    Federal Real Property: Strategy Needed to Address Agencies'
    Long-standing Reliance on Costly Leasing (24-JAN-08, GAO-08-197).

    In January 2003, GAO designated federal real property as a
    high-risk area, citing the government's overreliance on costly,
    long-term leasing as one of the major reasons. GAO's work over
    the years has shown that building ownership often costs less than
    operating leases, especially for long-term space needs. GAO was
    asked to identify (1) the profile of domestically held, federally
    leased space including the overall amount and type of space
    agencies lease, and any related trends; (2) the factors that
    drive agencies to lease space that may be more cost-effective to
    own; and (3) any actions taken by the administration and
    alternative approaches proposed to address this issue. GAO
    reviewed fiscal year 2006 Federal Real Property Profile (FRPP)
    leasing data and relevant documents and interviewed officials
    from the General Services Administration (GSA), the Office of
    Management and Budget (OMB), and the U.S. Postal Service (USPS).
    GAO also reviewed 10 building leases that were among those with
    the largest dollar value in 3 locations GAO visited.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-197
        ACCNO:   A80110
      TITLE:     Federal Real Property: Strategy Needed to Address
    Agencies' Long-standing Reliance on Costly Leasing
         DATE:   01/24/2008
      SUBJECT:   Cost effectiveness analysis
    	     Data collection
    	     Data integrity
    	     Federal agencies
    	     Federal property
    	     Federal property management
    	     Leases
    	     Leasing policies
    	     Office buildings
    	     Real estate leases
    	     Real property
    	     Real property acquisition
    	     Cost estimates
    	     GAO High Risk Series

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    GAO-08-197

         * [1]Results in Brief
         * [2]Background
         * [3]Federal Agencies Rely Extensively on Leasing, Especially for

              * [4]Office Space Is the Predominant Type of Federally Leased Spa
              * [5]Data Quality Remains a Challenge
              * [6]GSA's Reliance on Leasing Continues to Increase

         * [7]Decisions to Lease Selected Federal Properties Are Not Alway

              * [8]Case Examples: FBI Field Offices in Chicago, Illinois, and T
              * [9]Case Example: Bureau of Alcohol, Tobacco, and Firearms and S
              * [10]Funds for Ownership Are Limited
              * [11]Operational Considerations Also Drive Decisions to Lease
              * [12]Security Considerations Can Lead to Leasing
              * [13]Leasing Can Meet Short-term Needs and Is Sometimes Practical

         * [14]Various Alternatives for Addressing the Leasing Challenge Ha

              * [15]Scoring Can Have an Effect on Public-Private Partnerships
              * [16]Alternatives to the Current Budget Scorekeeping Rules Have B

                   * [17]Scoring Long-term Leases Up Front
                   * [18]Establishing Capital Acquisition Funds to Pursue More
                     Owners

              * [19]Real Property Initiative Has Not Yet Addressed the Leasing C

         * [20]Conclusions
         * [21]Recommendation for Executive Action
         * [22]Agency Comments and Our Evaluation
         * [23]Appendix I: Objectives, Scope, and Methodology
         * [24]Appendix II: Comments from the Office of Management and Budg
         * [25]Appendix III: Comments from the General Services Administrat
         * [26]Appendix IV: GAO Contact and Staff Acknowledgments

              * [27]GAO Contact
              * [28]Staff Acknowledgments

         * [29]Related GAO Products

              * [30]Order by Mail or Phone

    Report to the Subcommittee on Federal Financial Management, Government
    Information, Federal Services, and International Security, Committee on
    Homeland Security and Governmental Affairs, U.S. Senate

    United States Government Accountability Office

    GAO

    January 2008

    FEDERAL REAL PROPERTY

    Strategy Needed to Address Agencies' Long-standing Reliance on Costly
    Leasing

    GAO-08-197

    Contents

    Letter 1

    Results in Brief 4
    Background 6
    Federal Agencies Rely Extensively on Leasing, Especially for Office Space
    Needs; GSA Predicts It Will Lease More Space Than It Owns in 2008 9
    Decisions to Lease Selected Federal Properties Are Not Always Driven by
    Cost-effectiveness Considerations 14
    Various Alternatives for Addressing the Leasing Challenge Have Been
    Debated, but No Action Has Been Taken to Resolve This Difficult Issue 22
    Conclusions 27
    Recommendation for Executive Action 27
    Agency Comments and Our Evaluation 28
    Appendix I Objectives, Scope, and Methodology 31
    Appendix II Comments from the Office of Management and Budget 34
    Appendix III Comments from the General Services Administration 37
    Appendix IV GAO Contact and Staff Acknowledgments 38
    Related GAO Products 39

    Tables

    Table 1: Profile of Building Asset's Leased Square Footage in the United
    States and U.S. Territories by Federal Agencies, Fiscal Year 2006 9
    Table 2: Comparative Cost Advantages and Disadvantages of Construction
    versus Leasing for Selected GSA Buildings 15

    Figures

    Figure 1: Federal Real Property Profile of Leased Square Footage by
    Predominant Usage in the United States and U.S. Territories, Fiscal Year
    2006 11
    Figure 2: FBI Field Office in Chicago, Illinois, and Tampa, Florida 17

    Abbreviations

    Agriculture U.S. Department of Agriculture

    CAF capital acquisition fund
    CBO Congressional Budget Office
    FBI Federal Bureau of Investigation
    FRPC Federal Real Property Council
    FRPP Federal Real Property Profile
    GSA Government Services Administration
    OMB Office of Management and Budget
    TAPS The Automated Prospectus System
    USPS U.S. Postal Service

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. The published product may be reproduced
    and distributed in its entirety without further permission from GAO.
    However, because this work may contain copyrighted images or other
    material, permission from the copyright holder may be necessary if you
    wish to reproduce this material separately.

    United States Government Accountability Office
    Washington, DC 20548

    January 24, 2008

    The Honorable Tom Carper:
    Chairman:
    The Honorable Tom Coburn:
    Ranking Member:
    Subcommittee on Federal Financial Management, Government Information,
    Federal Services, and International Security:
    Committee on Homeland Security and Governmental Affairs:
    United States Senate:

    In January 2003, we designated federal real property as a high-risk
    area,^1 citing the government's overreliance on costly leasing as one of
    the major reasons for our designation. Other reasons for the designation
    included unreliable data, excess and deteriorating property, and
    challenges associated with protecting assets against the threat of
    terrorism. Under certain conditions, such as fulfilling short-term space
    needs, leasing may be a lower-cost option than ownership. However, our
    work over the years has shown that building ownership often costs less
    than operating leases, especially for long-term space needs. For example,
    in 1995, we found that 55 of 73 operating leases that the General Services
    Administration (GSA) had entered into cost a total of $700 million more
    than construction.^2 In 1999, we reported that for eight of nine major
    operating lease acquisitions GSA had proposed, construction would have
    cost less than leasing and saved the government $126 million over 30
    years.^3

    In February of 2004, the President signed Executive Order 13327,^4 which
    created the Federal Real Property Council (FRPC). Real property management
    also was added to the President's Management Agenda^5 to address the
    problems we had raised in our high-risk report. The order required
    executive branch agencies^6 to standardize real property data for
    inclusion in a governmentwide database of owned and leased space, known as
    the Federal Real Property Profile (FRPP). FRPP is maintained by GSA on
    behalf of FRPC, which controls access to the data. Shortly after signing
    the executive order, the President added the Federal Asset Management
    Initiative, commonly referred to as the real property initiative, to the
    President's Management Agenda. Under the executive order, the Office of
    Management and Budget (OMB) was given the responsibility to, among other
    things, review the efforts of agencies in achieving the governmentwide
    policies established in the executive order. In our April 2007 update on
    real property high-risk issues,^7 we concluded that these efforts provided
    a good foundation for strategically managing federal real property, but
    that more progress was needed for us to remove real property management
    from our high-risk list.

    ^1 GAO, High-Risk Series: Federal Real Property, [31]GAO-03-122
    (Washington, D.C.: January 2003).

