Budget Scoring: Budget Scoring Affects Some Lease Terms, but Full
Extent Is Uncertain (31-AUG-01, GAO-01-929).			 
								 
This report responds to a concern that budget-scoring		 
restrictions were forcing the General Services Administration	 
(GSA) to rely on shorter term leases that increase the costs to  
the Federal Buildings Fund because their per-square-foot costs	 
are greater than longer term leases. Budget-scorekeeping rules	 
are to be used by the scorekeepers to assure compliance with	 
budget laws and  purpose is to ensure that the scorekeepers	 
measure the effects of legislation consistent with scorekeeping  
conventions and specific legal requirements. The rules are	 
reviewed annually and revised as necessary to achieve that	 
purpose. The way in which budget-scoring rules were implemented  
affected the lease or lease project term of at least 13 of the 39
federal agency leases reviewed. Since GSA officials do not	 
generally seek comparisons of long-term versus short-term leases 
in the solicitation process, GAO could not determine the overall 
monetary impact of budget scoring in the lease term. However, GAO
identified three isolated cases that had comparisons of long term
versus short-term leases in the solicitation process, and, in	 
each case, the price per net useable square foot was lower with  
the longer term lease. GSA officials said that while budget	 
scoring affects the term of some leases, the term of most leases 
is determined by various factors, either individually, or in	 
combination, such as rental market condition, location, and the  
term desired by the agency.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-929 					        
    ACCNO:   A01689						        
  TITLE:     Budget Scoring: Budget Scoring Affects Some Lease Terms, 
but Full Extent Is Uncertain					 
     DATE:   08/31/2001 
  SUBJECT:   Budget administration				 
	     Budget authority					 
	     Federal procurement				 
	     Budget scorekeeping				 
	     Real estate leases 				 
	     Federal Buildings Fund				 

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GAO-01-929
     
Chairmen and Ranking Minority Members, House Committee on Appropriations and
House Committee on Transportation and Infrastructure

United States General Accounting Office

GAO

August 2001 BUDGET SCORING Budget Scoring Affects Some Lease Terms but Full
Extent Is Uncertain

GAO- 01- 929

Page 1 GAO- 01- 929 Budget Scoring

August 31, 2001 The Honorable C. W. Bill Young Chairman The Honorable David
Obey Ranking Minority Member Committee on Appropriations House of
Representatives

The Honorable Don Young Chairman The Honorable James L. Oberstar Ranking
Democratic Member Committee on Transportation and Infrastructure House of
Representatives

This report responds to House Report 106- 756, on the Treasury, Postal
Service and General Government Appropriation Act, 2001, for a review of the
effects that the current budget- scoring rules have had on the General
Services Administration?s (GSA) lease program. 1 The report expressed a
concern that budget- scoring restrictions were forcing GSA to rely on
shorter term leases that increase the costs to the Federal Buildings Fund
because their per- square- foot costs are greater than longer term leases.
This report said that this reliance on shorter term leases was hampering
GSA?s ability to fund other important programs such as repairs for
maintaining the integrity of the federal building inventory and critically
needed new construction.

As agreed with your offices, the objective of our work was to determine the
impact of budget- scoring rules on the lease term and identify other factors
that influence the lease term. We agreed to have GSA (1) identify whether
all 39 prospectus- level lease projects, which GSA submitted to the
appropriate House and Senate committees for fiscal year 2000 and 2001

1 Budget scorekeeping is the process of estimating the budgetary effects of
pending and enacted legislation and comparing them with limits set in the
budget resolution or legislation. Scorekeeping tracks data such as budget
authority, receipts, outlays, the surplus or deficit, and the public debt
limit.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 929 Budget Scoring

were affected by budget scoring, 2 have GSA?s 11 regional offices identify
any other leases whose term was influenced by scoring, and review active
lease files to see if we could determine the effects of budget scoring from
the lease files; (2) determine, if possible, the monetary impact of budget
scoring on the lease term; and (3) identify other factors that influence the
lease term. Further, as agreed, we limited our review to only the budget
scoring criteria that were concerned with the term of the lease. These
criteria specify that in order for a lease to be scored as an operating
lease, the lease term not exceed 75 percent of the estimated life of the
asset and the present value of the minimum lease payments over the life of
the lease not exceed 90 percent of the fair market value (FMV) of the asset
at the beginning of the lease term.

