[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.]



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