    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                             CAPITAL ASSETS CRISIS:
                            MAINTAINING FEDERAL REAL
                           ESTATE WITH THE DWINDLING
                             FEDERAL BUILDING FUND

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

                                    (111-99)

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
        ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY MANAGEMENT

                                     OF THE

                                  COMMITTEE ON
                       TRANSPORTATION AND INFRASTRUCTURE
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 March 24, 2010

                                   __________

                           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                             VERNON J. EHLERS, Michigan
    JERROLD NADLER, New York             FRANK A. LoBIONDO, New Jersey
    CORRINE BROWN, Florida               JERRY MORAN, Kansas
    BOB FILNER, California               GARY G. MILLER, California
    EDDIE BERNICE JOHNSON, Texas         HENRY E. BROWN, Jr., South
    GENE TAYLOR, Mississippi             Carolina
    ELIJAH E. CUMMINGS, Maryland         TIMOTHY V. JOHNSON, Illinois
    LEONARD L. BOSWELL, Iowa             TODD RUSSELL PLATTS, Pennsylvania
    TIM HOLDEN, Pennsylvania             SAM GRAVES, Missouri
    BRIAN BAIRD, Washington              BILL SHUSTER, Pennsylvania
    RICK LARSEN, Washington              JOHN BOOZMAN, Arkansas
    MICHAEL E. CAPUANO, Massachusetts    SHELLEY MOORE CAPITO, West
    TIMOTHY H. BISHOP, New York          Virginia
    MICHAEL H. MICHAUD, Maine            JIM GERLACH, Pennsylvania
    RUSS CARNAHAN, Missouri              MARIO DIAZ-BALART, Florida
    GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
    DANIEL LIPINSKI, Illinois            CONNIE MACK, Florida
    MAZIE K. HIRONO, Hawaii              LYNN A WESTMORELAND, Georgia
    JASON ALTMIRE, Pennsylvania          JEAN SCHMIDT, Ohio
    TIMOTHY J. WALZ, Minnesota           CANDICE S. MILLER, Michigan
    HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma
    MICHAEL A. ARCURI, New York          VERN BUCHANAN, Florida
    HARRY E. MITCHELL, Arizona           ROBERT E. LATTA, Ohio
    CHRISTOPHER P. CARNEY, Pennsylvania  BRETT GUTHRIE, Kentucky
    JOHN J. HALL, New York               ANH ``JOSEPH'' CAO, Louisiana
    STEVE KAGEN, Wisconsin               AARON SCHOCK, Illinois
    STEVE COHEN, Tennessee               PETE OLSON, Texas
    LAURA A. RICHARDSON, California
    ALBIO SIRES, New Jersey
    DONNA F. EDWARDS, Maryland
    SOLOMON P. ORTIZ, Texas
    PHIL HARE, Illinois
    JOHN A. BOCCIERI, Ohio
    MARK H. SCHAUER, Michigan
    BETSY MARKEY, Colorado
    MICHAEL E. McMAHON, New York
    THOMAS S. P. PERRIELLO, Virginia
    DINA TITUS, Nevada
    HARRY TEAGUE, New Mexico
    JOHN GARAMENDI, California
    VACANCY

                                      (ii)

     Subcommittee on Economic Development, Public Buildings, and Emergency
                                   Management

               ELEANOR HOLMES NORTON, District of Columbia, Chair

    BETSY MARKEY, Colorado               MARIO DIAZ-BALART, Florida
    MICHAEL H. MICHAUD, Maine            TIMOTHY V. JOHNSON, Illinois
    HEATH SHULER, North Carolina         SAM GRAVES, Missouri
    RUSS CARNAHAN, Missouri              SHELLEY MOORE CAPITO, West
    TIMOTHY J. WALZ, Minnesota           Virginia
    MICHAEL A. ARCURI, New York          MARY FALLIN, Oklahoma
    CHRISTOPHER P. CARNEY, Pennsylvania  BRETT GUTHRIE, Kentucky
    DONNA F. EDWARDS, Maryland           ANH ``JOSEPH'' CAO, Louisiana
    THOMAS S. P. PERRIELLO, Virginia,    PETE OLSON, Texas
    Vice Chair                           VACANCY
    VACANCY
    JAMES L. OBERSTAR, Minnesota
      (Ex Officio)

                                     (iii)

                                    CONTENTS

                                                                       Page

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

                                   TESTIMONY

    Greninger, Richard, Managing Partner, Carr Services..............    23
    Hentschel, John, President, Hentschel Real Estate Services,
      Member, Counselors of Real Estate..............................    23
    Nash, David, President, Dave Nash & Associates, One Perimeter
      South, National Academy of Science.............................    23
    Peck, Robert, Public Buildings Service Commissioner, General
      Services Administration........................................     5
    Stoklosa, Kevin, Assistant Technical Director, Financial
      Accounting Standards Board.....................................    23

              PREPARED STATEMENT SUBMITTED BY MEMBERS OF CONGRESS

    Carnahan, Hon. Russ, of Missouri.................................    42
    Norton, Hon. Eleanor Holmes, of the District of Columbia.........    43

                   PREPARED STATEMENTS SUBMITTED BY WITNESSES

    Greninger, Richard...............................................    46
    Hentschel, John..................................................    54
    Nash, David......................................................    58
    Peck, Robert.....................................................    67
    Stoklosa, Kevin..................................................    81

                           SUBMISSIONS FOR THE RECORD

    Peck, Robert, Public Buildings Service Commissioner, General
      Services Administration, response to request for information
      from the Subcommittee..........................................    73

        CAPITAL ASSETS CRISIS: MAINTAINING FEDERAL REAL ESTATE WITH THE
                         DWINDLING FEDERALBUILDING FUND

                                  ----------

                           Wednesday, March 24, 2010

                      House of Representatives,
          Subcommittee on Economic Development, Public
                    Buildings and Emergency Management,
                Committee on Transportation and Infrastructure,
                                                        Washington, DC.
        The Subcommittee met, pursuant to call, at 2:05 p.m., in
    Room 2167, Rayburn House Office Building, Hon. Eleanor Holmes
    Norton [Chair of the Subcommittee] presiding.
        Ms. Norton. Good afternoon, and welcome to today's hearing
    on the Federal Buildings Fund, or FBF.
        Today we will examine whether the FBF offers the General
    Services Administration Public Buildings Service a viable tool
    for meeting its mandate of optimizing the use of Federal office
    space and providing a source of revenue to maintain existing
    buildings and to fund new construction.
        The GSA owns more than 1,500 Federal buildings, totaling
    176.5 million rentable square feet of space. It leases 177.5
    million rentable square feet of space in almost 7,100 leased
    properties. However, in recent years the GSA construction
    program has essentially been reduced to land ports of entry and
    to courthouses, with few exceptions, and GSA increasingly
    relies on private commercial office space to meet its needs,
    straining the building fund and creating a growing crisis in
    meeting GSA's vital function.
        The FBF was created in 1975 by Public Law 92-313 to provide
    a revolving fund that required agencies to pay for the space
    they occupied and to provide a revenue source for new Federal
    construction and upkeep of existing Federal buildings.
        Today we will hear from witnesses across the spectrum to
    help us evaluate GSA's capital investment management strategies
    and to evaluate how GSA can manage Federal assets more
    effectively.
        Our witnesses include two private sector witnesses with
    experience in maintaining and repairing buildings, from whom we
    hope to learn, and an expert on capital asset management. We
    also will hear from an official from the Financial Accounting
    Standards Board, who will discuss how new accounting rules may
    affect how the Federal Government will evaluate the Public
    Buildings Service's Capital Investment and Leasing Program.
        The current guidelines for the budgetary treatment of
    leases require the full cost of a capital lease or lease
    purchase to be scored up front rather than at only the first
    year's annual rent and the value of any cancellation provision
    as in the case of operating leases.
        Of course, we will hear from Robert Peck, the PBS
    Commissioner, currently in his second tour of duty with GSA as
    the PBS Commissioner. We will want to focus on what it takes to
    properly maintain a capital assets portfolio and on the true
    costs of leasing versus owning Federal office space.
        Since its inception, the building fund has struggled to
    meet its original mission. As early as 1981, the Government
    Accountability Office, or GAO, found that there was no evidence
    that the FBF had promoted a more efficient use of space or
    produced enough funds for new construction. Periodically since
    then the GAO has noted the inability of the FBF to fund the
    repair and maintenance of existing Federal assets. More
    importantly, the current head of the PBS has indicated that the
    Federal Buildings Fund is on an unsustainable course and will
    be unable to fund the proper maintenance of its Federal capital
    assets in the near future.
        The Federal Buildings Fund recently received a much-needed
    infusion of cash of $5.5 billion provided by the American
    Recovery and Reinvestment Act. Even with this investment, there
    are public reports of a maintenance and repair backlog of
    almost $8.8 billion. Yet the PBS building portfolio has a
    replacement value of nearly $42 billion, which makes mandatory
    the development of a more effective approach for generating
    funds necessary to maintain our capital assets.
        Two examples show that the government is beginning to
    recognize that it must right-size its Capital Investment and
    Leasing Program. The administration's fiscal year 2010 budget
    request included $100 million for the GSA to exercise the
    purchase option for the Columbia Plaza building located in
    Washington, D.C. In addition, the fiscal year 2011 Capital
    Investment and Leasing Program also includes a proposal to
    purchase an IRS building in Martinsburg, West Virginia, for $25
    million.
        We continue to applaud the efforts of the agency to parse
    through the purchase opportunities available to GSA and to
    exercise them whenever it is prudent to do so. The GSA had long
    leased the Columbia Plaza building, but finally purchased this
    much-needed asset housing State Department employees at nearly
    50 percent of its 2006 appraised value. The building, close to
    the State Department headquarters, would otherwise have
    required another round of leasing and lost dollars to the
    building fund and to Federal taxpayers.
        The Committee on Transportation and Infrastructure and this
    Subcommittee have repeatedly expressed concern about the
    expensive trend toward providing Federal office space through
    leasing and not Federal ownership, to the point that, for the
    first time, the Federal Government is now occupying more lease
    space than owned space in fiscal year 2008, according to a July
    2009 GAO report. In almost every case, over the long term,
    leasing is more expensive than Federal ownership and deprives
    the Federal Buildings Fund of direct payments from agencies
    occupying government-owned space, which instead goes to
    developers.
        The intended purpose of the FBF was to provide the
    resources to enable GSA to construct, maintain and repair
    buildings in the Federal inventory. That purpose is undermined
    by the steady shrinking of available funds to maintain Federal
    assets, much less to generate funds for new Federal
    construction. This skewed lease-to-own ratio trend presents a
    distressing portrait of the condition of Federal asset
    management, which is an essential function of government. We
    need to determine if the financial and managerial systems are
    in place for GSA to properly administer the FBF and maintain
    existing assets. We plan to address the assumptions used to
    justify the current capital asset management strategies.
        Finally, and perhaps most importantly, this Subcommittee
    will examine whether GSA has existing statutory authority to
    address its needs and to maintain its own capital assets. We
    have pressed GSA to use all of the authority available to it,
    including section 412 of Public Law 108, which grants GSA the
    authority to enter into agreements that include selling,
    leasing, the exchanging of capital assets, and retaining the
    proceeds within the Federal Buildings Fund. When Congress
    granted this authority, it was contemplated that GSA would have
    a powerful tool at its disposal to enhance its ability to
    properly manage its capital assets portfolio and the Federal
    Buildings Fund as well. Instead, this authority has not been
    exercised as yet, and we are facing, perhaps, a looming crisis
    in managing our Nation's public buildings.
        I very much look forward to hearing from today's witnesses,
    and I am pleased at this time to ask the full Ranking Member,
    shall we call him, of the Committee if he has any opening
    remarks. Mr. Mica.
        Mr. Mica. Thank you.
        I ask unanimous consent to participate in the Subcommittee
    hearing. I serve on all six Subcommittees, but I have to ask
    unanimous consent to fully participate. It is just a technical
    matter.
        Ms. Norton. So granted.
        Mr. Mica. Thank you.
        I am pleased to join you today, and I regret Mr. Diaz-
    Balart is delayed at another obligation and should be here
    later. But I appreciate the Chair's attention to this important
    matter of capital assets and maintaining Federal real estate
    with our dwindling Federal Buildings Fund and Federal
    resources.
        I admire Ms. Norton not only for her tenacity on a number
    of issues and for her fine representation of the District, but
    she also gets into the weeds, which I think we need to do as
    Members of Congress, particularly when it comes to getting the
    best return for the taxpayers. Certainly GSA has an important
    responsibility, and so does she.
        So it is a pleasure for me to be here. I have a personal
    interest, as she knows. Years ago I was in real estate
    development, and I enjoy making certain, as I tell some folks--
    the Federal Government has a great deal of public assets, and I
    always say we shouldn't be sitting on our assets, and that we
    should utilize them to the fullest and get the return, and that
    is what this hearing is about. So, again, thank you for
    convening it.
        Let me just make a couple of points.
        There is no better time than now, as you have heard me say
    before, to act. Now is the time we can lease and get the best
    deals for the Federal Government. This is the time when a wise
    real estate investor looks at acquiring properties, and
    certainly the Federal Government has one of the highest
    inventories.
        You also have to look at the assets that we have within our
    inventories. Many of these assets--in fact, Mr. Nash, who, I
    think, is a later witness, is going to testify today that over
    half of the Federal buildings are more than 50 years old. Now,
    think about that. An old building, first of all, is going to be
    very costly to maintain. Anyone who has dealt with any property
    knows that an aging building is one of your highest assets to
    maintain. So we have this huge inventory of ancient buildings
    that are very costly to operate. This is the time to change out
    those properties to make the best deal.
        Possibly, too, we could look at selling some of those
    assets and reinvesting that in properties that are less costly
    to own and to maintain, and we could probably get more net
    usable space for the taxpayers and increase our inventory.
    Again, it is aged just by having newer units.
        The other thing that is so important today is when you have
    a 50-year old building, it isn't very friendly to the
    environment or very efficient.
        So, on those two accounts, it is wise to acquire newer
    buildings and buildings that also have been built with more
    efficient systems. One of the most costly things to operate is
    energy utilization in those buildings, not to mention the high
    maintenance, but it is the high energy costs and low
    consideration and a high negative impact to the environment.
        So, with every one of these deals that we are able to put
    forward at this time, again, we get greater value than we have
    ever gotten because the cost is down. We get greater efficiency
    in the operation as far as energy, and I think we do a big plus
    in helping the environment. Again, I think this is a very
    worthwhile hearing.
        I think it is also important, as a leader of this T&I
    Committee, to look at the Federal Government's commitment to
    locating these properties, these new properties in particular,
    that we acquire close to public transportation. It is so
    important that that be a consideration because we do need to
    move people more efficiently. Again, the high amount of
    negative contamination to the atmosphere is done by
    transportation--by one person and one inefficient vehicle when
    one is getting to work or around the community. So I think we
    have an obligation to lead as far as also supporting transit-
    oriented development and acquisition as we move forward.
        So I look forward to hearing from Mr. Peck. I think part of
    the problem that he deals with--and he has done a good job.
    First, he has to deal with the laws that Congress has already
    passed, and some of those may need some flexibility. Some of
    them, just like our capital assets inventory, may need some
    updating. Give him the flexibility to make these investments at
    this critical time when we have the money that is going to be
    spent--some stimulus, some other capital improvements--and give
    him the ability to be flexible in changing out aged assets.
    Maybe you could get more for the location. The building may not
    be that good, but in acquiring more energy-efficient
    transportation and an environmentally friendly property, we end
    up with a net plus for the taxpayer and the Federal Government.
        So I look forward to hearing responses, commentary and also
    constructive suggestions from the witnesses today as to what
    laws or what approaches may be needed for the future, because
    we need to give them the tools to get this job done.
        This is probably more than you wanted to hear, Ms. Norton,
    but since you have got me, those are my comments.
        I yield back.
        Ms. Norton. I thank the Ranking Member for, really, very
    thoughtful comments, and I appreciate very much that he thinks
    deeply about this subject, too. This is a subject in need of
    leadership and in need of new ideas and new approaches, and I
    am sure we are going to get some of that from Mr. Peck, who I
    am pleased to welcome as our first witness.