During our review, we learned that the Security and Exchange Commission
(SEC), which has independent leasing authority, entered into a lease for a
new headquarters building that we identified as being affected by budget
scoring. Other than the SEC lease, we did not review leases or lease
projects of other agencies that use their own authority to lease space
independent of GSA.

The way in which budget- scoring rules were implemented affected the lease
or lease project term of at least 13 federal agency leases. 3 In addition to
the SEC lease, which we identified, GSA regions identified 12 leases or
lease projects whose terms were affected by budget- scoring rules. 4
Additionally, other GSA leases or lease projects may have been affected by
budget- scoring rules, but a number of factors hampered the identification
of all such leases or lease projects. According to GSA officials,
budgetscoring rules are affecting an unknown number of leases. For example,
at the beginning of a lease acquisition, staff often assume or believe that
a project will be affected by budget- scoring rules. Therefore, they reduce
the lease term to one that they think will be scored as an operating lease
versus a capital lease to avoid the higher up- front scoring associated with
a capital lease. Further, when a lease is actually scored, the term may have

2 A prospectus, which is a justification for a proposed project is required
when its cost exceeds a legislatively established threshold and includes
information on the project?s size, cost, location, and other features; it is
submitted to the appropriate House and Senate authorizing committees. All
other leases are known as nonprospectus leases.

3 A lease project is a project on which GSA is trying to obtain a lease. 4
As of August 2000, GSA had more than 7,000 active leases. Results in Brief

Page 3 GAO- 01- 929 Budget Scoring

to be reduced in order for it to be an operating lease. Also, as of October
1998, GSA?s regional offices were to score and document the scoring of both
prospectus- and nonprospectus- level leases, according to officials.
However, the officials said that the files will contain only the final
scoring sheets and not preliminary runs that might identify situations where
a lease term was adjusted in order for the lease to score lower.

We could not determine the overall monetary impact of budget scoring on the
lease term. GSA officials told us that they do not generally seek
comparisons of long- term versus short- term leases in the solicitation
process. However, we did identify three isolated cases that had comparisons
of long term versus short- term leases in the solicitation process. Two were
GSA leases that were not identified as being affected by scoring, and the
SEC lease, which was affected by scoring. GSA had requested as part of the
bidding process 10- year and 20- year lease costs, in one case, and 15- year
and 20- year lease costs, in the other case. Our review of these two leases
showed that for the winning offers, the longterm cost per net useable square
foot (NUSF) was slightly lower than the shorter term offers cost per NUSF-
3.24 percent, and 5.56 percent lower, respectively. 5 Further, GSA also
provided a consultant?s report that showed the estimated annual lease costs
per square foot for a Federal Bureau of Investigation (FBI) building in
Texas were 32 percent less expensive for a 20- year lease than for a 10-
year lease. While GSA officials agreed that a 20- year lease usually has
lower annual cost than a 10- or 15- year lease, they could not estimate the
potential amount saved by using a 20- year lease versus a 10- or 15- year
lease.

SEC had requested as part of the bidding process that offers range between
10 and 20 years. Our review of SEC lease files showed that for the
successful offer, the 20- year lease cost and the 15- year lease costs were
the same per rentable square foot (RSF). 6

GSA officials stated that (1) if GSA has a justifiable need for a 20- year
lease, (2) the space requirement is large enough, and (3) it is located in
an appropriate market, then, in most cases, GSA should build rather than

5 Net useable square feet is the term used by the government to identify the
square footage of space that can actually be used to house agency
operations. 6 Rentable square foot is a term used in the commercial real
estate market that includes net useable square feet plus the tenants?
proportional share of common building areas, such as rest rooms, exit
stairways/ fire corridors, and lobbies.

