Federal Real Property: Reliance on Costly Leasing to Meet New	 
Space Needs Is an Ongoing Problem (06-OCT-05, GAO-06-136T).	 
                                                                 
In January 2003, GAO designated federal real property a high-risk
area and issued an update on this area in January 2005. GAO	 
identified the government's reliance on costly leased space as	 
one of the major reasons for the high-risk designation. Other	 
reasons included excess and deteriorated property, unreliable	 
real property data, and the challenges associated with protecting
these assets from terrorism. This testimony discusses GAO's	 
designation of federal real property as a high-risk area and	 
focuses specifically on the government's reliance on costly	 
leased space.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-136T					        
    ACCNO:   A39158						        
  TITLE:     Federal Real Property: Reliance on Costly Leasing to Meet
New Space Needs Is an Ongoing Problem				 
     DATE:   10/06/2005 
  SUBJECT:   Facility security					 
	     Federal procurement				 
	     Federal property					 
	     Federal property management			 
	     Financial management				 
	     Leases						 
	     Real property					 
	     Strategic planning 				 
	     Cost effectiveness analysis			 

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GAO-06-136T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Federal Financial Management, Government
Information, and International Security, Senate Committee on Homeland
Security and Governmental Affairs

For Release on Delivery

Expected at 2:30 p.m. EDT FEDERAL REAL

Thursday, October 6, 2005

PROPERTY

    Reliance on Costly Leasing to Meet New Space Needs Is an Ongoing Problem

Statement of Mark L. Goldstein, Director Physical Infrastructure Issues

GAO-06-136T

[IMG]

October 6, 2005

FEDERAL REAL PROPERTY

Reliance on Costly Leasing to Meet New Space Needs Is an Ongoing Problem

                                 What GAO Found

The underlying conditions and related obstacles that led to GAO's
designation of federal real property as high risk still exist. Many of the
assets in the government's vast and diverse portfolio of real property are
not effectively aligned with, or responsive to, agencies' changing
missions. Furthermore, many assets are in an alarming state of
deterioration; agencies have estimated restoration and repair needs to be
in the tens of billions of dollars. Compounding these problems are the
lack of reliable governmentwide data for strategic asset management and
the cost and challenge of protecting these assets against terrorism.
Additionally, a heavy reliance on costly leasing, instead of ownership, to
meet new space needs is a pervasive and ongoing problem. Since GAO's
designation of this area as high risk in January 2003, some important
efforts to address these problems have been initiated, but it is too early
to judge whether the administration's focus on this area will have a
lasting impact.

The federal government owns and leases about 3.3 billion square feet of
building floor area in roughly a half-million buildings worldwide, of
which more than 380 million square feet are leased. Building ownership
options through construction or purchase and lease-purchase are generally
less costly than using operating leases to meet long-term space needs.
However, as GAO reported over the last decade, the General Services
Administration relies heavily on operating leases to meet new long-term
space needs because it lacks funds to pursue ownership. Operating leases
have become an attractive option, in part because budget scorekeeping
rules allow budget authority for some operating leases to be spread out
over the term of the lease and "look cheaper" in any given year, even
though they are generally more costly over time. In contrast, budget
authority for ownership options is recorded fully up front in the budget
to appropriately reflect the government's commitment. As a result, this
situation has encouraged an overreliance on operating leases for
satisfying long-term space needs. For example, the Patent and Trademark
Office's (PTO) operating lease for longterm space needs was estimated to
cost $48 million more than construction and $38 million more than
lease-purchase.

Examples of Leased Federal Facilities

Source (from left to right): GSA and PTO.

From left to right: Department of Transportation Headquarters Building
(under construction), Washington, D.C. and Main PTO Building, Alexandria,
VA.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to testify today on our work related to

federal real property and, in particular, the government's reliance on
space

leased from the private sector. As you know, at the start of each new

Congress since 1999, we have issued a special series of reports entitled
the

Performance and Accountability Series: Major Management Challenges

and Program Risks. In January 2003, we designated federal real property

a high-risk area as part of this series, and we issued an update on this
area

in January 2005.1 We identified the government's reliance on costly leased

space as one of the major reasons for the high-risk designation. Other

reasons included excess and deteriorated property, unreliable real

property data, and the challenges associated with protecting these assets

from terrorism. My testimony today will (1) discuss our designation of

federal real property as a high-risk area and (2) focus specifically on
the

government's reliance on costly leased space.