    ^2 GAO, General Services Administration: Opportunities for Cost Savings in
    the Public Buildings Area, [32]GAO/T-GGD-95-149 (Washington, D.C.: July
    13, 1995).

    ^3 GAO, General Services Administration: Comparison of Space Acquisition
    Alternatives--Leasing to Lease-Purchase and Leasing to Construction,
    [33]GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).

    ^4 Executive Order 13327--Federal Real Property Asset Management, Feb. 6,
    2004.

    You requested that we evaluate federal leasing trends and challenges. To
    do so, we addressed the following questions:

               1. What is the profile of domestically held, federally leased
               space, including the overall amount and type of space agencies
               lease, and what are any related trends?
               2. What factors drive agencies to lease space that may be more
               cost-effective to own?
               3. What actions has the administration taken, and what alternative
               approaches have been proposed, to address agencies' reliance on
               costly leased space?

    ^5 The President's Management Agenda, announced in the summer of 2001, is
    the administration's strategy for improving the management of the federal
    government in five areas, including strategic management of human capital,
    competitive sourcing, improved financial performance, expanded electronic
    government, and budget and performance integration.

    ^6 The executive order applies to 24 executive branch agencies, but not to
    the United States Postal Service (USPS). However, USPS submitted real
    property information to the Federal Real Property Profile (FRPP), the
    centralized real property database, in fiscal years 2005 and 2006, but did
    not include any usable data on performance measures.

    ^7 GAO, Federal Real Property: Progress Made Toward Addressing Problems,
    but Underlying Obstacles Continue to Hamper Reform, [34]GAO-07-349
    (Washington, D.C.: Apr. 13, 2007).

    To answer the first question, we used publicly available data from FRPP,
    as well as additional data analyses we requested from OMB. These
    additional analyses used data from the three civilian
    real-property-holding agencies with the largest portfolios of leased
    building space held within the United States and U.S. territories--GSA,
    the U.S. Postal Service (USPS), and the U.S. Department of Agriculture
    (Agriculture)--to develop a more detailed analysis and assessment of FRPP
    data. We used data from GSA's Public Building Service to examine trends in
    leasing because GSA had historical data and GSA's tenants represent a
    cross-section of federal agencies. These data are different from those of
    FRPP. FRPP data are governmentwide, while Public Building Service data are
    more detailed and are only for properties that GSA controls. The FRPP data
    were generally reliable for describing the inventory, but data quality
    concerns, such as missing data, which we identified both during this
    review and previously,^8 would limit the usefulness of FRPP for other
    purposes, such as strategic decision making. OMB is taking action to
    address these data quality concerns. USPS and Agriculture could not
    provide us with an electronic copy of historical data on their leases;
    therefore, we could not include information from these agencies in our
    analysis of trends. We determined that the FRPP and GSA Public Building
    Service data were sufficiently reliable for the purposes of our review by
    reviewing GSA's data systems and other reports. In addition, we defined
    "domestic" or "domestically held" leased space as being in the United
    States and U.S. territories.

    To answer the second question, we analyzed seven GSA and three USPS
    building leases to determine the estimated cost of leasing versus the cost
    of new construction. We visited GSA regional offices in Atlanta, Georgia;
    Chicago, Illinois; and Fort Worth, Texas; and USPS facility service
    offices in Lawrenceville, Georgia; Bloomingdale, Illinois; and Dallas,
    Texas, to determine the reasons that led these agencies to lease certain
    building space. We selected these locations because multiple agencies
    leased space there, the number of larger-dollar-value leases was high, and
    the locations were geographically diverse. The building leases we selected
    were among the larger-dollar-value leases within these locations. Our
    findings from visits to, and economic analyses of, federally leased space
    cannot be generalized to federally leased space nationwide. USPS provided
    similar data for its leases but requested that we not provide them in this
    report because of a Postal Regulatory Commission ruling that such data
    should not be disclosed to the public.

    ^8 [35]GAO-07-349 .

    To answer the third question, we analyzed administration and agency
    efforts to address long-standing problems in real property and past
    proposals for reforming federal leasing policy. For this question, we did
    not focus on issues related to USPS, because USPS is not subject to OMB
    guidance on leasing. In addressing each of the three questions, we
    interviewed agency officials and obtained and analyzed relevant laws and
    documents. Additional information on our methodology appears in appendix
    I. We conducted this performance audit from July 2006 to January 2008 in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain sufficient,
    appropriate evidence to provide a reasonable basis for our findings and
    conclusions based on our audit objectives. We believe that the evidence
    obtained provides a reasonable basis for our findings and conclusions
    based on our audit objectives.

    Results in Brief

    Federal agencies rely extensively on leasing, occupying about 398 million
    square feet of leased building space domestically in fiscal year 2006,
    according to data from FRPP. Over half of the leased square footage is
    used for offices, with the remaining space allocated for a mix of
    warehouses, family housing, schools, and other uses. GSA (which acts as a
    leasing agent for most federal agencies), USPS, and Agriculture were the
    dominant civilian agencies, leasing roughly 71 percent of this space, with
    the military services leasing an additional 17 percent. FRPP is a
    relatively new inventory, and as a result, governmentwide data on leasing
    trends are not available. However, GSA maintains historical data on
    leasing and ownership that are useful for trends because GSA's tenants
    represent a cross-section of federal agencies. The most striking trend in
    GSA-leased space is that, according to GSA, for the first time, it
    predicts it will lease more space than it owns in 2008. From fiscal year
    2003 through fiscal year 2006, GSA increased its leased space from about
    160 million square feet to about 172 million square feet while its owned
    space decreased from about 180 million square feet to about 174 million
    square feet. GSA also analyzes trends in its leased portfolio, including
    trends in lease extensions and vacancy rates.

    In the 10 leases we examined, decisions to lease space for long-term needs
    that would have been more cost-effective to own were driven by the limited
    availability of capital for ownership and other considerations, such as
    security and operational efficiency. For four of the seven GSA leases we
    analyzed, leasing was more costly over the long term than construction--by
    an estimated $83.3 million over 30 years. For example, GSA executed leases
    for the Federal Bureau of Investigation's (FBI) field offices in Chicago
    in 2006 and in Tampa in 2005. These leases were estimated to cost $40
    million and about $7 million more, respectively, than federal construction
    over 30 years. GSA officials said they entered into these leases because
    GSA lacked up-front capital at that time and there were security
    considerations. For GSA, limited funding for construction is exacerbated
    by federal budget scorekeeping rules, which require, for ownership and
    capital leases, that the full cost of the government's commitment be
    recorded in the budget in the first year. In contrast, for operating
    leases, only the amount needed to cover yearly lease payments plus
    cancellation costs is required to be recorded in the annual budget,
    thereby making operating leases "look cheaper" in any given year. This is
    a long-standing challenge, and overreliance on leasing is one of the major
    reasons we designated federal real property management as a high-risk
    area. Although USPS is not subject to the federal budget scorekeeping
    rules, USPS officials said that limited up-front capital to fund
    construction projects also is a hindrance for USPS.

    The administration has made considerable progress in focusing on
    long-standing problems in the real property area, such as poor data and
    excess property, but efforts to address the leasing challenge have been
    limited. The 2004 executive order on real property management,
    establishment of FRPC, and other related initiatives have given greater
    emphasis to improving real property management and have brought a more
    strategic focus to fixing the problems. However, the impact of budget
    scorekeeping rules--though rooted in sound budget policy and designed to
    promote transparency--on real property costs has not been addressed. We
    have raised this issue for almost 20 years. Over this time, several
    proposals have been discussed, such as scoring operating leases the same
    as ownership when they are used to meet a long-term need or establishing
    capital acquisition funds at agencies to fund ownership. However, none of
    these proposals have been implemented. OMB staff said that the
    administration's efforts have not yet addressed the leasing challenge and
    that basic improvements, such as developing a reliable, governmentwide
    inventory of space and establishing performance measures, had to occur
    before OMB could take on broader, more complex policy issues such as the
    leasing challenge. Nonetheless, with progress being made and increased
    commitment by OMB and Congress to address long-standing real property
    problems, there is reason to be optimistic that the leasing challenge can
    be addressed. We are therefore recommending that OMB, in conjunction with
    FRPC and other stakeholders, develop a strategy to reduce agencies'
    reliance on leased space for long-term needs when ownership would be less
    costly.