Page 4 GAO- 01- 929 Budget Scoring

lease because construction is generally less expensive than a long- term
lease. We have previously reported that for long- term needs, construction
is less expensive than leasing. Also, we have previously reported that the
budget scoring rules have the effect of favoring 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 or construction. 7 We recently initiated a broad
governmentwide review of real property management and plan to address the
effects of budget scoring on real property acquisition, as well as other
actions, as one part of this effort.

According to GSA officials, while budget scoring affects the term of some
leases, the term of most leases is determined by various factors, either
individually or in combination, such as rental market condition, location,
and the term desired by the agency.

We received written comments from both GSA and SEC. GSA basically agreed
with our report and provided additional comments supporting the effect of
budget scoring on leasing. SEC provided clarifying information, which has
been included in the report.

Budget- scorekeeping rules were developed by the executive and legislative
branches in connection with the Budget Enforcement Act of 1990. These rules
are to be used by the scorekeepers to assure compliance with budget laws. 8
Their purpose is to ensure that the scorekeepers measure the effects of
legislation consistent with scorekeeping conventions and specific legal
requirements. The rules are reviewed annually and revised as necessary to
achieve that purpose. Leases may be of two general types- operating and
capital. The Office of Management and Budget (OMB) identifies six criteria
that a lease must meet in order to be considered an operating lease rather
than a capital lease.

 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.

7 Acquisition of Leased Space for the U. S. Patent and Trademark Office
(GAO- 01- 578R, June 5, 2001). 8 The scorekeepers are the House and Senate
Budget Committees, the Congressional Budget Office, and the Office of
Management and Budget. Background

Page 5 GAO- 01- 929 Budget Scoring

 The lease does not contain a bargain- price purchase option.  The lease
term does not exceed 75 percent of the estimated economic life

of the asset.  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.  There is a private sector market for the asset.  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 term.

If a lease does not meet all six criteria above, it must be treated as a
capital lease for budget- scoring purposes. For a capital lease, the net
present value of the total cost of the lease is scored as budget authority
in the year budget authority is first made available for the lease. For GSA
operating leases, only the budget authority needed to cover the annual
payment is required to be scored. 9 As we previously reported, in general,
capital facilities should be funded up front at the time the federal
government enters into the commitment. 10

In June 1991, GSA wrote to OMB generally describing the policies and
procedures it would follow to ensure the proper implementation of the new
budget scoring rules. These rules were incorporated in OMB Circular A- 11.
Appendix B of the circular contains the scoring rules for leasepurchases and
leases of capital assets. In March 1992, GSA wrote to OMB

9 According to an OMB official, the self- insuring part of the following
definition applies to GSA because GSA is considered to be self- insuring for
budget- scoring purposes. 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, a 20- year lease with a yearly rent of $10
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 $200 million in total lease costs would be scored against GSA?s
fiscal year budget authority in the year lease payments began.

10 Budget Issues: Budgeting for Federal Capital (GAO/ AIMD- 97- 5, Nov. 12,
1996).

Page 6 GAO- 01- 929 Budget Scoring

saying that after reviewing its nonprospectus inventory, as well as OMB
policies and procedures, GSA concluded that nonprospectus leases should be
considered operating leases for scoring purposes without the necessity of a
case- by- case determination. In this letter, GSA stated that there was no
practical way to implement a policy of determining whether each
nonprospectus lease met the criteria for being considered an operating lease
without severely damaging its ability to meet client- agency needs. GSA
considered this view consistent with OMB?s intent, as well as an operational
necessity. In April 1992, GSA issued guidance on lease scoring in which it
stated that all nonprospectus leases are to be considered operating leases
unless the lease is a lease- purchase, the lease contains a nominal or
bargain purchase price, or the lease is on government- owned land. 11 All
nonprospectus leases that met one of these exceptions were to be scored as
capital leases by the regions. All prospectus- level leases were to be
scored at GSA?s central office.

In October 1998, GSA announced it was no longer following the policy of
considering most nonprospectus leases as operating leases. Since then,
according to GSA officials, GSA has required regional offices to apply the
appropriate criteria to all prospectus and nonprospectus leases and that
copies of the resulting scoring be retained in the regionally maintained
lease file. GSA headquarters is to review the scoring of all prospectus-
level leases.