          TESTIMONY OF ROBERT PECK, PUBLIC BUILDINGS SERVICE
             COMMISSIONER, GENERAL SERVICES ADMINISTRATION

        Mr. Peck. Thank you, Madam Chairperson and Ranking Member
    Mica. Thank you for inviting me here.
        If I can step out of protocol a bit, I would also like to
    welcome both counsels, with whom we work very closely, and one
    who is new with you, Ms. Norton, who is a distinguished GSA
    alum, Mr. Kendall.
        Actually, Madam Chair and Mr. Mica, you have pretty much
    made my statement. You have summarized, for the most part, how
    the fund is supposed to work, how it has worked, and some of
    the issues that I face, but I will go into a little bit of
    detail.
        As you noted, the Federal Buildings Fund, which was
    established in 1972, was designed to provide a stable source of
    funding for both the operating needs of the building inventory
    and its capital needs. Rent revenues, which we get from Federal
    agencies whether we lease or own the buildings, are deposited
    into the fund and are made available to cover our activities,
    though, of course, we have to get an appropriation every year
    to spend them.
        What is important to remember about the fund is that it is
    a revolving fund, which means that, not unlike some trust funds
    that we have in the government, we use current revenues to pay
    off liabilities that have accumulated over time, and that means
    that the age of our fund and the relative ratio of new
    buildings to old buildings is incredibly important.
        I should also note while the initial intent was that the
    rent revenues going into the fund would cover both operating
    costs and capital needs, both new construction and renovation
    needs, within a very few years after the fund was set up, it
    was pretty clear that that was not going to be the case. The
    fund started collecting rent in 1975. By 1979, we were already
    receiving appropriated funds. We have in 8 of the last 10 years
    received appropriated funds to cover our capital needs.
        As early as 1981, as you noted, the GAO reported that the
    fund was generating not enough revenues. In fact, they reported
    in 1981 that the fund was generating less revenue for new
    construction and other capital needs than Congress had been
    appropriating annually into the fund before the fund was
    created. The GAO identified a number of factors contributing to
    that, including an increase in leased space, the high repair
    and alteration needs of an old building inventory, and a
    reduction in rental income due to administrative and
    legislative actions. It is interesting to note that, nearly 30
    years later, we could say exactly the same thing.
        From time to time, the administration and Congress have
    provided funding for a significant number of new buildings,
    including in 1983, partly in response to that GAO report of
    1981, an opportunity purchase program under which GSA did go
    out and buy a number of existing buildings which were added to
    the inventory.
        The most recent example of a significant boost in funding
    is, of course, the American Recovery and Reinvestment Act of
    2009, which provided us with $5.5 billion for capital projects.
    Unlike previous building programs--and this is not a bad
    thing--not all of that money was directed to our direct capital
    needs for repairs and alterations, but rather a significant
    amount of it was intended to green our inventory. That is
    clearly a benefit to our inventory as a whole because it will,
    in the end, reduce our operating costs. It will also help us
    provide examples to the American building industry in general
    of what technologies and practices work.
        I can also report, in response to Mr. Mica's note about the
    favorable investment climate, we are, in the Recovery Act,
    getting pretty low bids on construction. That is a good thing
    for us in a way. It is sort of a discouraging commentary in a
    way, however, on how soft the real estate market is out there,
    so we don't take undue satisfaction from that.
        This infusion of capital from the Recovery Act will allow
    us to reduce the liability we have on some of our aging assets,
    and it will reduce the liability that we had which we had
    estimated a couple of years ago at about $7.3 billion in
    capital needs for significant alterations in our fund. I should
    note that the average age of our inventory, if you weight the
    square footage, is 46 years, and 31 percent of our square
    footage is older than GSA itself, which was founded in 1949.
        In recent years we have met new space needs primarily
    through leasing buildings. There is nothing wrong with leasing
    per se, except that the income and outflow are exactly the
    same. We get rent from our agencies, and then we send it out a
    revolving door in lease payments to a private owner. It does
    not, in other words, contribute to the investment fund that we
    need to keep up our buildings. Without new government-owned
    facilities keeping up our income on the front end, because new
    facilities don't need repair and alterations and investments,
    funding for our reinvestment needs is reduced.
        We will continue to look for ways to increase revenue and
    to reduce expenses. We are looking at ways to maximize
    utilization in our buildings, seeing if we can squeeze more
    people into less space. Our vacancy rate in our own buildings
    is already at around 2 percent, and the inventory as a whole,
    including the leased space, is only about 4 percent, but there
    still are ways, clearly, that we could get more people into
    less square footage.
        I do want to note that Congress did give us the authority,
    under section 412 in an appropriations bill in fiscal 2005, I
    believe it was, or in 2004, and the opportunity to retain the
    proceeds when we dispose of surplus properties, and we have, in
    fact, used that authority. We have in the previous 3 years
    earned about $198 million from selling off old properties.
        We will also make sure that we collect rents in a timely
    way from our customer agencies, and we are looking at ways to
    reduce our own overhead, because with that, too, if we don't
    have the lowest possible overhead, we are eating into the net
    income that we need to maintain our buildings.
        I should note that under section 412, we have from time to
    time, as I think you know, considered other financial
    mechanisms that would provide the means to own buildings, and
    we will continue to do so. Beginning this year also, I should
    note, just on the topic of trying to do better with the space
    we have, we will work with three major customer agencies to
    produce overall national strategic portfolio plans in an
    attempt to see if we can reduce the amount of space they need.
        Finally, in response to Mr. Mica's comments about transit-
    oriented development, for which I thank you, I would note that,
    in October, President Obama signed Executive Order 13514,
    which, in ordering Federal agencies to pay much more attention
    to sustainable facilities, does say that, to the maximum extent
    we can, we should locate new Federal facilities in transit-
    oriented developmental locations, and we are developing
    guidance with the Department of Housing and Urban Development,
    the Department of Transportation and EPA to make that a
    reality.
        That concludes my statement. I will say I look forward to
    hearing also from the other witnesses, but, of course, I am
    happy to answer your questions.
        Ms. Norton. Thank you very much, Mr. Peck.
        Now, I think you said, for the record, something that is
    very important for this Subcommittee to note, which is that
    essentially--and correct me if I do not understand you--very
    soon after the Federal Buildings Fund was established, its
    premises appeared to be faulty in as much as it was assumed
    that the so-called "rent" from Federal agencies could cover new
    the construction and upkeep of the buildings.
        So, this premise, was this a theoretical premise? Although
    you would have thought that somebody would have done some
    numbers on it. Was it shortly seen to be a flawed premise, and
    it is all you can do with inflow and outflow, simply with a
    diminishing building fund, to simply keep the fund going, and
    that it is not an investment fund?
        Mr. Peck. Right.
        Well, I want to say there were a couple of premises in the
    fund, and we are focused on one. There are a couple that are
    good. One: Still having agencies pay rent so that they realize
    the cost of occupying space and don't accept it as a free good,
    that is good.
        Second: We do have a regular stream of income to do minor
    repairs and some of our capital expenses, and I think, compared
    to some other Federal agencies, we may even do better than they
    do in having some money to cover our capital investment needs.
        However, you are absolutely right. I don't know what
    numbers they were looking at back then, given the age of the
    inventory, which was an older inventory than most private
    investors would ever consider putting money into as an
    investment. If you consider the age of the fund, we just don't
    generate enough income. You are right. It seems that that was
    the case from the beginning.
        Ms. Norton. So, of course, I would add to this. This
    revolving fund notion, you say the agencies, you know, now
    understand there is nothing free in this world, and therefore,
    they are paying rent. But actually, the theory also is that the
    revolving fund is helping with the upkeep of the very buildings
    in which they are located. So the revolving fund notion is they
    really do get back the investment that comes from their so-
    called "lease payments"; is that not the case?
        Mr. Peck. That is. I always say I think I have the best job
    in American real estate. However, on a day-to-day basis, we get
    complaints, legitimate complaints, from the agencies we house
    that they are paying us fair market rents and are often not
    getting back the quality of building, if they are in an older
    building, that they would expect from those rents.
        Ms. Norton. Although the courts get more out of the fund
    than any other part of the Federal Government, they actually
    tried to get a waiver from their contribution to the Federal
    building. We could not believe the gall of any part of
    government believing that somehow somebody else--the
    taxpayers--ought to carry them, and that they should have
    nothing whatsoever to do with it. We were able to put that
    down, but there was a very concerted attempt to get that waiver
    in the last few years.
        Now, you have got to make us understand the Department of
    Agriculture and its waiver. Would you describe its waiver and
    indicate what you have done to make sure that they are like
    every other agency of the Federal Government?
        Mr. Peck. Well, at some point, I think it was--I have
    forgotten the number of years back, but I can provide that for
    the record. Within the last 10 years or so, we agreed to
    waiving all but operating expense rent for the Department of
    Agriculture. In other words, the basic rent was forgiven.
        Ms. Norton. They were supposed to keep the buildings up.
        Mr. Peck. Correct, in return for, it seemed like, a
    reasonable arrangement, I have to say, that the Department of
    Agriculture would take that rent money and use it to renovate
    their buildings, which are also Depression-era buildings and
    need a lot of work. My understanding on the numbers to date is
    that the waived rent amounts to about $400 million, and
    Agriculture to date has put about $200 million into the
    buildings. We have had a discussion within----
        Ms. Norton. Just let me ask you: Since you are the leasing
    and construction arm of the Federal Government, one way to have
    controlled this would simply have been for you to take the
    money out of their appropriation and do the repairs as you
    would do for any other building. I mean, did you just say to
    them, You who have to do with Agriculture, you who are not in
    the construction and leasing building, you take your own money,
    and you fix your own building up?
        Mr. Peck. That is it in essence. I mean, that is, in
    essence, what we said. We took the building out of the Federal
    Buildings Fund, for all intents and purposes, and we said to
    Agriculture, You fix it up out of your own funding. That is the
    way that it was supposed to work, and they have put significant
    money into the building, although it looks like not as much as
    we have waived.
        Ms. Norton. How long is that arrangement supposed to last?
    Is there a letter from OMB that the Federal--we would like to
    see this letter from OMB. This says that the Federal Buildings
    Fund is not disadvantaged by the Department's not paying any
    rent.
        What is the theory of that?
        Mr. Peck. I am just checking to make sure. I think we did
    provide a letter to you either from OMB or----
        Ms. Norton. Would you describe to us the reasoning of OMB
    in that score?
        Mr. Peck. Yes, ma'am.
        Their view is that, while we no longer have the funds in
    the Federal Buildings Fund to fix up the building, neither do
    we anymore have the liability to fix up the building, and that
    that liability is on the Department of Agriculture.
        Ms. Norton. What did they say about the fact that they have
    only come up with $200 million of the $400 million they were
    supposed to come up with? I mean, I wish OMB were as forgiving
    in other respects as they seem to be here. How would they go
    and get the other money that has not come forward?
        Mr. Peck. I think that--I can't really speak for them, but
    I believe that the view may be that eventually the Department
    of Agriculture will get around to fixing up the building.
        Ms. Norton. What have been your discussions with them, Mr.
    Peck? I mean, they are not going to eventually spend any money
    they don't have to spend, let us face it. But there are other
    things if you are the Department of Agriculture--that is why we
    make you, not the Department of Agriculture or HSS, the leasing
    and construction arm of the Federal Government. So they are not
    going to do it unless somehow the GSA Public Buildings Service
    comes forward with a formula that gives them an offer they
    can't refuse.
        Mr. Peck. Well, thank you, because I obviously do have a
    concern, because if this established a precedent, eventually
    the Federal Buildings Fund would fall apart. We wouldn't have a
    revolving fund anymore. We would, in essence, have to create
    what people do in the private sector, which is to create a
    sinking fund. Every building would stand on its own and have a
    sinking fund. Somehow they would have to save money to fix up
    the building.
        We have had some conversation with Agriculture. I know that
    they do intend to fix up the building.
        Ms. Norton. I am at a loss. Did Agriculture request this
    letter from OMB, or did you request the letter that came from
    OMB?
        Mr. Peck. We requested the letter. It was partly in
    response, I believe, to yours and Mr. Oberstar's questions at a
    hearing sometime last year.
        Ms. Norton. Well, we are going to have--you know, as to the
    notion that OMB would not take into account past practice,
    whether or not, in fact, Agriculture had complied with its part
    of the agreement, was that addressed in the letter? If the
    agreement were a quid pro quo, the agreement is in violation.
        Mr. Peck. I suspect if you--you know, again, I have spoken
    to the officials at the Department of Agriculture. Let me just
    say I think that the origin of this arrangement may have been,
    if memory serves me well, that Agriculture felt that they had
    waited a long time for their turn to come around in the
    revolving fund to get their building fixed up. So I think the
    argument was, I will tell you what. Forgive the rent. We will
    use the money, and we will start the project ourselves. We will
    step out of the queue for building renovations. At the time we
    were way behind on fixing up any of the 1930s-era buildings in
    Washington. I think that is the history of it.
        The question of when they will finish the project I
    honestly can't address today. I can find out and provide it for
    you.
        Ms. Norton. I am going to have to ask you, Mr. Peck, if you
    would within 30 days get to the Committee a plan for assuring
    that the Department of Agriculture meet its agreement under--
    you don't sign an agreement and then go in violation and have
    nobody do anything about it. So, since you are the agency that
    is involved, the Committee is impatient with hearing about
    this, and even more impatient if OMB wants to let them off the
    hook since they rarely let anybody off the hook. We don't mind
    them saying there was originally a quid pro quo; we do mind
    them not saying that one party is in violation of the contract.
        We ask you to submit within 30 days a plan for making sure
    that the Department of Agriculture meets its agreement under
    the contract.
        Mr. Peck. I will be happy to do that.
        Ms. Norton. I very much would appreciate that.
        I have a number questions, and I will ask one before I go
    to the Ranking Member, who is very practiced in this area.
        I was interested in this 4 percent vacancy rate--that is
    the rate that we understood--compared to 16 percent in the
    private sector. I wondered if you were comparing the GSA rate
    to owner-occupied real estate portfolios or to general market
    vacancy rates.
        Mr. Peck. It is to general market vacancy rates.
        Ms. Norton. So that is the appropriate comparison?
        Mr. Peck. Not exactly, no. I just wanted to--we have not
    highlighted that in our testimony.
        My point is as a benchmark, it is hard to get occupancy
    rates from owner-occupied inventories, but it is just by way of
    showing that a 2 percent rate in the owned inventory, for
    example, is about what you would want to hold because you have
    needs. If you need to shift people around in buildings, you
    need to keep a little bit of vacancy.
        When people ask me that who are private sector owners, they
    say, Well, you know, we do, in the first instance, have the
    authority to order people to occupy our space. So it is not
    really a very fair comparison. On the other hand, we are very
    proud of the fact that even in the space where we lease, where
    agencies sometimes do move around, we manage to keep a pretty
    tight rate on inventory.
        Ms. Norton. Do you out-lease any federally owned space?
        Mr. Peck. Do we out-lease?
        Ms. Norton. Yes.
        Mr. Peck. We do some, but not very much.
        Ms. Norton. What kind of circumstance, given your needs,
