
private developer--in this case Keenan, in conjunction with 
Chevron--and have Keenan and Chevron build a central utility 
plant to provide steam, chilled water, conditioned power, 
backup power to the agencies that are taking those services 
from that plant.
    It would seem as though you could do something very similar 
with EUL authority at Saint Elizabeths, where, if you are 
building multiple buildings, the need for steam, chilled water, 
backup power would apply in a campus-like environment like 
that, and you would get a lower cost for that by using an EUL 
in order to provide the site for that central utility plant at 
a facility such as Saint Elizabeths.
    Again, I am just positing one example.
    Ms. Norton. No, keep positing, because, first of all, what 
you are dealing with are versions of things we are already 
using, and that is the only way I am going to be able to 
convince people; otherwise, they have to educate themselves in 
a whole area that they are not much interested in, which is 
real estate.
    Mr. DiPrinzio. My years of advising the Government has 
trained me to reach for analogies. If it is done over here, it 
is always helpful to be able to pick up on that and see to what 
extent we can replicate something maybe that was done in one 
area or one agency for another.
    Ms. Norton. In today's market, if somebody has a GSA-- I 
was interested that you said the market doesn't have-- that GSA 
is not as if--and that is interesting. Here, you would think 
GSA is a big player in the market nationally, but they are not 
much knowledge in the knowledge about how the Federal 
Government operates.
    Why is that? I mean, maybe they are not as big a player as 
I have posited. Here, we live, of course, in a region where 
there is a lot of Government work. How is the GSA lease 
regarded? Do GSA leases make up a significant part of the 
market or a part of the market that the market is interested in 
because it is the Federal Government? How does the GSA lease 
stand in the market when somebody goes with such a lease?
    Mr. Rudy. Let me give you a few of my personal observations 
over my career. I was talking about this at breakfast this 
morning.
    Outside of the National Capital region, while the Federal 
Government is clearly an important occupier of space, it pales 
in comparison to many other occupants all over the Country, so 
the private sector----
    Ms. Norton. But you see that the work is done here.
    Mr. Rudy. Understood. But you are asking a question about 
the understanding, I think, of the private sector's perception 
or knowledge of the GSA lease instrument. And when developers 
in other parts of the Country or landlords are interested in 
doing a lease with the Federal Government, this is not 
something they do on a regular basis. Most of the development 
community here in Washington, just to exist here, has done lots 
of business with the Federal Government and are probably more 
expert at it.
    But out in everywhere else it is back to the education 
discussion earlier, educating the private sector on really what 
does it mean to do business with the Federal Government, how do 
you go through a procurement, what are the risks of renewal, 
what are the rules governing how do you comply with the RFP or 
the SFO, and all those things. That level of uncertainty or 
just unknowingness on behalf of private developers leads them 
to price and risk.
    Ms. Norton. This is important to hear from you because the 
Subcommittee had to beat the agency about the head and 
shoulders in order to get some centralized leasing component 
here. I mean, it bothered us to no end that leasing was going 
on in the field with out the centralized component here, 
essentially in charge, if I may say so, in charge; and now, 
apparently, that has been rectified. We will be following that.
    But you can see just how far behind GSA is in measuring up 
to what, let's say, if this were headquarters of a major 
corporation that had to build things around the Country, 
imagine letting those folks go out there and do their leases, 
and they are knowledgeable, without bringing to bear the market 
position of the Federal Government. That is what we are 
contending with and what we are trying to move from.
    But we are contending with it because the GSA has had a lot 
of incentive to do things differently. That is why you hear me 
keep talking about GSA. Perhaps people will see the huge waste, 
if they see that you have many leases to deal with.
    Now, in terms of credit rating and Wall Street recognition 
of the Federal lease, how does the Federal lease stand? Here 
you have something close to the full faith and credit of the 
Federal Government; you know that that is going to be paid. Is 
that how it is regarded by the market? What kind of credit 
rating does the Federal Government have?
    Mr. Rudy. It is about as good as it gets. Again, my comment 
just a moment ago and now was not so much as to the process of 
leasing and how it is done centrally versus distributed, it was 
more a matter of the private sector's understanding of the 
process of doing a lease, their side of it, their perception; 
how complicated is it to do a lease and how complicated and 
nonconforming is the lease itself, which I think is the 
question you are now asking.
    The credit is great, but then you start detracting away 
from the benefits of that credit when the investor starts 
looking at clauses in the lease that gives them concern.
    Ms. Norton. Such as?
    Mr. Rudy. Such as caps on operating expense pass- throughs, 
the inability----
    Ms. Norton. Say that again?
    Mr. Rudy. Limits on the ability to pass through actual 
operating expenses--maintenance and utilities--associated with 
that lease to the Government because of the structure of the 
limitations of those pass-throughs in the lease is one example.
    Ms. Norton. How would you control that if you just had an 
ordinary pass-through? It is the Government, now.
    Mr. Rudy. Well, the private sector has the same concerns, 
by the way, so I don't want to make you----
    Ms. Norton. What did you say?
    Mr. Rudy. The private sector has the same concerns. A 
strong credit corporate tenant is also concerned, oftentimes, 
about whether a landlord runs building amuck, does it run it 
efficiently, and they try to negotiate limitations on those 
pass-throughs. So the private sector is used to those sort of 
negotiations and limits----
    Ms. Norton. So those should be negotiated, you are saying.
    Mr. Rudy. They can be negotiated.
    Ms. Norton. And this, I take it, would give an incentive to 
the owner to come up with perhaps ways to control it that would 
be attractive to the GSA.
    Mr. Rudy. Correct, energy saving, other sort of cost 
savings. So that is one feature of the lease. There are default 
features. Somebody on the panel mentioned earlier about the 
risk associated with potential interruption of services or some 
other sort of failure of a generator or an elevator or piece of 
plumbing.
    Ms. Norton. Yes, that is troublesome. Spell out what would 
happen, what that lease means, that default clause means.
    Mr. Rudy. Well, if a tenant claims default, ultimately 
constructive default, it can terminate the lease as a result. 
That is pretty Draconian.
    Ms. Norton. Now, of course, we know that never happens.
    Mr. Rudy. Well, if it never happens----
    Ms. Norton. But how should the Government--it doesn't. 
These things happen. They are not going to move somebody out of 
the building, probably. I can think of no circumstance. I won't 
say it won't happen, but I would be interested--just a moment. 
Apparently, in the old DOT building there was mold and--they 
moved them out of two or three floors.
    I was trying to come up with whether it had ever happened. 
The only reason I raise it has never happened is that if, in 
the experience of the Federal Government it almost never 
happens, then to continue to put it in like it does, without 
making any modification, at higher cost to the taxpayer sweats 
me. So the question becomes what should the Government use 
instead of something like a blanket default, which, of course, 
they have never had to use.
    Mr. Rudy. Well, the Government definitely needs its 
protection, so I am not suggesting they don't need any of the 
protection----
    Ms. Norton. Yes. So what kind of protection?
    Mr. Rudy. I am only suggesting that in the private sector, 
the triggers and clauses and remedies available to the private 
sector may be up here in terms of the negotiated thresholds; 
whereas, for the Federal Government it is much lower, much 
quicker, much more ability for the Federal Government to claim 
a default, to provide self-help and their own remedies. Which 
means they can offset rent, stop the rental payments, they can 
fix the buildings themselves, repair things, going around what 
might be the third-party management that is responsible for 
doing that, as opposed to going through what I would say is, 
again, a commercially viable private sector negotiated path for 
doing those things. So it is those additional trip wires that 
create additional risk to the investor that they have to 
somehow underwrite, they have to embed in their expected rate 
of return.
    Mr. DiPrinzio. Again, I would add to that. You picked up on 
rating and credit rating for a GSA lease financing, setting 
aside what agencies can do themselves. That is where renewal 
risk and essentiality comes into play from my perspective, what 
I underwriting, a setting aside the term of the lease. When GSA 
is in the firm term period, no one questions the 
creditworthiness of the tenant at that point. What we have at 
the front end is construction risk and what we have at the back 
end typically is renewal risk, and those two components will 
degrade from AAA, which is essentially the Federal Government's 
rating, down to some lower----
    Ms. Norton. Well, now, renewal risk would be there for 
everybody. Nobody can expect that they have the benefit of a 
lease. I don't know why it would be any greater for the Federal 
Government than anybody else. Nor do I know why the front end 
would be any greater.
    Mr. DiPrinzio. Right. I think that is correct. The 
construction risk on the front end is no different. But, 
frankly, I think, with respect to the renewal risk, given what 
we were talking about earlier, about essentiality and the 
importance of a facility to a Federal agency, reducing that 
risk of non-renewal through an education process, an ability to 
allow the investor--and this is what I do when I underwrite 
these transactions, I go in there and I understand what is the 
likelihood of non-renewal. How important is that facility to 
the Federal agency.
    I think, frankly, the Federal Government has a much better 
story to tell in the vast majority of cases with respect to 
renewal, which would ultimately raise the rating and bring down 
the financing cost and ultimately the rental cost.
    Ms. Norton. Indeed, I bet the Federal Government has a 
better record at renewal than private agencies, particularly in 
this region, where there is no place to run, no place to go.
    Is this what you mean, Mr. Chessen, when you speak in your 
testimony about Government leases that add risk to doing 
business? You call them covenants.