Two of the six scoring criteria used to determine an operating lease concern
the term of a lease: that the lease term not exceed 75 percent of the
estimated economic life of the asset and that the present value of the
minimum lease payments over the life of the lease not exceed 90 percent of
the FMV of the asset at the beginning of the lease term. According to GSA
officials, GSA?s leases generally meet the first of these two criteria. If
GSA rents new space, it meets this criterion because it only has 20- year
leasing authority and tax law specifies that a new building?s economic life
is longer than 30 years (30 yrs. times 75% = 22.50 yrs.). If GSA rents older
space, it generally requires it to be upgraded, which extends the building?s
estimated economic life, thereby meeting this criterion. Thus, the remaining
criterion that could affect the lease term is that the present value of the
minimum lease payments over the life of the lease not exceed

11 Lease- purchase is an agreement between a lessor and lessee in which the
lessee agrees to lease a building for a specified length of time and then
takes title to the building at the end of the lease period.

Page 7 GAO- 01- 929 Budget Scoring

90 percent of the FMV of the asset at the beginning of the lease term. For
example, if a lease has a 20- year term whose present value of the minimum
lease payments exceeds 90 percent of FMV then by reducing the 20- year term,
the present value of the minimum lease payments is reduced while the FMV of
the asset remains the same. This lowering of the percentage relationship
between present value of the minimum lease payments and 90 percent of FMV
allows a lease to meet this scoring criterion. However, if a lease does not
meet any one of the other four scoring criteria, the lease would be a
capital lease no matter what the term.

Six of GSA?s 11 regions identified 12 projects or leases for which the
scoring process had affected the term of the lease. In one other region,
according to a GSA official, GSA thought that the term of about eight other
leases had been affected in the last 2 years but they could neither identify
those leases nor the impact of budget scoring on the lease term. GSA
officials from the other four regions said they could not identify any
projects affected by budget scoring. Only 2 of the identified 12 projects- a
lease for the Immigration and Naturalization Service and a lease for the
Secret Service- were among the 39 prospectus- level projects reviewed, and
none came from the 102 lease files we reviewed. According to GSA officials,
other factors, such as the agency or the market, determined the term of
these other leases. Table 1 lists the leases or lease projects that we or
GSA identified as being affected by scoring. Budget Scoring

Impacts Some Leases, But Full Extent Is Unknown

Page 8 GAO- 01- 929 Budget Scoring

Table 1: Leases or Lease Projects Whose Term Was Affected By Budget Scoring
12

GSA region Agency Rentable

square feet How budget scoring affected the lease

2 FBI 15,000 Term reduced from 20 to 10 years. 3 Social Security

Administration (SSA)

824,563 Term reduced from 20 to 10 years. a 3 FBI 131,169 Term reduced from
16 to 10 years and

agency only wanted a 10- year lease. 5 Secret Service 76,200 Term reduced
from 15 to 10 years. 5 FBI 126,912 Term reduced from 20 to 10 years. 7
Federal

Emergency Management Agency

82,017 Term increased from 10 to 15 years with right to cancel after 10
years. This is a build- to- suit lease. Since the agency is generating the
market, by going to a 15- year lease the lessor could get better financing
thus reducing the lease costs. 10 Immigration and

Naturalization Service

125,000 Term reduced from 20 to 10 years. 11 Department of

Transportation 1,350,000 Term reduced from 20 to 15 years. 11 National
Science

Foundation 2,023 b Term reduced from 11 to 8 years. 11 Drug

Enforcement Agency

49,692 Term reduced from 20 to 18 years and loading dock dropped from
project.

11 Federal Drug Administration 25,196 Term reduced from 5 years with 2- year

options to 5 years only. 11 Department of

Defense 16,675 Term reduced from 5 years with a 5- year option to 5 years
only. N/ A SEC 650,000 Term reduced from 20 years to 14 years.

Legend: N/ A= Not Applicable. a The lessor has submitted an unsolicited
proposal to extend the lease by 15 years at lower rent if

GSA will renew the lease now rather than waiting until lease expiration in
September 2003. This is why it shows up on the Fiscal Year 2001 Capital
Investment Plan. b This is in net useable square feet.