    would be--do you have a building that is partially filled?
        Mr. Peck. We have some authorities to occasionally--and I
    am not sure it is true anymore. We had buildings that were
    occupied by the VA in which veterans' organizations could lease
    space. We do have the ability under the Public Buildings
    Cooperative Use Act to lease ground floor and other space for
    retail purposes where that is appropriate.
        In some cases, for example, the Hotel Monaco here is an
    out-leased building because it no longer served very
    efficiently as an office building, and we leased it to a hotel
    group that renovated it and turned it into a hotel, and we do
    get some rent back from that, but rarely do we lease out space
    otherwise. Section 412 did give us much more flexible authority
    to do that. It used to be we had to declare space surplus and
    go through a long process before we could lease it out to
    anyone else.
        There was one case I know of in which we out-leased to a
    State court when we no longer needed a Federal building, but it
    is the exception.
        Ms. Norton. Mr. Mica.
        Mr. Mica. Thank you for yielding.
        Just a couple of quick questions.
        As far as your funds to--right now, you know, everyone is
    talking about acquiring buildings and also about getting rid
    of, say, some buildings that are inefficient, and getting them
    off the rolls and replacing them with more efficient
    government-owned buildings. As far as dollars to accomplish
    that, what do you have on hand?
        Mr. Peck. Well, as you know, and as, I think, Ms. Norton
    noted, we did in the President's budget this year propose
    acquiring two buildings that we already have under lease, the
    Columbia Plaza building here and the IRS building in
    Martinsburg, West Virginia, but we don't have any available
    funding at the moment----
        Mr. Mica. Okay.
        Mr. Peck. --to acquire existing buildings that are----
        Mr. Mica. Out of this stimulus money, you can't acquire
    buildings, but could you build a building?
        Mr. Peck. We are taking a couple of buildings that were
    already designed but had not been funded and are building them;
    for example, a new courthouse in Austin, Texas. The Recovery
    Act money was not allowed----
        Mr. Mica. To acquire buildings?
        Mr. Peck. It did not allow to us acquire buildings because
    it doesn't create jobs.
        Mr. Mica. Is there any money available, or is all of that
    spoken for?
        Mr. Peck. The Recovery Act money, all of it is committed to
    projects. We have a project list of more than 250 projects that
    are getting funding. Even, I have to say, we have realized some
    savings, as I noted, in some of our bids. Even those have
    been--because the Recovery Act funding said we had to put them
    into renovation projects or construction, we have clearly not
    allocated any of that to opportunity purchases either.
        Mr. Mica. So, if you wanted to acquire new buildings,
    basically you are out of cash and out of authority?
        Mr. Peck. That is correct.
        Mr. Mica. Okay. So you would need that cash or authority by
    Congress, right?
        Mr. Peck. That is correct. Of course, you can authorize via
    prospectus, obviously, but we would need to find the
    appropriations funding.
        Mr. Mica. What about your legislative flexibility to
    accomplish some of these deals and maybe sell some properties
    that are inefficient, replace them, take those moneys and put
    them into other projects? Do you have enough authority to do
    that?
        Mr. Peck. I think we do have the authority to do that at
    the moment. The one thing that sometimes gets in the way, which
    people forget, is that we rarely find that we have a building
    that is totally vacant. I mean, we manage better than that.
        Where we find buildings that are only underutilized because
    they are inefficient or partially vacant, you need money up
    front to be able to move people out of those and put them into
    another space. It is kind of like what we discovered in the
    BRAC process. You need to put a lot more construction in Fort
    Belvoir, for example, to move out the people you are moving
    from other military bases that you are able to close down.
        Mr. Mica. Do you keep an inventory of partially occupied
    Federal buildings?
        Mr. Peck. We do. We have an inventory of what we call--the
    term of art in government is "underutilized property," and we
    actually maintain that----
        Mr. Mica. Right. If possible, could you share a copy with
    our staff? I would appreciate that. I would like to look at
    that.
        If there are any impediments or lack of flexibility that
    would allow you to acquire properties, exchange properties,
    dispose of inefficient properties, again, with taking on newer,
    maybe more efficient, environmentally friendly, transit-located
    properties--if there is anything missing or lacking, I would
    like to know what authority you need.
        Mr. Peck. I will.
        We are, in fact, ourselves taking a look at our surplus
    property procedures because, as you know, there are a number of
    screening requirements that we have to go through once we have
    declared a property surplused before we can take it all the way
    to sale. There are certain procedures that we think we can do
    faster. On the other hand, some of the statutory requirements
    do make it more time-consuming than, I think, we might want. We
    may have some suggestions that we could send up to you.
        Mr. Mica. All right. The only final thing would be if any
    of those deals that you said you have been obligated to fall
    through, could you also let us know on that account?
        Mr. Peck. Yes, sir.
        Mr. Mica. Thank you.
        Mr. Peck. Can I add one other thing?
        We were able with some of our Recovery Act funding to turn
    a couple of projects that would have been long-term leases for
    long-term government needs into constructed projects. I could
    just name two. One Mr. Diaz-Balart may know as the FBI project
    in Miami. The second was a courthouse in Yuma, Arizona, both of
    which we changed from long-term leases, built-to-suit leases
    basically, into owned buildings.
        Mr. Mica. Thank you.
        I yield back, Madam Chair.
        Ms. Norton. Mr. Diaz-Balart.
        Mr. Diaz-Balart. Just one question. Thank you, Madam Chair.
        With the stimulus money, obviously there were projects that
    went forward, or they had to be on the drawing board really
    quickly. So didn't that potentially free up some funding for
    you? I understand you can't use it for purchasing, but didn't
    it free up some money that you were looking for that you were
    already scheduled to do something else with?
        Mr. Peck. The only money it would have freed up would have
    been the first-year lease cost of those buildings, and we do
    not actually have to pay the lease until the building is built.
    So, theoretically it is freed-up lease costs, say, 2 years from
    now that we won't have to pay in return for an upfront payment
    now to build the buildings.
        Mr. Diaz-Balart. It is not cash on hand?
        Mr. Peck. Not significant, no. It would not be significant,
    but it is not cash on hand either. Yes, sir.
        Mr. Diaz-Balart. Thank you.
        Ms. Norton. Thank you, Mr. Diaz-Balart.
        Now, I want to get at some of the efficiencies of the way
    you manage the portfolio. What is the industry pricing standard
    for managing a real estate portfolio expressed as a percentage
    of the value of the managed portfolio?
        Mr. Peck. Do you mean the amount of money that one should
    spend every year on your maintaining your capital inventory?
        Ms. Norton. Yes.
        Mr. Peck. The benchmark which we have used in the past is
    the one from the National Research Council, which recommends
    that 2 to 4 percent of the replacement value of an inventory be
    reinvested every year as a capital upgrade. We have discovered
    that there is a similar benchmark used by the association of
    the University Business Administrators, so somewhere in between
    2 and 4 percent, and I think the range suggests that if you
    have an older inventory, you go toward the top of that range.
        Ms. Norton. I was going to make sure I was not being
    misunderstood. I am really interested in your overhead costs,
    costs which, I think, you testify in your testimony need to be
    reduced.
        Mr. Peck. Right. I do not have a good benchmark on those
    because, you know, again, speculative real estate owners
    typically don't have large workforces. They contract everything
    out. The only thing I can say is I think, you know, in the
    Public Buildings Service budget, about 95 percent of what we
    spend is already contracted out and is, I think, managed pretty
    efficiently. On the remaining 5 percent, which is what we spend
    on our own salaries, I honestly don't know what a good
    benchmark is. We are really good at benchmarking our utility
    costs and cleaning costs.
        Ms. Norton. Well, wouldn't what you contract out have to be
    figured into your overhead costs as well?
        Mr. Peck. Well----
        Ms. Norton. There must be some way in which you would have
    to capture that.
        Mr. Peck. No. Most of what we contract out is building
    operations, cleaning, maintenance, architecture services,
    construction services, those kinds of things.
        Ms. Norton. Leasing you contract out a lot.
        Mr. Peck. Correct. Although that presumably does not cost
    us, because we at least pay those brokers who are doing that
    work out of the lease cost----
        Ms. Norton. True.
        Mr. Peck. --but I will have to get you a number. The one
    thing----
        Ms. Norton. But you believe that those costs exceed what
    industry costs generally are, and that they should be better
    controlled? You don't have a handle on that?
        Mr. Peck. Let me answer it two ways. One is I think they
    could always be better controlled, although I think we are
    pretty good. I don't want to go farther than that at the moment
    because we are doing a pretty serious review.
        The other thing I will just note is because we are the
    government, and we have procedures for letting contracts and
    doing leasing that are much more time-consuming than the
    private sector has, most of the time for good reason, and
    requiring that we get competition and fairness in a way that
    private sector people don't always have to do, I think it would
    be hard to benchmark the overhead costs. I am not trying to
    evade it. I just think overhead costs can always be reduced if
    you get serious about it.
        Ms. Norton. Well, I think you have got to find some way to
    compare yourself to the private sector to see how much and
    whether, for that matter. We agree that there is room to reduce
    overhead costs in what you do.
        I was in a quandary to understand why a couple of years ago
    PBS reduced the fee it charges to customers, its agencies--to
    the agencies for leasing services. Why was that done? What was
    the impact on the profitability of this?
        Mr. Peck. We reduced the--I will have to get you the
    number. I believe it was a year and a half or 2 years ago that
    we reduced the leasing fee from 8 percent to 7 percent. The
    rationale for that was that as we used private sector broker
    services for some of the work, we felt that we needed to--it
    was before my time, but we felt that there should be a
    commensurate reduction in how much work the Public Buildings
    Service employees had to do. But we only reduced by 1 percent,
    in part because a large percentage of that leasing fee is what
    is required for us to administer the lease during its term,
    which is after the brokers go away.
        Second, it is an insurance fund, in a way, against the fact
    that agencies can give us 120 days' notice and walk away from
    their space, leaving us with rent on vacant space, but I don't
    know how much that 1 percent reduction has cost us.
        Ms. Norton. They can do what?
        Mr. Peck. You know, one of the fundamental precepts of
    GSA's being a government-wide real estate organization is that
    we bear the risk in the government that somebody on short
    notice might not need the space that they occupy because we
    have the opportunity--theoretically, if agency X decides they
    don't need space, we can invite agency Y, which may be looking
    for space, to reoccupy it. So agencies can give us 120-days'
    notice that they have a marketable block of space, and we will
    take it back.
        Ms. Norton. But you are not left holding the bag very
    often, are you, Mr. Peck?
        Mr. Peck. No, we are not.
        The only time we have been we have solved this issue.
    Notice I said they have to give us a marketable block of space.
    There have been times when people have said, Okay. I no longer
    need this office. You can give it to somebody else, and we say,
    You know, we are not quite sure that the Department of Defense
    really wants to occupy one office in the middle of the Park
    Service space, so we don't let them do that.
        Ms. Norton. Mr. Peck, we don't know any way to look at GSA,
    which, after all, is in the marketplace along with everybody
    else in the real estate market, except by comparing you with
    others in the market. So I wonder how you would respond to
    these facts and figures.
        You control Federal properties, according to your
    estimates, of something like $24 billion to $30 billion. Now,
    just think of it. This is debt free. You don't pay any real
    estate taxes. However, you collect equivalent rent, which is
    inclusive of real estate taxes. Using--your own parlance--funds
    from the operation, you are supposed to be netting in the
    vicinity of $1.5 billion a year, which equates to about 5 to 6
    percent, but one would expect an investment on income, since
    GSA does charge commercially equivalent rents, to be at least 7
    or 8 percent and possibly more when the real estate market is
    robust.
        Why can't the Federal Buildings Fund over, the long term at
    least, produce returns in the range of the commercial rates?
        Mr. Peck. You know, we produce a pretty good return. If you
    take a look at our--let me approach it this way.
        Of our $8.5 billion or so of rental income this year, about
    $5 billion immediately goes out as lease payments, and that is
    on about half of the square footage. So, of the rent that we
    collect on the rest, we have about $3.5 billion left to
    maintain operations--overhead, utilities, cleaning, all those
    things, and minor and major alterations on our buildings.
        The way it works out when all is said and done and over the
    last several years on an annual basis, we are at about $700
    million, $800 million worth of major and minor repairs, and
    given the age of our inventory, that is less than we probably
    need to stay even with the needs. That is the way our budgeting
    looks.
        Ms. Norton. So you are blaming it on the fact that you
    don't produce the same percentage return on your investment
    as--you are blaming that on the fact that you increasingly
    lease so much, and that so much of what you get goes into the
    leasing market and not----
        Mr. Peck. Well, let me put it a different way. I mean,
    leasing is pretty much a wash, but when you look at this huge
    rent roll we have got--and $8.5 billion is serious money--it
    looks like you should have a lot of money left over to work on
    your buildings, but that $5 billion is kind of gone.
        You know, the $3.5 billion that we collect on the rest of
    the inventory in part is relatively low because in old
    buildings--and this, again, goes back to what a revolving fund
    is all about--on an old building, we charge a relatively low
    rent, because, in real estate parlance, it is often a class C
    building. So when you compare it to other buildings in the
    market--you know, when you look at law firms renting class A
    space, they are renting a much better building for a much
    better price. Our class C buildings, in essence, don't make
    enough money, clearly, to fix them up, and we rely on new
    buildings that are charging higher rents and are having less
    real estate need to make the profit.
        Basically what is happening is we don't have enough of
    those to clear a really good profit to make up for ones that
    get low rents, that don't make much profit, but that have the
    needs. So we are a little bit upside down on our income and our
    needs.
        I have to say, lest anybody take this to mean that our
    buildings are just in terrible shape, you know, you can look
    around here. We have now, but in some measure with appropriated
    funds, been able to fix up almost all of the Federal Triangle
    buildings. The Commerce Department and the FTC still need
    significant work.
        Ms. Norton. But that goes back to how we are doing it.
        Mr. Peck. Right.
        Ms. Norton. That goes back to the fact that this has
    nothing to do with the Federal Buildings Fund. This has nothing
    to do with the original concept or theory of how we would do
    this upkeep or how we would build buildings.
        One of the things that I hope we get out of this hearing is
    what do we do next. This ain't working, people. This is not
    functioning well. This is not the way to do it, to continue to
    operate off of a faulty theory.
        You know, Congress does this all the time. This doesn't
    have anything to do with GSA. Congress hides the ball all the
    time and just hopes for the best. Clearly, that is what was
    happening here. But it really does mean, Mr. Peck, that we need
    to face up and say, for example, that the Federal Buildings
    Fund will no longer have to do with one of these functions,
    possibly construction, because it doesn't do it anyway, and
    then consider what else we should do.
        You talk about--you know, you look around and you say, But
    we have been able to do X, Y and Z, but then you put in the
    right caveat "with appropriated funds." It is appropriated
    funds that are helping you to fix up buildings all over the
    United States as I speak, precisely because the Federal
    Buildings Fund could do nothing about it, and we had a
    deteriorating set of assets.
        Mr. Peck. Right. That is right.
        Ms. Norton. I want to know, have you and GSA thought about
    how to eliminate what amounts to a structural imbalance built
    into, inherent in, the Federal Buildings Fund? Have you given
    any thought to another formula or to another way to manage your
    capital assets?
        Mr. Peck. We have certainly had ideas over the years. I was
    just reflecting that had someone offered the Federal building
    inventory to private investors in 1972, they probably would
    have taken a look at the numbers and said, I can only do this
    if you capitalize a renovation fund, because I need to bring