According to available data, the federal government owns and leases about
3.3 billion square feet of building floor area worldwide in roughly a
halfmillion buildings. About 380 million square feet of this space is
leased. My testimony today will highlight the following points:

o  	The conditions that led to our January 2003 high-risk designation
still exist. Many of the assets in the government's vast and diverse
portfolio of real property are not effectively aligned with, or responsive
to, agencies' changing missions. Furthermore, many assets are in an
alarming state of deterioration; agencies have estimated restoration and
repair needs to be in the tens of billions of dollars. Compounding these
problems are the lack of reliable governmentwide data for strategic asset
management and the cost and challenge of protecting these assets against
terrorism. Additionally, a heavy reliance on costly leasing, instead of
ownership, to meet new space needs, is a pervasive and ongoing problem.
The administration has acknowledged the problems in this area; in February
2004, the President added the Federal Asset Management Initiative to the
President's Management Agenda and signed an executive order on real
property management reform.2 These and other efforts are positive steps,

but it is too early to judge whether the administration's focus on this
area

1GAO, High-Risk Series: Federal Real Property, GAO-03-122 (Washington,
D.C.; Jan. 2003); GAO, High-Risk Series: An Update, GAO-05-207
(Washington, D.C.; Jan. 2005).

2Presidential Executive Order 13327, Feb. 4, 2004.

will have a lasting impact. In addition, we continue to believe that a
comprehensive and integrated transformation strategy is needed to address
the problems and several underlying obstacles to reform, which include
competing stakeholder interests, various funding and budgetary
disincentives, and the need for improved capital planning among agencies.

o  As a general rule, building ownership options through construction or

purchase are the least expensive ways to meet agencies' long-term and
recurring requirements for space. Lease-purchases-under which payments are
spread over time and ownership of the assets is eventually transferred to
the government-are generally less costly than using ordinary operating
leases to meet long-term space needs but are more costly than other
ownership options. However, over the last decade, we have reported that
the General Services Administration (GSA)-as the central leasing agent for
most agencies-relies heavily on operating leases to meet new long-term
needs because it lacks funds to pursue ownership. Operating leases have
become an attractive option in part because they generally "look cheaper"
in any given year, even though they are generally more costly over time.
Budget scorekeeping rules allow budget authority for some of these costly
operating leases to be spread out over the term of the lease. In contrast,
budget authority for ownership options, according to the scorekeeping
rules, are recorded fully up-front in the budget to appropriately reflect
the government's commitment. As a result, this situation has encouraged an
overreliance on operating leases for satisfying long-term space needs.
Resolving this problem has been difficult; however, change is needed
because the current practice of relying on costly leasing to meet
long-term space needs results in excessive costs to taxpayers and does not
reflect a sensible or economically rational approach to capital asset
management.

Over 30 federal agencies control hundreds of thousands of real property
assets-including both facilities and land-in the United States and abroad.
These assets are worth hundreds of billions of dollars. Unfortunately,
much of this vast and valuable asset portfolio presents significant
management challenges and reflects an infrastructure based on the business
model and technological environment of the 1950s. Many assets are no
longer effectively aligned with, or responsive to, agencies' changing
missions and are therefore no longer needed. Our high-risk reports
highlighted problems with excess and underutilized property at several
agencies, including the Departments of Defense, Veterans Affairs (VA),
Energy, and State; the U.S. Postal Service (USPS); and GSA. Furthermore,
many assets are in an alarming state of deterioration; agencies have
estimated restoration, repair, and maintenance needs to be

  Federal Real Property: A High-Risk Area

in the tens of billions of dollars. For example, we reported in 2003 that
the Department of the Interior had a maintenance backlog of between $8
billion and $11 billion. Compounding these problems are the lack of
reliable governmentwide data for strategic asset management, a heavy
reliance on costly leasing instead of ownership to meet new space needs,
and the cost and challenge of protecting these assets against potential
terrorism. The problems facing the federal portfolio have been exacerbated
by a number of factors, including competing stakeholder interests in real
property decisions, various legal and budget-related disincentives to
businesslike outcomes, and the need for better capital planning among real
property-holding agencies.

More specifically:

o  	Competing Stakeholder Interests -In addition to Congress, the Office
of Management and Budget (OMB), and the real property-holding agencies
themselves, several other stakeholders have an interest in how the federal
government carries out its real property acquisition, management, and
disposal practices. These include foreign and local governments; business
interests in the communities where the assets are located; private sector
construction and leasing firms; historic preservation organizations;
various advocacy groups; and the public in general, which often views the
facilities as the physical face of the federal government in local
communities. As a result of competing stakeholder interests, decisions
about real property often do not reflect the most cost-effective or
efficient alternative that is in the interests of the agency or the
government as a whole, but instead reflect other priorities.