    Mr. Chessen. Right. That is exactly right, it is all the 
terms that surround the loan or the lease that a bank has to 
look at to evaluate how to price that loan and what risk they 
assume, and I think it was described very well here. You do 
have the construction at the beginning, which is like any other 
construction project; you have to weigh that and who is doing 
it and how you are financing that, what is the risk of that 
builder defaulting.
    And on the back side I would absolutely agree with you, I 
think the Government is probably better at that renewal rate 
than most companies. But there may be cases where the 
Government wants to abandon a property or they are leasing 
property that is only a small percentage of that overall 
building, and could put that owner in a situation where they 
may want to do something different, such as get another tenant 
and lease in the property, as opposed to the Government.
    So there are factors you have to weigh in terms of what is 
the risk_we think of the property, of course, as being owned 
and fully occupied by the Government, but I am sure there are 
areas where the government only leases a certain portion of 
that building, and that would be considered by the lender in 
terms of the risk of that whole property of non-renewal.
    Mr. Rudy. Mr. Chessen brings up a very interesting point on 
the renewal thing. I also agree with you that the renewal risk 
is inherent in any lease for any occupant, whether it is 
Government or private sector. But it is actually the end of the 
term issues that are also non-market conforming in a Federal 
lease that present some risk, such as the private sector 
developer has much less teeth or ability to move the Federal 
Government tenant out of the space at the end of the expiration 
if the Federal Government tenant wants to hold over, even 
beyond expiration. And that is a problem because they may have 
re-leasing plans or plan to bring in a new tenant to replace 
the income they may in fact be losing. So it is the end of the 
term issues that is one example.
    Another one is the Federal Government has the ability to 
make physical alterations to their improvements, their space, 
through the lease term without necessarily having the 
obligation to restore those improvements to an originally 
approved condition.
    That is not correct?
    Mr. DiPrinzio. No, no, that wreaks havoc on the financing.
    Mr. Rudy. Yes. So, again, those residual risks we are 
talking about go up, not because of renewal risk, necessarily, 
but because of some of the end of the term issues, such as the 
two I mentioned.
    Ms. Norton. Talking about irrational issues in the 
Government, the condemnation and the holdovers, we tried to get 
behind that to find out what it is doing. Here, you raise the 
cost of credit because you don't have enough experienced staff, 
apparently, to renegotiate, as we heard testimony, the renewal 
of the lease, so you put the homeowner--sorry, the building 
owner in an impossible position. You use this authority that 
nobody else would have, only the Federal Government, and it is 
a total outrage.
    As you can see, part of the problem is that nobody has 
looked with fresh eyes at any of this process for a very long 
time, and as we try to do so and are harnessed somewhat by OMB, 
we nevertheless see, particularly from your testimony, ways to 
begin to find our way out of this thicket.
    I want to thank each of you for, really, very, very helpful 
testimony to us as we try to look next term toward what can 
only be called a redesign of the entire system. We want to do 
leasing and construction very differently. We think we will 
have a good case to make about taxpayer savings, and we want to 
use some of the testimony you have given us to try and get an 
entirely different approach based on the model, perhaps, of 
showing what can be done with the group of buildings that will 
go up for the Homeland Security Department.
    So I thank you once again for excellent testimony; it has 
been very useful to us.
    The next witnesses Steven Grigg, Executive Committee past 
President, as well as District of Columbia Building and 
Industry Association; Richard Purtell, Chair and CEO, Building 
Owners and Management Association, or BOMA; and, of course, our 
Commissioner of the Public Building Service, David Winstead.
    We will, of course, begin with Mr. Winstead.

  TESTIMONY OF DAVID WINSTEAD, COMMISSIONER, PUBLIC BUILDINGS 
   SERVICE, U.S. GENERAL SERVICE ADMINISTRATION; RICHARD D. 
 PURTELL, CHAIR AND CHIEF ELECTED OFFICER, BUILDING OWNERS AND 
   MANAGERS ASSOCIATION INTERNATIONAL; AND STEVEN A. GRIGG, 
  PRESIDENT AND CHIEF EXECUTIVE OFFICER, REPUBLIC PROPERTIES 
               CORPORATION, REPRESENTATIVE DCBIA

    Mr. Winstead. Madam Chair, again, I am David Winstead, 
Commissioner of the Public Buildings Service, and I thank you 
for inviting us here again today to discuss the impact of the 
tightening credit market on GSA's capital program. I want to 
recognize that we have had a number of hearings over the last 
three months. We appreciate the attention the Committee is 
giving our leasing program and our construction program, as 
well as trying to determine what the impact of the current 
financial situation is on our business.
    I did want to mention several areas I wanted to touch on. 
Clearly, the former panel--we very much appreciate their 
input--focused obviously on leasing and scoring issues, and the 
authorities that we have, or lack thereof, to do lease 
financing approaches. I did want to focus, first off, on new 
construction and modernization, because through the funding of 
direct appropriations from the Federal Buildings Fund, our new 
construction modernization R&A program is really not directly 
affected by the decreases in the availability of credit 
generally.
    As noted by the former panel, we have seen 70 percent of 
the financing in real estate disappear over the last year. We 
see $235 billion that has been lost in financing for real 
estate and the economy generally. I think that Mr. Rudy's 
comments certainly demonstrated that. So we are continuing to 
see issues on the construction side in terms of escalation of 
cost and subcontractors in terms of what they typically 
require. But, as you know, we do not obtain third-party 
financing, and most of our construction is financed through the 
Federal Buildings Fund, direct appropriations.
    Secondly, on the leasing side, which the prior panel and 
your questions largely dealt with, I do want to say that we are 
noticing some impact of the credit crunch on our leasing 
program. As you know, our leasing program consists of 176 
million square feet of space, of which a third is in the 
National Capital Region, your district, or the Metropolitan 
Washington area. We have asked, as a result of this hearing, 
each of our regional offices whether GSA offerors were 
experiencing difficulty obtaining financing for GSA leases.
    We had a prospectus hearing earlier last month on this, and 
we have determined that most costly leasing terms, of course, 
generally result in higher rates for the Government. But what 
we are finding is that we are not experiencing a lot of lack of 
competition on our major prospectus leases. Therefore, in a 
general way, when credit becomes more expensive, it obviously 
could be reflected in increasing rent downturn and, also, on 
the financing side, 75 percent of capital financing and real 
estate has disappeared over the last year. The terms are 
getting more constricted and, obviously, certain developers 
aren't going to find the financing to proceed and deliver new 
office space on time.
    In a few instances, we have seen successful GSA offerors 
who, because of the issues in the credit markets that the 
former panel addressed, have not been able to proceed with 
lease construct projects. At our last hearing we dealt a lot 
with the FBI lease program, the SSA lease program. Offerors 
have attributed some of these issues to tighter credit markets. 
For example, in 2005, GSA initiated a lease construction 
project for the FBI for up to 266,000 square feet and 271 
parking spaces in Detroit, Michigan.
    In May of 2006, we finalized negotiations for a no-cost 
assignment of 10 acres on a two-phased, best value procurement 
for that space. We awarded the lease, actually, of that 
development in February of 2007. The developer indicated that, 
as a result of the tight credit market and post-award addition 
of modifications to the projects, they couldn't secure the 
financing as they had anticipated, and we actually rescinded 
that contract in February of this year and are out now for 
rebidding it.
    So while I testify here today, it is not as if we are not 
immune from impact; there are two or three cases which I would 
be happy to supply this Committee full information on where it 
has created problems.
    Secondly, the former panel talked a lot about--a different 
term was used, but persuading and our utilization of credit 
tenant leases, or what we call CTL leases, and we have 
proceeded on that. The PTO project, the DOT project in the 
District that you know well, were under credit tenant leases, 
and it does allow the developer to gain better leasing terms 
for more effective financing availability. The CTL has been 
used with varying degrees of success in several GSA regions. We 
did have a GAO report that alluded to the fact that we can get, 
and are getting, better leasing terms under some of these CTL 
leases.
    I will tell you that GSA has, in response to those two 
leases here in the region that you are probably most familiar 
with, modified general clauses in the CTL to enable better 
lease financing for major transactions. Under the CTL, 
successful offerors may be able to obtain better and higher 
loan amounts at lower interest rates under the CTL.
    Once the lease space is delivered according to the lease 
requirement, the Government, GSA, has been able to compromise 
on some termination and setoff rights against the debt service 
portion of the rental payment in order to allow an 
uninterrupted rent flow to the lessor's debt. So the Government 
retains its rights to enforce the lease service obligation in 
any regard.
    In order to ensure that we are obtaining the value of the 
lease modification, we have encouraged our regions to request 
pricing on both standard lease requirements and CTL so that we 
can be seeing savings, and, obviously, the current credit 
market requires this. At the same time, Madam Chair, I will 
tell you 80 percent of our lease actions nationwide are under 
20,000 square feet, and what we are talking about is the real 
value or the large prospectus leases that we are looking at CTL 
approaches for. Chip Morris, who heads up our leasing programs, 
is behind me and could certainly provide additional information 
to the Committee on those specific cases.
    A third area that we are seeing some impact, which I know 
has been the subject of hearings here before, and that is on 
our green building program. We are relying on energy savings 
performance contracts to accomplish renovations of building 
systems in our some 1500 owned inventory, of which 600 are 30 
and 40 years old. Through these ESPCs, we conduct a 
comprehensive energy audit, identify improvements that will 
save energy to the facility, and arrange financing to pay for 
them.