    these buildings up to a certain standard so I can charge enough
    rent to have this revolving fund get the running start it needs
    to keep going over time. And that clearly didn't happen.
        To bring it forward and to answer your question more
    directly, we have certainly over the years considered a number
    of other things. One is--and again, this requires an upfront
    infusion of appropriated dollars--going out and buying new
    assets so that we can trade in old assets or fix up old assets.
        Ms. Norton. See, that would mean, of course, we go to
    appropriated funds. I don't need to tell you, Mr. Peck--you
    worked in the Senate--that the hardest money to come by is
    bricks and mortar money.
        Mr. Peck. Correct. I am clearly not here to suggest, and
    would be in some hot water if I did, that I will see those
    funds on the horizon any time soon.
        Ms. Norton. So why don't we just write that off, Mr. Peck,
    and come up with a real formula.
        Mr. Peck. Well, every once in a while we get infusion
    funds.
        Ms. Norton. No. Your own administration has shown--for
    example, if the administration--let us try to work out a way to
    deal with this.
        If the administration said, We--in 1 year in office and
    with our first budget, we bought a building--a building, I
    might add, that we had bought several times over--but that we
    bought a building because we weren't going to do that anymore,
    and in the second year in office, with our newest budget, we
    are buying another building, and if this President spent 8
    years--and I am hoping for 8--buying a building, he would have
    done more in the purchasing of real estate than any
    administration in the history of the United States with only
    eight buildings.
        If we don't have a goal like that, the whole notion of,
    well, we could always buy buildings--Mr. Mica talked about
    buying a building, and he asked you how much money was there in
    your portfolio to buy a building, and you ran down where the
    money goes. We know that the money isn't there, and we know
    that Congress isn't going to come up with the money except in a
    circumstance like the one we are in now where you are trying to
    stimulate the economy, so I am not sure we should even put that
    on the table unless we put a goal on the table as well.
        Mr. Peck. Well, one other thing I will just note, and you
    certainly know, is that funding the Coast Guard headquarters
    building is also getting us out of a--will put us in a good
    position for a long time in the Federal Buildings Fund, as will
    the rest of the Department of Homeland Security's consolidation
    of St. Elizabeth's, which will get us out of----
        Ms. Norton. By the way, Mr. Peck, have you done any
    analysis of just how much in the Federal Buildings Fund will be
    generated by those moves alone? Could you get within 30 days to
    this? I mean, would it get us some distance toward making the
    case that building does matter?
        Mr. Peck. We can get you that. We have actually done the
    analysis on the leases that will be vacating for DHS.
        Ms. Norton. We know that there are as many as 60 different
    locations. I don't know if all will be vacated, but we do know
    a fair number of them not only will be vacated with what is
    going up now but the RFP that is out on the streets now.
        Mr. Peck. The number is--I have to be careful, because I am
    recused from talking about that lease. But I do know DHS will
    go from something like 43 leased locations down to 3 or 4
    leased locations when it is all done.
        Let me just note one other mechanism that is really
    important to put on the table and that is, since we have so
    much leased space--and, as you know, over the years we have
    talked about this a number of times--to the extent that we can
    turn some of our leased locations into government-owned
    locations, either by buying them up front now or purchasing
    them over time is probably----
        Ms. Norton. Funny you should bring up 412 authority.
        Mr. Peck.--probably the most significant way to make a
    change in the profile of the inventory.
        As you know, that has been proposed. We have looked at it
    any number of times. We have had some limited success, but only
    limited success. And partly for legitimate government
    accounting reasons, many of those if they are regarded as
    installment purposes, the government scores them as a capital
    lease.
        Ms. Norton. This leads to the 412 authority to increase
    government ownership, and it may be the only thing on the table
    that is realistic at this point. Although I would ask you in
    your discussions with OMB to consider keeping up the pace of at
    least buying some building that you keep paying for if you
    don't buy it. That may be the criterion to set. You have at
    least an option to buy most or many.
        I should ask that question. Do you often have an option to
    purchase?
        Mr. Peck. Not that often. We do have some.
        Ms. Norton. What determines if you are leasing a whole
    building, in the course of the negotiations would you normally
    want to have--and you don't anticipate moving out of the
    location--would you normally want to have an option to buy?
        Mr. Peck. Yes and no. Yes, it is a nice thing to have. But
    I think since the scoring rules were written the way they have
    been, we can no longer write a purchase option that allows us
    to purchase at a below-market rate, which means, in essence,
    that you come----
        Ms. Norton. How did you do the State Department or the
    Columbia Pike----
        Mr. Peck. That purchase option was written before the
    scoring rules were put into effect, so we have an incredibly
    favorable below-market purchase option.
        Where we are left today if we write a purchase option, we
    get to the end of the lease and we can go to the owner and say,
    we would like to buy the building; and he or she says, sure,
    for market value; I will put it out to bid. And so, whether we
    have a purchase option or not, we don't have any different
    situation than we would have if we would just sort of go to
    them at the end of the lease.
        Ms. Norton. Oh, my, I didn't even know that.
        Could you within 30 days tell--write to this Committee
    about how many below-market purchase options you have
    outstanding now, recognizing that you couldn't do that scoring.
    Every time I find a new way in which scoring costs the
    taxpayers money.
        Mr. Peck. We can get you that.
        Ms. Norton. Appreciate that.
        On 412 authority--we have had this dialogue over and over
    again--you were to go to OMB to say, can we use what Congress
    told us to use? We, of course, were insulted by that. We
    thought we were the ones who got to tell you what to do.
        But, in any case, let me ask you, if you have had a
    conversation with OMB, did you have it around specific 412
    projects? If you have it in the abstract, of course, I can
    imagine what they would say. Has that conversation been taken--
    been had about projects on which 412 authority could be used?
        Mr. Peck. We have had--at least since I have been back at
    GSA, we have had that conversation with OMB about their
    openness to looking at some 412 projects; and they have said,
    as you suggest, on a project-by-project basis they are open to
    it.
        We have brought one or two projects to them within the last
    year that are potential that we don't yet have--we have not yet
    done all the analysis we need to go to them and talk about how
    it might be done in a way that will conform to those--we
    haven't gotten the numbers to the point where we can say with
    assurance to them or to ourselves that they don't violate the
    scoring rules. But we do have a couple in the pipeline.
        Ms. Norton. Mr. Peck, I am going to have to ask you,
    because the Subcommittee believes it has to advance the
    conversation every time we meet, to submit to us fact sheets
    for five projects. Theoretical, we are not asking you to commit
    to them, where at least theoretically you believe GSA believes
    412 authority would be appropriate to use, the numbers and all
    of what would be appropriate turned out; and if you would
    include in the fact sheets all the information that would be
    included in a prospectus. We need to judge this against
    something realistic so we don't keep asking questions in the
    abstract.
        Could you get that? I will give you 60 days on that one.
        One more question. This comes from your testimony. You
    indicated PBS has sold unneeded assets totaling $198 million
    and I think that you testified about that as an indication of
    your use of 412 authority.
        Mr. Peck. What I meant was, before section 412, when we
    sold the property we certainly had the authority to sell a
    property, but the revenue from that went into either the
    general treasury or the landlord conservation fund. But now we
    have the opportunity to put it back into the Federal Buildings
    Fund----
        Ms. Norton. That's it. This is why 412 authority is just so
    valuable. If I were in your position I would spend all my
    waking hours trying to find ways to use 412 authority. There
    are so many avenues that it opens for a creative real estate
    developer to try to take advantage of it, even within scoring
    rules, we believe.
        But you found $198 million. Does that mean $198 million
    went into the Federal Buildings Fund?
        Mr. Peck. Yes, yes.
        Ms. Norton. Were these under-performing assets? Give us an
    idea of what kinds of properties and over what period of time
    are we talking.
        Mr. Peck. This was going back to fiscal 2005 through I
    think the middle of 2009--or the end of fiscal year 2009. So
    over 4 years.
        We had one--for example, the Thaddeus Dulski Federal
    Building in Buffalo, New York, which we were able to vacate in
    its entirety and sell, I think was one of the bigger sales. I
    would be happy to provide you a list of the others.
        Ms. Norton. I wish you would.
        Mr. Peck. There were a couple of large sales that usually
    happens.
        Ms. Norton. They were under performing? I mean, why did you
    decide--on what basis did GSA decide to sell an asset?
        Mr. Peck. Typically, where we are building a new building
    or new courthouse.
        Ms. Norton. Is that what happened here?
        Mr. Peck. I think we just reached a point in Buffalo where
    we didn't need as much space anymore, and it wasn't worth
    putting money back into it. We were able to move enough people
    out to vacate it in its entirety.
        Ms. Norton. Do you have a goal for looking for under-
    performing assets and selling assets? And, if so, how is that
    done and what do you expect for this coming fiscal year.
        Mr. Peck. Well, in fact, we organized this morning a task
    force to look at vacant surplus property because we want to put
    more emphasis on that as well. We are trying to scrub our
    inventory to see what realistically we might sell in a
    realistic time frame.
        Ms. Norton. Recognizing this is not the market where you
    have many people trying to buy except us, we should be trying
    to buy, but it is a very good thing to be doing, and we applaud
    it and encourage it.
        I am going to ask you a last question about courthouses,
    the bane of our existence. Are you building any courthouses as
    I speak?
        Mr. Peck. Oh, yes, ma'am.
        Ms. Norton. Where are the courthouses being built?
        Mr. Peck. Under construction as we speak--Austin, Texas--I
    am trying to think. I know of courthouses in design. I believe
    we have just let a design-built contract in Bakersfield,
    California. I don't know exactly where it is in the process.
    San Diego is under construction again.
        Ms. Norton. I am asking you this question really to make
    sure about any new courthouses, and I must ask you straight up:
    Will each and every new courthouse you are building comply with
    the sharing standards established in this Subcommittee's San
    Diego resolution? And those are: two magistrates for one
    courtroom, two senior judges for one courtroom.
        Mr. Peck. As far as I know. Needless to say, I have had
    conversations about this. The information that I have from the
    courts, at least on all the conversations I have had with them
    on projects--and so I am want to issue a caveat in a moment--
    they have said that they are meeting the sharing guidelines----
        Ms. Norton. It is not up to them.
        Mr. Peck. No, I know that. But the courts have agreed to a
    set of sharing guidelines which we are, in fact, enforcing. In
    San Diego specifically, I know that the Committee put a
    standard in the resolution, and we are following that in the
    San Diego project.
        Ms. Norton. Those standards were not for San Diego alone. I
    mean, we would not do to San Diego what we would not do to
    every courthouse. We have found scandalous inventory unused in
    courthouses, and that is now a well-known fact that will be
    documented in a GAO report that is going to come out soon. We
    found courtrooms that nobody was using for long periods of
    time, because the judges said so. The judges are no more in
    charge of building their own premises than any Federal agency
    is. The fact that they took control of what is your province
    was a reflection on GSA and much to the detriment of the
    courthouse.
        They were found, as you know, Mr. Peck--I am not sure you
    were here or not when really scandalous stuff was found in the
    courthouses. Like they were building as if they were CEOs of
    some Fortune 500 company. Building extra kitchens and bathrooms
    and thinking of things. What else can we do? It was
    particularly inappropriate behavior for a judge, because it
    bordered on the kind of stuff people go to jail for, using
    taxpayers' money beyond what anybody could possibly have
    expected. And we talked to GSA. GSA said, well, the judge did
    it. What does a judge know?
        Mr. Peck. Madam Chair, when I was at GSA before, we
    established a design guide with the courts; and after a lot
    of----
        Ms. Norton. --are going to put that guide exclusively under
    the control of GSA. We have had a hard enough time with GSA
    keeping control of its own function when it comes to sister
    agencies, but with respect to the courts GSA gave it up, and
    they became essentially their own GSA.
        Mr. Peck. What I think happened--well, one of the issues
    that I think you and we and the courts have been concerned
    with--because I wanted to describe my conversations recently
    with the courts--is a question aside from the issue you raise,
    which is legitimate, about how much we are using existing
    courtrooms--is the projection of how many judicial officers
    will there be in a district or a circuit in a given amount of
    time. Because some of what we are doing is building for
    expansion needs, some of which has clearly not come about.
        Ms. Norton. Let's stop right there. The judges and GSA
    bought it, had insisted on building courtrooms for judges that
    Congress had never even authorized on the theory that one day
    we will have bigger courts. The outrage of assuming for us that
    we are going to somehow authorize increasing numbers of
    district and Court of Appeals judges is a way of getting one
    courtroom per judge, nothing more and nothing less; and we are
    not falling for it anymore.
        Mr. Peck. Well, let me say I don't think--except for
    meetings on security, I don't think I have had any more
    meetings since I have been back at GSA with anyone other than
    the courts.
        I will say I think there has been a change in the judicial
    conference in the administrative office. I think their
    leadership on the space committee of the judges and the
    leadership at the top of the AOC, I think they have recognized
    that the courthouse building program--which I have to say we
    have been fortunate to be a part of just because we are
    building great courthouses and I think they are an important
    function for our democracy--I think that there is a realization
    that if we don't get pretty tight about space utilization that
    the program is in jeopardy. And I think there is much more of a
    recognition that they really have to take a look at what the
    projections are for judgeships and build to a more realistic
    expectation. And I have to say they are working in a much more
    cooperative manner with us than they were when I was here
    before.
        I feel like I need to say that. I am not sure we are at the
    perfect balance yet, but I think we are working pretty hard at
    it. And the courthouses that we are designing now, I think--and
    I would be happy to talk to you about this--meet the standard
    that I understand has been one agreed to about what senior
    judges get and what magistrates get and at least they are
    sharing there.
        Ms. Norton. That is very good news. The judges have only a
    right to inform us of courthouses in terms of vacancies, not
    they anticipate that Congress will authorize new judges and to
    leave us with courthouses, courtrooms standing. But, again,
    this will become more apparent when the GAO report comes out.
        Mr. Peck, your testimony has been very helpful. We look
    forward to getting the list of potential--and we understand it
    to be only highly potential--but potential of 412 authorities.
    Frankly, we are at a loss. That is why this hearing is so
    important, to fill in what we appreciate you candidly told us
    in your testimony, that the present formula doesn't work, and
    we think it is important for the Subcommittee working with GSA
    to come forward with a new formula.
        That is why you see me trying out things--can we get the
    administration, I wish you would have a conversation with OMB,
    recognizing that there is--we are certainly not going to cure
    this problem by building a whole bunch of new buildings.
        Can we get at least the goal of purchasing a building on
    the order of Columbia Plaza where you keep buying the building?
    That could be one standard you could put. Can we carve out 412
    authorities that stay within scoring where the return for the
    government is so great that it becomes, particularly in this
    market, almost irresistible? Are there parties who could
    cooperate with the Federal Government in this economy to do so?
    If we begin to do the planning, we will see, the more we flesh
    it out, whether we are talking about anything realistic.
        Thank you very much, Mr. Peck.
        Mr. Peck. Thank you for the opportunity.
        Ms. Norton. I ask for the second panel to come forward,
    please. I ask you to testify in the order in which you are
    seated.
        Panel II, David Nash, the President of David Nash &
    Associates, testifying for the National Academy of Sciences.

