General Services Administration and Real Estate Brokers' Commissions, B-302811, July 12, 2004

TITLE: General Services Administration and Real Estate Brokers' Commissions, B-302811, July 12, 2004
BNUMBER: B-302811
DATE: July 12, 2004
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B-302811

July 12, 2004

The Honorable James Oberstar

Ranking Minority Member

Committee on Transportation

And Infrastructure

House of Representatives

The Honorable Eleanor Holmes Norton

Ranking Minority Member

Subcommittee on Public Buildings, Economic

Development and Emergency Management

Committee on Transportation

and Infrastructure

House of Representatives

Subject: General Services Administration and Real Estate Brokers'
Commissions

This responds to your joint letter of March 23, 2004, requesting our
opinion regarding some aspects of the General Services Administration's
(GSA) proposed National Brokers Contract. In discussions with your staff,
we agreed to address several questions centering on the nature of the
services that GSA will obtain under the proposed National Brokers Contract
and the payment for those services. We also agreed to explain the
difference between GSA's proposed National Brokers Contract, which we
addressed in a 2003 decision, B-291947, Aug. 7, 2003, and a Small Business
Administration (SBA) contract related to its Preferred Lenders Program,
which we addressed in a 2004 decision, Ba**300248, Jan. 15, 2004.

We are of the view that the broker services that GSA will acquire under
the National Brokers Contract are services that brokers commonly offer in
commercial leasing transactions. We found that for commercial leases,
while it is common practice for the parties to negotiate the particular
mix of services the broker will provide, the services that GSA will
acquire are among those services that brokers commonly offer. We also
found that while brokers may negotiate the method and amount of payment,
which could be through a commission or fee, the services that GSA will
acquire under the National Brokers Contract are commonly covered by
landlords' commissions.

As we explain in more detail below, the legal nature of the proposed GSA
brokers contract differs from that of SBA's contract. Under the proposed
brokers contract, brokers will agree to provide services at no cost to
GSA. B-291947, Aug. 7, 2003. As a result, GSA has no financial liability
to its brokers, and the brokers have no expectation of a payment from
GSA. Such a contract is sometimes referred to as a *no cost* contract
because the United States has no financial liability under the contract.
SBA, on the other hand, did not have a *no cost* contract. SBA entered
into a contract for assistance in reviews of lenders participating in its
Preferred Lenders Program, and arranged to pay its contractor by
improperly imposing fees on its lenders and requiring the lenders to pay
those fees to the SBA contractor.

B-300248, Jan. 15, 2004.

We have not analyzed the soundness or advisability of entering into the
National Brokers Contract in this opinion, nor did we in our 2003 decision
to GSA regarding GSA's leasing program, B-291947, n.2, Aug. 7, 2003.
However, in an enclosure to this opinion, we offer some questions that you
may wish to consider in your oversight role.

In responding to your request, we asked GSA for its views in writing,
interviewed GSA staff, surveyed professional literature relating to the
provision of real estate services by brokers, and conducted some informal
interviews with a number of persons familiar with the practices of the
real estate profession. The persons we interviewed included some
suggested by your staff as well as other academic and professional experts
that we identified.[1]

BACKGROUND

With its National Brokers Contract, GSA proposes to award approximately
four real estate brokers exclusive rights to represent the United States
with respect to all GSA real property leases. GSA Solicitation No:
GS-04P-02-BVD-0035 (hereinafter, Solicitation), S M.[2] According to GSA,
all four brokers must provide services nationwide. Letter from Samuel J.
Morris, III, Associate General Counsel, GSA, to Thomas H. Armstrong,
Assistant General Counsel, GAO, June 16, 2004, at 4 (GSA Letter). The
solicitation identifies lease acquisition services that GSA expects from
its contractors, ranging from helping federal agencies with the
development of their space requirements to surveying the rental market to
negotiating offers and preparing leases. Solicitation, S C.4.2.1. The
solicitation, also, identifies lease expansion and extension services.
Id. at SS C.4.3, C.4.4. GSA officials will review all terms and
conditions negotiated by contractors, and GSA contracting officers, not
brokers, will execute leases that obligate the government. GSA Letter at
1.