    OMB generally agreed with the report and its recommendation but asked that
    we narrow the recommendation to focus on how to identify those instances
    in which agencies are relying on costly leasing. A means of identifying
    such leases could logically be part of the strategy we are recommending
    and seems worthwhile pursuing. However, our report objectives did not
    include how best to identify costly leases, and therefore we chose not to
    change our recommendation. OMB also provided technical clarifications,
    which we incorporated where appropriate. GSA also agreed with the report
    and provided technical clarifications, which we incorporated where
    appropriate. USPS and Agriculture did not provide comments on the draft
    report.

    Background

    The federal real property environment has many stakeholders and involves a
    vast and diverse portfolio of assets that are used for a wide variety of
    missions. Real property is generally defined as facilities, land, and
    anything constructed on or attached to land. According to FRPP data, the
    federal government owned and leased 1.2 million assets with a replacement
    value of $1.5 trillion in fiscal year 2006. The Department of Defense,
    USPS, GSA, and the Department of Veterans Affairs hold the majority of the
    owned and leased facility space. The makeup of the federal government's
    facilities reflects the diversity of agencies' missions and includes
    office buildings, prisons, post offices, courthouses, laboratories, and
    border stations.

    GSA is authorized by law to acquire, manage, utilize, and dispose of real
    property for most federal agencies. These authorities are contained in
    title 40 of the U.S. Code, and GSA is responsible for its implementation.
    Agencies are subject to title 40 authorities unless they have their own
    specific real estate authority and are exempted from title 40. Under title
    40, GSA is authorized to enter into lease agreements for up to 20 years
    that the Administrator of GSA considers to be in the interest of the
    federal government and necessary to accommodate a federal agency.^9 GSA
    uses this authority to lease space on behalf of many federal government
    agencies. In 1996, GSA began a program called "Can't Beat GSA Leasing"
    that offered federal agencies the choice of using GSA as their leasing
    agent or assuming responsibility for their own leasing. Under this
    program, GSA delegated leasing authority for general purpose space to the
    heads of all federal agencies. GSA's original delegation consisted of six
    conditions, which included the requirements that federal agencies acquire
    and utilize leased space in accordance with all applicable laws and
    regulations. In December of 2002, GSA revised its regulations to
    specifically state that all agencies must follow the budget
    scorekeeping^10 guidelines and OMB's requirements for leases, capital
    leases, and lease purchases identified in appendixes A and B of OMB
    Circular A-11.^11 Federal agencies also may have their own independent
    statutory authority related to real property. In November 2007, GSA
    amended its delegations of leasing authority to acquire general purpose
    office space and special purpose office space. GSA said its basis for
    amending these delegations of authority was to increase oversight and to
    facilitate compliance with all applicable laws and regulations governing
    the acquisition of real property, since several recent audits of its
    delegation program found instances in which agencies had failed to meet
    the requirements of their leasing delegation. USPS, which is an
    independent establishment in the executive branch, is authorized to sell,
    lease, or dispose of property under its general powers and is exempt from
    most federal laws dealing with real property and contracting.^12

    ^9 40 U.S.C. S 585.

    Since 2003, we have reported that federal real property is a high-risk
    area due to excess and deteriorating property, reliance on costly leasing,
    unreliable data, and security challenges.^13 Specifically, problems are
    exacerbated by underlying obstacles that include competing stakeholder
    interests, legal and budgetary limitations, and the need for improved
    capital planning. For example, agencies cited local interests as barriers
    to disposing of excess property, and agencies' limited ability to pursue
    ownership leads them to lease property that may be more cost-effective to
    own over time. In February of 2004, the President signed Executive Order
    13327 and added real property management to the President's Management
    Agenda, which scores agencies on their progress in meeting performance
    targets. The order applies to 24 executive branch departments and
    agencies,^14 but not to USPS. Agencies under that executive order have,
    among other things, designated senior real property officers, established
    asset management plans, standardized real property data reporting, and
    adopted various performance measures to track progress. The
    administration's establishment of FRPC also supports reform efforts.
    Furthermore, OMB staff said that the administration intends to work with
    Congress to provide agencies with tools to more effectively manage their
    real property assets. To meet the order's requirement for standardized
    real property data reporting, FRPC worked with GSA to develop FRPP.^15 The
    first governmentwide reporting of inventory data for FRPP took place in
    December of 2005, and selected data were included in the fiscal year 2005
    Federal Real Property Report, published by GSA on behalf of FRPC in June
    of 2006. In our April 2007 update on real property high-risk issues, we
    reported that the administration and major real-property-holding agencies
    had made progress toward strategically managing federal real property and
    addressing some long-standing problems.

    ^10 Budget scorekeeping rules are designed to ensure that the effects of
    legislation on the deficit are consistent with established conventions and
    comply with statute.

    ^11 41 C.F.R. S 102-73.135.

    ^12 39 U.S.C. SS 401 and 410.

    ^13 See the list of related GAO products at the end of this report.

    ^14 The executive order applies to the Departments of Agriculture,
    Commerce, Defense, Education, Energy, Health and Human Services, Homeland
    Security, Housing and Urban Development, the Interior, Justice, Labor,
    State, Transportation, the Treasury, and Veterans Affairs; the
    Environmental Protection Agency; National Aeronautics and Space
    Administration; U.S. Agency for International Development; GSA; the
    National Science Foundation, the Nuclear Regulatory Commission; the Office
    of Personnel Management; the Small Business Administration; and the Social
    Security Administration.

    ^15 OMB officials told us that Federal Management Regulations require all
    executive branch agencies, including independent agencies, to report data
    for FRPP. USPS is not subject to the executive order but provided OMB with
    data for FRPP in fiscal year 2005 that did not include any usable data on
    performance measures.

    Federal Agencies Rely Extensively on Leasing, Especially for Office Space Needs;
    GSA Predicts It Will Lease More Space Than It Owns in 2008

    Federal agencies rely extensively on leasing, occupying about 398 million
    square feet of leased building space domestically in fiscal year 2006,
    according to data from FRPP. According to fiscal year 2006 FRPP
    information, GSA and USPS hold the majority of the federal government's
    leased building space, totaling about 270 million square feet, or about 67
    percent of the leased inventory of space within the United States and U.S.
    territories. Agriculture holds 4 percent of leased space. In fiscal year
    2006, GSA, which acts as a leasing agent for other agencies, had 6,750
    leases and provided slightly less than 169 million square feet of leased
    building space to nearly every department within the federal government.
    Table 1 shows the amount of domestically leased space by agency, according
    to FRPP.

    Table 1: Profile of Building Asset's Leased Square Footage in the United
    States and U.S. Territories by Federal Agencies, Fiscal Year 2006

    Agency name: GSA;
    Leased square footage: 168,929,552.

    Agency name: USPS;
    Leased square footage: 99,527,123.

    Agency name: Army;
    Leased square footage: 43,665,656.

    Agency name: Agriculture;
    Leased square footage: 16,752,216.

    Agency name: Air Force;
    Leased square footage: 15,800,618.

    Agency name: Navy;
    Leased square footage: 9,173,844.

    Agency name: Transportation;
    Leased square footage: 7,854,759.

    Agency name: Veterans Affairs;
    Leased square footage: 7,589,059.

    Agency name: Energy;
    Leased square footage: 6,657,275.

    Agency name: Health and Human Services;
    Leased square footage: 4,160,208.

    Agency name: Interior;
    Leased square footage: 4,025,243.

    Agency name: Labor;
    Leased square footage: 3,776,466.

    Agency name: Justice;
    Leased square footage: 3,227,893.

    Agency name: Treasury;
    Leased square footage: 1,474,853.

    Agency name: Homeland Security;
    Leased square footage: 1,470,675.

    Agency name: Commerce;
    Leased square footage: 1,197,995.

