Acquisition of Leased Space for the U.S. Patent and Trademark	 
Office (05-JUN-01, GAO-01-578R).				 
								 
This report reviews the data, assumptions, and conclusions	 
reached by the General Services Administration (GSA) and the	 
Patent and Trademark Office (PTO) relating to the acquisition of 
about two million square feet of leased space for the		 
consolidation of PTO activities. This build-to-suit lease, valued
at approximately $1.2 billion over its 20-year term, was signed  
in June 2000. This objective of this report is to respond to	 
allegations and questions from two public interest groups about  
the PTO lease acquisition. One public interest group alleged that
during the procurement process for the lease (1) GSA improperly  
awarded the lease to an offeror who had not complied with the	 
solicitation's stated requirements, (2) GSA failed to compete the
construction of the interior finishes phase of the project as	 
required by law, and (3) GSA used an illegal			 
cost-plus-a-percentage-of-cost contract. The second public	 
interest group asked (1) whether the requirements in GSA's	 
Solicitation for Offers for the PTO lease transformed the lease  
from an operating lease to a capital lease under Office of	 
Management and Budget (OMB) Circular A-11, (2) whether the new	 
facility will be able to house all PTO employees and contractors 
throughout the lease term because the staff may grow, including  
whether this growth invalidates the potential cost savings from  
consolidation, (3) whether some of the standard requirements of  
the lease, such as a day care center and a fitness center, are	 
essential to providing adequate office space for PTO, (4) whether
the cost estimates for the tenant improvement allowance and	 
furniture costs are excessive, and (5) whether constructing the  
PTO facility would have been less costly than leasing it. In	 
response to the first public interest group's allegations, GAO	 
found nothing improper in GSA's award of the lease for the PTO	 
facility. In response to the questions from the second public	 
interest group, GAO found that (1) GSA acted in accordance with  
OMB's and its own guidance in determining that the PTO lease was 
an operating lease, (2) it is currently unknown whether PTO's new
space will meet all of its future housing needs, (3) features	 
such as the day care and fitness centers are either authorized by
law or governmentwide policy, (4) none of the available 	 
information indicated that the funding planned for tenant	 
improvements was excessive, and the competitive procurement for  
the furniture was aimed at achieving the best value for the	 
money, and (5) constructing a facility would have been less	 
costly, however, it was not a viable option because funds for	 
government ownership were not available at the time that GSA made
its decision.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-578R					        
    ACCNO:   A01123						        
  TITLE:     Acquisition of Leased Space for the U.S. Patent and      
             Trademark Office                                                 
     DATE:   06/05/2001 
  SUBJECT:   Contract award protests				 
	     Real estate leases 				 
	     Interest groups					 
	     Federal procurement				 

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GAO-01-578R
     
GAO- 01- 578R Leased Space for the U. S. Patent and Trademark Office United
States General Accounting Office

Washington, DC 20548

June 5, 2001 Senator James M. Inhofe Senator John McCain United State Senate

Subject: Acquisition of Leased Space for the U. S. Patent and Trademark
Office

This letter responds to your requests for a review of the data, assumptions,
and conclusions reached by the General Services Administration (GSA) and the
Patent and Trademark Office (PTO) relating to the acquisition of about 2
million square feet of leased space for the consolidation of PTO activities.
This build- to- suit lease, valued at approximately $1.2 billion over its
20- year term, was signed in June 2000. According to GSA officials, the
lease can be terminated without penalty to the government only if the lessor
fails to perform.

As agreed with you, the objective of our work was to respond to allegations
and questions from two public interest groups about the PTO lease
acquisition. One public interest group made the following allegations
concerning the procurement process for the lease: (1) GSA improperly awarded
the lease to an offeror who had not complied with the solicitation?s stated
requirements, (2) GSA failed to compete the construction of the interior
finishes phase of the project as required by the Competition in Contracting
Act of 1984 (CICA), and (3) GSA used an illegal cost- plus- a- percentage-
of- cost contract. 1 The second public interest group asked (1) whether the
requirements in GSA?s Solicitation for Offers (SFO) for the PTO lease
transformed the lease from an operating lease to a capital lease under
Office of Management and Budget (OMB) Circular A- 11; (2) whether the new
facility will be able to house all PTO employees and contractors throughout
the lease term because the staff may grow, 2 including whether this growth
invalidates the potential cost savings from consolidation; (3) whether some
of the standard requirements of the lease, such as a day care center and a
fitness center, are essential to providing adequate office space for PTO;
(4) whether the cost estimates for the tenant improvement allowance and
furniture costs are excessive; and (5) whether constructing the PTO facility
would have been less costly than leasing it. The methodology we used to
respond to these allegations and questions is discussed in enclosure II.

1 We consolidated all their allegations into three allegations. 2 PTO?s
workload is projected to grow 116 percent between 2000 and 2005.

2 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark Office
Results in Brief

In response to the first public interest group?s allegations, we found
nothing improper in GSA?s award of the lease for the PTO facility. This
procurement has also been reviewed by the Department of Commerce?s (DOC)
Inspector General and later in litigation in federal court. None of these
reviews resulted in a conclusion that the procurement activities had been
conducted improperly.