In the past, GSA paid real estate brokers from GSA's appropriations. See

B-291947, Aug.A 7, 2003. GSA prohibited brokers from receiving
compensation from any other source. Id. Recently, however, GSA decided
to adopt a common practice of the real estate industry and allow the
brokers to accept payment from landlords whose property the government
leases. Id. The payment is in the form of a commission that is a
percentage of the value of the lease. Id. GSA, of course, will
ultimately pay the costs of brokers' commissions through its rent payments
to its landlords. GSA Letter at 7.

The solicitation requires that each broker in its bid specify a percentage
of its commission that it is willing to forego in government lease
transactions. Solicitation, S B.2.1. The solicitation announces that in
awarding broker contracts, GSA, in addition to evaluating
brokers'A technical ability to do the job, will consider the percentage of
commission that the broker agrees to forego. Id. at S M. With respect to
any lease transaction, GSA will require the broker to forego the
percentage of the commission proposed in the broker's offer and the
landlord to apply its savings in that regard as an offset to GSA's rent.
Id.

DISCUSSION

You requested our opinion on several aspects of GSA's proposed National
Brokers Contract.[3] Because the National Brokers Contract will
materially change how GSA implements the government's $3.7 billion leasing
program, you want to ensure that the contract is sound and in the best
interests of the government. In your letter, you raise a number of
concerns that relate primarily to GSA's characterization of the contract
as reflecting the traditional arrangement between a tenant and its
broker. Id. You believe that some of the services that GSA will acquire
are services which brokers do not provide to tenants under *common
industry practice* as addressed in our 2003 decision.

2)A A A A Noting that our August 2003 decision relied upon GSA's
assertion that the National Brokers Contract would adopt the common
industry practice whereby landlords pay broker's fees, you ask: if GSA
uses the National Brokers Contract to gratuitously obtain non-traditional
services from brokers, will that constitute an improper augmentation of
GSA's appropriations?

3)A A A A In B-300248, January 15, 2004, we concluded that the Small
Business Administration (SBA) could not compensate a contractor retained
to assist with Preferred Lender Program oversight reviews by requiring the
preferred lenders to pay a user fee directly to the contractor. How does
SBA's contract differ from GSA's National Brokers Contract?

Because we found that GSA, in the National Brokers Contract, will procure
only commonly provided services, we address questions 1 and 2 together.

Commonly Provided Services

The National Brokers Contract lists 10 services that brokers will be
required to perform under the contract:

A A A A A A A A A A A A A A A A A A A A 1)A A A A A A A A assisting the
tenant agency with development of requirements;

A A A A A A A A A A A A A A A A A A A A 2)A A A A A A A A participating
in orientations with agency officials;

A A A A A A A A A A A A A A A A A A A A 3)A A A A A A A A developing
project schedules;

A A A A A A A A A A A A A A A A A A A A 4)A A A A A A A A advertising
agency requirements, and analyzing and surveying the market and preparing
market survey reports;

A A A A A A A A A A A A A A A A A A A A 5)A A A A A A A A if required by
the contracting officer, preparing cost benefit analyses for the approval
of the contracting officer as described in applicable GSA rules;

A A A A A A A A A A A A A A A A A A A A 6)A A A A A A A A developing and
issuing solicitations for offers;

A A A A A A A A A A A A A A A A A A A A 7)A A A A A A A A reviewing and
evaluating offers;

A A A A A A A A A A A A A A A A A A A A 8)A A A A A A A A negotiating
offers;

A A A A A A A A A A A A A A A A A A A A 9)A A A A A A A A preparing
lease contract documents and obtaining signatures; and

A A A A A A A A A A A A A A A A A A 10)A A A A A A performing certain
post award services.

Solicitation, S C.4.2.1.

GSA states that many brokerage firms have become *full service providers
that manage a project from cradle to grave, including monitoring and
administration of the build out of a tenant's space.* GSA Letter at 2.
Staff of GSA's General Counsel's Office informally told us that GSA will
use the National Brokers Contract to procure only those services that GSA
says real estate brokers commonly provide; that is, those services
necessary to solicit offers for, and facilitate completion of, leases.
The GSA staff told us that GSA will obtain any other services by using
separate contractual vehicles, including GSA's federal supply schedules.