    Agency name: National Archives and Records Administration;
    Leased square footage: 545,258.

    Agency name: National Aeronautics And Space Administration;
    Leased square footage: 524,029.

    Agency name: Defense/Washington Headquarters Service;
    Leased square footage: 499,559.

    Agency name: Corps of Engineers;
    Leased square footage: 303,769.

    Agency name: Environmental Protection Agency;
    Leased square footage: 243,732.

    Agency name: National Science Foundation;
    Leased square footage: 188,527.

    Agency name: State;
    Leased square footage: 183,848.

    Agency name: Office of Personnel Management;
    Leased square footage: 91,271.

    Agency name: Peace Corps;
    Leased square footage: 18,886.

    Agency name: U.S. Agency for International Development;
    Leased square footage: 3,553.

    Agency name: Total;
    Leased square footage: 397,885,867.

    Source: OMB.

    Office Space Is the Predominant Type of Federally Leased Space

    According to FRPP data, over half of the space, in terms of square
    footage, is office space, with a mix of other uses including warehouses,
    family housing, and schools. The single largest category of federally
    leased space--office-related purposes--accounts for approximately 201
    million square feet, or 51 percent of all domestic leased building space.
    This category includes office space and military headquarters space. The
    second largest category of leased space, "all other," includes space for
    post offices and laboratories, as well as other buildings that cannot be
    classified in other categories. About 104 million square feet of leased
    space were reported in this category. In addition, agencies reported
    leasing about 29 million square feet of building space for warehouses and
    about 22 million square feet for family housing--a category that includes,
    among other things, public housing and military personnel housing. Figure
    1 shows domestic leased square footage by predominant usage.

    Figure 1: Federal Real Property Profile of Leased Square Footage by
    Predominant Usage in the United States and U.S. Territories, Fiscal Year
    2006

    Note: The "other institutional uses" category includes buildings such as
    libraries, chapels, museums, and outpatient clinics. The miscellaneous
    category includes the remaining leased building space predominant use
    categories--laboratories; dormitories/barracks; hospital, prison, and
    detention centers; industrial, navigation and traffic aids; communication
    systems; and post offices. The service category includes buildings used
    for service activities, such as maintenance and repair shops.

    As the federal agency that leases the most space, GSA leases space for a
    variety of purposes, but about 152 million square feet, or 90 percent of
    its leased portfolio, is leased exclusively for offices. GSA also leases
    about 15 million square feet, or about 9 percent of its overall leased
    portfolio, for warehouses for agencies. Additionally, GSA leases building
    space for such purposes as laboratories, family housing, and other
    miscellaneous uses. These uses account for about 1 percent of its leased
    space. Agriculture had more than 3,700 leases totaling nearly 17 million
    square feet of building space in fiscal year 2006. About 92 percent of
    Agriculture's leased space, or slightly more than 15 million square feet,
    is for offices. Agriculture also has a little over a million square feet
    leased under the all other, warehouse, and service categories. According
    to FRPP data, USPS has roughly 28,100 leases, which are categorized as all
    other. According to OMB staff, because of a USPS data-coding error, the
    square footage for USPS assets was included in the "all other" category
    and accounts for about 95 percent of the square footage reported for this
    category. USPS told us that the majority of its leased buildings are used
    primarily for customer service post offices, and a portion of its building
    space is used for retail facilities and carrier annexes.^16

    We did not develop data on the overall yearly cost of leased space to the
    federal government. OMB staff said that variation in costs included in
    lease payments among agencies would create data consistency problems. As
    an indicator of asset value, FRPP tracks replacement value--or the cost to
    replace leased space with owned space--and the estimated replacement value
    of the federal government's existing domestic leases totals $48 billion.

    Data Quality Remains a Challenge

    In April of 2007, we reported that although agencies have made progress in
    collecting and reporting standardized real property data for FRPP, data
    reliability is still a challenge at some of the agencies, and agencies
    lack a standard framework for data validation.^17 For this review, we
    assessed the fiscal year 2006 FRPP leasing data and found them to be
    generally reliable for the purpose of profiling the leased inventory.
    However, we noted some data quality issues that would be cause for concern
    if FRPP were used for more than describing the inventory, such as
    strategic decision making. For example, USPS categorized its 28,108 leased
    assets "mission dependent not critical" and did not include annual
    operating costs for each leased asset. The categorization of USPS's leased
    facilities as "mission dependent not critical" and "not mission critical"
    could be questioned, since USPS's facilities serve as the main channel for
    providing mail delivery service to all people residing in the United
    States. In our April 2007 report, we recommended that OMB develop a
    framework that agencies can use to better ensure the validity and
    usefulness of key real property data in FRPP. OMB concurred with this
    recommendation and has required agency-specific validation and
    verification plans and, according to OMB officials, has developed an FRPP
    validation protocol to certify agency data. According to OMB staff, each
    score card agency has developed and implemented an agency-specific data
    validation and verification plan.

    ^16 Carrier annexes house the carrier routes without a retail or post
    office box operation.

    ^17 [36]GAO-07-349 .

    GSA's Reliance on Leasing Continues to Increase

    FRPP is a relatively new inventory, a result of implementing Executive
    Order 13327, and therefore governmentwide data on leasing trends were not
    available. However, GSA, whose tenants represent a cross-section of
    federal agencies, maintains historical data that are useful in examining
    trends. The most striking trend in GSA-leased space, GSA predicts, is that
    for the first time it will lease more space than it owns in 2008. From
    fiscal year 2003 through fiscal year 2006, GSA increased its leased space
    from about 160 million square feet to about 172 million square feet while
    its owned space decreased from about 180 million square feet to about 174
    million square feet. ^18

    Besides tracking total leased square footage, as all federal agencies are
    required to do for FRPP, GSA captures, analyzes, and evaluates a number of
    other leasing trends, including trends in lease extensions, vacancy rates
    in leased facilities, negative net operating income leases,^19 and GSA
    lease rates compared with market lease rates. GSA conducts trend analysis
    using the data from prior years that it retains, or annually archives. GSA
    officials stated that annually archiving data is the key to establishing
    baselines and conducting trend analysis because it aggregates data for
    similar fields over time, which allows for analyses of comparable data
    each year. According to GSA officials, these analyses can then be used to
    better anticipate and react to market changes, helping to ensure the most
    efficient management of the lease portfolio. GSA officials said they can
    use annually archived data to isolate key trends, examine the causes of
    these trends, and identify potential solutions. According to GSA
    officials, they are broadening the use of outside published data to
    forecast market conditions and rent for leasing activity.

    GSA officials told us that trend analysis with annually archived data can
    identify "low- value" leases--those for which the government is currently
    paying above-market rates. Such analysis also can identify leases in
    markets where rental rates are forecasted to grow quickly and the
    government risks paying higher lease rates in the future. Second, trend
    analysis of market data comparisons can indicate whether a lease extended
    without full competition is more expensive than a lease fully competed in
    the free market. GSA estimated that approximately 65 percent of its
    expiring leases were extended at the request of tenant agencies. GSA
    officials said that leases that are extended could potentially place GSA
    at risk, especially in areas where the agency may be overpaying because of
    changing market rates. According to GSA officials, information on vacancy
    rates is crucial for asset managers to effectively manage and minimize
    vacancies.

    ^18 GSA uses end-of-the-fiscal-year leased square footage calculations for
    its State of the Portfolio report, whereas its FRPP submission is based on
    data for the end of the calendar year.

    ^19 A GSA-leased building has a negative net operating income when the
    rental payments from tenant agencies generate a negative net return to
    GSA.