In response to the questions from the second public interest group, we found
that GSA acted in accordance with OMB?s and its own guidance in determining
that the PTO lease was an operating lease. 3 It is currently unknown whether
PTO?s new space will meet all of its future housing needs. A number of
different dynamics could mitigate the need for additional space in spite of
the anticipated growth in workload, such as PTO?s efforts to automate its
increasing workload and allow greater use of telecommuting by its staff, and
its success or failure in hiring and retaining staff. Although the cost of
housing future staff growth is unknown, it is a moot point because any
future housing needs would be incurred under the PTO consolidated and
unconsolidated scenarios. Further, PTO?s estimates of substantial savings
from consolidation seem reasonable. Features such as day care and fitness
centers are either authorized by law or governmentwide policy and PTO had a
justification that appeared reasonable. None of the information available at
this time indicated that the funding planned for tenant improvements was
excessive, and the competitive procurement for furniture is aimed at
achieving the best value for the money. GSA?s tenant improvement allowance
for the PTO facility exceeds its normal standard tenant improvement
allowance because it includes additional necessary cost elements. 4 Lastly,
as we have previously reported, construction of the PTO facility would be
less costly than leasing; however, that was not a viable alternative at the
time GSA made the decision for the PTO facility because funds were not
available to provide for government ownership. The issues are discussed in
more detail in enclosure I.

Background

Since the 1960s, PTO has been in leased space in the Crystal City area of
Arlington, VA. Currently, PTO has 33 leases occupying all or portions of 18
buildings in Crystal City. 5 Its annual rent for these spaces is about $58
million to house the current 6,400 PTO employees. 6 PTO fully occupies 5
buildings and shares the other 13 with other government and private sector
tenants.

3 If a GSA lease, being self- insured, is determined to be an operating
lease, then the yearly rent is scored against GSA?s budget authority 1 year
at a time. If a GSA lease is determined to be a capital lease, then the net
present value of the entire cost of the full term of the lease is scored
against GSA?s budget authority in the year the lease becomes effective. For
example, because GSA is considered to be selfinsuring, PTO?s yearly rent of
$62 million would be scored against GSA?s budget authority for each of the
next 20 years as an operating lease. If it was a capital lease, the net
present value of the $1.2 billion in total lease costs would be scored
against GSA?s fiscal year 2003 budget authority. Also see footnote 12.

4 The standard tenant improvement allowance is the financial allotment that
GSA gives an agency for finishing and customizing the space to the agency?s
specifications. The PTO tenant improvement allowance includes this finishing
and customizing plus installation of all branch and secondary distribution
systems for mechanical and electrical services.

5 PTO also has three warehouse locations that are not being consolidated
into the new facility. 6 This rate cannot be projected out 20 years because
the rents are not fixed as in the new lease and may rise or fall over this
period.

3 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark Office

In 1989, PTO began working with GSA on approaches to meet its long- range
space requirements. In August 1995, OMB authorized GSA to seek congressional
approval to consolidate PTO operations at a single location in new leased
space.

By resolutions, the appropriate Senate and House committees approved the
prospectus for the lease procurement in October and November 1995,
respectively. 7 The resolutions authorized the competitive procurement of a
20- year operating lease for about 2 million square feet for the purpose of
consolidating PTO in an area between the Potomac River and Dulles
International Airport in Northern Virginia.

On June 26, 1996, GSA issued the SFO for the lease. The procurement was to
be conducted in two phases. In Phase I, the offerors were to provide basic
information about their sites, development plans, qualifications of design
teams and developers, preliminary financial information, and a phase 1
environmental assessment and questionnaire. In Phase II, selected offerors
were to provide more detailed information regarding the site, proposed
design of the facility, the interior architect, the development schedule,
and the operations and maintenance firm. On December 23, 1996, GSA received
six offers. On March 11, 1997, four of the offerors were invited to proceed
to Phase II of the procurement. After a bid protest to GAO and litigation
concerning this procurement, on June 1, 2000, GSA signed a 20- year lease
with LCOR Alexandria L. L. C. for approximately 2.2 million rentable square
feet, 8 which are to be built to suit GSA/ PTO needs and to house 7,100
staff at the Carlyle site in Alexandria, VA. The lease is valued at $1. 24
billion over 20 years, plus operating expenses and taxes.

The City of Alexandria, which is presently reviewing the design of the
project, must approve the design before the lessor can proceed. According to
PTO?s Administrator for Space Acquisition, it anticipates that LCOR will be
able to begin construction of the five- building complex in October or
November 2001. PTO plans to begin moving into the complex in late 2003.

Agency Comments

In May 2001, we received written comments from the Acting Under Secretary of
Commerce for Intellectual Property and Acting Director, PTO. We received
oral comments from OMB?s Branch Chief for GSA and Justice and GSA ?s
National Capital Region Assistant Regional Administrator, Public Buildings
Service. The PTO official concurred with our report and provided additional,
clarifying, or updated information, which has been included in the report.
GSA concurred with our report without comments, and OMB had no comments.

We conducted our review at GSA and PTO between September 2000 and April 2001
in accordance with generally accepted government auditing standards.

- - - - 7 A prospectus, which is a justification for a proposed project,
includes information on the size, cost, location, and other features and is
submitted to the appropriate House and Senate authorizing committees.

8 Rentable square feet is a term used in the commercial real estate market
that includes occupiable square feet plus the tenants? proportional share of
common building areas, such as rest rooms, exit stairways/ fire corridors,
and lobbies. Occupiable square feet is a term used by the government to
identify the square footage of space that can actually be used to house
agency operations.