Source: GSA and GAO.

According to GSA officials, during the planning for the Department of
Transportation lease, it was realized that due to the rental rates in the
District of Columbia, a 20- year lease would probably not satisfy the 90

12 Either we or GSA identified these projects as ones that the lease term
was affected by budget scoring criteria. This list includes leases that have
not yet been awarded and leases and supplemental leases that have been
awarded, as well as the SEC lease.

Page 9 GAO- 01- 929 Budget Scoring

percent scoring criterion. In order to address this issue, GSA reduced the
lease term to 15 years, estimating that the present value of the minimum
lease payments for a 15- year lease would not exceed 90 percent of the FMV.
For the SSA lease, according to officials, it was originally submitted as
new construction but not approved. GSA then decided to do it as a 20year
build- to- suit lease, 13 but when reviewed it was determined that it would
be a capital lease because it did not satisfy the 90- percent scoring
criterion. At OMB?s direction, the lease was awarded as a 10- year lease
because OMB thought that SSA space needs might be reduced in the future
because of automation.

Four factors limited the identification of leases affected by budget
scoring, according to GSA officials. First, GSA did not begin determining
whether each nonprospectus lease met the scoring criteria for being
considered an operating lease until about October 1998. GSA issued guidance
in 1992 that stated there was no practical way to implement a policy of
determining whether each nonprospectus lease met the criteria for being
considered an operating lease without severely damaging its ability to meet
client- agency needs. Nonprospectus leases were to be considered operating
leases unless the lease was a lease- purchase, the lease contained a nominal
or bargain purchase price, or the lease was on government- owned land. Thus,
it is unknown if nonprospectus leases would have been affected by scoring
between 1992 and 1998. Second, prospectus- level leases were scored in
headquarters until September 1998, and scoring records were not kept in the
lease files that are maintained by GSA?s regional offices. Third, GSA
headquarters does not maintain documentation on whether the scoring process
affected the lease term. According to a headquarters official, although GSA
kept copies of scoring for prospectus leases, the records do not show
whether the term was directly affected by scoring. Fourth, according to GSA
officials, budget- scoring rules affect an unknown number of leases because
if staff believe a project will be affected by budget- scoring rules, they
reduce the term to avoid the potential scoring conflict. However, they do
not formally score the lease and do not use the scoring rules as a tool to
identify the best term. As of October 1998, GSA?s regional offices were to
score and document the scoring of both prospectus and nonprospectus leases,
according to officials. However, the officials said that the files will
contain only the final scoring sheets and not

13 Build- to- suit refers to leased buildings that are constructed to meet a
specific need of a GSA client- agency. Factors Limiting the

Identification of Lease Term Influenced By Scoring

Page 10 GAO- 01- 929 Budget Scoring

preliminary runs that might identify situations where a lease term was
adjusted in order for the lease to score as an operating lease.

We could not determine the actual monetary impact of reducing the lease
term. However, we found two leases in which GSA requested 10- year and 20-
year and 15- year and 20- year lease costs. GSA provided a consultant?s
report showing the difference between 10- and 20- year lease costs for
another project and the SEC lease had 15- and 20- year lease costs. GSA did
not identify these two lease terms as being affected by budget scoring.
However, the SEC lease term was affected by scoring. According to GSA
officials, GSA does not generally seek comparisons of short- and long- term
lease costs in the solicitation process. Also, GSA officials stated that the
use of a 20- year lease is only appropriate in certain situations, such as
if the agency has a long- term need and the federal presence is large enough
in the market to backfill the space with other federal employees if the
needs of the requesting agency change over time. Also, they pointed out that
in most cases it would be less costly to construct a federal facility to
meet a long- term need than it is to lease. We previously reported that
construction was usually the least costly approach for meeting long- term
space needs. 14 Further, GSA pointed out that other factors, such as market,
location, and the agency?s desires, affect the selection of the lease term.