     STATEMENTS OF DAVID NASH, PRESIDENT, DAVE NASH & ASSOCIATES,
        ONE PERIMETER SOUTH, NATIONAL ACADEMY OF SCIENCE; JOHN
     HENTSCHEL, PRESIDENT, HENTSCHEL REAL ESTATE SERVICES, MEMBER,
    COUNSELORS OF REAL ESTATE; RICHARD GRENINGER, MANAGING PARTNER,
        CARR SERVICES; AND KEVIN STOKLOSA, ASSISTANT TECHNICAL
            DIRECTOR, FINANCIAL ACCOUNTING STANDARDS BOARD

        Mr. Nash. Thank you, Madam Chair.
        As you said, my name is David Nash; and I am the President
    of Dave Nash & Associates. It is a firm that provides project
    and program management consulting.
        I am on about my third retirement now, so I have had a lot
    of action over the 45 years I have been in this business. I
    have been involved with buildings and infrastructure for, as I
    said, 45 years in various places, from the U.S. Navy shore
    establishment around the world to, most recently, the
    reconstruction of Iraq's infrastructure.
        I am here today as a member of the National Academy of
    Engineering and the Chair of the National Research Council's
    Board on Infrastructure and the Constructed Environment. My
    primary message here today is that, although we may have a
    crisis in Federal capital assets, we also have a tremendous
    opportunity to change how we invest in Federal facilities so we
    can operate them more cost effectively and more sustainability.
    Change is both necessary and possible, in my opinion.
        In 2004, I was Vice Chair of the National Research
    Council's Committee on Business Strategies for Public Capital
    Investment. The committee's task was to develop guidelines for
    making better decisions about investments in Federal facilities
    based on best practices from private-sector organizations.
        From the start, our committee recognized that there are
    inherent differences between the mission's goals and operating
    environments of the private-sector organizations and those in
    the Federal Government. Nonetheless, we identified a number of
    best practices from the private sector that we thought could be
    adapted through the Federal Government and could result in a
    better and more cost-effective management of our Federal
    facilities. Such practices include life-cycle costing,
    approaches for acquiring facilities, determining when to own
    and when to lease, and, finally, disposal of excess facilities.
    Our committee found that the Federal budget practice provide
    few if any incentives for Federal agencies to use these
    procedures.
        Although your hearing today is focused on the General
    Services Administration's building fund, in our research we
    found that there are 30 other Federal agencies that are also
    responsible for investing and operating and maintaining
    facilities. In total, those agencies own more than 400,000
    facilities worldwide. Many of these agencies are reporting
    billions of dollars in deferred maintenance.
        Obviously, one of the reasons is lack of funding. Another
    reason is that all of the buildings are at least 50 years old
    and much older in DOD and are deteriorating due to wear and
    tear.
        In the last 50 years, the missions and programs of some of
    these Federal agencies have changed, although their buildings
    haven't, for the most part. The result is that many departments
    and agencies have excess, underutilized and obsolete facilities
    that are still operating and they are still operating and
    maintaining.
        So what can we do to change this situation? One important
    step, in our opinion, would be the change to require life-cycle
    costing for major facilities proposals. Life-cycle costing
    considers not only what it will cost to build a facility but
    also what it will cost to operate and maintain it for 20 or
    more years.
        Private-sector organizations use life-cycle costing to
    calculate what a building will cost and what it will cost for
    equipment and furniture and staff. This process provides
    transparency about the total commitment of the resources that
    they--and the "they" are the boards and the leadership of these
    various companies--are making. They intend to determine what
    the total impacts will be on the organization and what trade-
    offs that will have to be made.
        In the Federal Government, the budget process and the
    scoring rules are structured not only to look at design and
    construction costs but facility which--the first cost, which
    may be only 10 percent of the life-cycle cost. In other words,
    the rest of the cost of owning a building occurs over the years
    it is in use. So when the funding is approved to acquire a new
    Federal building, what it will actually cost to operate the
    building for 20 or more years is not transparent to
    decisionmakers or the public.
        The NRC has recommended that agencies should use life-cycle
    costing for all significant facilities investment decisions to
    better inform decisionmakers about the full cost for a proposed
    investment.
        Best practice private sector organizations also use life-
    cycle costing when they are deciding whether to own or lease
    facilities. Large private-sector corporations typically own
    those facilities that are most important to their business
    success and for which they want to exert maximum control for a
    long period of time. They lease those facilities that are less
    critical to their operations for which they may need only for a
    short time. This allows private-sector firms to divest
    facilities they no longer need.
        For Federal agencies, the own versus lease decision is not
    as clear-cut. Again, the budget process focuses on design and
    construction costs and focuses only on the next fiscal year.
    These budget practices create an incentive to lease space,
    because the 1-year cost is much lower than the cost of
    designing and constructing a new building. However, over those
    20 or 30 years the building is in use the cost of leasing may
    be greater than the cost of owning.
        The budget process also encourages agencies to continue to
    use old and obsolete facilities, which may cost more to operate
    and maintain but where costs are not transparent to the
    decisionmakers.
        Our committee did find that some Federal agencies were able
    to use some alternative approaches for acquiring, operating,
    and maintaining facilities in order to leverage available
    funding. These approaches included some public-private
    partnerships, out leasing arrangements. However, all these
    approaches were used on a case-by-case basis under an agency
    specific legislation.
        Our committee recognized that using alternative approaches
    on a more widespread basis does carry some risk and raises
    concern about transparency. Nonetheless, the NRC has
    recommended that more widespread use of such approaches be
    allowed in order to leverage funding.
        We also recommended that pilot programs be used to test the
    effectiveness of various approaches and to evaluate the outcome
    of national, State, and local perspectives. Making this happen
    will require a collaborative effort on the part of Congress,
    the administration, Federal agencies, including the Office of
    Management Budget and Congressional Budget Office.
        Finally, I would like to address the issue of excess,
    underutilized, and obsolete facilities. Significant amounts of
    available funding for maintenance and repair are invested in
    such facilities, just to keep them up and running. Potentially
    significant amounts of taxpayer dollars can be saved over the
    long term if greater emphasis was placed on divesting the
    government of unneeded but still viable properties. Under
    current procedures, agencies have few incentives and
    significant disincentives to dispose of excess facilities.
        The National Research Council has recommended long-term
    requirements for maintenance and repair expenditures should be
    managed by reducing the size of the Federal facilities
    portfolio. The Council has also recommended that Congress and
    the administration lead an effort to streamline government-wide
    policies, regulations, and processes related to facilities
    disposal.
        This concludes my remarks. Thank you for the opportunity to
    testify.
        Ms. Norton. Thank you very much, Mr. Nash.
        John Hentschel, who is President of Hentschel Real Estate
    Services, Counselors of Real Estate.
        Mr. Hentschel. Good afternoon, Madam Chairwoman and Members
    of the Committee. Thank you for the opportunity to testify
    before you today.
        My name is John Hentschel. I am a member of the Counselors
    of Real Estate and President of Hentschel Real Estate Services,
    a real estate consulting and advisory firm that, among other
    things, advises government leaders in the U.S. and abroad about
    real estate valuation and asset and portfolio management
    issues.
        I can also empathize with Mr. Peck because in a former
    portion of my career I also had to manage a government
    portfolio of real estate for the city of Baltimore.
        The testimony that I am presenting today is based on the
    findings of a 2001 CRE Consulting Corps assignment commissioned
    by the Public Building Service. It was designed to
    independently assess PBS's portfolio management policies and
    procedures and compare its newly devised asset management
    strategy at the time with best practices employed in the
    private sector.
        PBS's new strategy sought to shift its capital decision-
    making process from a tactical to a strategic one. It
    envisioned that only self-sufficient properties that would be
    capable of producing revenues greater than operating expenses
    for the Federal buildings fund would be retained and allotted
    funding for repairs, alterations, and replacements. Those
    properties that failed to meet that criteria would be targeted
    for disposal.
        The Counselors of Real Estate, an affiliate of the National
    Association of Realtors, is a professional society whose
    approximately 1,100 members are among the world's most
    respected and highly qualified advisors on real estate matters.
    As a public service, the Counselors organized a Consulting
    Corps which provides strategic advice to government agencies
    and non-profit organizations who seek strategies to resolve
    real estate problems.
        The Consulting Corps employs a collaborative process for
    which CREs volunteer their time and effort on a pro bono basis.
    For this assignment, I chaired a panel of CREs that also
    included Mahlon Apgar, Howie Gelbtuch, Barbara Hampton, and
    Frank Livingston.
        After reviewing relevant documents and briefing materials
    and conducting 5 days of intensive interviews and thoughtful
    deliberations, the panel presented its findings and
    recommendations to the PBS Commissioner in a verbal report
    entitled An Agenda for Strategic Change on September 14th,
    2001, followed by the panel Chair's address to a conference of
    PBS regional administrators in Kansas City on November 6th,
    2001.
        With respect to the PBS portfolio, the CRE panel observed
    that:
        In terms of age, the building inventory was old, with an
    average building age of more than 50 years, and was below
    average in quality and physical condition.
        In terms of productivity, the income produced by the
    building inventory for the Federal Buildings Fund was highly
    stratified and concentrated, with 55 percent of the square
    footage generating 95 percent of the funds from operations.
        The capital needs of the building inventory for RAR--
    repairs, alterations, and replacements--were excessive,
    estimated by the GAO at that time to be in excess of $4
    billion, with many repairs having been deferred repeatedly and
    indefinitely.
        The availability of and access to investment capital to
    address the portfolio's RAR needs was extremely limited, well
    beyond the FBF funding capacity, with little prospect with
    direct congressional appropriation and few other identifiable
    sources.
        Unlike the private sector, the legal and budgetary
    environment within PBS operated was highly structured, rigid,
    unsympathetic, and not amenable to change, modification, or
    exception.
        In comparison to private-sector standards, PBS's allocate
    of administrative overhead to each building within the
    portfolio was exorbitant, counteracting any benefits associated
    with self insurance and local property tax exemption.
        PBS at the time lacked a strategic mind-set. Its narrow
    caretaker focus and preference for long-term property ownership
    conflicted with PBS's stated mission and the Federal
    Government's inherent budgetary and accounting bias against
    capital investment reflected in its "scoring" rules, the
    absence of a capital budgeting process, and PBS's inability to
    retain disposition proceeds for other uses at the time.
        Unlike prior studies commissioned by PBS, the CRE panel
    approached the issue from a much broader perspective that
    considered PBS's mission, funding, structure, systems, and
    skill sets.
        In addition to endorsing the adoption of PBS's more
    strategic approach to allocating its limited resources, the
    panel also recommended that PBS assume and demonstrate its
    capacity to perform a strategic leadership role as an advisor
    to help Congress, the OMB, and client agencies make informed
    real estate decisions. The panel further suggested that PBS
    should define and develop cost, efficiency, and performance
    standards to guide real estate decisions of the Federal
    Government.
        Organizationally, the panel believed that PBS should reduce
    redundancy and streamline regional entities, intensify
    management controls and institute uniformity and universal
    application of all processes, procedures, and decisions which
    were lacking at the time.
        Procedurally, the panel felt that PBS should instill more
    discipline in its decision-making process and introduce more
    rigor and uniformity in its analytical procedures. Among the
    panel's many suggestions were that PBS should compare and
    contrast the cost and benefits of leasing versus ownership--
    including the cost of repairs, alterations, and replacements--
    on a net present value basis as well as calculating the cost of
    inertia--that is, the cost of doing nothing for every property
    related decision.
        The panel also thought that adopting a 5-year capital
    budget process which compared and contrasted portfolio results
    with and without the expenditure of the needed RAR investments,
    even if performed internally for information purposes, would
    impose a level of fiscal discipline then lacking at the PBS
    analytical process. In the panel's view, opportunities for
    outsourcing, especially the management of small, remote, or
    isolated facilities, should be examined and encouraged whenever
    possible to save money.
        The panel encouraged PBS to seek the authority to not only
    negotiate cancellation rights and purchase options in its lease
    agreements but also the ability to segregate maintenance from
    new construction funds and retain property sale proceeds within
    the Federal Buildings Fund to fund RAR requirements, which was