4 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark Office

We are sending copies of this letter to Senators Ted Stevens, Robert Byrd,
Orrin Hatch, Patrick Leahy, Bob Smith, Harry Reid, Judd Gregg, Ernest
Hollings, Ben Nighthorse Campbell, Byron Dorgan, Peter Fitzgerald, and Max
Baucus; and Representatives C. W. Bill Young, David Obey, Jim Sensenbrenner,
John Conyers, W. J. Tauzin, Don Young, James Oberstar, Cliff Sterns,
Edolphus Towns, Steven LaTourette, Jerry Costello, Frank Wolf, Jose Serrano,
Ernest Istook, and Steny Hoyer in their capacities as Chairmen or Ranking
Members of committees and subcommittees with jurisdiction over GSA,
Commerce, and PTO activities; the Honorable Dick Armey, House Majority
Leader; Mr. Nicholas Godici, Acting Director, Office of Patents and
Trademarks; the Honorable Thurmond Davis, Acting Administrator of GSA; the
Honorable Donald Evans, Secretary of Commerce; and other interested parties.
The letter will also be available on GAO?s home page at www.// gao. gov.

Key contributors to this letter were Ronald L. King and Thomas G. Keightley.
If you have any questions, please contact me or Ron King on (202) 512- 8387.

Bernard L. Ungar Director, Physical Infrastructure Issues

Enclosure I 5 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

Detailed Information on the Questions GSA?s Award of the Lease Appears
Proper

One public interest group had questioned whether the General Services
Administration (GSA) improperly awarded the lease to LCOR because the
offeror had not complied with the solicitation?s stated requirements. We
found nothing improper in GSA?s evaluation and selection of LCOR?s offer.
According to the public interest group, LCOR did not meet the Solicitation
for Offers? (SFO) minimum requirement that the offeror have the necessary
zoning and master land- use plan approval for the required amount of office
space and for the above- grade parking garages LCOR proposed to build at the
site. The public interest group believed that LCOR was improperly allowed to
correct these deficiencies after it was awarded the lease when, as a result
of the City of Alexandria changing its land- use plans, LCOR?s design
received the necessary approvals. The public interest group essentially
maintains that GSA should have instead eliminated LCOR from the competition
and that GSA otherwise provided LCOR with a significant competitive
advantage by allowing it to obtain the approvals after the award.

We found that under the SFO, LCOR was not required to have all the necessary
planning and zoning approvals in place prior to award of the lease. Further,
according to GSA, LCOR provided it with sufficient assurances that it could
obtain the necessary approvals and meet the planning and zoning requirements
to enable GSA to determine that LCOR had the capability to provide the
required office space and the proposed parking facilities at the Carlyle
site.

In this regard, the SFO required LCOR to submit a legal opinion describing
in detail the site?s compliance with land- use and zoning restrictions and
confirming that the planning and zoning for the site had been completed in a
manner sufficient to meet the SFO?s requirements. Further, GSA amended the
SFO during the competition to allow an offeror to be considered compliant
with land- use restrictions even if it had not completed and received all
the necessary site plan approvals. An offeror without all the necessary
approvals prior to award could thus compete as long as the jurisdiction?s
normal approval process would permit construction of the required amount of
office space and completion of a facility meeting all requirements of the
SFO. Here, LCOR obtained the necessary approvals in conformance with the
government?s schedule.

We also found that GSA was not required to hold a separate competition for
the construction of the interior finishes phase of the project. Under the
SFO, the construction of the interior of the buildings is not a separately
competed phase of the project; it is to be performed by the selected
developer following the construction of the exterior shell of the buildings.

We believe that GSA?s approach for the interior construction phase seems
reasonable. The public interest group appeared to be concerned that the lack
of a detailed design and cost ceiling for the interior phase of the project
may increase costs because the developer would be in a ?sole- source?
position. However, it appears that GSA has addressed these concerns, and we
have no basis on which to disagree with GSA?s response. Specifically,
according to GSA, the interior construction phase is designed to minimize
the risks to the government and the developer. These risks result from the
fact that several years may elapse between the award of the lease and the
completion of all constructed space, during which the space requirements of
the government may change. This approach gives GSA and the Patent and
Trademark Office (PTO) design flexibility and the ability to defer final
design decisions until

Enclosure I 6 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

closer to the occupancy date, reducing the probability of change orders and
the need to accommodate reengineered space layouts that may be required
during this interval. The SFO establishes a tenant improvement allowance for
interior finishes that, with any additional funds provided by PTO, GSA
considers a cost ceiling for this phase of the project. GSA stated that it
will closely manage this phase of the project and that the SFO establishes
several measures (such as budgets and subcontract competition) that should
control costs incurred by the developer in completing the interior of the
buildings. GSA believes that alternative measures, such as detailed
specifications and pricing prior to lease award, would subject the
government to a higher degree of risk than the measures provided in the SFO.
We agree that GSA?s approach seems reasonable in that change orders can be
very costly.

We also do not believe that the interior construction phase of the
procurement results in a prohibited cost- plus- a- percentage- of- cost
contract. 9 The lease agreement itself is simply not a cost- plus-
percentage- of- cost contract. Rather, the lease provides for, in addition
to the tenant improvement allowance discussed previously, a fixed lease
payment by the government (subject to certain adjustments) to the contractor
that is to include the contractor?s fee (profit). Thus, the lease does not
allow the contractor to base its fee on the percentage of costs it incurs.