GSA believes that the broker services it will acquire under the National
Brokers Contract are services that brokers commonly provide tenants, and
that it is not acquiring services for which brokers would expect to
receive additional remuneration beyond that provided by the landlord's
commission. GSA Letter at 2. Prior to developing the scope of work for
the contract, GSA conducted market research, including discussions with
large corporations that have extensive leasing needs and with major real
estate firms. Id. From these discussions, and its knowledge of industry
custom and practice, GSA determined that the contract services are those
that are commonly paid for by commissions from landlords to brokers, not
by tenants. Id.

From both the professional literature and our informal consultations, we
would agree. Our research indicates that while real estate brokers offer
a wider range of services to their customers today (the so-called
*cradle-to-grave* services) than they may have in the past, and that the
actual services that a broker may perform for a customer, and the payment
for those services, is subject to negotiation between the broker and its
customer, the services listed in the National Brokers Contract are
services that brokers commonly provide to close a lease transaction and
are services typically expected to be covered by landlords' commissions to
brokers.

The literature that we reviewed makes a distinction between transactional
services, which are typically expected to be covered by landlords'
commissions to brokers, and consultative services, which are additional
services for which brokers charge tenants a fee. In the 1990s, brokerages
began *to shift away from the traditional deal-by-deal way of doing
business*[4] to *a hybrid that involves reduced commissions plus fees for
.A .A . ancillary services* based on *value delivered outside of the pure
property deal.*[5] One commentator pointed to landlord-paid commissions
as a reason for the shift: *While commissions have always proven
negotiable to some extent, brokers today report wild plunges in what
owners are willing to pay.* Fickes at 52. To supplement commissions,
brokers began offering other services, what GSA calls *cradle-to-grave*
services, for which they charge fees. These include, for example,
assistance in putting together a financing plan, fitting out new property
or renovating old property, and property management and related services.
Id. at 54; Brown at 82. One commentator describing this new direction
said, *It's the consultative approach to delivering services vs. the
traditional transactional approach.* Brown at 82. According to a recent
article in The New York Times, *While most such companies still make the
bulk of their profits from brokerage fees, they now offer a broad array of
other services including property and leasing management, research,
appraisals, investment management, mortgage lending, strategic planning
and sometimes project management and development.* Terry Pristin, *The
Market Is Rising for Real Estate Services. How About Shares?* The New York
Times at C6, Mar. 17, 2004. From the literature's description of the
various services that brokers might offer, the services that GSA will
acquire under the National Brokers Contract, in our view, are
transactional services that are commonly covered by landlords'
commissions.

Our interviews with persons who are familiar with real estate practices
confirm this view. The persons whom we interviewed stated that all ten of
the services listed in the proposed National Brokers Contract are services
that brokers commonly provide, although a broker may not necessarily
perform all ten services in every transaction. They also said that while
brokers will often accept a landlord's commission in full payment for
these services, sometimes a broker may not; they opined that many brokers,
for example, might negotiate to have the tenant pay separately for
post-award services.

Of course, in performing for GSA, brokers will have to tailor the details
of how they provide their services to fit the various specific statutory
and regulatory requirements applicable to government leases of real
property. In informal conversations, GSA staff explained, and we would
agree, that this differs only in the details that any broker faces;
brokers necessarily tailor their services to the circumstances and needs
of individual clients. See also GSA Letter at 2.

Also, GSA recognizes that while a broker will assist in such activities as
reviewing and evaluating offers, negotiating terms and conditions of
leases, and preparing lease documents, GSA officials must review all
broker actions, and only GSA contracting officers may execute leases that
will obligate the government. GSA Letter at 1.

Comparison of GSA Contract with SBA Contract

You asked us to explain our 2003 GSA decision in light of a subsequent
opinion addressing an SBA contract, B-300248, Jan. 15, 2004. In our 2003
GSA decision, we concluded that GSA's proposed brokers contract would not
be an unauthorized augmentation and would not violate the statutory
prohibition on accepting voluntary services, 31 U.S.C. S 1342. In our
2004 SBA opinion, we concluded that SBA had constructively augmented its
appropriation when it improperly imposed fees on its Preferred Lenders
Program lenders and required the lenders to pay those fees to an SBA
contractor to defray the cost to SBA of the contractor's services. SBA
had no authority to impose those fees. SBA transferred its liability to a
third party and augmented its appropriations.