    subsequently done.
        In closing, the panel commended PBS's foresight and its
    commitment to adopt contemporary asset management procedures.
    The panel exhorted PBS to continually strive to achieve the
    efficient and balanced deployment of Federal real estate assets
    by periodically evaluating portfolio contents and electing to
    dispose of those properties that under perform established
    benchmarks to yield the most benefits at the least cost.
        Thank you very much for your time and attention.
        Ms. Norton. Thank you very much.
        Mr. Greninger, Managing Partner, Carr Services. Mr.
    Greninger.
        Mr. Greninger. Good afternoon. I am Richard Greninger,
    Managing Partner, Carr Services; and I am here today on behalf
    of the Building Owners and Managers Association International.
    Thank you for the opportunity to share BOMA's perspective on
    best practices in managing building maintenance programs.
        To begin, I could like to clarify that my comments are
    limited to general industry practices and are not intended to
    infer that GSA does or doesn't follow these practices.
        According to BOMA's annual income and expense benchmarking
    report, the Experience Exchange Report, private-sector
    commercial office buildings in 2008 spent $1.80 per square foot
    on repair and maintenance and an additional $0.23 per square
    foot on the maintenance of roads and grounds. This represents
    approximately 25 percent of a building's operating expenses.
        For government buildings, the amount spent on repairs and
    maintenance is quite a bit higher, $2.43 per square foot. The
    combined expense of repairs, maintenance, roads, and grounds
    for government buildings accounts for approximately 28 percent
    of the operating budget.
        For the building as well as the building systems to remain
    fully operational as designed, the property manager and the
    engineering team need to develop a maintenance program. Most
    properties' programs include three basic types of maintenance:
    reactive, preventive, and predictive maintenance. The degree to
    which the property dedicates its resources to each form of
    maintenance depends greatly on the owner's objective for the
    property, the staffing level and skill set of the engineering
    employees assigned to the property, and many other factors.
        Reactive maintenance occurs when the building system has
    already broken and needs repairing or requires calibration.
    This type of maintenance typically bothers tenants the most
    because they have no warning that the system will be out of
    service. Examples of reactive maintenance include replacing
    light tubes and bulbs when they burn out, fixing a motor when
    it fails, or repairing a pump when it seizes up.
        All buildings employ some degree of reactive maintenance.
    No maintenance system can predict or prevent failures with 100
    percent certainty. Even if such a system existed, it would be
    too expensive to manage in a commercial building. In the long
    term, however, reactive maintenance programs tend to be
    expensive. Equipment that is not maintained proactively often
    fails earlier and costs more to operate than equipment that is
    maintained aggressively ahead of time.
        In some cases, reactive maintenance may actually be the
    preferred strategy. If, for example, the owner is preparing to
    perform extensive renovations of a vacant building, he may
    choose to contain costs before construction begins by fixing
    only the critical components that malfunction.
        Preventive maintenance strives to prevent the system
    components from ever breaking. Preventive maintenance lowers
    operating costs and utility costs and, in many cases, extends
    the useful life of systems components. In addition, evidence of
    a good preventive maintenance program improves the value of the
    property at sale because the purchaser believes the systems are
    in good condition and won't need to be replaced in the near
    future. Plus tenant satisfaction and retention levels may
    improve because tenants are inconvenienced less when
    maintenance is done on a time-based schedule.
        Preventive maintenance is based upon visual inspections of
    equipment and regular maintenance schedules. The centerpiece of
    the preventive maintenance program is a schedule listing of all
    the preventive maintenance tasks and a plan to achieve them
    during the year.
        The third type of maintenance, which is growing in
    popularity among high-performance organizations, is predictive
    maintenance. Predictive maintenance is a program that uses
    approved nondestructive testing procedures to analyze the
    condition of building equipment and relies on statistics,
    measurement, and experience to predict equipment service and
    maintenance requirements. Like preventive maintenance,
    predictive maintenance is proactive. Where preventive
    maintenance relies upon a time-based schedule, predictive
    maintenance uses statistics, measurements, and experience to
    determine the service interval for a particular piece of
    equipment.
        Predictive maintenance is based upon the fact that, before
    a piece of equipment fails, certain measurements will start to
    change. In a typical predictive maintenance program, the time
    intervals between preventive maintenance operations are based
    not on the calendar but on when the equipment actually needs
    maintenance to continue to optimize performance.
        Major equipment manufacturers have begun to embrace the
    concept of predictive maintenance. Preventive maintenance may
    call for a part to be replaced every year, regardless of the
    amount of use the equipment received. With predictive
    maintenance, the specific use pattern of each piece of
    equipment and the measurement taken to show how the equipment
    is working are used in the decision process.
        In conclusion, building owners and managers must look at
    both short-term and long-term costs when developing a
    maintenance plan and budget for their buildings. The General
    Services Administration has done a good job with the tools they
    have been given. However, to most effectively manage a diverse
    range of facility design, construction, rehabilitation,
    restoration, renovation, and operations projects, they must be
    given sufficient funding.
        Thank you. I welcome any questions you may have.
        Ms. Norton. Thank you, Mr. Greninger.
        Finally, Kevin Stoklosa, Assistant Technical Director,
    Financial Accounting Standards Board.
        Mr. Stoklosa. Thank you, Madam Chairperson.
        My name is Kevin Stoklosa. I am Assistant Director of
    Technical Activities at the Financial Accounting Standards
    Board.
        The FASB is an independent private-sector organization that
    establishes standards for financial accounting and reporting
    for private-sector entities, including businesses and not-for-
    profit organizations. Those standards are officially regarded
    as generally accepted and authoritative.
        The Subcommittee has identified the challenge of
    maintaining a dwindling Federal Buildings Fund. As the
    Subcommittee considers ways in which to address these
    challenges, I would like to focus my remarks on the FASB's
    Statement 13, Accounting for Leases, and how the expected
    revisions to the standard could impact the Federal Buildings
    Fund.
        The primary reason for the FASB's current joint leasing
    project with the International Accounting Standards Board is
    the SEC's report from June, 2005, entitled Report and
    Recommendations Pursuant to Section 401(c) of the Sarbanes-
    Oxley Act of 2002, and arrangements with off-balance-sheet
    implications, special purpose entities, and transparency of
    filings by issuers. A link to this report is provided in my
    written testimony.
        The SEC report included several standard-setting
    recommendations, including reconsideration of the accounting
    guidance for leases, noting that the current accounting for
    leases take an all-or-nothing approach to recognizing leases on
    the balance sheet.
        Today, lease accounting standards require lessees to
    classify their lease contracts as either finance leases or
    operating leases. Finance leases are defined as those leases
    that transfer to the lessee substantially all the risks and
    rewards incidental to ownership to the leased asset. All other
    leases are deemed operating leases. Detailed rules and bright-
    line tests are used to differentiate between whether a lease is
    classified as a finance lease or as an operating lease.
        Leases classified as finance leases are treated similarly
    to the purchase of an asset such as purchasing office furniture
    or a copy machine. Consequently, lessees recognize in the
    statement of financial position the leased item and an
    obligation to pay rentals. The lessee depreciates the leased
    items in a portion of lease payments between a finance charge
    and reduction of the outstanding liability. The lessor treats
    the leased item as a sale and removes its from its balance
    sheet.
        For leases classified as operating leases, no similar
    assets or liabilities are recognized by the lessee; and the
    lessor does not remove the asset from its balance sheet. Other
    than rental expense being reported in the income statement each
    reporting period, operating lease accounting lacks transparency
    around the assets and liabilities inherent in the lease. Given
    this lack of transparency, the existing lease accounting model
    has been criticized by users of financial statements for
    failing to meet their needs.
        Preparers and auditors also have criticized the existing
    leased accounting model for its complexity. In particular, the
    detailed rules and bright-line tests for differentiating
    between financed leases versus operating leases have proven
    difficult to implement.
        After much analysis, the FASB and the IASB are developing a
    new approach to accounting for leases that would require all
    leases to be counted for similarly. Rather than treating some
    leases like the purchase of a leased item, which would be
    financed leases, and others as operating leases, the new, more
    transparent proposed approach would treat all these contracts
    as the acquisition of a right to use the leased item for the
    lease term. Under this approach, the lessee would recognize an
    asset representing its right to use the leased item for the
    lease term, also known as a right-to-use asset, and a liability
    for its obligation to pay rentals.
        For lessors, the Board has decided to adopt a performance
    obligation approach. Under that approach, a lessor would
    recognize an asset representing its right to receive rental
    payments, which would be a lease receivable, and the liability
    representing its performance obligation under the lease, that
    being its obligation to permit the lessee to use one of its
    assets. The lessor would recognize revenue as the performance
    obligation to satisfy over the lease term.
        This new approach to lease accounting also would be applied
    to sale leaseback type transactions whereby the owner of an
    asset such as a building sells the building to a third party
    and leases it back for an agreed-upon period of time. In those
    situations, the seller would derecognize--that is, remove--the
    building from its balance sheet, record any profits associated
    with the sale, and then recognize an asset representing its
    right to use the leased building for the lease term and a
    liability for its obligation to pay rentals.
        The FASB and the IASB have noted that this new approach to
    lease accounting would address many of the criticisms of the
    existing standards.
        Madam Chairperson, that concludes my prepared remarks. I
    would like to thank you and the Subcommittee for the
    opportunity to testify this afternoon. I would be happy to
    answer any questions.
        Ms. Norton. Thank you, Mr. Stoklosa.
        While we have you here, particularly in light of our
    discussion with Mr. Peck, would the proposed changes of the
    Board of FASB 13 make a material difference in the owned versus
    leased decision for real estate users?
        Mr. Stoklosa. The proposed changes would not make a major
    difference.
        Currently, under current accounting guidance, there is a
    difference. Because if you have an operating lease, then you
    don't record an asset or liability. But under the new approach,
    regardless of whether you lease or you buy, you would record an
    asset and a liability, assuming you financed the purchase of it
    if you bought it.
        Ms. Norton. Has there been any response from OMB on the
    proposed new accounting standards?
        Mr. Stoklosa. There has been no response yet.
        Ms. Norton. When were these issued again, please?
        Mr. Stoklosa. We haven't issued yet. We are going to issue
    an exposure draft probably in June of this year, and we will
    issue an exposure draft for a comment period of about 4 months.
    During that time, we will solicit comments both in writing and
    we will reach to different constituents who have a lot of
    leasing activities and talk to them about the proposals.
        Ms. Norton. Do you think government and private for-profit
    entities should be governed by the same accounting standards?
        Mr. Stoklosa. In my opinion, I think if you buy or lease
    something, regardless if you are a government or private
    entity, I think you should account for the assets and the
    liabilities that you have.
        Ms. Norton. What do you think is the major contribution of
    these new standards? For example, are they going to make
    transactions more transparent?
        Mr. Stoklosa. That is correct. They will put on the balance
    sheet the assets and the liabilities that exist within a leased
    contract for investors to be able to analyze all the assets and
    all the liabilities that an entity may have, as well as the
    income statement impacts of those assets and liabilities.
        Ms. Norton. Have any private parties voluntarily adopted
    the standards that the Board is proposing?
        Mr. Stoklosa. They can't be voluntarily adopted until they
    become official, and then at that point they would have to
    become mandatorily adopted.
        Ms. Norton. What is the view of the private sector on what
    you have been doing? I am sure you have been having hearings of
    the kind we have been having.
        Mr. Stoklosa. The general view of the private sector is
    that they believe putting these assets and liabilities on the
    balance sheet is a good thing, and now they have some concerns
    about how the income statement will be impacted by putting
    those assets and liabilities on the balance sheet. So we have
    to work through those issues.
        Ms. Norton. Mr. Hentschel, I was stunned by the statistic
    in your testimony that 55 percent of the buildings, I believe
    you said, in the GSA portfolio produced 95 percent of the
    funds.
        Mr. Hentschel. Yes, ma'am.
        Ms. Norton. I wonder what you think should be--with that
    kind of imbalance, does that relate to the age of some of the
    buildings versus others?
        Mr. Hentschel. Whenever you are dealing with an aging