We note that the Department of Commerce (DOC) Inspector General?s earlier
review of this procurement had found the initial interagency memorandum of
agreement between GSA and PTO to manage the project (not the lease agreement
itself) was similar to a prohibited costplus- percentage- of- cost contract.
10 The Inspector General found that under the initial arrangement, GSA had
little incentive to monitor costs or rein in overdesigning or overbuilding
by PTO. According to the Inspector General, GSA would receive a percentage
fee for its services based on the costs incurred by PTO to accomplish the
design and construction of the interior of the buildings, and these costs
had not been capped under the lease agreement. GSA and PTO have since
addressed the Inspector General?s concerns in a Memorandum of Understanding
between the agencies that limited the fee that GSA could receive. Further,
the lease agreement established several cost control measures, such as
requiring the lessor to identify cost control methods and explain how
selecting alternative options, cost estimating, and monitoring will be done,
to ensure that the interior finishes are delivered within the allowance
established for this work plus any additional funds provided by PTO for
interior finishes.

As previously mentioned, this procurement has also been reviewed by the DOC
Inspector General and later in litigation in federal court. 11 None of these
reviews resulted in a conclusion that the procurement activities had been
conducted improperly.

9 41 U. S. C. 254( b) prohibits such contracts because they provide a
contractor an incentive to increase costs to the government by basing its
fee on the percentage of costs incurred. 10 The Inspector General did not
actually conclude that the agreement between GSA and PTO was a prohibited
cost- plus- percentage- of- cost contract but that the agreement presented a
similar risk of increased costs.

11 In December 1998, a competitor for the lease, the Charles E. Smith
companies, filed a lawsuit in U. S. District Court, Eastern District of
Virginia, alleging that the SFO?s requirements overstated the government?s
minimum needs. Specifically, Smith alleged that it was disadvantaged in the
competition because its proposal to renovate existing buildings was uniquely
affected by the excess requirements. On July 29, 1999, the court ruled in
favor of the government, and this ruling was affirmed on appeal. CESC Plaza
Ltd. Partnership v. U. S. Dept. of Commerce, No. 99- 2432, 2000 U. S. App.
LEXIS 12823 (4th Cir. June 8, 2000) (per curiam). An earlier bid protest
filed at GAO by Smith against certain

Enclosure I 7 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office GSA Followed OMB?s and Its Own Guidance in Scoring the Lease as an
Operating

Lease

The public interest group questioned whether the requirements in GSA?s SFO
for the PTO lease transformed the lease from an operating lease to a capital
lease under Office of Management and Budget (OMB) Circular A- 11. 12 The
public interest group contends that contrary to OMB?s criteria for an
operating lease,

 the lease term would exceed 75 percent of the asset?s estimated economic
life,

 the facility would be special purpose,

 there would be no private sector market for the PTO facility, and

 the present value of the minimum lease payments would exceed 90 percent of
the fair market value (FMV) of the asset at the beginning of the lease term.

To qualify as an operating lease, a lease must meet six OMB criteria set
forth in Appendix B of OMB Circular A- 11. 13 Before analyzing these
factors, we discussed them with OMB to better understand its interpretation
of these criteria. Table 1 shows OMB?s six criteria and our analysis of
whether the PTO lease met the criteria.

requirements of the SFO was dismissed by GAO as untimely. The Charles E.
Smith Companies, B277391, Sept. 25, 1997, 97- 2 CPD para. 88. Smith and other
plaintiffs had also sought to prevent the consolidation of the PTO
facilities in Alexandria on the basis that the government failed to comply
with environmental law requirements. The U. S. District Court, District of
Columbia, decided this case in favor of the government in Young v. General
Services Administration, 99 F. Supp. 2d 59 (June 1, 2000). On December 14,
2000, the DC Circuit Court affirmed the ruling.

12 If an agency?s lease is determined to be an operating lease, budget
authority is required for the estimated total payments expected to arise
under the full term of the contract or, if the contract includes a
cancellation clause, an amount sufficient to cover the lease payments for
the first year plus an amount sufficient to cover the costs associated with
cancellation of the contract. In a limited number of cases, where funds are
self- insuring under existing authority, only the amount of budget authority
needed to cover the annual lease payment is required to be scored. If an
agency?s lease is determined to be a capital lease, budget authority will be
scored in the year in which the authority is first made available in the
amount of the net present value of the government?s total estimated legal
obligations over the life of the contract. For both operating and capital
leases, outlays will be scored over the lease term equal to the annual lease
payments. For example, since GSA is considered to be self- insuring, PTO?s
yearly rent of $62 million would be scored against GSA?s budget authority
for each of the next 20 years as an operating lease. If it was a capital
lease, the net present value of the $1.2 billion in total lease costs would
be scored against GSA?s fiscal year 2003 budget authority.

13 According to OMB officials, OMB reviews the scoring of a lease only when
the prospectus is prepared. OMB considers it the agency?s responsibility to
score the lease when it is ready for signature.

Enclosure I 8 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

Table1: Comparison of OMB?s Six Criteria to the PTO Lease

OMB?s six criteria for determining an operating lease GAO Analysis of GSA
lease for PTO facility

Ownership of the asset remains with the lessor during the term of the lease
and is not transferred to the government at or shortly after the end of the
lease term.

Ownership of the asset remains with the lessor. The lease does not contain a
bargain- price purchase option.

Although the lease does contain a provision providing the right to purchase
the facility, we saw no evidence that the option to purchase at about $821
million at 20 years or the FMV at 20 years is a bargain- price purchase
option. According to an OMB official, the purchase price has to be equal to
or near the FMV of the property to meet this criterion.

The lease term does not exceed 75 percent of the estimated economic life of
the asset. The 20- year term of the lease is not greater than 75

percent of the expected 30- year or more economic life of the building. Both
OMB and GSA officials said the expected life of the building applies to the
exterior structure itself, not its systems. The SFO required that the
exterior structure be built to last at least 50 years.