The proposed National Brokers Contract is what is sometimes referred to as
a

*no cost* contract; that is, the contractor provides services under a
formal contract at no cost to the United States. See B-291947, Aug. 7,
2003. In our 2003 decision, we concluded that because of the *no cost*
nature of the contract, it would not constitute an unauthorized
augmentation and would not violate the statutory prohibition on accepting
voluntary services. Id. Because the contract was constructed as a no
cost contract, GSA will have no financial liability to brokers, and
brokers will have no expectation of a payment from GSA. The acceptance of
services without payment pursuant to a valid, binding no-cost contract
does not augment an agency's appropriation nor does it violate the
voluntary services prohibition. Although the brokers contract clearly
expects that brokers will be remunerated by commissions from landlords, as
is a common practice in the real estate industry, GSA does not require
landlords to pay commissions. If a landlord were to fail to pay a broker,
the broker would have no claim against GSA.

SBA, unlike GSA, did not have a no-cost contract. In the SBA case, SBA
retained a contractor to assist it with oversight reviews of SBA's
preferred lenders. We concluded that SBA constructively augmented its
appropriations when it arranged for payment of its contractor's services
by improperly imposing a fee on its preferred lenders and requiring them
to pay the fee directly to SBA's contractor. B-300248,

Jan. 15, 2004. Prior to the start of each fiscal year, SBA and its
contractor, together, agreed on the amount of the fee to ensure that the
fee would cover all of the contractor's costs, including the contractor's
employees' salaries, and travel and administrative expenses. Id. The
fee, which SBA imposed and which SBA directed be paid to the contractor,
was intended to defray SBA's liability to the contractor. If a preferred
lender failed to pay the SBA contractor, the contractor would have a claim
against SBA for payment.

The important difference between the GSA and SBA contracts is that under
GSA's contract with brokers, brokers offer their services without any
expectation of payment from GSA, whereas under SBA's contract, the
contractor offered its services only after SBA agreed to impose a fee on
its preferred lenders to cover the contractor's costs and to require the
lenders to pay that fee to the contractor.

A A A A A A A Has GSA, by requiring brokers to earn commissions from
landlords rather than payments from GSA, provided brokers an incentive to
steer government leasing to properties whose owners pay commissions, and
to those owners who pay the larger commissions, at the expense of owners
who pay no commissions to tenant brokers?

.A A A A A A A Because GSA will no longer pay brokers, thereby reducing
its costs of providing space to federal agencies, will GSA reduce the
amounts that it charges agencies for the services that GSA provides them?

.A A A A A A A Given the size of the government's leasing program and the
peculiar space needs of federal agencies, will GSA engage an adequate
number of competent brokers under the National Brokers Contract?

As brokers revise their businesses to rely less on landlord-paid
commissions, will GSA be able to acquire broker services for the
government leasing program?

------------------------

[1] The persons whom we consulted included present and former officers of
professional real estate organizations, who are themselves brokers, and
educators and published researchers from accredited public universities
and professional institutes established to train brokers and study real
estate practices.

[2] National Broker Services RFP, Volumes I - III, at
http://www2.eps.gov/spg/GSA/PBS/4PE/GS04P02bvd0035/ATTACHMENTS.html (last
visited on July 8, 2004).

[3] Letter from Representative James Oberstar, Ranking Minority Member,
House Committee on Transportation and Infrastructure, and Representative
Eleanor Holmes Norton, Ranking Minority Member, Subcommittee on Public
Buildings, Economic Development and Emergency Management, House Committee
on Transportation and Infrastructure, to David M. Walker, Comptroller
General of the United States, Mar. 23, 2004.

[4] Steve Brown, *Commercial Real Estate Brokers: Firms Tightening Belts
in Changing Markets; New Services and Directions Can Bring Success,*
National Real Estate Investor at 81, 82 (March 1990) (hereinafter,
Brown).

[5] Michael Fickes, *A changing pie,* National Real Estate Investor at 52,
53 - 54 (July 2000) (hereinafter, Fickes).