    Decisions to Lease Selected Federal Properties Are Not Always Driven by
    Cost-effectiveness Considerations

    In the 10 leases we examined, decisions to lease space that would be more
    cost-effective to own were driven by the limited availability of capital
    for ownership and other considerations, such as operational efficiency and
    security. To examine the cost-effectiveness of leasing decisions, we
    analyzed economic analyses--30-year net present value calculations--that
    GSA provided for seven building leases and that USPS provided for three
    leases.^20 We found that leasing was more costly over the long-term than
    construction for four of the seven GSA leases, and these four GSA leases
    were estimated to be $83.3 million more costly over 30 years than
    construction. ^21 Table 2 shows the results of our analyses for the seven
    selected GSA lease acquisitions, the comparative cost advantages and
    disadvantages of construction versus leasing for these acquisitions, and
    the reasons cited by agency officials for leasing. USPS provided similar
    data for its leases but requested that we not provide them in this report
    because of a Postal Regulatory Commission ruling that such data should not
    be disclosed to the public.

    ^20 A 30-year net present value analysis measures multiyear cash flows in
    present-dollar terms, so the value of a dollar received today can be
    compared against the value of a dollar received in the future. Such an
    analysis allows managers to compare the cost of a multiyear lease, with
    payments spread over a number of years, with ownership, which requires
    up-front expenditures of capital.

    ^21 GSA performed the economic analyses for the seven building leases at
    our request to demonstrate the long-term costs of construction versus
    leasing. GSA had already decided to enter into these leases and used
    actual rental rates for the individual leases in its analyses.

    Table 2: Comparative Cost Advantages and Disadvantages of Construction
    versus Leasing for Selected GSA Buildings

    Square feet in thousands, dollars in millions
                                          Estimated
                                        present-value
                                       acquisition cost        Cost
                                           for each         advantage/
                                         alternative      (disadvantage)
                                Base
                            year for
    Primary           Total  present
    occupant and     square    value                        Construction  Acquisition Reason(s) cited
    location        footage analysis  Construction Lease       vs. lease  decision    for decision
    FBI, Chicago,     384.5     2005         229.8 270.1            40.3  Lease       Limited
    Illinois                                                                          up-front
                                                                                      capital,
                                                                                      security
                                                                                      considerations,
                                                                                      consolidation
                                                                                      of existing
                                                                                      leases
    Alcohol,             99     2005          56.4  89.6            33.2  Lease       Security
    Tobacco, and                                                                      requirements
    Firearms and
    Secret Service,
    Chicago,
    Illinois
    FBI, Tampa,       130.3     2005          67.6  74.4             6.8  Lease       Limited
    Florida                                                                           up-front
                                                                                      capital,
                                                                                      immediate need
                                                                                      for space
    FBI, Dallas,      210.4     2005         101.1 104.1               3  Lease       Limited
    Texas                                                                             up-front
                                                                                      capital,
                                                                                      immediate need
                                                                                      for space
    Atlanta Federal 1,196.1     2005         597.1 593.5           (3.6)  Lease       Leasing the
    Center, various                                                                   most
    agencies,                                                                         cost-effective
    Atlanta,                                                                          option,
    Georgia                                                                           immediate need
                                                                                      for space
    Centers for       107.2     2005            54  45.8           (8.2)  Lease       Leasing the
    Disease Control                                                                   most
    and Prevention,                                                                   cost-effective
    Atlanta,                                                                          option,
    Georgia                                                                           immediate need
                                                                                      for space
    Social Security   274.5     2005         134.6 111.4          (23.2)  Lease       Leasing the
    Administration,                                                                   most
    Dallas, Texas                                                                     cost-effective
                                                                                      option,
                                                                                      immediate need
                                                                                      for space

    Source: GSA.

    Case Examples: FBI Field Offices in Chicago, Illinois, and Tampa, Florida

    For FBI's field office in Chicago, Illinois, the 30-year net present value
    cost of meeting FBI's long-term space need with an operating lease was
    estimated to cost $40 million more than construction. In this instance,
    GSA officials stated, limited availability of up-front capital and
    security considerations prevented them from pursuing ownership at that
    time. According to GSA officials, before deciding to enter into the lease
    in 2006 for the new field office, which has a 14-year term, GSA pursued
    other options for its tenant agency, including repair and alteration and
    building construction. Ultimately, these options proved unfeasible
    because, according to GSA officials, massive repairs were needed at one of
    the proposed facilities and existing facilities could not meet new
    building security requirements established after the September 11, 2001,
    terrorist attacks.

    For the FBI field office in Tampa, Florida, the 30-year net present-value
    cost of meeting FBI's long-term space need with an operating lease was
    estimated at about $7 million more than construction over a 30-year period
    in 2005. According to a GSA official, building construction was never
    considered as a viable option because of the perceived lack of necessary
    up-front capital. A GSA official stated that FBI had outgrown existing
    space in several leased facilities throughout the city and cited enhanced
    security requirements, anticipated expansion, and the immediacy of FBI's
    space need as major reasons for consolidating existing leases into one
    central location. The term of the lease is 15 years. Primarily because of
    the amount of square footage required, virtually all downtown Tampa
    locations were eliminated. GSA is using operating leases to help FBI meet
    long-term needs for field offices. For instance, GSA is using operating
    leases in 40 of 41 new FBI field office locations across the country.
    Figure 2 shows the FBI field offices in Chicago and Tampa.

    Figure 2: FBI Field Office in Chicago, Illinois, and Tampa, Florida

    Case Example: Bureau of Alcohol, Tobacco, and Firearms and Secret Service,
    Chicago, Illinois

    GSA entered into 10-year operating leases in Chicago for the Bureau of
    Alcohol, Tobacco, and Firearms and the Secret Service in the same
    building, estimated at a 30-year net present value to cost $33 million
    more than construction. GSA officials said that the prior leases for both
    agencies, which also were housed previously in the same facility, expired
    and the original lessor opted not to retain the agencies as tenants for
    various reasons, including the need for enhanced security requirements.
    GSA did not have any owned federal space available in its existing
    inventory to meet the specialized security needs of both agencies, so
    finding another location that met their security needs was a major factor
    in choosing the new space.

    Funds for Ownership Are Limited

    For GSA, limited funding for construction is exacerbated by federal budget
    scorekeeping rules which require, for ownership and capital leases, that
    the full cost of the government's commitment be recorded up front in the
    budget. In contrast, for operating leases, only the amount needed to cover
    yearly lease payments plus cancellation costs is required to be recorded
    in the budget, thereby making operating leases "look cheaper" in any given
    year.^22 This is a long-standing problem, and overreliance on leasing is
    one of the major reasons we designated federal real property management as
    a high-risk area. The budget scorekeeping issue and efforts to resolve it
    will be discussed at length later in this report.

    GSA real property officials in the regions we visited told us that for
    most space requests they fulfill, constraints on capital funding
    influenced their pursuit of ownership as a realistic option. While several
    of the GSA officials we spoke with noted that construction funds are
    available for capital projects in their region, these dollars tend to be
    designated for the construction of agency headquarters, courthouses, and
    border stations and typically are not used for federal office space, such
    as that needed to fulfill FBI's field office needs. Specifically, for
    fiscal years 2006 through 2008, the President requested funding for GSA
    primarily for courthouses or border stations, although for all 3 years GSA
    requested funds to cover other construction and repair and alteration
    projects. According to GSA real property officials, these types of
    constraints on construction funding for federal office space often limit
    their ability to pursue ownership for general purpose office space.

    For this review, GSA developed and provided a 30-year net present-value
    analysis of leasing versus ownership for the building leases we selected.
    When proposing a lease, GSA no longer provides this type of analysis to
    Congress. According to GSA officials, until the submission of the fiscal
    year 1995 capital investment and leasing program, GSA included the results
    of a 30-year net present-value analysis of housing alternatives in lease
    prospectuses. Now, according to GSA officials, GSA instead performs a
    scoring analysis for all lease prospectuses. The scoring analysis, GSA
    officials said, includes an estimate of construction costs. Other
    estimated costs include those for the proposed asset's design, management,
    and inspection and site acquisition. According to GSA, these combined
    estimates provide a total asset value based on cost that forms the basis
    for determining whether the proposal scores as a capital or an operating
    lease. GSA officials said GSA's authorizing committees requested that they
    provide this information with lease prospectuses in lieu of the 30-year
    net present value analysis.