The asset is a general- purpose asset rather than being for a special
purpose of the government and is not built to unique specifications of the
government lessee.

On the basis of interviews with GSA and OMB officials, our review of the
SFO, the program of requirements, the independent appraisal, and the
location of the property and its proximity to public transportation and
major connector roads, we concluded that this is a general- purpose asset.
Both OMB and GSA officials said that special- purpose assets refer to such
items as border stations and courthouses but generally not to office
building requirements such as PTO?s. Although some of the features of the
buildings are being built to meet PTO?s needs, they do not appear to be of
the type that would preclude other tenants from occupying the space. Also,
GSA?s Inspector General concluded in its review that this was not a special
purpose asset.

There is a private sector market for the asset. There is no evidence that
there would not be a private sector market for the facility given its basic
design and the location of the buildings. The lease allows the government to
purchase all or a designated portion of the facility. If the government does
not buy the property, the lessor could sell the five buildings separately,
thus making the buildings easier to market. Also, GSA?s Inspector General
concluded in its review that there is nothing in the design that would
diminish future marketability.

The present value of the minimum lease payments over the life of the lease
does not exceed 90 percent of the FMV of the asset at the beginning of the
lease

The present value of the minimum PTO lease payments over the life of the
lease does not exceed 90 percent of the FMV of the asset at the beginning of
the

Enclosure I 9 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

term. lease term. GSA used data from the lease and calculated the FMV on the
basis of government construction costs. Further, to ensure that the lease
was an operating lease, GSA determined the FMV using another method and had
the FMV determined by an appraisal. These figures were inserted in the
appropriate formula, and in both cases the calculations resulted in an
operating lease.

Source: OMB Circular A- 11, GSA and GAO

To determine whether the present value of the minimum lease payments over
the life of the lease would not exceed 90 percent of the FMV of the asset at
the beginning of the lease term, GSA has a scoring formula that has been
reviewed by OMB. According to OMB officials, they used the same formula when
they initially scored the lease on the basis of the prospectus in 1995. For
scoring the PTO lease prior to signing it in June 2000, GSA used Appendix C,
valid through the end of January 2001, of OMB Circular A- 94 to determine
the discount rate of 6.2 percent. 14 We confirmed that GSA calculated the
other appropriate figures for the formula from the lease- occupiable square
feet (OSF), lease award date, effective date of the lease, rent per OSF,
operating cost per OSF, taxes and insurance per OSF, and lessor management
costs per OSF. The last figure needed to complete the formula is the FMV of
the leased property.

We confirmed that GSA followed its General Construction Cost Review Guide
for Federal Facilities in making its determination of the FMV by reviewing
its estimate. 15 According to a GSA official, the FMV for the PTO facility
was estimated on the basis of the review guide?s cost to construct the
facility. This guideline provides data and calculation procedures to
establish planning phase cost estimates for new construction projects.
According to GSA officials, this is the standard guidance used for
estimating the construction of federal facilities. An OMB official verified
that this guidance was the appropriate guidance for estimating federal
construction costs. This figure was used in the scoring formula, which
showed it was an operating lease. 16 The OMB guidance in effect at the time
that GSA scored the lease prior to signing it did not specifically indicate
how the FMV should be calculated. Further, according to a GSA official, to
ensure that the lease was an operating lease, GSA determined the FMV using
another method and had the FMV determined by an appraisal. For the other
method, he obtained the FMV by inflating the 1995 FMV to reflect increased
construction costs that have occurred since the original estimate. Using
either this figure or the appraisal figure for the FMV in the scoring
formula resulted in an operating lease.

In July 2000, after the lease was signed, OMB issued new scoring guidance
that more specifically addressed how the FMV should be calculated. Because
no asset existed, as of the date the lease was signed, OMB?s new guidance
says:

14 The guidance provides 10- year and 30- year discount rates, 6. 1percent
and 6.3 percent, respectively. OMB officials said that for 20 years one
should interpolate the difference between the 10- year and 30- year rates,
which would be 6.2%.

15 General Construction Cost Review Guide for Federal Facilities, Oct. 1999,
Office of the Chief Architect. 16 We have not discussed the specific figures
used in the calculation because certain information, such as operating
expenses and management expenses per OSF, are proprietary information of the
lessor.

Enclosure I 10 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

?? the fair market value of the proposed asset should be calculated based on
the Government?s estimate of the cost to construct a facility equal in size
and other characteristics to the amount of space to be leased. The estimate
should include consideration of the Government?s total direct and indirect
costs of the facility, including land, design, site improvements and
management costs.?

This is the same method GSA used to score the lease in June 2000. For the
purpose of this review, we assessed GSA?s conformance with existing OMB and
GSA guidance relating to scoring the PTO lease. However, we did not
independently assess the government?s criteria and guidance related to
scoring proposed facility acquisitions. We plan to include such an
assessment in a broad review we have initiated on the government?s overall
approach to acquisition, management, and disposal of real property.

It Is Unknown Whether PTO?s New Space Will House All Future Space Needs

The public interest group believed the new facility will not be able to
house all PTO employees and contractors throughout the lease term because it
believes PTO staff could grow to 9,000, which is 1,900 higher than the
planned occupancy, by the occupancy date of about 2003. Further, the group
believed that this growth would diminish or eliminate the potential cost
savings from consolidation.

It is unknown whether PTO?s new space will meet all of its future housing
needs. A number of different dynamics could mitigate the need for additional
space in spite of the anticipated growth in workload, such as PTO?s efforts
to automate its increasing workload and allow greater use of telecommuting
by its staff, and PTO?s success or failure in hiring and retaining staff.