    The energy service company guarantees that the improvements 
will generate savings sufficient to pay for the project and we 
estimate that our potential use of these ESPC and utility 
energy service contracts in the current fiscal year, fiscal 
year 2009, will be approximately $24 million. We are seeing 
that ESPC financing is not traditional financing, it is based 
by guaranteed energy savings resulting from improvement, and, 
therefore, the financing markets are impacting the ESPC 
contracts where we see rates now 6 to about 10 percent.
    A fourth area that we do see some potential impact, but, 
fortunately, we haven't seen any here in the National Capital 
Region, is on retail leasing. Obviously, the economy is having 
real recession issues, purchasing and information is a bit more 
than it was a year ago, and we do, as you know, have mixed use 
and retail tenancy. The Ronald Reagan Building, the 
International Trade Center, the ATF Headquarters building has 
8,000 square feet of retail and restaurant space and the ATF. 
Banks are tightening standards for loans to small business, and 
a lot of the retail food service vendors that we have.
    But so far, fortunately, these more restrictive credit 
conditions that the former panel presented to the Committee are 
really not having an adverse impact on our retail tenants in 
the Reagan or the ATF situation. In fact, the Ronald Reagan 
Building is fully leased at 100 percent of retail space; the 
ATF Building, as you know well in the NoMa District, has four 
retail tenants that are in the process of moving in. We have 
had some unfortunate delays as a result of getting gas service 
to the facility, but we do anticipate that by the end of August 
[subsequently edited to ``January'' - ed.] those retail tenants 
will be in place and providing food service and other amenities 
to the ATF employees.
    So in conclusion, Madam Chair, the tightening of the credit 
market does potentially affect GSA in three areas: obviously 
leasing, energy service performance contracts, and retail 
leasing, as well. So far, none of these areas we have seen any 
significant impact negatively on GSA and its leasing actions. 
Credit is available to our lessors at favorable rates with the 
Government tenancy, the AAA rating that the panel member 
earlier alluded to.
    The Federal Government generally may experience an 
increased reliance on larger ESPC contracts that might have 
higher rates, but although some small businesses may in fact, 
in our retail functions in some of our mixed space in our 
buildings, may find tighter credit, we do not see that in the 
current situation with those buildings I mentioned in 
Washington.
    Madam Chair, the last thing I would mention before turning 
it on to the other panelists is that, as Mr. Rudy mentioned, in 
the Jones Lang LaSalle testimony earlier, being a major player 
in the market, we do see the credit tenant leases getting very 
competitive offers to date. We are seeing, fortunately, in the 
slow down that there is less demand, for example, in Lower 
Manhattan because of the Bear Stearns collapse. There is a lot 
of space on the market in Lower Manhattan now and a lot better 
rates, and we are seeing 600,000 square feet available in Lower 
Manhattan for Federal tenants. We are actually getting better 
deals as a result of some of the market turning down.
    But I would conclude, lastly, that we appreciate the 
Committee's inquiry into these leasing issues, the former 
discussion on scoring I dealt with on June the 10th in great 
detail and St. Elizabeths as an example. Thank you again for 
this opportunity.
    Ms. Norton. Thank you very much.
    Mr. Purtell?
    Mr. Purtell. Thank you. Good morning, Chairman Norton and 
Members of the Subcommittee. Thank you for holding this 
important hearing on the impact the current credit crunch is 
having on the leasing and construction of Federal office 
buildings. I am Dick Purtell, Portfolio Manager for Grubb and 
Ellis Management Services, and I am here today in my role as 
Chair and Chief Elected Officer of the Building Owners and 
Managers Association International.
    With the rise in delinquencies and defaults on subprime 
mortgages over the past couple of years, it is only inevitable 
that this financial crisis would ultimately have some impact on 
commercial real estate. My testimony today will touch on how 
the current economic circumstance is affecting the renovation 
of buildings, build-to-suit leases, attracting and retaining 
tenants, as well as rents and occupancy rates.
    In general, much of the economic dynamics of the commercial 
real estate sector can vary due to local market forces. 
However, one thing our member all across the Country 
acknowledge: it is becoming increasingly difficult to acquire 
capital for new projects and renovations for public buildings, 
as well as those intended for private sector use. Lenders are 
making it more and more expensive for even the most 
economically sound companies to borrow money.
    And for those whose balance sheets aren't as healthy, it is 
nearly impossible. Consequently, this has negatively affected 
building owners wishing to refinance, sell existing buildings, 
or plan for future renovations in which the financing for the 
project has not yet been secured. It could also become a favor 
in a building owner's ability to attract and retain tenants by 
limiting tenant improvement packages offered in the future.
    An example of where access to capital has made it difficult 
to liquidate properties is in San Diego, where one BOMA member, 
who has the responsibility for a municipal government's 
portfolio, has had a number of buildings on the market for over 
a year at what are considered bargain basement prices. But due 
to the increased borrowing restraints and cost of funds, he has 
had trouble finding buyers without having to reduce the price 
even further. In Philadelphia, we have received reports that 
building owners are currently moving forward with renovations 
and improvements that were more than likely already in the 
pipeline; however, plans for renovations in 2009 do not appear 
to be in the budgets of most.
    The increased difficulty to obtain capital for the purposes 
of developing commercial buildings has also negatively impacted 
build-to-suit leases. We are hearing that very few build-to-
suit leases are being executed at this time. Stricter 
underwriting requirements, skyrocketing construction costs, 
combined with the increasing vacancy rate, decreasing effective 
rent and economic slowdown, has eliminated any new 
construction. Currently, those build-to-suit leases that are in 
the works were either begun some time ago or are being financed 
largely through private equity.
    From the Federal Government's perspective, in areas where 
there are owners or developers with larger existing buildings 
or buildings under construction that are looking at the 
Government as prospective tenants, current conditions may 
actually help the Government, as their demand never goes down.
    However, it is adversely affecting large build-to-suits, 
even those for the Federal Government, due to the uncertainty 
of financing, capitalization rates, and buyers. Since, in these 
times, the Government is an even more important player in the 
building and construction industry than it is normally due to 
its demand for space continuing at a more constant rate than 
private industry, it becomes even more critical for the 
Government to eliminate barriers and constraints to the 
Government leasing space, especially in build-to-suits that 
were discussed in previous BOMA testimony before this 
Committee.
    The ability of building owners to attract and retain 
tenants, as well as stabilize rents and occupancy rates, are 
issues that appear to be more sensitive to the local area's 
supply and demand. Some reports from members have indicated 
that rents continue to be on the rise, but not quite as rapidly 
as in recent years, as is the case in the District.
    In other markets, the economic slowdown has hurt overall 
occupancy levels as tenants are struggling to survive. Owners 
are still trying to maintain the same rental rates, but are now 
offering significant tenant and broker incentives. In these 
parts of the Country, it is definitely a tenant's market. In 
buildings with weak occupancy, owners are having even more 
trouble making mortgage payments.
    In some markets, owners are taking a wait and see approach 
to see if the slowing economy leads to tenants shedding 
unwanted space. Due to the nature of the industry, the possible 
negative effects in certain parts of the Country may not be 
felt for several years.
    If there is an upside to this, it is the amount of supply 
coming online over the next several years will be significantly 
less, which will have a positive impact on the market overall 
from a landlord's perspective.
    We thank the Subcommittee for holding this important 
hearing and hope this testimony has provided some insight on 
the effect of the credit crunch has had on the commercial real 
estate industry. I would welcome any questions you may have.
    Ms. Norton. Thank you, Mr. Purtell.
    Mr. Grigg?
    Mr. Grigg. Good morning, Chairman Norton. It is good to see 
you again, Ms. Britta and the rest of the staff. I am Steve 
Grigg, President of Republic Properties Corporation. I am here 
testifying on behalf of the D.C. Building Industry Association, 
where, as you know, I am past President, one of them, and 
member of the Executive Committee.
    As it has been clear to the Committee and to everyone else, 
the credit crunch is having a direct and broad impact on 
development, leasing, and management of commercial office space 
nationwide. The District of Columbia and the Nation's Capital 
Region are neither distinct nor immune from those problems. The 
collapse of conventional debt financing for development 
projects and the permanent financing market are working in 
tandem to make new development and major renovations of 
existing buildings much more difficult and expensive.
    With the collapse of securitized debt markets and with the 
values of existing loan portfolios in doubt, lenders have 
become reluctant to assume any risk, underwriting standards 
have been tightened, and loan-to-value ratios have shrunk. The 
result is higher borrowing costs and higher levels of required 
equity participation, if capital funding is available at all. 
Meanwhile, equity investors are repricing their conceivable 
participation to reflect higher perceived risk.
    The Federal Government is a major user of office space and 
is not immune from the impact of this credit crunch. It is 
probable that the Government has not seen the impact of the 
credit situation thus far. As existing space is being absorbed 
up, however, that will become an inevitable change. Larger 
procurements with prospectus level rents that were established 
some time ago are going to be seeing less competition now and 
going forward.
    The Government is a special class of user of commercial 
office space; hence, the Government leases are essentially flat 
for various terms. Space leased by the Government used to be 
advantaged by steady, prompt payment of rent. The margins 
associated with rental income have declined as a result of 
problems in timing and the amount of reimbursement in increases 
and real estate pass-throughs and operating expenses, which are 
indexed to CPI increases. Both the business reality and 
underwriting standards have increasingly noted those changes in 
dealing with the Federal Government in leases and occupancies. 