    ^22For GSA operating leases, only the budget authority needed to cover the
    annual lease payment is required. According to scorekeeping guidelines,
    for funds that are self-insuring under existing authority, only the amount
    of budget authority needed to cover the annual lease payment is required
    to be scored. In November 2005, OMB clarified its requirements by stating
    that the only funds that are considered self-insuring are certain
    revolving funds in GSA.

    Although USPS is self-financed and not dependent on appropriations or
    subject to the scorekeeping rules that apply to other federal agencies,
    USPS officials said that limited up-front capital to fund construction
    projects is also a hindrance to ownership. USPS's leasing guidance states
    that a lease-versus-purchase analysis is to be conducted when new
    construction leasing or the purchase of a building is the recommended
    building acquisition alternative. These lease-versus-purchase analyses
    consider the net present value and the return on investment of acquisition
    alternatives. The lease-versus-purchase analysis at USPS includes the
    purchase of a newly constructed building, but also can include the
    exercise of options available in certain lease contracts to purchase a
    currently leased building. USPS officials at the three facilities service
    offices we visited said major reductions in capital funding dictated many
    of their decisions about leasing and ownership. In particular, USPS
    headquarters officials stated that they would prefer to own all of the
    larger facilities, such as mail-processing facilities, but that capital
    constraints can prevent ownership of all such facilities.

    Operational Considerations Also Drive Decisions to Lease

    While GSA and USPS officials emphasized that the limited availability of
    capital was a major impediment to building ownership, they also cited
    operational requirements-- such as changes to an agency's mission,
    immediate space needs, security requirements, or a desire for
    flexibility--as drivers of the decision to lease rather than own space.
    Other factors, such as shorter-term or smaller space needs, also may
    influence agencies' decisions to lease space. GSA and USPS officials cited
    agency mission as a reason they chose to pursue leasing rather than
    building ownership for certain projects. For instance, USPS officials said
    they strive to locate postal service buildings in areas that will optimize
    the efficiency of mail delivery. Thus, when deciding between leasing and
    constructing a building, they may consider operational factors such as the
    size of a facility, traffic routes, access to parking, and convenience for
    the customer. USPS officials noted, particularly for customer service post
    offices, that leasing in existing retail space, rather than constructing a
    new facility, is usually the optimal way to reach customers. However, as
    we have previously reported,^23 significant challenges remain related to
    USPS's planning and implementation of its infrastructure realignment,
    which is designed to reduce excess capacity as well as reflect changes in
    operations. Further challenges persist related to USPS's identification
    and disposal of excess property. We previously have recommended that USPS
    develop a facilities plan that includes a strategy for how USPS intends to
    rationalize the postal facilities network and remove excess processing
    capacity and space from the network.^24 In some instances, officials told
    us that operational requirements take precedence over economic
    considerations. For instance, automation at USPS has affected operational
    planning requirements for future facilities by changing the expected need
    for square footage. GSA officials also cited changes in a tenant agency's
    mission as dictating an immediate need for space. For instance, expanding
    mission requirements for the Department of Homeland Security created
    additional space requirements. Faced with a changing mission and
    relatively immediate space needs, agencies may opt for lease construction
    rather than federal construction, GSA officials told us, because lease
    construction is perceived to take less time than federal construction.
    Under lease construction, an agency works with the private sector to
    design and build a building that the government leases to meet the
    agency's mission needs. The private developer finances the construction of
    the building and agrees to lease the finished building to the agency. This
    arrangement allows an agency to obtain a new building suited to its needs
    without having to pay the up-front costs associated with federal
    construction. GSA officials said that it is highly challenging to
    determine when a tenant agency's mission may change and what space needs
    may subsequently emerge.

    ^23 GAO, High-Risk Series: An Update, [37]GAO-07-310 (Washington, D.C.:
    Jan. 19, 2007).

    Both GSA and USPS cited the need for flexibility in their space
    assignments as a reason for leasing rather than owning space. Certain
    agencies that GSA obtains space for, such as the Social Security
    Administration, try to locate their facilities close to their customers.
    As demographic shifts occur in certain areas of the country, customers can
    potentially move to new areas. GSA real property officials stated that
    leasing rather than ownership is frequently used to give these agencies
    the flexibility to relocate closer to their customers, if necessary.
    Postal officials also cited flexibility as a reason for leasing retail
    post office space. According to Postal Service officials in the Southwest
    Facilities Service Office, recent population increases in Texas and
    Northwestern Arkansas may expand the need for retail postal facilities in
    these areas. Because the majority of the space USPS obtains in the region
    is small and subject to demographic shifts, leasing provides flexibility
    to meet changing operational needs.

    ^24 GAO, U.S. Postal Service: Bold Action Needed to Continue Progress on
    Postal Transformation, [38]GAO-04-108T (Washington, D.C.: Nov. 5, 2003).

    Security Considerations Can Lead to Leasing

    Due to the expansion of security requirements in recent years, such as
    those for blast-resistant building exteriors and the need for greater
    setbacks, GSA officials said that agency requirements have become more
    stringent and complex. In some circumstances, GSA officials said, these
    security needs cannot be met in existing federal buildings, causing
    agencies to pursue lease construction. When acquiring space for the FBI
    field office in Chicago, GSA first pursued the option of repair and
    alteration and then building purchase. GSA officials said that after
    reviewing the federal inventory and investigating the site with the most
    potential, GSA determined that the repairs needed to make existing federal
    building space comply with post-September 11 security requirements would
    be cost prohibitive. Given the costliness of the repair and alteration
    method and the limited availability of capital for construction, GSA
    officials selected lease construction as the method to acquire a building
    for FBI. Similarly, when looking for new space to consolidate FBI
    operations in Tampa, GSA real estate specialists told us they eliminated
    downtown Tampa--where existing federal buildings were located--as a site
    because of the difficulty of locating space with the required 100-foot
    building setbacks. GSA did find, however, a private developer for a lease
    construction project away from the downtown area on the Western Shore of
    Tampa.

    Leasing Can Meet Short-term Needs and Is Sometimes Practical

    An additional factor that may cause agencies to lease space is a
    customer's temporary or short-term space needs. For instance, GSA
    officials said that over 200 GSA-owned and leased buildings were damaged
    by Hurricane Katrina, necessitating the relocation of 2,600 federal
    employees from 28 federal agencies, many of which were GSA tenant
    agencies. To meet this emergency need, GSA expanded its use of leases to
    house agencies in temporary space to fulfill a short-term need. GSA
    Regional officials told us they still have a number of Hurricane
    Katrina-related leases in their portfolio.

    Agencies also choose leasing over ownership because it is a practical way
    to address issues such as a limited amount of available federal space in a
    geographic area or a need for a small amount of square footage. GSA
    officials stated that in certain rural locations, construction would not
    be economically advantageous. The amount of square footage needed also may
    dictate whether an agency chooses to lease rather than own space. For
    instance, more than 80 percent of GSA's leases are for 20,000 square feet
    or less. When agencies require less than 20,000 square feet, GSA officials
    stated, leasing is usually cost-competitive with ownership, and federal
    construction is an unlikely option. Additionally, USPS officials told us
    that many of their assignments are for 3,000 square feet or less and that
    for assignments of this size, construction is not often practical.

    Various Alternatives for Addressing the Leasing Challenge Have Been Debated, but
    No Action Has Been Taken to Resolve This Difficult Issue

    The administration has made considerable progress in focusing on
    long-standing problems in the real property area such as poor data and
    excess property. The executive order on real property management,
    establishment of FRPC, and other related initiatives have given greater
    emphasis to improving real property management and bringing a more
    strategic focus to fixing the problems. However, the administration's
    efforts to address the leasing challenge have been limited. As mentioned
    previously, building ownership through construction or purchase is often
    the least expensive way to meet agencies' long-term requirements.^25 For
    operating leases, only the amount needed to cover yearly lease payments
    plus cancellation costs is required to be recorded in the annual budget,
    thereby making operating leases "look cheaper" in any given year even
    though they are generally more costly over time. We have raised this issue
    for almost 20 years in several reports and testimonies. For example, we
    have reported as follows:

    "Efforts to increase ownership are ... hampered by a budgetary bias
    against capital investment. GSA must record in 1 year's budget the total
    cost of a newly constructed or purchased building, but is required to
    record only 1 year's lease payments for a leased building. As a result,
    leasing appears to be less costly for the current year despite its greater
    long-term costs" (December 1989, [39]GAO/GGD-90-11 ).