Whether the projected $72 million in savings from consolidating is realized
or not, PTO would still have to pay for housing increased staff under either
a consolidated or unconsolidated scenario. Also, there are other benefits
from consolidation, such as improved security and compliance with current
fire, life safety, and accessibility codes and requirements, that are not
available in all of the buildings where PTO staff currently work.

PTO is trying to automate and reengineer its operations, such as automating
all of its files and testing a pilot work- at- home program for trademark
attorneys. These efforts could result in reduced staffing needs and/ or
decreased space needs in the future. It is clear that PTO?s workload is
growing, but it is impossible to predict the long- term effects on PTO?s
employment levels because of PTO?s automation and reengineering efforts, its
difficulties in hiring employees in today?s competitive market, and the
possibilities of a broadly applied work- at- home program and/ or the use of
satellite sites located closer to the source of the workload.

In addition, we reviewed the June 10, 1999, Business Case Analysis of Space
and Facilities Management prepared by DEVA and Associates, PC (DEVA report),
which identified the $72 million in savings over a 20- year period for
housing 7,108 staff. 17 This report presented the potential economic
differences between remaining unconsolidated and consolidating into one
location. DEVA identified 24 cost areas for analysis, including basic rent,
dual rent, security, security upgrades, shuttle cost, and lost production
time. DEVA attributed the bulk

17 The original DEVA report done in May 1998 was updated in June 1999 in
response to a request by the Chairman, Subcommittee on Economic Development,
Public Buildings, Hazardous Materials and Pipeline Transportation, House
Committee on Transportation and Infrastructure. It was updated to reflect
comments made in an Arthur Andersen LLP review of the initial report.

Enclosure I 11 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

of the potential savings to reducing nonproductive travel time among PTO
sites and rent for space for staff increases from 6,400 to 7,100. The
methodology and assumptions used to identify the cost savings seemed
reasonable.

At our request, DEVA updated its report in November 2000 to reflect recent
increases in rent costs. The update showed that the consolidation now has
the potential for cost savings of $98 million over 20 years. The cost
savings are estimates, and it is not yet certain how much will actually be
saved through the consolidation.

Further, even if no savings occur, the consolidation would enable PTO to
provide better security for its staff and meet fire, life safety, and
accessibility standards for federal facilities. In June 1995, the Department
of Justice (DOJ) issued a report recommending specific minimum security
standards, such as controlled parking facilities and use of security
according to building occupancy, size, contact with the public, and mission
of the agency. PTO currently occupies eight buildings that according to DOJ
standards, should have controlled parking facilities and security guards,
which, according to a PTO official, are not currently available. The six
facilities we visited had limited or no security for the staff housed there
and had underground parking to which the public had unrestricted access. 18
In addition, according to GSA, three buildings currently occupied by PTO do
not comply with current fire, life safety, and accessibility codes and
standards. The new facility, which will be a complex of five interconnected
buildings, will allow PTO to implement new security features and ensure that
the buildings meet all fire, life safety, and accessibility codes and
standards.

Some Building Features, Such as Fitness and Day Care Centers, Have Become
Important Recruitment Tools

One public interest group believed that some of the features being proposed
for the new PTO facility, such as a health care unit, fitness center, day
care center, auditorium, and dual power source capability, although
desirable, may not be essential to providing adequate office space for PTO.
Because final specifications for the new PTO facility were not completed at
the time of our work, we could not assess all the details concerning the
features, such as a health care unit and day care and fitness centers, the
public interest group has questioned. Nevertheless, these types of features
are not unique to PTO and appear to us to be reasonable because these three
features have been authorized by law or governmentwide policy for government
buildings. Furthermore, the justifications for the other features appeared
reasonable because there are a large number of people to be located at the
new facility, and the features should help PTO with its mission and in
hiring and retaining employees. 19

In keeping with its integrated workplace initiative, GSA is providing PTO,
as well as other agencies, tools it will need to develop a workplace that
will serve the needs and work practices of its employees and enhance the
government?s ability to recruit and retain employees. The goal of this
initiative is to identify and promote a more comprehensive approach to
providing leading- edge workplaces that will assist federal agencies in
creating cost- effective, flexible, efficient office environments that
enhance productivity and assist in attracting and retaining a quality
workforce.

18 We toured six of PTO?s current buildings. We found key- card access
devices at one location for access to office space, but no such devices at
the other five locations. The parking for all the sites was under the
buildings and was not restricted by key- card devices or guards.

19 As of March 22, 2001, the City of Alexandria had not yet approved the
design of the building.

Enclosure I 12 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

PTO?s new facility is to provide a number of features, such as a health care
unit, fitness center, day care center, auditorium, and dual power source
capability. Some of these types of features, such as the health care unit,
fitness center, and day care center, are authorized by law or governmentwide
policy. Furthermore, according to PTO officials, these features are
important because PTO is having difficulty recruiting and keeping employees,
and the features may help to alleviate this problem.

Congress has supported health care programs to promote and maintain the
physical and mental fitness of government employees since 1946, when it
passed the first law authorizing the head of government agencies to spend
federal funds for health service programs. 20 Under this law, agencies
established health units for employee use. Since then, through
governmentwide policy, the federal government has supported and encouraged
physical fitness and other preventive health care programs as essential
elements of an agency?s health service program for workers. Further in 1985,
Congress authorized federal agencies to establish child care facilities for
federal employees. 21 Currently, GSA has 110 child care centers operating in
32 states and the District of Columbia.