Either the system has to change or face rents will dramatically 
increase to reflect these conditions.
    The Government's prospectus level rents and expectations of 
various tenant agencies will have to be adjusted upward in the 
future. While we believe that the availability of financing 
will eventually be eased, the effective increased costs will 
become more predominant over the coming years.
    Thank you for your attention. I am available to answer any 
questions.
    Ms. Norton. Thank you, Mr. Grigg.
    We put the three of you together. Normally, the Government 
witness is separate. We mean no breach of protocol, but the 
fact is that Mr. Winstead's job is to work with people around 
his table, for the benefit of the taxpayer, to be sure. Thus, 
the exchange among you would be very valuable to us. For 
example, Mr. Winstead spoke of getting better deals. He spoke 
of the Government's AAA rating. And Mr. Winstead knows that my 
concern is whether or not we are taking full advantage of that 
rating.
    But you have testified we are getting better deals. You 
pointed to the vacancy rate in New York. I would like to hear 
you elaborate on that and give me an example of what a better 
deal is and let me ask you about the vacancy rate in the 
National Capital Region. That is a two-part question. You hear 
Mr. Purtell say it is a tenant's market. You hear it from the--
excuse me, Mr. Purtell--horse's mouth.
    Mr. Winstead. Madam Chair, I think, obviously, the market, 
as alluded to, in terms of the crunch and Mr. Grigg talked 
about the impact of the financing tightening lending on the 
delivery of new space, and that will impact. I think it is 
going to be a couple years before we really see that.
    Ms. Norton. So it is very important to note for the record, 
because I think Mr. Winstead's testimony was like the early 
reports we had from developers who were already in the market, 
from business owners. They didn't see much different. The 
Committee sits here trying to think ahead, trying to think as I 
am, for example, about Saint Elizabeths. Hey, there are some 
people in some buildings now, there are some leases that 
neither party, frankly, can do much about, but the Federal 
Government is, for example--leave aside leasing new space all 
the time--about to build the largest compound, at least for 
GSA, in its history. So even when it comes to leasing, while I 
accept Mr. Winstead's testimony, I am sobered by the testimony 
of his brethren beside him.
    Who am I quoting from here? Become increasingly difficult 
to acquire capital for new projects and renovations for public 
buildings, as well as those intended. This may be you, Mr. 
Winstead.
    Mr. Winstead. Madam Chair, your comment----
    Ms. Norton. Wait a minute. Both Mr. Grigg and Mr. Purtell 
have spoken really to the major concern we have. Mr. Winstead, 
our own work verifies what you say about present conditions. 
You have been dealing with the top of the mark; you always 
will. But the testimony here from those who have those leases, 
have those contracts is that those same very creditworthy 
owners are finding it difficult today--if they were today, not 
the process that we deal with--what does it take, 10 years, 8 
years, 5 years, whatever it is, to get going -- but today--that 
there would be increased costs to borrowing.
    There would be, in other words, a totally different 
situation from what it is right now. And what I am trying to 
learn is, for example, from your own testimony, that you are 
already beginning to take advantage of the tenant's market, 
what is the difference between what you have been doing before 
and what you are doing--let's take your own example--in New 
York now.
    Mr. Winstead. Madam Chair, you have raised several 
questions and I will try to answer them. First one was about 
our vacancy. You know, this Committee well knows, improving our 
leases prospectuses, that we are managing our leased portfolio 
of 176 million square feet, a third of which is in the National 
Capital Region, very tightly because we control those terms and 
it is about a 1.5 percent vacancy on our leased inventory 
currently nationwide. So that is a very tight margin.
    Secondly, your question about St. Elizabeths and the market 
and how it might change. There is no question that if in fact 
there is attrition in----
    Ms. Norton. I am sorry, I was trying to understand. What 
vacancy are you talking about?
    Mr. Winstead. I am talking about on our leased inventory. 
If you look at----
    Ms. Norton. Your own leases?
    Mr. Winstead. All leases, 176 million square feet 
nationwide, in terms of any vacancies. We keep that very tight 
because we are obviously leasing the space about 1 percent. 
Nationwide, in terms of Federal ownership, it is higher, 
unfortunately, because we have had some attrition, 
consolidation of IRS, FBI moving out of some, as you well know, 
center city buildings in Federal field offices, new offices.
    Your second question dealt with St. Elizabeths and its 
impact on the market, and there is no question that as 
financing of new projects and the----
    Ms. Norton. Wait a minute. I also asked you what were you 
doing--I am sorry, you said you were able to get better deals. 
I am not sure I heard the answer to that question. Because I 
wanted to know what is a better deal.
    Mr. Winstead. Well, I don't think there is any--okay, in 
terms of better deal, you know, whether--you want specific 
rental rates in D.C. or----
    Ms. Norton. You acknowledged----
    Mr. Winstead. There is no question the next couple of 
years, and currently, with the impact of the credit crunch, we 
are going to see vacancies creeping upwards; we are going to 
see effective rents going downwards; we are going to see 
specific markets in urban areas like New York and Lower 
Manhattan, where we have had huge vacancies created because of 
Bear Stearns' failing and consolidation, we are going to see 
better deals.
    Ms. Norton. So what would the GSA do? Not what is it doing, 
but what is it that the GSA would do differently, operating in 
that market today, with vacancy rates up? How would you operate 
any differently from how you have been operating before? What 
kinds of different deals might you be able to forge?
    Mr. Winstead. Well, I think, again, it is largely, 
unfortunately, the lack of authority for enhanced use leasing 
and some of these other authorities DOD has and VA----
    Ms. Norton. So you think enhanced use leasing would help?
    Mr. Winstead. Enhanced use leasing has been shown, Madam 
Chair--I supplied this Committee six months ago our 10 most 
costly leases in which we showed the relative cost of lease 
construct versus direct Federal construction versus enhanced 
use leasing, and enhanced use leasing is almost as cost-
effective as Federal construction in building out those housing 
demands. So you have good evidence of our analysis of the cost 
of options.
    Ms. Norton. So you would need----
    Mr. Winstead. Authority.
    Ms. Norton. You would need authority, statutory authority.
    Mr. Winstead. We also would need OMB's approval in terms of 
prospectus, and from both the June 6th hearing, the July 11th 
hearing and this hearing, it is clear to me that this Committee 
would love to see more use of that kind of authority that DOD 
and VA----
    Ms. Norton. As of now--and you heard me say I am going to 
try to get more authority and you heard me say I am trying to 
find out as much about the authority that other agencies have 
that will help me convince the Congress that we should have the 
same authority, but being in the position you are now, seeing 
with some leases and some agencies are up, and an agency--I am 
trying to give you a direct hypothetical-- an agency looking 
for space--and you have heard Mr. Purtell call it a tenant's 
market--how, given the limitations on you now, would you go 
about seeking space in a tenant's market?
    Mr. Winstead. Madam Chair, I think we are leveraged very 
well with our partners in the private sector to take advantage 
of the best deals, and if they are going down in the near term 
because of this unfortunate credit crunch, then I think that 
through the national brokerage contract that you have asked a 
lot of questions about, we have supplied a lot of information, 
we are leveraging the strength of the Federal purchasing power 
and getting below market lease rates around the Country.
    Ms. Norton. Would you give us examples of getting below 
market lease rates?
    Mr. Winstead. Well, I would certainly suggest that recent 
acquisitions in NoMa--and I know some are being contested--have 
had very competitive rates because availability and new space 
coming online in NoMa.
    Ms. Norton. So you believe those were below market rates?
    Mr. Winstead. I think they were very effective rates. I 
mean, they responded----
    Ms. Norton. You may be right on NoMa. NoMa, of course, 
looked at the market and said what do our rates have to be to 
get people to move here, and you may be right there. If it were 
a part of the city, for example, midtown, would you be able to 
negotiate similar rates?
    Mr. Winstead. Well, Madam Chair, I am not a financial 
expert, I am a lawyer by background, but I will tell you that 
if some of the financing arrangements on these major landmark 
buildings, private sector buildings in downtown have to be 
refinanced with the impact of the credit crunch, and new 
financing terms that might be imposed on these building owners, 
we might see rental rates, because of that, them being forced, 
you know, for them to go up.
    So we might see that under current credit and financing 
rates for these buildings they structure the deal with us based 
on a rent that we committed in contract to pay. If they are 
having to refinance these buildings at a time in which cap 
rates are going up and at a time in which leasing terms are 
more restrictive, they might find themselves less competitive 
for our leases.
    Ms. Norton. Let me take an analogy from the real crisis in 
the housing market. The marketplace knows how to respond when 
it is down, and if you take the worst place in the marketplace, 
they are all but giving away the house. But they don't want to 
do that, so you have heard fantastic things-- obviously, real 
estate isn't in the same position, but it makes my point--if 
you buy this house, we will give you gas for a year, for 
example, because they see that one of the major problems with 
where homes are located today is something we really can't do 
anything about, and that is gas prices are going up with 
nothing except pricing, frankly, to bring it down.
    Okay, we speak of concession packages. I think you spoke 
about them in your last testimony. Give me an example of a 
concession package that might be asked for by the Federal 
Government if it wanted to acquire space in Downtown 
Washington.
    Mr. Winstead. Well, obviously, we would be looking for the 
factors under our credit lease structure deal with right of 
assignment, looking at tenant fit-out, looking at casualty and 
termination rights, looking at rental offsets for maintenance 
and services.