While reviewing files, we identified two leases for which GSA had solicited
offers for both 10- and 20- year and 15- and 20- year leases. The first
lease was for a 20- year lease structured as either a 10- year lease with a
10- year option or a 20- year lease. 15 The 20- year lease term was 3.24
percent less expensive per NUSF than the 10- year lease that was awarded.
This lease was awarded as a 10- year lease with a 10- year option because
the agency?s long- range plans were unknown. Eight final offers showed that
the 20- year lease ranged from 0 to 12.9 percent less expensive per NUSF
than the 10

14 Space Acquisition Cost: Comparison of GSA Estimates of Three Alternatives

(GAO/ GGD- 97- 148, Aug. 6, 1997, and General Services Administration:
Comparison of Space Acquisition Alternatives- Leasing to Lease- Purchase and
Leasing to Construction

(GAO/ GGD- 99- 49R, Mar. 12, 1999). 15 In analyzing the lease, the 10- year
option is included in the analysis. Also, other factors such as free rent or
a cash allowance that may be made by offerors have not been included in the
analysis. We have calculated the cost differences based on cost per square
foot. Further, GSA may use technical factors such as expandability and space
efficiency along with cost in determining the best offer. Overall Monetary

Impact of 10- Year Leases Versus 20- Year Leases Is Not Known

Page 11 GAO- 01- 929 Budget Scoring

year lease. 16 However, for two other final offers the 20- year lease ranged
from .06 percent to 1.19 percent more expensive per NUSF than the 10year
lease. The second lease was for a 20- year lease structured as a 20- year
lease with cancellation rights at 15 years or a 20- year lease. The 20- year
lease term was 5. 56 percent less expensive per NUSF than the 20- year lease
with cancellation rights at 15 years for the offer selected for award. The
contract was awarded as a 20- year lease with cancellation rights at 15-
years. It is not clear from the file why this option was chosen. Four final
offers showed that the 20- year lease ranged from 5.56 percent to 7.75
percent less expensive per NUSF than the 20- year lease with cancellation
rights at 15 years. However, for two other final offers the 20- year lease
was 5.99 percent and 7.97 percent more expensive per NUSF than the 20- year
lease with cancellation rights after 15 years. Furthermore, a consultant?s
report on locating an FBI building in Texas showed that a 20- year lease was
32 percent less expensive per square foot than a 10- year lease. The
consultant pointed out that the cost difference might be due to the
specialized nature of the FBI building.

The SEC lease project had offers ranging from 10 to 20 years. 17 For the
successful offer, the 20- year lease costs and the 15- year lease costs were
the same per RSF. 18 Three other final offers showed that the 20- year lease
costs ranged from 1.3 percent to 4.1 percent less expensive per RSF than the
15- year lease costs. One final offer included 10- year lease costs. This
offer showed that 20- year lease costs were 8.8 percent less expensive per
RSF than 10- year lease costs per RSF. Further, 15- year lease costs were 7.
4 percent less expensive per RSF than 10- year lease costs per RSF. The
difference identified between terms and costs in these three examples are
not projectable to other leases because other factors such as market
condition (whether rental rates are high or low) affect the cost of a lease.

16 We dropped three other final offers because two had been withdrawn, and
the data for the other one could not be clearly interpreted. 17 The SEC
Solicitation for Offers (SFO) allowed offers up to 650,000 RSF. The SFO
allowed joint offers or allowed SEC to combine offers. We have included in
our discussion only the four of eight final offers that ranged from about
546, 000 RSF to 650,000 RSF. We did this to keep costs as comparable as
possible.

18 According to an SEC official, after receipt of Best and Final Offers, the
offeror remaining in the competitive range reduced its price and offered a
14- year term. Accordingly, the cost per RSF for the 14- year lease SEC
signed is not comparable to the 20- year lease and 15- year lease costs in
the prior offer of the successful offeror.