    portfolio of properties, the other properties are probably
    going to require more maintenance, more repairs. But over time
    what it basically says and what our panel found was there is an
    inclination to, in this custodial function, what we found in
    terms of our paneled discussions, sometimes when you are
    managing assets you have to take a look from a strategic rather
    than a tactical standpoint.
        The first thing you do when you say the roof is leaking is
    you say oh, gee, we should fix the roof; and that is not the
    first thing you should think. The first thing you should think
    is should we fix the roof? Because just because it is leaking
    doesn't necessarily mean you automatically spend precious
    resources to repair it.
        Ms. Norton. What would go into the decision not to fix a
    leaking roof?
        Mr. Hentschel. I had a similar circumstance when I was
    running real estate for Baltimore city with our police
    headquarters building. In that particular case, we had asbestos
    problems and we had systems failures.
        The first inclination of the city was to say, let's move
    everybody out, and let's fix the building, and we will move
    everybody back in.
        At that point in time, I said, from an asset management
    perspective, we should step back for a second in this one
    particular building and now let's start looking at are there
    other alternatives. Should we be thinking about leasing
    property instead of owning it. Should we be thinking about
    building a new building? Should we be thinking about other
    options, buying another existing building and moving our
    personnel in there, and making a cost comparison on a strategic
    decision-making process to then say, of the alternatives
    available to us, which of those alternatives on a net present
    value basis yields us the highest possible present value?
        Ms. Norton. If it has asbestos, I take it one of those
    alternatives would be simply abandoning the building. Who else
    is going to want to buy--if you don't take care of the
    asbestos, I can't imagine who else would want to do it. So was
    abandoning the building part of your----
        Mr. Hentschel. That was one of the circumstances. The other
    circumstance was build a new building, lease a new building,
    acquiring an existing building, move into it, but then either
    leave the building in its contaminated state and see what value
    we can obtain from the property in that state versus trying to
    mitigate the contamination, which would have been cheaper
    mitigating it without people in it than mitigating with people
    in it. And then saying using that as part of the decision-
    making process as a residual value to say, in a strategic
    decision, which of all of these alternatives, including
    remediating with people in place versus remediating with people
    someplace else in a vacant building, which of all these
    alternatives yields the best benefit and bang for the buck to
    the government--in that case, the city.
        What we found as a panel and what we made recommendation to
    PBS at the time was and what we found their proposed strategic
    policy to be was let's start looking at these decisions
    strategically rather than tactically. Let's stop just
    responding and saying, the building is leaking, the roof is
    leaking, let's fix the roof. To start stepping back in advance.
        And this is why one of our recommendations was, even if
    only on an informational basis, put together a capital
    budgeting process that goes out 5 years and then take a look.
    If you spend the RAR on these buildings, what happens to the
    value of the portfolio? If you don't spend it, what happens to
    the value of the portfolio? And always performing a cost-of-
    inertia analysis. What happens if we don't do anything both in
    the short run and in the long run?
        Ms. Norton. Did you find that PBS responded by going
    through that exercise?
        Mr. Hentschel. We didn't follow it over time. Obviously,
    Madam Chairwoman, it has been 8 and a half years. We didn't
    follow it over time. It was our understanding that they had
    intended to implement that procedure.
        Ms. Norton. They could go through the exercise and discover
    a great deal, even if strictures--Federal Government strictures
    kept them from acting on much of what they would want to do. At
    least they would be able to capture those strategies they ought
    to focus on, given the requirements we place on them.
        Mr. Hentschel. One of the things that we had advised PBS at
    the time was we recognized--in our report, which I provided a
    copy to your Subcommittee, in our report, we recognized that
    certain recommendations we were making we called it inside the
    box. And what we referred to was these are things you could
    implement immediately versus those decisions which would
    require long-term change, either in terms of policies,
    procedures, and sometimes loss.
        But you have to start with data. You have to start with
    empirical information. And this is one of the things you recall
    in my testimony that we suggested, that PBS take a strategic
    advisory role, to advise Congress, to advise OMB; and to advise
    you have to have empirical data to back up what you are saying.
        So what we were saying was go through the processes, go
    through the procedures that Mr. Nash also referred to inhis
    comments. Go through these procedures not just for the sake of
    conducting procedures but in building a database of information
    so that when you come to a Committee such as yours you have
    empirical data to show here is what we are doing, here is what
    we should be doing, here is how we can make things better, and
    here is the end result of that process.
        Ms. Norton. Well, this advice role to Congress and to OMB
    seems to be precisely the role that an expert real estate
    agency could and should play.
        For example, we cannot account for the response of OMB to
    412 authority or, for that matter, other ways of dealing with
    Federal real estate, except that they don't deal in real
    estate. In fact, if you look at the business they are in, it is
    precisely the opposite. The whole notion of capital budgets and
    mortgages and the rest is simply not what their portfolio is
    all about.
        So if GSA doesn't work up these issues--they do understand
    numbers. They do understand what costs and what does not. If
    you don't work it up as an exercise, then they never learn. We
    don't believe there are people at OMB who have a particular
    interest in real estate. That doesn't have much to do with what
    they are called upon to do every day. So we and GSA are always
    in a mode of, essentially--it is not educating. The word is in
    dispute with GSA, who throws back the government rules that
    seem perfectly in order for commodities, for example, but have
    nothing to do with real estate.
        When you speak about work up the options, it does seem to
    me you make a valuable contribution. It may seem to a
    government agency that working of the options is a futile
    exercise. Because they begin from the outset saying, OMB would
    never do that or we could never sell this building or we could
    never lease to purchase so what is the use. And the result is
    that OMB and, for that matter, the Congress does not get
    educated as to what is in the best interest of the Federal
    taxpayers.
        So it is important to hear you say that you work them up
    anyway. That is why I gave you the example: abandon the
    building. Put that right on the table along with everything
    else.
        And, you know, if you say most of the time they do asbestos
    when people are in the building, okay, we do swing space. Maybe
    it makes sense. The real estate is so valuable. So move them
    out for a year and move them back in. Yeah, it costs moving
    costs in and out. But if somebody doesn't work that up, you
    don't know what in hell--excuse me--you do not know what you
    are talking about. And, increasingly, we are talking about
    matters of this kind as if they were theoretical matters that
    we couldn't put numbers to, and we are making our decisions on
    that basis.
        Ms. Norton. I feel we are stuck in the Federal Building
    Fund exercise in that way, and as a formula it doesn't work.
    One has to almost take it apart and say, If you were starting
    from scratch, now knowing what you know, what would you do? In
    fact, I think that is the question I would like to put to all
    of you.
        For example, Mr. Nash, you say that current Federal budget
    processes and procedures provide few, if any, incentives for
    Federal agencies to use more innovative and more cost-effective
    management practices.
        Well, they certainly do, and they build on one another
    endlessly into absolutely predictable results. So I would like
    to ask you, given what I regard to be wholesale and needed
    criticism: If you had your way, recognizing that there are some
    practical realities, what kinds of incentives would you put in
    place to drive this more innovative and cost-effective
    behavior?
        I suppose it would be some analogy to what Mr. Hentschel is
    saying, working up all of the scenarios and putting those
    before the decisionmakers so that they know what they are
    talking about before they tell you that you can't do something
    or you can do something else.
        Mr. Nash. Well, I am entering my 33 years in the Navy. I
    tried to be an innovator, and that is not without its penalty.
        Our committee's advice was let's put together some of the
    best minds, both inside government and outside government, and
    look at things that we can try. Take some chances. Understand
    that there is risk associated with it.
        I think what you did with the building program in terms of
    turning it into sort of a revolving fund, which I ran one of
    those for a while, is really intelligent. A lot of folks inside
    the government do not like those because they feel like they
    have lost control of those who allocate scarce resources.
        So I think it is going to take a little bravery on the part
    of Congress and also on the part of the administration to say
    let's try some of these things, because I believe it is not a
    crisis of GSA's. I think it is a crisis of the Federal
    facilities in total, and we need to find something else to do
    because we are going to run out of airspeed and ideas pretty
    soon.
        Ms. Norton. We certainly ran out of that idea very quickly,
    but I love the revolving fund idea. It is perfect. You have an
    appropriations process, and you have an oversight committee and
    the agencies responsible. You have rules about how a revolving
    fund works. I think we are perfectly capable of keeping control
    of such a fund, and if we could keep that part in place--and I
    don't see that going anywhere--that would be fine, except that
    it is meant to do, from the beginning or almost the beginning,
    what they knew it could not do.
        But since nobody--if I may venture this--wanted to find a
    way to get the money for construction, and since we can't get
    the money for construction the way the private sector does,
    borrow it even from a Federal bank, you pretend as though
    somehow this revolving fund will create enough funds for upkeep
    and for construction. The pretense wore out almost from the
    beginning.
        Mr. Nash. I would suggest, Madam Chairman, that the way to
    do this is not just do it once and put something in place. It
    is to manage it over time and to keep checking on it, and
    whoever has that control--because there are always people, in
    my experience, who you will find who will want to hijack what
    is going on and will want to turn it back to the old way.
        So I think it is exactly what you are doing;,and that is
    checking on how it is going and, you know, why it isn't
    working, and then tweaking it until it does work. Otherwise, it
    will just die on the vine.
        So that is my recommendation, and I think there are a lot
    of people who want to help. The National Research Council has
    done a series of studies on how could the Federal Government do
    better in the facilities world. Some of them have been greeted
    with excitement. Others have been just turned into things you
    throw in front of the door to keep it from blowing shut. I
    think there is a body of knowledge, a body of people who want
    to help, and I think there are some real positive things you
    can do.
        I have been in the private sector for 15 years, and I was
    in the government for 34 years, so I think there are some
    things on both sides that can be put together and used.
        Ms. Norton. Well, you described that it had a process of
    invention and reinvention. I can see how lots of that could
    take place in practice within GSA and real estate generally. I
    do believe that, when you start with a formula or an approach
    and when you, at the beginning, expect it to do more than any
    theoretical examination of it to show what it could do, then
    you are stuck with a false formula in the first place.
        Now, Mr. Greninger, I was interested in your report of
    BOMA's experience with private sector commercial office
    buildings. I am looking at page 1 of your testimony. You spent
    $1.80 per square foot for repair, maintenance and some
    additional funds. Anyway, it adds up to 25 percent of the
    building's operating expenses. We go to, not $1.80 as in the
    private sector, but to a much higher rate of $2.43 per square
    foot for government buildings. When you combine the repairs and
    other features, it is 28 percent, not 25.5 percent, of the
    operating costs.
        I did not know whether this had to do with use categories,
    if this was because the Federal Government engages in what you
    are terming "reactive maintenance."
        Why is the cost per square foot so much greater for the
    public sector?
        Mr. Greninger. I am not exactly sure why there is a
    disparity. It could be that all of the categories are identical
    and that the compensation figures in the private sector for
    engineers may be less than those in the public sector; or it
    could be that less predictive maintenance is being performed
    and that more reactive maintenance is being performed.
        So it could be that the private sector's balance of those
    three types of maintenance methodologies is providing a more
    efficient approach than is the GSA; but why or if that is true,
    I am not sure.
        Ms. Norton. For example, it says that the Federal
    Government builds a Department of Transportation headquarters
    building. It leases it. Well, let's take something that it is
    building now. It is really building a state-of-the-art building
    for the Department of Homeland Security--I mean, platinum. They
    think, given how important this facility is and because the
    state of the art keeps changing and becoming less expensive,
    that they could actually reach a goal.
        I was in a gold building in the District of Columbia
    yesterday. If you are building gold, wouldn't there be every
    incentive to do your so-called "predictive maintenance" on the
    theory that this building is here for a very long time? It has