    "...consideration [should] be given to revisiting the scoring of operating
    leases. In principle, those leases that are perceived by all sides as
    long-term federal commitments ought to be scored in a way that is
    comparable to direct federal ownership. Applying the principle of full
    recognition of the long-term costs to all instruments is more likely to
    promote the emergence of the most cost-effective alternative" (October
    1993, [40]GAO/T-AIMD-GGD-94-43 ).

    ^25 In assessing alternatives to address the leasing challenge, we did not
    focus on USPS, which is not subject to OMB guidance related to leasing.

    "...GSA's economic analysis for 55 ... leases it proposed showed that
    federal construction would have been a less costly alternative and would
    have saved approximately $700 million (present value) over a 30-year
    period" (July 1995, [41]GAO/T-GGD-95-149 ).

    "...a GSA present value cost analysis estimated that the recently leased
    U.S. Patent and Trademark Office-complex currently being constructed in
    Alexandria, Virginia, by a private company, cost taxpayers about $48
    million more to lease over the 20-year lease period than it would have
    cost to purchase it" (April 2003, [42]GAO-03-609T ).

    "Federal real property is a high-risk area due to excess and deteriorating
    property, reliance on costly leasing, unreliable data, and security
    challenges ... Energy, Interior, GSA, State, and VA reported an increased
    reliance on leasing to meet space needs" (April 2007, [43]GAO-07-349 ).

    A complete listing of these reports appears at the end of this report in
    the Related GAO Products section.

    It is important to recognize in any discussion about the budget
    scorekeeping rules that their intended purpose is rooted in sound budget
    principles and transparency. For Congress to efficiently allocate
    resources, it needs to know and vote on the full cost of any program it
    approves at the time the funding decision is made. Hence, the scorekeeping
    rules require that budget authority for the cost of purchasing an
    asset--whether through construction or purchase--be recorded in the budget
    when it can be controlled, that is, up front, so that decision makers have
    the information needed and an incentive to take the full cost of their
    decisions into account. Under current budget scorekeeping rules, the
    budget records the full cost of the government's commitment in the year
    the commitment is made. As a result, for operating leases, only the amount
    needed to cover the first year lease payments plus cancellation costs need
    to be recorded, thereby disguising the fact that over time, leasing will
    cost more than ownership.^26

    ^26 An operating lease is a lease that meets the six criteria listed in the
    scorekeeping guidelines in OMB Circular A-11, app. A. Specifically, (1)
    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; (2) the lease does not contain a bargain-price purchase
    option; (3) the lease term does not exceed 75 percent of the estimated
    economic life of the asset; (4) the asset is a general purpose asset, it
    is not for a special purpose of the government, and it is not built to the
    unique specifications of the government lessee; (5) there is a private
    sector market for the asset; and (6) the present value of the minimum
    lease payments over the life of the lease does not exceed 90 percent of
    the fair market value of the asset at the beginning of the lease term.

    Scoring Can Have an Effect on Public-Private Partnerships

    In addition to encouraging the use of operating leases, the budget
    scorekeeping rules have a clear impact on public-private partnerships. One
    type of partnership that agencies such as the Department of Veterans
    Affairs and the Department of Defense have specific statutory authority to
    enter into is called an enhanced use lease agreement. Such an agreement is
    a lease agreement for property under an agency's control or custody that
    the agency can (1) enter into with a public or private entity and (2)
    receive as payment under the lease either cash or other consideration,
    such as repairs of the property. According to the Congressional Budget
    Office (CBO), in a public-private partnership, a business entity is
    created by public and private parties for a single, specified purpose with
    activities that are predetermined by the contracts and other arrangements
    between the parties involved.

    The scoring of H.R. 3947, the Federal Property Asset Management Reform Act
    of 2002, illustrates how scoring has, and will continue to have, an impact
    on the prospects for greater use of public-private partnerships. The
    bill--which was not enacted--would have authorized most federal
    real-property-holding agencies, including GSA, to enter into partnerships
    and other business arrangements with private firms to improve the
    government's real property. Agencies could have sold, leased, or conveyed
    government property as part of the business arrangements and retained or
    spent the proceeds without further appropriations. CBO expected that many
    of the ventures that agencies would enter into would be used to finance
    investment on behalf of the government. Because of the extent of the
    government's control and use of the projects likely to be undertaken, CBO
    concluded that spending by the ventures associated with that financing
    should be treated as governmental and recorded as budget authority and
    outlays. CBO reported that spending would increase by $1 billion between
    2004 and 2012. CBO's report contains a full explanation of CBO's
    conclusions.^27

    Alternatives to the Current Budget Scorekeeping Rules Have Been Proposed

    Over the nearly 20 years that we have been raising the scorekeeping issue
    as a problem that needs to be addressed, several alternatives have been
    discussed by, for example, the President's Commission to Study Capital
    Budgeting and us. In addition to improving capital planning overall so
    that the most cost-effective capital investments can be identified, other
    alternatives have included scoring operating leases up front and
    establishing capital acquisition funds at agencies to fund ownership.
    Although these alternatives would pose various implementation challenges,
    they serve to illustrate proposals that have been considered.

    ^27Congressional Budget Office, The Budgetary Treatment of Leases and
    Public/Private Ventures (Washington, D.C., February 2003).

      Scoring Long-term Leases Up Front

    An alternative that could result in long-term savings for the government,
    proposed in the past by us, would be to recognize that many operating
    leases are used for long-term needs and should be treated on the same
    basis as ownership. This would make such instruments comparable in the
    budget to direct federal ownership and would foster more cost-effective
    decision making by OMB and Congress. Applying the principle of full,
    up-front recognition of the long-term costs to all options for satisfying
    long-term space needs--whether through construction, purchase,
    lease-purchase, or operating lease--is more likely to result in the
    selection of the most cost-effective alternative than using the current
    scoring rules. It is important to note that there would be implementation
    challenges if this option were pursued. Additionally, it would be
    challenging to reach consensus on what constitutes long-term space needs
    that would warrant this up-front budgetary treatment.

    In commenting on various options for correcting the scoring issue, CBO
    reported that ending the distinction between various types of leases has
    been considered in the private sector. According to CBO, the Financial
    Accounting Standards Board--noting that private firms often devise leases
    that barely fall within the limits for operating leases--has considered
    requiring firms to capitalize all leases in their books, rather than
    maintain the current distinction between capital leases and operating
    leases. In the context of federal budgeting, CBO reported that
    capitalizing all leases could mean scoring all leases up front on the
    basis of the present value of lease payments over the lease term, without
    attempting to distinguish between leases that are equivalent to
    purchases--capital leases--and those that are not--operating leases.

      Establishing Capital Acquisition Funds to Pursue More Ownership

    The President's Commission to Study Capital Budgeting recommended in 1999
    that Congress and the executive branch have one or more agencies with
    capital-intensive operations establish a separate capital acquisition fund
    (CAF) within their budget that would receive appropriations for the
    construction and acquisition of large capital projects.^28 CAFs would use
    authority to borrow from Treasury's general fund and then charge operating
    units within the agency rents equal to the debt service (interest and
    amortization costs) on those projects. Although the Commission's
    discussion of CAFs was within the context of identifying measures short of
    capital budgeting that the government could adopt, CAFs have implications
    for the scoring issue because they represent a vehicle for providing
    up-front funding for ownership. The main advantage of CAFs, according to
    the Commission, is that they should improve agencies' planning and
    budgeting. If units or divisions within agencies are charged the true
    costs of their space and of other large capital items, they are likely to
    make more efficient uses of those assets, according to the Commission
    report. The report said that CAFs would not replace the Federal Buildings
    Fund, GSA's governmentwide revolving fund. Authority to acquire buildings
    through CAFs could be delegated by GSA as agencies demonstrate their
    effectiveness in using this instrument. In 2005, we reported that
    implementation issues could overwhelm the potential benefits of CAFs,
    which could be achieved through simpler means.^29

    ^28 President's Commission to Study Capital Budgeting, Report of the
    President's Commission to Study Capital Budgeting (Washington, D.C.,
    February 1999).