Page 12 GAO- 01- 929 Budget Scoring

In testimony before the Subcommittee on Public Buildings and Economic
Development, House Committee on Transportation and Infrastructure, on May
15,1997, a private industry real estate official testified that a 20- year
lease term could have annual rental rates as much as 33 percent less
expensive than a 10- year lease and 13 percent less expensive than a 15year
lease. Also, he testified that a 15- year lease term can be as much as 23
percent less expensive than a 10- year lease. He further stated that renewal
options in a lease are more advantageous than having to renegotiate a new
lease for the same location. While GSA officials agree that a long- term
lease generally has a lower cost than a short- term lease, they could not
quantify the difference between a 20- year lease or 15- year lease and a
10year lease. Also, they stated that it is generally less costly to
construct a federal facility to meet a long- term need- 20 years or more-
than it is to lease. Furthermore, they pointed out that other factors such
as the desires of the agency and the market must be considered along with
cost.

For nine GSA lease acquisitions, we previously reported that construction
would have been less costly in eight of the nine cases, with the range of
cost differences being from a negative $. 2 million to a positive $48.1
million for construction. 19 For 11 cities throughout the country, we
reported that to build a hypothetical 100,000 square foot office building
versus obtaining a 20- year lease, the estimated range of cost savings for
construction versus leasing was from $. 3 million in St Louis, MO, to $14
million in Washington, D. C. 20

Also, we 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. 21 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, lease- purchase or operating leases- is
more likely to result in selection of the most cost- effective alternative
than the current scoring rules would.

19 The negative result is due to the low lease cost for warehouse space
offered for this acquisition. 20 GAO/ GGD- 99- 49R, Mar. 12, 1999.

21 GAO- 01- 578R, June 5, 2001.

Page 13 GAO- 01- 929 Budget Scoring

According GSA officials, while scoring does affect the term of some leases,
the term of most leases is determined by various factors other than budget
scoring, such as the type of space- existing or build- to- suit- lease term
desired by the agency, rental market condition, and location of the
structure. The importance of each variable may be different for each lease.

GSA officials said that for existing space, lease terms do not usually
exceed 10 years. This has been a standard practice for some time. If the
requirement is for build- to- suit space, then the term of the lease may
have to be longer than 10 years to accommodate the lessor?s ability to
finance the building. It is these build- to- suit leases that are most
likely to be affected by scoring because the lessor must have a longer term
lease to get financing for a new structure.

The lease term to which the agency is willing to commit is another important
factor. GSA officials stated that some agencies told GSA that the agency
only has authority to commit to a maximum of a 10- year lease. Other
agencies only want leases of 10 years or less because of the changes
occurring within the agency, such as downsizing or consolidation. An
example, according to GSA officials, is the Internal Revenue Service;
because of downsizing it does not want to sign a lease longer than 10 years.

The rental market conditions also affect a lease?s term. GSA does not want
to commit to a long- term lease when the market rent is considered high.
Conversely, if market rent is low, GSA will consider a longer term lease,
according to officials. An example is a lease for the Customs Service in
Seattle, WA, for which GSA did not want a long- term lease because the
current rental rates were high.

Location becomes an important factor because GSA is required to take space
back from an agency with only 120 days notice. So in areas with a limited
federal presence, GSA does not want to commit to leases where the space
cannot be easily back filled with other federal agency employees, according
to GSA officials. For example, in small towns, GSA would not want to commit
to a lease term longer than an agency wanted when it is the only federal
agency in the location. GSA would not be able to find another federal tenant
for this space.

Although efforts to address budget- scoring rules did result in shorter term
leases in some cases, we could not determine the total number of leases
where the term was actually affected by budget scoring because of GSA?s
Factors Other Than

Scoring That Influence Lease Term Selection

Conclusions

Page 14 GAO- 01- 929 Budget Scoring

documentation process for scoring leases. Further, while a shorter term
lease can be more costly than a longer term lease, we could not determine
the actual overall monetary impact of shorter lease terms because GSA does
not generally seek comparisons of short- and long- term lease costs in the
solicitation process. In addition to having some effect on the lease term,
our previous work has shown that budget scoring can affect the government?s
decision whether to construct or lease a facility. Also, we have previously
reported that the budget- scoring rules have the effect of favoring 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 or construction.

Because of the overall effect budget scoring appears to be having on the
acquisition of real property, we plan to address the effects of budget
scoring on real property acquisition as part of a govermentwide review of
real property management we recently initiated.