    I mentioned earlier in my testimony----
    Ms. Norton. So some changes in these clauses.
    Mr. Winstead. That is correct. I mentioned earlier that 
under the credit tenant lease that we are applying to large 
prospectus leases, which you know a lot about and we have seen 
a lot come before this Committee--the bigger deals, not the 80 
percent under 20,000 square feet, the large prospectus leases--
we are, under this CTL, acknowledging that we do need to attend 
and are relaxing and modifying the casualty and termination 
rights under that kind of CTL lease approach, also the rental 
offset rights for maintenance and service. So we are 
acknowledging and are negotiating and applying----
    Ms. Norton. And those you are using with CTL.
    Mr. Winstead. That is correct.
    Ms. Norton. Is it the GSA now committed to using CTL 
wherever it can?
    Mr. Winstead. Madam Chair, on the large prospectus leases 
we are. The last two were obviously DOT and PTO and others, but 
we are looking at this and talking with the industry. Actually, 
yesterday--this came up in a lease construct workshop that I 
mentioned that we had in early June. Yesterday, our team was 
sitting down with financial experts as a result of the current 
market conditions and looking at the credit tenant lease and 
looking at how we can modify those clauses without damage to 
the Federal Government and our obligation, but to get better 
deals, to allow some flexibility in those two areas where a 
potential offeror or lessor could in fact get better financing 
terms and thus get better rates for us, as well as reflect the 
issues that Mr. Grigg mentioned that are in the market.
    Ms. Norton. This Subcommittee does not intend to press the 
GSA to put the Government at any substantial risk. We are very 
open to hearing why the GSA doesn't leverage some of these--it 
has got them now. We know industry hates it. Why it doesn't 
leverage that to at least get a better price by making 
modifications where there may be no history of needing, for 
example, clauses as strict as some of those. So risk might be 
said to be rather insubstantial. We don't want to ever put the 
Government in the position where anybody takes its thinking of 
risk, but the way in which--well, let me ask Mr. Grigg and Mr. 
Purtell.
    Surely there are private sector businesses whose business 
is of a kind that they need certain kinds of protections when 
they move into a building, and they have the same financial 
pressures that we are speaking about in this hearing. What I am 
really interested in is how somebody who has--and I recognize 
the Government would be at the highest level--has to, let's 
say, lease a building that may be outside of the norms of what 
you might expect in particular clauses to accommodate this 
particular business and its lease. I mean, you might truly have 
such in this region, but I am talking about private businesses 
now.
    I am trying to get some idea of how the business, let's 
say, would negotiate in order to offset its cost without 
substantial increase in risk where it knows it is almost using 
boilerplate language--because that is what the Government is 
doing--for many of these clauses, how some kind of 
accommodation would be reached between the business, which 
knows it needs something somewhat different from the average 
tenant, and the owner.
    What kinds of things would they feel they could negotiate 
and how would that be structured? What kinds of exchanges of 
win-wins, whatever you like to call it, do you think might be 
structured in that kind of situation, where you really do need 
something extra but you really don't need the kind of standard 
clauses that they could get out of a book and, for that matter, 
GSA gets out of its play book?
    Mr. Grigg?
    Mr. Grigg. Well, I think that the simple answer to that 
question is if you can make Government leases more consistent 
with the private sector, then you would gain some advantages. 
There are examples that deal with the reimbursement for tax 
increases, which are essentially, by lease, are phased many, 
many months beyond what a private tenant would have.
    Ms. Norton. Federal tax increases?
    Mr. Grigg. No, real estate tax increases. I didn't mean 
income tax. Essentially what that does is it requires the 
landlord to carry those payments as a balance over an extended 
period of time. The increases for Consumer Price Index have 
recently not been competitive. The increases in power and in 
wages haven't matched the published price indexes for years. 
There is some question as to what the Consumer Price Index 
means in general and who manipulates it, and that is beyond 
maybe the discussions today, but, from a cost standpoint, that 
represents essentially a phantom loss that one has to absorb in 
a way that you wouldn't in most private leases.
    Ms. Norton. And you think that negotiating with these items 
you have mentioned would reduce cost to the Government 
ultimately? See, the question is the Government is going to 
look and say, well, this is going to increase. It is going to 
do a straight line look at it.
    Mr. Grigg. Well, you have to look at it not in an 
individual moment of the next 12 months or two years, but you 
have to look over a long-term basis.
    Ms. Norton. Well, over, for example, the lease. You think 
over the lease itself, over the time of the lease itself. What 
are they, 10 year leases, usually? Ten or 15 year leases 
themselves. You think a case can be made for that?
    Mr. Grigg. I would think the average Government lease is 
actually somewhere about five to seven years, but they could--
--
    Ms. Norton. Mr. Winstead, are they really only five to 
seven?
    Mr. Winstead. Madam Chair, most of these smaller leases 
that I mentioned, 80 percent of the portfolio are shorter term 
leases, they are smaller, more flexible uses, under 20,000 
square feet. So I think Mr. Grigg is correct.
    Mr. Purtell. I can speak, maybe, to that. I am from 
Cincinnati, Ohio and I have recent experience in this area with 
the Department of Energy on a lease of about initially 40,000 
feet, and it was a five-year lease--actually, a ten- year lease 
with a five-year cancellation, which causes some issues.
    Mr. Norton. Is that good or bad for the private sector?
    Mr. Purtell. Probably a negative, if we have to be prepared 
for that lease to be cancelled after five years. But I would 
echo some of the things that have been said regarding 
flexibility and previous testimony----
    Ms. Norton. Excuse me.
    Mr. Winstead, why are the leases five to seven years, so I 
can understand?
    Mr. Winstead. Well, again, they are based on our leased 
tiering approach and agencies' needs, and basically the term of 
the housing giving their tenancy and also getting the best deal 
on the market for the Government. I mean, this may not be the 
best deal for the offeror, but for the Government. That is what 
we negotiate for.
    Ms. Norton. So a long-term lease would not be the best?
    Mr. Winstead. Well, the DOT lease, which is, as I said, a 
CTL lease, a credit tenant lease, we did get a longer 20- year 
term, and you are well aware of the size, 1.2 million square 
feet.
    Ms. Norton. But you think that is appropriate only for 
larger leases?
    Mr. Winstead. Well, what in fact we do see is that the 
larger leases, the longer leases than the shorter leases, more 
flexibility under lease tiering approach that we are doing. We 
are looking to agency changes. We are having consolidation of 
the IRS. The Social Security Administration has wanted smaller, 
more rural offices because the demographics of retirees are 
changing, so they are going to where the retirees are. It is a 
constant flow.
    And what I did mention in the June hearing is like we have 
on the portfolio side, with portfolio restructuring and using 
section 412 authority to access under--we are now applying the 
same sort of lease tiering approach so that we can predict when 
these leases are expiring, when we need to have notice, clear 
the housing plan with the agency and get back in the market to 
test the best deal, and that is really why those lease terms 
are structured to be short or long.
    Ms. Norton. I am sorry, I didn't want to interrupt you, Mr. 
Purtell, I was trying to understand.
    Mr. Purtell. That is all right. One thing we did in this 
lease, which is a fairly recent lease, we did take out the 
property tax issue, and that is a separate issue with this 
lease now, in that we have direct pass-through on property 
taxes. We still do not have----
    Ms. Norton. Was this a lease with the Government?
    Mr. Purtell. Yes, it was, it is a GSA lease, and worked 
with the Chicago office on this document.
    Ms. Norton. So you sat and simply negotiated that.
    Mr. Purtell. Yes. Yes. That was part of the negotiation, to 
have the direct pass-through on property taxes, because it is 
an uncontrollable expense which typically, with all the other 
leases, is the way it works.
    But we still have issues, and I think to be more 
competitive, from your perspective, if there is more 
flexibility there--because when bidders are bidding on leases, 
they are protecting themselves by covering these items that 
they have to allow for certain increases. For example, one of 
the biggest ones right now is utilities. To have to cover 
utilities and have that built in to the lease for a 10- year 
period is a real challenge for a landlord.
    Ms. Norton. Yes, Mr. Grigg.
    Mr. Grigg. I think in answer to an earlier question that 
you asked Mr. Winstead, how would you change the pattern, I 
think that from a portfolio standpoint, in an environment where 
there is a great vacancy that is available in a marketplace, 
the answer is that GSA should be leasing more rather than less, 
instead of self-building. And when there isn't much vacancy in 
the marketplace and it is essentially having to compete 
increasingly with that, it should use its buying power by 
building more buildings which----
    Ms. Norton. What do you mean, self-building? They don't 
build much, Mr. Grigg. They build to suit.
    Mr. Grigg. Right.
    Ms. Norton. So they are leasing most of the time. Now, they 
build to suit on these cross border stations. That is the FBI, 
of course. Their FBI stations are going to be built from the 
ground up, of course.
    Mr. Grigg. Well, you were describing the Homeland Security 
headquarters or cluster at Saint Elizabeths.
    Ms. Norton. But how could that--I mean, they own the land 
there, and that is the only reason it is being built on the 
West Campus of Saint Elizabeths, is that finally we own the 
land, we can build on our own land. And guess what? We act as 
if we didn't, because we are building in the same way we would 
in Downtown Washington. So I am not sure that Homeland Security 
provides us with an opportunity, since we don't have to 
purchase the land, at least, in order to build there.