    already been built to the highest state of the art, yet it will
    get higher. But this would be in terms of how you plan for the
    maintenance and upkeep of that building, as opposed, for that
    matter, of a building that was built 15 years ago.
        Mr. Greninger. Well, absolutely.
        In commissioning the building from development and
    construction into operations, those types of maintenance
    strategies are put in place. Then, of course, the LEED
    certification program, after a relatively short period of time,
    has to be upgraded to the existing building terms and
    certification requirements, and that likewise causes a need to
    incorporate new and more efficient maintenance practices.
    Absolutely.
        Ms. Norton. Mr. Hentschel, how do you expect the private
    sector is going to react to these new accounting standards that
    we have heard discussed here today?
        Mr. Hentschel. I have to agree. I mean it will be a more
    transparent process because there will be an asset with a
    corresponding liability. So, from that standpoint, you know, it
    will present more transparency in the decision-making process.
        At the same time, if all of a sudden the lease now is at
    the same par as a purchase, you may start seeing more net
    present value analyses, comparing the difference between
    ownership and leasing. I am speaking personally now. You know,
    if I were looking at it myself, I mean, at that point, capital
    is capital whether I am sending my payment to a lender or
    whether I am sending my payment to a lessor. It then becomes
    more of a present-value decision because at the end, with
    ownership, I will have a residual value.
        At the same time, if I have an asset that I have to
    maintain, I mean, I think part of this is going to be how the
    definition comes down because, you know, right now we have a
    financing lease and we have an operating lease. Well, if I have
    an operating lease and that operating lease mandates that I
    maintain it, versus an operating lease where the landlord
    maintains it, I am going to be looking at those kinds of
    circumstances in an entirely different fashion. But with
    everything being equal and the tenant is maintaining it in the
    same capacity as an owner, then the net present value of that
    residual value will be important.
        The reason I say that is because, if you do not maintain
    the building properly, the residual value will be diminished at
    the end. So it is imperative that in the financial analysis
    being performed, whether you are in government or whether you
    are in private sector, that you reflect whether or not you
    intend to maintain the building; because if you do not maintain
    the building as it needs to be, the residual value will
    diminish, and the present value of your investment will go
    down.
        Ms. Norton. Mr. Stoklosa, I take it you agree with his
    analysis?
        Mr. Stoklosa. I do.
        Ms. Norton. Mr. Nash, I only have a few more questions, but
    I was delighted to see--I think it was on page 3 or 4 of your
    testimony--the recognition that the full costs are not
    reflected in government facilities investments and that often
    short-term, expensive decisions are made. This is the bane of
    our existence, indeed.
        I wonder if you have any suggestions or would submit
    further information that might be included in a prospectus
    which would enable the Subcommittee to see the full costs of a
    GSA prospectus.
        Mr. Nash. We did about three or four reports of this nature
    that talked about life-cycle costing and how to do it. We can
    provide more information.
        Your point about we make sometimes in Federal Government
    bad decisions, normally they are different than you would make
    in the industry, because the industry--when they invest in a
    facility, it has something to do with something they are
    manufacturing or whatever their business is. It aligns with
    their mission, and it is easy to see what this investment is
    going to return for them.
        In the United States Government, that is very hard to do
    since the government provides service. It doesn't make a
    profit. So I think that is one of the problems of trying to
    compare the two.
        We will provide, and we will be happy to work with your
    staff to try to help wherever we can with the various and
    sundry things we have, plus our experts who are available to
    help you.
        Ms. Norton. That would be very useful.
        I want to ask whether any of you are familiar--and perhaps
    you, Mr. Hentschel particularly--with this number that we keep
    throwing out, this so-called "412 authority" that this
    Committee or the Congress itself provided, which allows GSA to
    retain funds from the sale, lease, or exchange of real property
    instead of its going back to the Treasury.
        Is this the type of authority, Mr. Hentschel, that the
    Counselors of Real Estate recommend being provided to GSA or
    has recommended in this report you cited earlier?
        Mr. Hentschel. Madam Chairwoman, that was one of our
    principal findings, and that is not just applying to the
    Federal Government. In my practice over the years, both as a
    public official as well as a private sector consultant and as a
    real estate practitioner, there was the fact that you cannot
    retain the money that is realized from proceeds of a sale to
    utilize that with regard to maintenance, repairs, and
    replacements of other properties.
        You know, one of the big problems I had when I was running
    government portfolios is we constantly would look to fair
    market rent and fair market value and compare ourselves to
    private sector operations. The problem is, when you are
    operating in a public sector environment, you are not totally
    the same as when you are operating in the private sector,
    especially with respect to rates of return on investment,
    reinvestment funds, the way you can reinvest things.
        I mean, if I am a private sector investor and I run into a
    situation where I have become cash poor and I need to maintain
    my portfolio and my buildings, I can make a decision to analyze
    which is my least likely performer or my least best performer,
    and liquidate it and take that money and then maintain the
    balance of my portfolio or use some of those proceeds to
    maintain the balance of my portfolio.
        As a government operator, whether it is the Federal
    Government or local governments or State governments, most
    governments did not have or do not have the ability, or
    government real estate practitioners do not have the ability to
    do that because, with the 412 authority, it gives you that
    authority.
        So my direct answer to you is that that is a very important
    tool in a government real estate decisionmaker's and
    practitioner's quiver of arrows to be able to perform his job.
        Ms. Norton. If one looks at what is available to us now and
    if you see that lying dormant on the books, you don't see
    almost any other way to proceed, and you see some breakthroughs
    here that, it seems to me, would begin to make the government
    understand real estate and understand how to operate in a real
    estate market. We don't see that the government operates as if
    it is in a real estate market.
        I agree with you that we compare ourselves to the private
    sector. That is because we operate in the private sector. But
    when it comes to comparing the leases to commercial rents, that
    searches for something to compare it to that is a hard number;
    and if not that, the question becomes: What? That is how you
    get to that. That is really the only way I can see that we get
    to that number, because we don't have any other number, and it
    more closely approximates who the GSA is.
        The GSA is a big player in the real estate market. We don't
    think it plays big, however, in that market because of these
    limits that we have placed on it and that sometimes it has
    placed on itself. We don't regard it as a very innovative real
    estate developer.
        Mr. Hentschel. Madam Chairwoman, you know, I will take this
    opportunity. I mean this panel that we convened is now 8-1/2
    years old. I would take this opportunity publicly to offer the
    services, again, of this panel to the General Services
    Administration Public Building Service to revisit this issue. I
    would volunteer again to chair such a panel and to compare and
    contrast what has happened in that 8-1/2-year difference----
        Ms. Norton. Since that time.
        Mr. Hentschel. --and see if our recommendations, A, you
    know, had any effect. B, you know, we could see how, perhaps,
    we could make additional recommendations.
        Ms. Norton. You know, I am almost inclined to swear Mr.
    Peck in again. It was done, apparently, by one of his
    predecessors. I would ask you to consider, and very much
    appreciate that Mr. Peck has remained. I think it shows the
    respect he has for this panel and his own search for ways
    around some of the obstacles he has found.
        I ask you to consider what Mr. Hentschel has said, and I
    think such a panel would also enhance our standing and yours
    with OMB's to review what has been done 7 or 8 years ago.
        I would also like to ask Mr. Nash--I think it is Mr. Nash
    who spoke about something that is also close to our hearts, if
    you will allow, and that is enhanced lease authority, because
    you mentioned that several agencies have this authority.
        Would you describe the kinds of authority you speak of and
    what your impression is of agencies with this authority and
    whether you think it would help the GSA to better fulfill its
    mission?
        Mr. Nash. The only one that I am most familiar with is DOD
    and their enhanced use leasing. They have done things like in
    terms of public partners, public-private partnerships, plus in
    energy. They have provided land, and entrepreneurs come in and
    put in solar panels or they put in wind turbines, and then that
    allows the base to have a good source of power, and it is
    reasonable.
        To me, it was really a significant move forward when
    enhanced use leasing was allowed, where the government is
    allowed to deal with the private sector and where both benefit.
    You use the government land, but you use the ability of the
    private sector to provide things that the government needs.
        So I think an enhanced use lease is one of the best things
    that has happened in the Federal Government for a long time. It
    has to be watched, obviously. You know, there are always
    opportunities for people to go off into the ditch, but I think
    those kinds of things are the kinds of innovative things that I
    am recommending.
        I would say one other thing. When I was on Active Duty, Bob
    Peck was in GSA, and I considered him one of our finest
    innovators in the Federal Government. And I enjoyed working
    with him when we were both swimming upstream in heavy tides. So
    I think he is the right man to be able to do what you would
    like to have done.
        Ms. Norton. Well, I am glad he is here so he can hear the
    standard to which we are going to hold him, the standard of
    innovation.
        Mr. Nash. And he didn't pay me, and I am not related to
    him.
        Ms. Norton. No. He couldn't have paid you enough for that,
    but I know he appreciates it and so do we.
        It is interesting that you mentioned enhanced leasing and
    energy, because much of what the government is about is just
    that kind of quid pro quo, because we are very much about
    reducing our enormous energy costs. And to look at enhanced
    leasing that way very much fits where the administration is and
    where, frankly, the country and the globe is today with respect
    to where the savings are to be made and where the growth in
    industry is.
        We think, for example, that the government is in the
    position to drive down markedly the cost of energy simply
    because of its holdings across the country and across the
    world, and we are trying to make those kinds of decisions now.
    GSA has done a fairly good job in real estate, in making those
    decisions.
        The entire stimulus package, interestingly this time, had
    nothing the do with simply repairing the inventory. To be sure,
    it is going to do that, but there has got to be a strong
    component of energy conservation and every bit of that $5.5
    billion that we are spending in the stimulus package.
        I have a final question for Mr. Greninger that I did not
    get a chance to ask.
        I wonder whether or not there is any industry standard you
    are aware of, at least using current best practices, for how
    long a new building should go without major capital repair
    investment, with the emphasis on "major," or do you think that
    what you call predictive maintenance can mean that you don't
    get to that point?
        Mr. Greninger. Well, no. We do a 20-year projection on all
    of our investments.
        Ms. Norton. That means you are going to need to do
    something with, for example, the energy system.
        Mr. Greninger. Absolutely. Yes.
        As buildings are developed or purchased during a
    commissioning effort, if the age is zero, then there is going
    to be a certain manufacturer recommendation on when certain
    elements of major maintenance and/or replacement are going to
    take place, and you put that into action. But the predictive
    index--I mean indexing and maintenance inspections are becoming
    vitally beneficial to our industry.
        Ms. Norton. So would you think that predictive maintenance
    is becoming an industry standard?
        Mr. Greninger. Yes.
        Ms. Norton. Maybe you could predict what Mr. Hentschel used
    as his example in which you have a building where, some years
    from now, you find out that asbestos is a threat to the health
    of anybody in the building. Maybe you can't predict that, but
    there are many, many factors, elements, that make up the
    maintenance of a building that are perfectly predictive today,
    and there are enough of them.
        Mr. Greninger. Well, in that particular case, we inspect on
    a regular basis the air quality inside of our buildings,
    capturing particles of many different types that could, in
    fact, when the concentration gets too high, predict that
    something dramatic needs to change.
        Ms. Norton. Here, the prediction perhaps could not be--I
    don't know--50 years ago, that it would cause cancer. You don't
    want to get it too high, but you don't want to get it at all if
    it is asbestos. I mean I am allowing for that. I am allowing
    for things that nobody could predict because you seem to say
    that there are many, many things that are predictable that are
    built into how maintenance is done today as a matter of best
    practices.
        Mr. Greninger. Correct.
        Ms. Norton. I want to thank this panel very much. This has
    been a very important panel for educating us about something
    that has been truly perplexing to the Subcommittee and even to
    GSA. I very much appreciate the testimony that all four of you
    have presented. It has been very helpful to the Subcommittee.
        The hearing is adjourned.
        [Whereupon, at 4:30 p.m., the Subcommittee was adjourned.]