Many organizations, including the Office of Personnel Management, GSA, PTO,
and us, believe that such features are important in helping federal agencies
recruit and retain employees in a competitive market and help contribute to
employee morale and productivity. Further, we found 100 private local
buildings plus other federal buildings that provide some of these types of
features.

We found that PTO had justified the inclusion of several other building
features that one public interest group believed were unnecessary. For
example, according to a PTO official, the auditorium is needed to hold large
staff meetings, briefings for the public, and other conferences, and
meetings that cannot be handled by a conference room. Without the
auditorium, PTO would have to rent space to hold these various meetings, as
it does now. Further, PTO believes that the auditorium supports GSA?s policy
under the Public Buildings Cooperative Use Act of 1976 to support the
surrounding community by providing a facility for arts and community use. 22

Also, a PTO official told us that PTO wants dual power source capability
from separate substations to support its automation efforts. PTO has begun
to accept patent and trademark applications over the Internet and has plans
to maintain the official copies of these applications on computers rather
than retain paper copies. Therefore, a loss of power could bring PTO?s
operations to a halt and prevent it from serving its customers in a timely
manner. Having an alternative power source should reduce the possibility of
this occurring. Further, in its review of the record in a civil action
concerning PTO, a federal court confirmed PTO?s need for dual power on the
basis of the Court?s review of the administrative record. 23

20 5 U. S. C. 7901. 21 40 U. S. C. 490b. 22 40 U. S. C. 601a. 23 U. S
District Court for the Eastern District of Virginia, Civil Action #98- 1.

Enclosure I 13 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office Funding Planned for Tenant Improvements Did Not Appear Excessive and
a

Competitive Furniture Procurement Appears to Offer the Best Value

The public interest group believed that the standard tenant improvement
allowance and planned furniture acquisition are excessive. It also suggested
that there may not be a cap on the amount that can be spent on interior
finishes in the new PTO facility. GSA has provided an $88 million tenant
improvement allowance for PTO?s new facility, and PTO plans to spend another
$29 million for above- standard improvements. The combined $117 million in
tenant improvement allowance does not seem excessive. The public interest
group apparently misunderstood what comprises GSA standard tenant
improvement allowance. PTO also plans to spend, if appropriated, $64 million
for furniture. Although the final details for these items had not been
completed, the information currently available on the types of items PTO
plans to buy and the fact that it is a planned competitive procurement do
not support the conclusion that the planned expenditures are excessive. PTO
considers the amount to be spent on interior finishes for the PTO facility
to be capped at $29 million.

Tenant Improvement Allowance We found that the public interest group had
apparently misunderstood what comprises GSA?s tenant improvement allowance
when it said the allowance was excessive. First, the group identified $125
million as the amount established for the standard tenant improvement
allowance. We were able to identify only $117 million- GSA?s $88 million
tenant improvement allowance plus the $29 million to be funded by PTO
directly for its specific needs- for items that are typically considered
tenant improvements. 24 Although PTO does plan to spend additional funds for
its consolidation over and above what GSA is providing under the lease,
these costs are not part of GSA?s or PTO?s ?tenant improvement allowance.?
25

Second, GSA?s standard tenant improvement allowance, which is generally used
to convert existing space to a new tenant?s needs, provides funds for such
items as floor coverings, interior partitions, ceilings, and interior doors.
PTO?s $88 million allowance-$ 44. 24 per OSF- provides funds (about $38. 30
per OSF) for these same finishes plus funds (about $5.94 per OSF) for all
branch and secondary distribution systems for mechanical and electrical
services through the office areas and joint use space. 26 According to a GSA
official, the cost for mechanical and electrical services usually ranges
from $10 to $15 per OSF. Consequently, one could reasonably expect the per
OSF allowance to be between $48 to $53; thus, the

24 We believe that the $8 million comes from the $135 million in space
consolidation costs, but we could not identify a specific item with which to
associate it. 25 PTO?s planned space consolidation costs total about $135
million. In addition to PTO?s $29 million tenant improvement allowance,
these space consolidation costs include $64 million for furniture, $17
million for information technology and signage, $7. 8 million for dual rent,
$6.9 million for program management, $5. 5 million in moving expenses, and
$5 million in security upgrades. The figures do not total to $135 million
because of rounding. PTO reports quarterly to its Senate appropriations
subcommittee on the status of all of its space consolidation costs.

26 The standard tenant improvement allowance is calculated using the base
rate of $31.92 per usable square foot (approximately equal to an occupiable
square foot) for the Washington, D. C., area for fiscal year 2000. This
amount is then multiplied by a specific factor on an agency- by- agency
basis. In this case the PTO factor is 1. 2. This results in a standard
tenant improvement allowance for PTO of $38.30. It is unclear how the public
interest group obtained the figure $36.69 for the standard tenant
improvement allowance.

Enclosure I 14 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

$44.24 allowance does not appear to be excessive. According to GSA
officials, it is the lessor?s responsibility to provide all the agreed- upon
standard improvements for $88 million. Third, the $29 million in above-
standard tenant improvements is not part of GSA?s standard tenant
improvement allowance. PTO has prepared a written justification for the
types of additional items it wants in the facility. The $29 million
represents funds for what are known as above- standard finishes, which, in
PTO?s case, include such items as slab- to- slab partitions with a sound
transmission coefficient of 45 for sound control and security; locks on
office doors; upgraded carpets in public areas; and special heating,
ventilating, and air conditioning for the conference rooms. Agencies often
seek separate funds from Congress to pay for these above- standard items as
well as for other space consolidation- related costs, such as moving
expenses, that are over and above GSA?s standard tenant improvement
allowance. PTO told us that the above- standard improvement allowance for
the PTO facility is capped at $29 million. At the time we did our fieldwork,
the detailed specifications for the above- standard items were not
completed.