    Mr. Grigg. Well----
    Ms. Norton. So if that is what you think should happen, I 
think it is happening and, thus, I am far more interested in 
the leasing market than I am in the construction market, 
because I don't see the Government coming up--particularly with 
the way in which we pay for construction--for a courthouse. If 
we are going to build a million square foot courthouse complex, 
which is usually a courthouse and an office building with it, 
we have to get the appropriation up front, and there is no 
capital budget here. If that sounds stupid, it is.
    But that means that forces the Government into the leasing 
market and, therefore, I am looking for savings, for 
partnerships with the leasing market to save each money that is 
being spent because GSA makes it and, therefore, the taxpayers 
get left holding the bag. This is the big leasing territory for 
the Federal Government.
    Mr. Grigg. Well, certainly, the National Capital Region is 
that and Washington, D.C. But I think then I go back to my 
previous response, and that is to the extent the Government can 
make its performance more like the private sector, it will 
probably be able to negotiate the best economic terms on a 
long-term basis.
    That is not to say in specific instances that it can't 
drive a harder bargain in the short-run, but the long-term 
benefits to the Government would be better served by modifying 
its standard practices to be more consistent, and those involve 
payment approvals, timing of reimbursements, term provisions, 
might include escalation of costs over a period of time instead 
of demanding flat leases, and the like.
    Ms. Norton. Oh, well, this is an important point. We can't 
depend on, assuming we could get a better deal in this market, 
who would want this market.
    So we have to assume that this is, I think, something more 
than cyclical, but we have to assume that it has real cyclical 
aspects to it and, if it does, that it is going to get better 
and it always does get better. If so, then we are left with the 
same procedures that we had before, and then we are robbed of 
whatever leverage we thought we had during a time of downturn.
    Mr. Purtell. I would comment that the full, as I said in my 
testimony, the full impact may not be felt for a couple years, 
and I think the timing of this hearing and what you are doing 
has well positioned GSA to prepare for the opportunities I 
think that are out there for any expiring leases or any new 
lease opportunities.
    Ms. Norton. Mr. Winstead, let me ask you, how are you 
preparing for that? We have many leases expiring. Indeed, you 
have leases that you are sitting on or using the condemnation 
notion or holdover notion.
    Mr. Winstead. Madam Chair, I think continue both with our 
existing landlords and successive offerors to look ahead to 
both space requirements and when those lease expirations are 
occurring.
    I did state on the June 6th hearing that I was very 
concerned. I do not see a national trend in some of the 
holdover issues we discussed.
    I know Mr. Grigg commented about rent payment, and we are 
committed to paying rent on time, and we are committed to 
paying our construction bills on time. I did mention at great 
length, I think in June, what we are doing to trying to ensure 
that.
    Ms. Norton. Are you saying, Mr. Purtell, holdovers, Federal 
holdovers are condemnation use by GSA?
    Mr. Purtell. I, personally, haven't witnessed that.
    Ms. Norton. Mr. Grigg, do you know of any?
    Mr. Grigg. Yes.
    Ms. Norton. In this region, for example?
    Mr. Grigg. Yes.
    Ms. Norton. What does a building owner do when these 
procedures are used?
    Mr. Grigg. Vote every couple years.
    Ms. Norton. Does what?
    Mr. Grigg. Votes every couple years. There isn't a lot that 
the building owner and the government----
    Ms. Norton. You can't vote the GSA in or out if you notice 
that, and my great frustration is that I see no difference 
between Republican and Democratic administrations. You need a 
sea change in this agency.
    Mr. Grigg. Although I have been guilty on commenting on GSA 
at various times, I don't think this is really a product of 
GSA's actions or inactions of and by themselves. They are 
providing services to tenant agencies. They have budget issues 
associated with the annual budgets. It is a big complex system 
that we all operate in.
    But holdovers are major features, and the consequences of 
those holdovers or passive condemnations, whatever you want to 
call them, and the imposing of terms on landlords, it is a 
tension that impacts landlords and others in the business 
market that could be avoided.
    Ms. Norton. Let me ask you this, what effect does that have 
on costs and on competition? If you know that holdovers occur, 
does that get built into the cost of doing business with the 
government?
    Mr. Grigg. It has an impact on the whole business plan 
depending on the individual buildings.
    Ms. Norton. Yes, that is what I mean.
    Mr. Grigg. It has impacts on the marketplace. You know you 
have the benefit of government occupancy as any other benefit 
of having occupants.
    It is the only situation where a tenant gets an opportunity 
to stay where they are and pay an indeterminate amount of rent 
for an indeterminate amount of time with really no mechanism 
that is particularly palatable except going to the court of 
claims or whatever to kind of seek relief, and one doesn't get 
reimbursed for that or relief as opposed to private lease.
    If a tenant holds over, the tenant is going to pay the 
cost, all the cost of that action including the cost of being 
made whole through the courts.
    I am not suggesting here we try and restructure the whole 
relationship between the government as a tenant and the 
landlords in general, but as one would move that bar closer to 
a businesslike setting, the government will get long-term 
benefits.
    It is necessary that the government be able to operate, and 
it has superior powers because of the nature of it being a 
government. But to the extent you can remove those and balance 
things out, the system will work better, more equitably, and 
eventually the government will get the benefit of the bargain.
    Ms. Norton. Let me ask all three of you this question. I am 
still enamored from my days as a full-time professional lawyer 
to hypotheticals to make me understand things. That is how 
people understand law school. You give them a real life 
example. So you have seen what my ever present real life 
example is. It is Saint Elizabeths.
    Mr. Winstead's testimony says, and I think he is right, 
that in general the GSA has not felt the impacts now, as of 
when we speak, and he submits some evidence to that effect.
    Then he says, however, one thing--is this him? No, sorry. 
This was Mr. Purtell's testimony.
    I am reading from page two, although I must say Mr. 
Winstead agrees with you about the general effect now. But you 
said that it was becoming increasingly difficult to acquire 
capital for new projects and renovations for public buildings. 
That is your testimony.
    Now let's assume, obviously, the Federal Government is 
committed to a new headquarters for the Homeland Security 
Department. Obviously, none of that is happening now. They have 
to clean up, and you know how long these things take.
    I am not now assuming CTL or advanced. I am just assuming 
that it will be built in the ordinary way. How else can I 
proceed because we have an appropriation coming down, we hope? 
It has been in the President's budget for the last three years 
to build the thing.
    So if you were to look up the time scale, time frame, you 
wouldn't see anything happening there in terms of 
groundbreaking competition for how long, Mr. Winstead?
    Mr. Winstead. Madam Chair, as you know, the House and 
Senate just approved 300 and 180 million. So we now have 
funding in 2009 and looking at 2010 as well. We are looking at 
2016 for a build-out of that.
    Ms. Norton. You are looking at what? Talk directly into the 
mic.
    Mr. Winstead. I am sorry. We are looking at 2016 for build-
out of that four million square feet of space.
    I know the St. Elizabeths situation, based on both panels, 
does provide the earlier finance panel looking at options and 
better approaches, Mr. Grigg's approach and a more private 
sector lease approach that is more conforming to the private 
sector. We looked at all those alternatives, as you know, the 
GAO study as well as our response to this Committee.
    If you looked at the 30-year cost for the reason you 
mention, Madam Chair, the acreage we have up there at no cost 
to the taxpayer, it is a $2 billion project for us, $1 billion 
for DHS. Over 30 years, the net present value savings to the 
Federal taxpayers is three-quarters of a billion dollars.
    Now, the prospectus, we sent----
    Ms. Norton. Now you are counting the savings from what?
    Mr. Winstead. I am sorry?
    Ms. Norton. Savings based on?
    Mr. Winstead. If you look at that lease approach for St. 
Elizabeths, we looked at the enhanced use lease approach. We 
looked at the Federal program.
    Ms. Norton. Is it enhanced use? Where is the 30-year?
    Mr. Winstead. No, no, no. The 30-year, three-quarters of a 
billion dollars savings is if we took that four million square 
feet, wherever we could find it, and I assure you it would be 
pretty far out, and we were to lease that under a standard.
    Ms. Norton. Yes. In other words, you are saying instead of 
leasing where we are leasing now.
    Mr. Winstead. That is correct.
    Ms. Norton. Okay.
    Mr. Winstead. That is correct. So our savings, looking at 
that project, looking at the free ground.
    Ms. Norton. Well, that is the savings that has nothing to 
do with building the project except we won't be paying other 
than we don't own. I am talking about on building the project, 
Mr. Winstead.
    Mr. Winstead. In terms of the lease construct projects 
themselves?
    Ms. Norton. Whatever. First of all, I want to break my 
question down.
    Mr. Winstead. Okay.
    Ms. Norton. When would you expect, let's say, because this 
would assume the competition had occurred, ground to be broken?
    I know this is a guesstimate. Assuming all went well, we 
got the appropriation out this time, you have already begun to 
clean up, what is the earliest you would expect ground to be 
broken on the headquarters for the first building?
    Mr. Winstead. Well, right now, as you know, we got the 
funding for the Coast Guard headquarters where a master plan is 
in process right now with ultimate action, we hope, by the 
beginning of the year, and I do think next year would be when 
we start seeing.
    We had done restoration, but we would start seeing design 
and moving to construction of that first facility. I think end 
of fiscal year.
    Ms. Norton. So by next year?
    Mr. Winstead. By the end of fiscal year 2010, I would 
assume, yes.