To address identifying leases affected by scoring, we reviewed OMB?s
guidance on scoring leases (Circular A- 11, Appendix B, and Circular A- 94),
interviewed GSA officials in headquarters and all 11 regions, and reviewed
102 active lease files with terms from 10 to19 years and 100,000 RSF or more
in GSA regions 3, 7, 8, and 11, which were the 4 regions with the most
leases meeting our criteria of 10 to 19 years and 100,000 RSF or more. We
dropped 8 lease files from our original selection of 110 files because the
files could not be located during our visit or had been moved to other
locations prior to our visiting the region. We did not verify the accuracy
of the data used to select the lease files. To determine monetary impact of
scoring on the lease term, we reviewed congressional testimony, previous GAO
reports, 102 GSA lease files, and 8 final offers for the SEC lease; and we
interviewed officials in GSA headquarters, all 11 GSA regions, and SEC. To
identify other factors influencing lease term, we reviewed 102 active GSA
lease files and interviewed GSA headquarters and regional officials.

We conducted our review at GSA and SEC between October 2000 and July 2001 in
accordance with generally accepted government auditing standards. We
obtained comments on a draft of the report from GSA and SEC. Scope and

Methodology

Page 15 GAO- 01- 929 Budget Scoring

On August 10 and 14, 2001, we received written comments from the Associate
Executive Director, SEC, and the Commissioner of GSA?s Public Buildings
Service (PBS), respectively. The SEC official provided clarifying
information, which has been included in the report. The PBS Commissioner
basically agreed with us that budget scoring is affecting the lease term and
provided additional comments, which he believes support this position. The
first comment stated that seasoned leasing specialists said that the use of
20- year leases had declined since the Congress passed the Budget
Enforcement Act of 1990. While this may be true, GSA did not have
documentation on the impact of budget scoring on the lease term, other than
for the cases cited. Also, it is possible that other factors, such as market
conditions, contributed to the decline in the use of 20- year leases.
Second, GSA stated that the National Capital Region sets the term of all the
above- prospectus leases it submits as part of its capital plan at 10-
years, except in certain cases, to avoid budget- scoring problems. For the
fiscal year 2000 and 2001 prospectus- level leases that we reviewed, this is
accurate. However, prior to fiscal year 2000, both the Patent and Trademark
Office and the Department of Transportation leases were submitted for longer
terms, 20 and 15 years, respectively. Third, GSA said while options to renew
a lease were advantageous, it did not generally seek them for leases with
10- year terms because options are scored as part of the 90- percent scoring
criterion and could result in a capital lease. While GSA is correct that OMB
guidance requires options to be considered in scoring leases, there is an
exception to this rule. According to OMB?s guidance, agencies do not have to
include an option for budget scoring if exercising the option would require
additional legislative action. Lastly, GSA raised the issue of short- term
leases resulting in increased rental costs in some cases because they lead
to shorter amortization periods and higher mortgage payments for lessors who
use federal leases as collateral for financing. While the report shows that
in certain cases shorter term leases are more expensive than long- term
leases, we did not look at whether this increased cost was driven by shorter
amortization periods and higher mortgage payments. GSA also made some
technical comments, which we have reflected in the report where appropriate.
We have included GSA?s written comments in appendix I.

We are sending copies of this report to the Chairmen and Ranking Minority
Members of congressional committees with jurisdiction over GSA and SEC. We
are also sending copies to the Administrator, GSA, and the Chairman, SEC.
Copies will also be made available to others upon request. Agency Comments

Page 16 GAO- 01- 929 Budget Scoring

Key contributors to this report were Ronald L. King and Thomas G. Keightley.
If you have any questions, please contact me or Ron King on (202) 512- 2834.

Bernard L. Ungar Director, Physical Infrastructure Issues

Appendix I: Comments From the General Services Administration

Page 17 GAO- 01- 929 Budget Scoring

Appendix I: Comments From the General Services Administration

Appendix I: Comments From the General Services Administration

Page 18 GAO- 01- 929 Budget Scoring (393007)

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