o  	Legal and Budgetary Disincentives -The complex legal and budgetary
environment in which real property managers operate has a significant
impact on real property decisionmaking and often does not lead to
economically rational and businesslike outcomes. For example, we have
reported that public-private partnerships might be a viable option for
redeveloping obsolete federal property when they provide the best economic
value for the government, compared with other options, such as federal
financing through appropriations or sale of the property. Resource
limitations, in general, often prevent agencies from addressing real
property needs from a strategic portfolio perspective. When available
funds for capital investment are limited, Congress must weigh the need for
new, modern facilities with the need for renovation, maintenance, and
disposal of existing facilities, the latter of which often gets deferred.
In disposing of excess property, agencies also need to consider a range of
laws intended to address other objectives-such as historic preservation

and environmental remediation.

o  	Need for Improved Capital Planning - Over the years, we have reported
that prudent capital planning can help agencies to make the most of
limited resources, and failure to make timely and effective capital
acquisitions can result in increased long-term costs. GAO, Congress, and
OMB have identified the need to improve federal decisionmaking regarding
capital investment. Our Executive Guide,3 OMB's Capital Programming Guide,
and OMB's revisions to Circular A-114 have attempted to provide guidance
to agencies for making capital investment decisions. However, agencies are
not required to use the guidance. Furthermore, agencies have not always
developed overall goals and strategies for implementing capital investment
decisions, nor has the federal government generally planned or budgeted
for capital assets over the long term.

Since our designation of this area as high risk in January 2003, some
important efforts to address these problems have been initiated by the
administration and executive agencies, including the addition of the
Federal Asset Management Initiative to the President's Management Agenda
and an executive order on real property management reform which led to the
development of guiding principles for real property asset management. The
executive order requires the establishment of senior real property
officers at most executive branch departments and agencies that, among
other things, prioritize actions needed to improve the operational and
financial management of the agency's real property inventory. The order
also established a Federal Real Property Council, with representation from
major real property-holding agencies. The council has developed guiding
principles for real property asset management and is also developing
performance measures, a real property inventory database, and an agency
asset management planning process. The executive order is clearly a
positive step. However, it has not been fully implemented, and further
actions are necessary to address the underlying problems and related
obstacles to reform. Despite these efforts and the sincerity with which
the federal real property community has embraced the need for reform, the
problems have persisted. We continue to believe that a comprehensive and
integrated transformation strategy for real

3GAO, Executive Guide: Leading Practices in Capital Decision-making,
GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).

4OMB, Circular No. A-11, Appendix B.

property is needed to build on the executive order. More specifically, the
additional step of developing a transformation strategy would provide
decisionmakers with a road map of actions for addressing the underlying
obstacles, assessing progress governmentwide, and enhancing accountability
for related actions. As an example, OMB and other stakeholders could look
to the USPS Transformation Plan and related progress reports, which GAO
has supported for guiding postal reform.5

If actions resulting from the transformation strategy and other efforts to
address the long-standing problems are effectively implemented, agencies
will be better able to recover asset values, reduce operating costs,
improve facility conditions, enhance security and safety, recruit and
retain employees, and achieve mission effectiveness. Realigning the
government's real property, taking into consideration the future federal
role, likely organizational structure, geographic presence, and workplace
needs, will be critical to improving the government's performance and
ensuring accountability within expected resource limits.

One of the major reasons for our high-risk designation was the pervasive
problem of over reliance on costly leased space to meet new space needs.
As a general rule, building ownership options through construction or
purchase are the least expensive ways to meet agencies' long-term
requirements. Lease-purchases-in which payments are spread out over time
and ownership of the asset is eventually transferred to the government-
are generally more expensive than purchase or construction but are
generally less costly than using ordinary operating leases to meet
long-term space needs. However, over the last decade we have reported that
GSA-as the central leasing agent for most agencies- relies heavily on
operating leases to meet new long-term needs because it lacks funds to
pursue ownership. In 1995, we reported that GSA had entered into 55
operating leases for long-term needs that were estimated to cost $700
million more than construction.6 In 1999, we reported that for 9 major
operating lease acquisitions GSA had proposed, construction would have
been the least-cost option in 8 cases and would have saved an estimated
$126 million. Lease-purchase would have saved an estimated

  Reliance on Costly Leasing

5U.S. Postal Service, Transformation Plan (Washington, D.C.: Apr. 2002);
U.S. Postal Service, Progress Report (Washington, D.C.: Nov. 2004).

6GAO, General Services Administration: Opportunities for Cost Savings in
the Public Buildings Area, GAO/T-GGD-95-149 (Washington, D.C.: July 13,
1995).