    Ms. Norton. By the end of next year?
    Mr. Winstead. During fiscal year 2010.
    Ms. Norton. Sorry?
    Mr. Winstead. During fiscal year 2010.
    Ms. Norton. During fiscal year 2010.
    Now looking toward fiscal year 2010 and assuming we are 
talking about the usual GSA processes--they have done the 
competition, they are breaking ground--what would you imagine 
will be the state of affairs for whoever gets that or wins that 
competition as it goes into the credit market at that time to 
build that first building?
    Mr. Winstead. Madam Chair, I do think--and I would look to 
our BOMA colleagues and others--the commercial, the 
construction market is in fact not financed. It is largely bank 
financed in terms of construction loans. We are not seeing a 
major impact on shortage of financing our construction 
projects.
    Ms. Norton. Right now?
    Mr. Winstead. Right now.
    Ms. Norton. We had testimony, earlier testimony about 
something that has been apparent for some time, and that is 
construction costs have escalated. Put that on the table first. 
Even if the economy were to come back, construction costs have 
tended to go up.
    I am just trying to get a sense of whether you think we 
will be back to normal when ground is broken.
    Mr. Winstead. Well, I think that is more of an economic 
question for an AGC or BOMA.
    But I would suspect that when we are ready, after this 
master plan, as you well know, gets approved and going out for 
the Coast Guard construction design effort, that there will be 
plenty of interest. There is no lack of interest.
    Ms. Norton. It is Mr. Purtell who says it is becoming 
increasingly difficult to acquire capital for new projects and 
renovations for public buildings.
    I am trying to understand whether you think that is purely 
cyclical based on what we are going through now. Obviously, it 
has huge cyclical aspects to it such that when you break ground 
and when you go for what you see right up the road, you think 
that cost of capital for new projects for public buildings will 
be such that the government will not be surprised.
    Mr. Purtell?
    Mr. Purtell. Clearly, it has been cyclical. To answer how 
long it will last, I think is a good guess.
    But you touched on, a minute ago, something that we really 
didn't talk about that I think is important to this whole 
process, the construction costs. In the market I am in and the 
market that I understand, construction costs for tenant 
improvements alone have increased probably as much as 20 to 30 
percent on steel products in the last year.
    Ms. Norton. I don't expect that to go down.
    Mr. Purtell. That is not going to go down. So that is my 
point.
    Ms. Norton. Given demand around the world.
    Mr. Purtell. And that is not going to change. So that is, 
obviously, a big impact on any project you are undertaking.
    Mr. Winstead. Madam Chair, again, I think the market. I 
totally agree.
    I don't think that the material cost increases we are 
experiencing now, fiscal year 2009, are as high as they were 
back when we were costing out the L.A. courthouse, for example. 
I think they are moderating down, but they are going to be ever 
increasing because of development around the world and material 
needed for the kind of growth we are seeing in other countries 
as well.
    But I think our efforts, as you know and I think I 
testified to earlier, we are having difficulty--I have provided 
evidence of that--in estimating and benchmarking these costs in 
these markets in terms of material available, in terms of the 
cyclical demand.
    We know that in L.A. and San Diego, there are billions of 
dollars of public procurement going on in addition to ours. The 
L.A. School District and in San Diego, there is major 
development. All of that competes for material.
    Ms. Norton. As your testimony indicated, the Detroit FBI 
building, you said it was derailed due to tight credit?
    Mr. Winstead. Well, it was tight credit, and it was cost 
and materials. I mean both, both Charlotte and Detroit.
    Our lease issues in Detroit were basically that back last 
October, October of 2007, nine months ago, the offeror there 
actually had difficulty getting financing for the project-- 
part of the issues I raised earlier in terms of the credit 
crunch--but we also saw increased costs in terms of land that 
was available in that part of Detroit. I think we were 
requiring 10 acres. The combination made that deal 
unsupportable, and that is why we are back in the market.
    Ms. Norton. You see that is what scares me here.
    Well, how many competitors did you see for the FBI border 
crossing building that some of them have apparently been 
competed already?
    Mr. Winstead. Yes, ma'am. We have actually had, if you 
look, we have had 34 of these construct projects completed. We 
have 38 FBI offices. Eight or I guess seven are going to be 
Federally owned, like the new one in Houston, but 31 are going 
to be leased.
    We are seeing, obviously, some difficulty in the Charlotte 
situation and in the Detroit situation because of material cost 
increases, because of the financial situation that the former 
panel described. The deals, the prospectus approval rental rate 
and the financial terms that were constructed as a result of 
that authority, the offeror could no longer essentially make 
work in the current market.
    So what we are trying to do is we are recompeting these 
problem projects. Now there are only three some that we have 
completed.
    We are value-engineering the projects to see whether costs 
could be taken off so that the financing pro formas work for 
those projects.
    We are validating the financial aspects, working with, and 
obviously these are being recompeted but making sure they are 
viable under the prospectus limits, and we are reviewing all 
lease construct projects nationwide now because the impact we 
have seen with these three problem projects. So we are trying 
to react to it.
    It is a subset of our overall. I mean the lease construct 
is still not the 170 million square feet. It is a small subset 
of that group, but it has all the issues.
    Ms. Norton. It is a subset, but I am trying to see what it 
tells us about the leasing market where, of course, you all 
have heavily leveraged.
    What concerns me is that though we are experiencing a 
cycle, parts of the cycle are not going to go away. The parts 
that I mentioned, for example, are the construction costs which 
are going up continually. Even when we have had our much better 
circumstances, demand for these same materials has only 
increased.
    So I am trying to analogize. It is not so much the build to 
suit but to the leasing market and to the government being in 
that market for an ever increasing need.
    The cycle comes back, but certain kinds of costs-- energy, 
materials--do not. I am trying to understand what GSA will find 
in that market when it has to deal not with cyclical change but 
with these rather indeterminate, seeming permanent increases 
because we are not to the end of them yet.
    Mr. Grigg?
    Mr. Grigg. Well, I think the simple answer is that the 
private market in the case of these build to suit FBI field 
offices might be viewed as a canary, if you like, if the 
analogy is in a mine situation.
    Ms. Norton. That is what I am afraid of.
    Mr. Grigg. The cost of operating the buildings as well as 
the cost of delivering those buildings, when weighed against 
the long-term projections that were made by the builder-lessor 
to the government in an underwriting situation, became too 
risky or the margin wasn't left that was originally projected.
    So the simple answer is that the cost of building the major 
facilities for Homeland Security and so forth will probably 
escalate more than people anticipated, unless they were 
sufficiently protective.
    As well, the cost of operating those facilities and 
maintaining them over an extended period of time is going to be 
a lot higher than probably people anticipated if they were 
using historical measures for how things increase. We don't 
expect to see a rebound in the cost of power. We expect it to 
be growing not at the CPI but at some multiple of the CPI.
    Historically, when we were in a regulated energy 
environment, because of regulation and because oil prices 
frankly weren't growing faster than CPI, the cost of those 
elements were really within, everything was in a balance. We 
don't view that in a long-term basis as happening really in the 
conceivable future.
    Energy prices are going to increase at some multiple of 
what we call the CPI, and we are going to have to live with 
that reality. Steel prices, unless production changes or 
technology changes, which we don't anticipate, we are into that 
being in a similar situation.
    So costs are going to escalate, and we have been through 
this cycle before. In the past, because the underlying material 
costs rebounded, you had a different circumstance. I don't 
think that is going to happen again.
    I think the reality is that we have seen a change in that 
and the change, as Mr. Winstead pointed out, is probably 
external to us as a Country and as an economy. We just need to 
be mindful of that.
    Mr. Winstead. Madam Chair, you know, obviously, our own 
clauses give us the authority on increasing the CPI, and Steve 
has certainly alluded to the fact it isn't going away. I mean I 
was horrified, reading some market data of energy costs, 
preparing for this hearing and predicting that next winter we 
are going to see maybe 30 percent higher electric bills.
    So the landlords like Mr. Grigg, we are going to have to be 
very attentive to the increases that we provide in our lease 
largely through the O&M clause provisions. Undoubtedly, we are 
going to be paying higher rates through our lease negotiations.
    Ms. Norton. I am going to ask just a couple more questions.
    There are some limitations on what we can do with these 
external factors, these costs that we have never seen go up and 
not go away. Everybody is experiencing those, but they don't 
have the same constraints the Federal Government has.
    I have to ask you, Mr. Winstead. You seem to understand 
that we are in a wholly different environment. What is GSA 
doing to accommodate itself for the near certainty of the kinds 
of costs we were just talking about, not cyclical costs or the 
kinds that most disturb me? Energy costs, cost of material, for 
example.
    I don't know how the Agency is positioned. Do you have 
regular meetings even with the private sector on the 
availability of space, on how this market is affecting them?
    How are you positioning yourself for costs that you know 
the government has not taken into account?
    I can tell you without fear of contradiction that we didn't 
take it in account when the President put the money in the 
budget for the Coast Guard building. I am trying to see how you 
are going to build that building now. He has had that in his 
budget for almost four years.
    Mr. Winstead. Madam Chair, I will tell you that our people 
in the OCA, the Office of Chief Architect, are looking very 
carefully. We have four national contractors that we updated 
and recompeted, that are really advising us on every project at 
every stage of development of the project on benchmarking of 
the cost of that project. We do our best to determine as we go 
through, from the authorization process through final opening 
of a facility, to make sure that we are building in the actual 
costs.