Planned Furniture Acquisition PTO plans to use a competitive procurement to
obtain its furniture needs, which should result in the best price for the
quality. The public interest group believed that the furniture expected to
cost about $64 million identified in the DEVA report may be overpriced.
Although PTO had not yet made final decisions on all of its planned
furniture acquisition when we completed our fieldwork, the process it was
going through to select and acquire the furniture generally appeared to be
aimed at achieving the best value for the government. According to a PTO
official, furniture costs are capped at $64 million.

Because of the amount of furniture needed, such as office furniture and
workstations for a potential 7,000 staff, and in an effort to obtain the
best value possible, PTO has decided to compete the requirements rather than
buying directly from the GSA Furniture Schedule. PTO issued a Request For
Information on furniture costs and received 24 responses from furniture
manufacturers. PTO then decided to create a showroom to have manufacturers
display their products for staff review and comment. 27 Thirteen
manufacturers participated, and PTO evaluated the responses to an employee
survey on the various products. According to a PTO official, as of April 10,
2001, PTO has finalized its specifications for a Request for Proposal (RFP)
and would like to conduct the furniture procurement on a best value basis so
that both quality and cost can be considered. PTO officials believe that a
competitive procurement will allow them to obtain both high quality and a
good price.

However, prior to issuing the competitive RFP, PTO will have to seek and
obtain a waiver, which it is in the process of doing, from Federal Prison
Industries (FPI), from which federal agencies are required to purchase
products if they meet the buying agencies? requirements and the prices
charged do not exceed current market prices. If PTO does not receive a
waiver from FPI, it is not known whether FPI can provide the best value;
however, PTO would be required by law to purchase the furniture from FPI. 28
PTO has identified 19,347 items, or 13 percent of its inventory, suitable
for relocation on the basis of condition and ergonomic quality. PTO has
received some initial funding for furniture but plans to ask for most of the

27 When PTO revised its cost analysis in June 2000, it showed furniture
costs rising to about $67 million. According to a PTO official, this was a
result of updating information in the model without adjusting the model to
reflect furniture costs being capped at about $64 million.

28 18 U. S. C. 4124

Enclosure I 15 GAO- 01- 578R Leased Space for the U. S. Patent and Trademark
Office

funding in the next 2 fiscal years-$ 16 million in fiscal year 2002 and
$42.9 million in fiscal year 2003.

Construction of the PTO Facility Would Have Been Less Costly but Was Not a
Viable Option

We have stated in reports issued in 1997 and 1999 that construction would
have been an estimated $48 million less costly than leasing space for PTO.
29 The public interest group says that GSA should have constructed the PTO
facilities with appropriated funds because it would be less costly to the
government. However, according to PTO?s Administrator of Space Acquisition,
at the time of the prospectus, the administration and PTO?s appropriation
committees agreed that a competitive lease was the only viable option
because neither user fees nor taxpayer funding were available to construct
or purchase a new PTO facility.

We have previously reported that the budget scoring rules favor leasing and
that one option for scorekeeping that could be considered would be to
recognize that many operating leases are used for long- term needs and
should be treated on the same basis as purchases. 30 This would entail
scoring up front the present value of lease payments covering the same time
period used to analyze ownership options. Applying the principle of up-
front full recognition of long- term costs to all options for satisfying
long- term space needs- purchases, leasepurchase or operating leases- is
more likely to result in selection of the most cost- effective alternative
than the current scoring rules would.

29 Space Acquisition Cost: Comparison of GSA Estimates of Three Alternatives
(GAO/ GGD- 97- 148R, Aug. 6, 1997). General Services Administration:
Comparison of Space Acquisition AlternativesLeasing to Lease- Purchase and
Leasing to Construction (GAO/ GGD- 99- 49R, Mar. 12, 1999).

30 Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings
(GAO/ T- AIMD- 94- 189, Sept. 20, 1994.)

Enclosure II 16 GAO- 01- 578R Leased Space for the U. S. Patent and
Trademark Office

Scope and Methodology

To address the allegations concerning the procurement process, we reviewed
the SFO, laws and court cases addressing the PTO lease, and GSA and DOC
Inspector General reports. For the concerns about the lease itself, we
reviewed the SFO; Program of Requirements; the lease; the independent
appraisal; the facility?s location; GSA IG reports; OMB?s guidance on
scoring a lease (Circular A- 11 Appendix B, and Circular A- 94); GSA?s
construction cost estimating guidance; GSA?s calculation of FMV of the
property; and GSA?s scoring of the lease. Also, we interviewed both OMB and
GSA officials concerning this issue. For the concerns about space needs, we
reviewed various documents PTO prepared concerning staffing, workload,
automation, and reengineering; visited six of PTO?s office locations;
reviewed the DEVA report and its assumptions; reviewed two consultant
reports that reviewed the DEVA report; and interviewed PTO staff. Further,
we had DEVA update the report to reflect current changes in the rent. For
the concern about nonessential requirements in the lease, we reviewed laws,
searched CoStar, a computerized listing of all commercial space in GSA?s
National Capital Region, and interviewed PTO and GSA officials concerning
the issue. For the concerns about the tenant allowance and furniture costs,
we reviewed the laws, SFO, Request for Information, and various other
documents concerning furniture needs and interviewed GSA and PTO officials.
For the concern about building versus leasing, we reviewed prior GAO
products and the lease.

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