$107 million compared with operating leases but would have cost $19
million more than construction.7

A prime example of this problem was the Patent and Trademark Office's
(PTO) long-term requirements in northern Virginia, where the cost of
meeting this need with an operating lease was estimated to be $48 million
more than construction and $38 million more than lease-purchase. In August
2001, we also reported that GSA reduced the term of a proposed 20-year
lease for the Department of Transportation (DOT) headquarters building to
15 years so that it could meet the definition of an operating lease. GSA's
fiscal year 1999 prospectus for constructing a new facility for this need
showed the cost of construction was estimated to be $190 million less than
an operating lease. The Securities and Exchange Commission used a similar
approach by reducing the terms of a proposed 20-year lease for its
facility to 14 years.8 Although most of our work in this area has focused
on GSA-controlled leases, other real property-holding agencies with
leasing authority-such as the Departments of State and Veterans
Affairs-also face the same obstacles to ownership. USPS officials have
told us that they do not believe that USPS is overly reliant on operating
leases. Figure 1 shows the main PTO building and construction of the DOT
headquarters building, both of which are being leased by the government.

7GAO, General Services Administration: Comparison of Space Acquisition
Alternatives-Leasing to Lease-Purchase and Leasing to Construction,
GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).

8GAO, Budget Scoring: Budget Scoring Affects Some Lease Terms but Full
Extent Is Uncertain, GAO-01-929 (Washington, D.C.: Aug. 31, 2001).

 Figure 1: The DOT Headquarters Building and Main PTO Building, which are Being
                       Leased By the Federal Government.

                   Source (from left to right): GSA and PTO.

Operating leases-in which periodic lease payments are made over the
specified length of the lease-have become an attractive option in part
because they generally "look cheaper" in any given year. Pursuant to the
scoring rules adopted as a result of the Budget Enforcement Act of 1990,
the budget authority to meet the government's real property needs is to be
scored-meaning recorded in the budget-in an amount equal to the
government's total legal commitment. For example, for lease-purchase
arrangements, the net present value of the government's legal obligations
over the life of the contract is to be scored in the budget in the first
year. For construction or purchase, the budget authority for the full
construction costs or purchase price is to be scored in the first year.
However, for many of the government's operating leases-including GSA
leases, which, according to GSA, account for over 70 percent of the
government's leasing expenditures and are self-insured in the event of
cancellation-only the budget authority to cover the government's
commitment for an annual lease payment is required to be scored in the
budget.9 Given this, while operating leases are generally more costly over

9According to the scoring rules (OMB Circular No. A-11, app. B), in cases
where the operating lease does not have a cancellation clause or is not
paid for by funds that are selfinsuring, budget authority to cover the
total costs expected over the life of the lease is to be scored in the
first year of the lease.

time, compared with other options, they add much less to a single year's
appropriation total than these other arrangements, making operating leases
a more attractive option from the agency's budget perspective. This is
particularly evident when funds for ownership are not available in an era
of constrained budgetary resources. While the requirement for "upfront
funding" provides for congressional control over the full costs to which
the government is committing itself, the budget scorekeeping rules for
self-insuring funds like GSA's Federal Buildings Fund allow costly
operating leases to "look cheaper" in the short term and have encouraged
an overreliance on them for satisfying long-term space needs.

Decisionmakers have struggled with this matter since the scoring rules
were established and the tendency for agencies with self-insuring funds to
choose operating leases instead of ownership became apparent. We have
suggested the alternative of scoring the budget authority for all
operating leases up front on the basis of the underlying time requirement
for the space so that all options are treated equally.10 Although this
could be viable, there would be implementation challenges if this were
pursued, including the need to evaluate the validity of agencies' stated
space requirements. Finding a solution for this problem has been
difficult; however, change is needed because the current practice of
relying on costly leasing to meet long-term space needs results in
excessive costs to taxpayers and does not reflect a sensible or
economically rational approach to capital asset management. To address
this and other complex problems related to federal real property, we
continue to believe that a comprehensive and integrated transformation
strategy is needed.

We conducted our work for this testimony in September 2005 in accordance
with generally accepted government auditing standards. The work is based
on our past reports on federal real property and, specifically, leasing
issues.

Scope and

                                  Methodology

Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may have
at this time.

10GAO, Supporting Congressional Oversight: Budgetary Implications of
Selected GAO Work for Fiscal Year 2003, GAO-02-576 (Washington, D.C.: Apr.
26, 2002).

Contacts and	For further information on this testimony, please contact
Mark L. Goldstein on (202) 512-2834 or at [email protected]. Key
contributions

Acknowledgments 	to this testimony were made by Christine Bonham, Susan
Michal-Smith, David Sausville, and Kelly Slade.

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