    And, I agree with you. I think there has been a benchmark 
shift in the last three or four years. We have seen it in gas. 
We have seen it with steel costs. We will continue to see it.
    It really is incumbent upon us to make sure we are getting 
the most accurate estimating information about material costs, 
that we are having benchmark verification during both the 
design cycle and the construction cycle on the viability and 
the competency of those estimates to be delivered on, and we 
have to hold our vendors, our contractors and our lessors 
accountable to our best judgment on behalf of the taxpayer of 
what those costs will be and what the best deal for the public 
will be.
    But I will tell you the former panel talked about, which 
was interesting to me, about engagement of GSA and partnering. 
We will continue to do that. I think we are.
    DCBIA, that Mr. Grigg represents, we have ongoing liaison 
with them, with BOMA. I sit on the National Advisory Council 
with BOMA. We are constantly working with them to try to 
anticipate where building operating costs are going and making 
sure we are, for own inventory, reacting to that as well as new 
construction or lease construct projects.
    So it has been a very troubled market. I think we have good 
counsel. I think we have good contractors to give us the best 
estimates.
    But the market is very volatile, and it is a difficult 
assignment. You saw it with the L.A. courthouse doubling in 
cost. You have seen it with the San Diego courthouse.
    Ms. Norton. Mr. Grigg, the canary is out of the coal mine. 
He just named two projects, FBI and the L.A. courthouse, way 
out of the mine.
    I am asking Mr. Winstead questions which are not under his 
control, and some that I have asked you are not under your 
control, certainly the uncontrollable costs.
    But I tell you what, I know what the appropriation is that 
is coming out of here, and I know they are going to start 
building with that appropriation, and I know that somehow I am 
going to have to go back to the government and say we don't 
have enough money. That bothers me to no end, and one thing I 
know I can't do anything about is the amount of money in the 
appropriation.
    So then I have to look at GSA and say now maybe the lesson 
will be learned from what is happening in the first building. 
You have heard me say I am going to try to get some enhanced 
authority of some kind. Of course, GSA has some authority at 
its disposal, some of which it hasn't even used.
    But when you look at where the wiggle room is, what bothers 
me is when the economy returns, I just don't understand where 
the wiggle room is, if it is more money from here or the more 
obvious answers.
    I guess I am quoting from Mr. Grigg's testimony. I think 
GSA has to take it very seriously. ``Space leased by the 
government used to be advantaged by steady, prompt payments for 
rent. The margins associated with rental income have declined 
as a result of problems in the timing and amount of 
reimbursements.''
    The operative words are things that GSA might be able to do 
something about. We know the things it can do nothing about: 
``timing and amount of reimbursements for increases in real 
estate pass-throughs and operating expenses.''
    Then it says, of course, ``which are indexed to CPI 
increases.'' I understand the problems you are under there.
    But you know one has to begin very seriously if you are in 
GSA's position. You have already seen the colossal. Where are 
we on the L.A. courthouse, the debacle of the largest 
courthouse in the United States?
    You see few competitors or too few competitors, rather, 
relative to what we expected in the border stations. You see 
the failure of the Detroit FBI building with the city saying it 
wants it so bad that it will see what it can do to be helpful.
    Once you see that occur and you know what we are up against 
here, then it seems to me GSA has to begin to look at its, at 
the moment, rather small arsenal of tools to see what can be 
done to take the standards clauses, the standard way of 
operating and squeezing more out of it.
    I suppose what I am looking for in this hearing are 
examples like some of the examples we have had from the private 
sector of how to do that or else, frankly, I see a crisis 
looming up there because we are so heavily in the leasing 
market and because much of it depends upon expansion and 
expansion opportunities.
    Mr. Winstead. Madam Chair, I certainly understand your 
concern and I think at the earlier hearing in June we did in 
response and I have reviewed them here briefly as to the 
actions we are going to take. So we have to be on this. We have 
to make sure that we have the right estimating crowd with us. 
We have to have the right relationship through our brokers, 
national brokerage contract, with the industry and directly 
DCBIA and ULI and BOMA and AGC and other groups. It is really 
incumbent on us bringing them in and making sure we understand 
how they view the market and their ability to compete for our 
business in the future.
    I think we are doing a good job of that now, but I will get 
the Committee, again, accountability of what we are doing in 
all these areas and just making sure it is very clear, so you 
are all aware of it.
    As this panel suggested ideas, we will continue.
    Ms. Norton. Well, I think GSA needs a five-year plan 
looking ahead at costs, some costs that will remain after the 
cycle and indeed will continue to go up which the average 
homeowner can see and certainly GSA can see. Look for a five- 
year plan.
    If I were GSA, I would say: Look, Congress, this is what I 
see. You are heading for a crisis because you are in the 
leasing market, and this is what the private sector you depend 
upon is experiencing. We need some relief.
    I mean who is in the best position to do this, of course, 
is GSA itself.
    I leave you with a name, one of Norton's common, ordinary 
examples that don't apply here but ought to indicate how the 
private sector begins to deal with problems like this, 
particularly in real estate.
    You will say what does Starbucks have to do with the rental 
of office space? I don't know how much of what Starbucks was in 
it owned or how much it rented. I know this, that the first 
thing it off-loaded when it recognized that people weren't 
going to pay four bucks or whatever it is you pay for Starbucks 
was its real estate. That is the first thing it did. It is 
getting as much out of the real estate business as it can.
    It is reducing what was one of the most profitable 
businesses in the world first. Of course, it is doing it in 
other ways inside, and it is doing the kinds of things you 
would expect an extraordinary business like that to do with 
respect to its own product, but the first thing it did was to 
close down a whole bunch of real estate was eating up its 
profit.
    I hope you see what I am doing here. I am certainly not 
saying that rental market is like Starbucks. But guess what? It 
is.
    It was up against the rental market and I doubt that they 
owned much, but they may have. They were up against costs that 
were out of their control. So they looked for ways to bring 
them down.
    Now we see in the leasing market they are dealing with a 
major lessor, at least in this National Capital Region, who is 
constrained by an outside force, otherwise known as Federal 
regulation, in its bargaining ability.
    My concern is that without some very candid five-year 
notion, we may have to get GSA to do this. It is best to do it 
from the Agency, of what leasing will look like nationwide, 
frankly, using the, I will say, totally unforeseeable.
    I do not believe that L.A. was foreseeable. I don't believe 
that Detroit was foreseeable. But now that we have seen it, it 
seems to me that everything else is foreseeable.
    Using those case examples to warn the Federal Government 
that this has to be seen as an ability to lease where 
necessary. You are in a better position to tell me what it 
would mean at other locations.
    Mr. Winstead. Madam Chair, I would be happy to, again, set 
this out in that five-year framework that this Committee can 
work with us on or we will provide that, so we do have a clear 
sense of how we are dealing with these market fluctuations and 
financing and credit issues and how we are responsive to the 
private sector's feedback to us.
    For example, we had a lease construct workshop on June the 
11th, and we had several feedbacks. They said we could do a 
better deal on these FBI field offices if we had a purchase 
option. They told us that it is better if GSA brings the site 
to the deal. They talked about prior to award, getting together 
with GSA and the contractor and the tenant to make sure 
requirements were fully understood and the risk allocation 
issue.
    So we actually are taking, as you suggest, based upon the 
lease construct program the best practices and ideas. This June 
11th workshop was directed to that.
    Ms. Norton. You intend to use some of those?
    Mr. Winstead. Yes, and I will make sure that we get back to 
the Committee how we anticipate because it is going to be five 
years before St. Elizabeths. It is going to be five years 
before a lot of these constructs how we are responding to 
market conditions and offeror's issues that they face to 
continue to get a good deal for the government.
    Ms. Norton. That would be very helpful. First, I would like 
to know how you are going to respond to the feedback from the 
private sector on the FBI type buildings.
    Mr. Winstead. Right.
    Ms. Norton. You listed four or five them.
    Mr. Winstead. Right.
    Ms. Norton. Then how are you going to respond, as you say, 
more generally to what you see up ahead and what the 
constraints are of responding?
    We know much of this is not in your hands now, and you see 
the Committee probing to find how can we find ways to convince 
everybody this is not only safe to do. This is what you have to 
do, given the growth in the Federal Government and its need for 
indispensable space.
    I think your two examples of the FBI buildings, the two FBI 
buildings make the point about indispensable space.
    Mr. Winstead. Right.
    Ms. Norton. Of course, those were being built. Both of them 
were being built to suit.
    You will not find it difficult to make the appropriate 
analogies of what you will find in the lease market where they 
are building and where you are leasing and where you are, in 
fact, going to be looking for space most of the time.
    Mr. Winstead. I would be happy to get that back to you 
because I think.
    Ms. Norton. Would you get us that? I know we would like to 
receive that within 60 days.
    Mr. Winstead. All right. I will make sure you do.
    Ms. Norton. It would be very instructive to us.
    If there is anything else that either of you would like to 
leave us with before I dismiss you from the table, I would be 
most pleased to hear.
    I want to thank all three of you, and I particularly thank 
you for listening to one another so that you can get a sense of 
the dynamic that we think is most helpful to the Committee. 
Your testimony has been extremely helpful to us, and I thank 
each and every one of you for the testimony you have given here 
today.
    Thank you, and the Committee is adjourned.
    [Whereupon, 1:00 p.m., the Subcommittee was adjourned.]
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