    Real Property Initiative Has Not Yet Addressed the Leasing Challenge

    In our April 2007 report updating our designation of federal real property
    as a high-risk area, we recommended that OMB, in conjunction with FRPC,
    develop an action plan for how FRPC will address key problems, including
    the continued reliance on costly leasing when ownership would be more
    cost-effective over the long term. OMB agreed with our recommendation and
    developed an action plan that included, as a priority action, "analyz[ing]
    real property budget scoring issues." OMB staff added that in their view,
    basic improvements, such as developing a reliable, governmentwide
    inventory of space and establishing performance measures had to occur
    before the administration could take on broader, complex policy issues
    such as how to address the leasing challenge. As a result, the current
    real property reform initiative has lacked a comprehensive analysis of
    alternatives and potential solutions to the leasing challenge. Without
    such an analysis, agencies' reliance on costly leasing is likely to
    continue and opportunities for using other instruments, such as
    public-private partnerships, may be limited. OMB staff said that efforts
    to resolve the leasing challenge could benefit from the input not only of
    FRPC, but also of other outside stakeholders, including Congress. At a
    minimum, consensus on resolving this difficult issue would involve
    analyzing current and past legislative and administration proposals that
    address the budget scorekeeping issue in relation to real property,
    gauging stakeholders' perspectives on what proposals are most viable, and
    determining the conditions under which leasing is an acceptable
    alternative even if it is not the most cost-effective option.

    ^29 GAO, Capital Financing: Potential Benefits of Capital Acquisition Funds
    Can Be Achieved through Simpler Means, [44]GAO-05-249 (Washington, D.C.:
    Apr. 8, 2005).

    Conclusions

    The leasing challenge--under which agencies have become overreliant on
    costly operating leases to meet long-term space needs--has persisted for
    many years. We have reported since the late 1980s that this problem has
    cost taxpayers hundreds of millions of dollars and needs to be addressed.
    Overreliance on costly leasing was, and continues to be, a major reason
    why real property management is on GAO's high-risk list. Trends show
    continued reliance on significant amounts of leased space. In particular,
    GSA predicts that in 2008 it will lease more space than it owns--an
    unprecedented situation. The predilection for leasing has been driven, in
    part, by federal budget scorekeeping rules, which make operating leases an
    attractive alternative to ownership. The scorekeeping rules, though rooted
    in sound budget policy and intended to improve transparency, have had this
    undesirable effect. Various alternatives have been proposed to remedy the
    problem, but it persists, and reaching a resolution will not be easy.
    Whatever change is under consideration--whether it involves scoring leases
    up front like ownership or using other methods to spur ownership--will
    involve making choices among competing priorities for limited federal
    resources. Whether to increase funding for federal real property at the
    expense of other programs and initiatives is properly a policy decision
    that only Congress and the President can make. Nonetheless, with the
    improvements in federal real property management made thus far and
    increased commitment by OMB and Congress to address long-standing real
    property problems, there is reason to be optimistic that stakeholders can
    reach a consensus on how to address the leasing challenge.

    Recommendation for Executive Action

    The Director of the Office of Management and Budget should direct the
    Deputy Director for Management, Office of Management and Budget, in
    conjunction with the Federal Real Property Council and in consultation
    with key stakeholders including Congress, to develop a strategy to reduce
    agencies' reliance on leased space for long-term needs when ownership
    would be less costly. The strategy should, at a minimum, analyze current
    and past legislative and administration proposals that addressed the
    budget scorekeeping issue in relation to real property, gauge
    stakeholders' perspectives on what proposals are most viable, and identify
    the conditions, if any, under which leasing is an acceptable alternative
    even if it is not the most cost-effective option.

    Agency Comments and Our Evaluation

    We provided a draft of this report to OMB, GSA, Agriculture, and USPS for
    review and comment. OMB generally agreed with the report and concurred
    with our recommendation. OMB also provided technical clarifications, which
    we incorporated, where appropriate. OMB's comments are discussed in more
    detail below. OMB's letter is contained in appendix II. GSA also agreed
    with the report and provided technical clarifications, which we
    incorporated where appropriate. GSA's letter appears in appendix III
    without the enclosure that contained the technical clarifications. USPS
    and Agriculture did not provide comments on the draft report.

    While generally agreeing with our report and recommendation, OMB asked us
    to narrow the scope of the recommendation and identified other issues
    inherent to the acquisition of leased space, including (1) leasing as a
    more practical option in certain situations, (2) the validity of the
    30-year net economic analysis comparing the acquisition costs of owned and
    leased space, and (3) challenges associated with pursuing building
    ownership. OMB asked us to narrow the scope of the recommendation to
    identify instances in which agencies are relying on costly, long-term
    leasing. A means of identifying such leases could logically be part of the
    strategy we are recommending and seems worthwhile pursuing. However, our
    report objectives did not include how best to identify costly leases, and
    therefore we chose not to change our recommendation. Over the last decade,
    our work has shown that GSA relies heavily on operating leases to meet new
    long-term space needs and that building ownership often costs less than
    operating leases, especially for long-term space needs. In these reports,
    we cite examples of leases that were estimated to cost millions of dollars
    more than construction over the long-term, including operating leases for
    the Patent and Trademark Office in Northern Virginia and the Department of
    Transportation's headquarters building and the Securities and Exchange
    Commission building in Washington, D.C. In this report, we identify
    examples in which the comparative cost advantage of building ownership
    would result in significant financial savings over the long term,
    including the FBI field office buildings in Chicago, Illinois, and Tampa,
    Florida (see table 2). Also, OMB said that we carefully selected long-term
    lease arrangements in our report. Our report methodology clearly indicates
    that we chose GSA's regional offices in Atlanta, Georgia; Chicago,
    Illinois; and Fort Worth, Texas; and USPS facility service offices in
    Lawrenceville, Georgia; Bloomingdale, Illinois; and Dallas, Texas, because
    these locations had a high number of larger-dollar-value leases and were
    geographically diverse.

    OMB said that our report recognizes 80 percent of GSA's leases are for
    20,000 square feet or less. OMB also said that when there is general
    purpose office space available in a competitive marketplace, leasing may
    be a more viable option. Our report acknowledges that leasing is a
    practical way to address issues such as a limited amount of available
    federal space in a geographic area or a need for a small amount of square
    footage. In addition, we cite operational requirements-- such as changes
    to an agency's mission, immediate space needs, security requirements, or a
    desire for flexibility--as drivers of the decision to lease rather than
    own space. OMB said that the 30-year economic comparison of leasing to
    ownership will almost always show that ownership is more cost-effective
    than leasing, especially when including land values, and that the federal
    government may not recoup the value the 30-year comparison suggests. We
    believe that the 30-year net present-value analysis, which GSA has used
    for decades and that measures multiyear cash flows in present-dollar terms
    so the value of a dollar received today can be compared against the value
    of a dollar received in the future, remains a valid measure for evaluating
    long-term costs of leasing versus building ownership. Finally, OMB states
    that in instances where there is a long-term need or if there is a need
    for a special purpose facility not readily available in the leasing
    market, that acquisition is an appropriate strategy and that agencies
    should budget accordingly. Our report discusses at length GSA's and USPS's
    concerns that they lack the up-front capital to pursue building ownership
    for facilities. For example, GSA officials we spoke with in the field said
    that construction funds are available for capital projects in their region
    but these dollars tend to be designated for the construction of agency
    headquarters, courthouses, and border stations and typically are not used
    for federal office space, such as that needed to fulfill FBI's field
    office needs.

    As agreed with your offices, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the report date. At that time, we will send copies of this report to the
    Director and Deputy Director of OMB, the Administrator of GSA, and the
    Postmaster General of the United States. Additional copies will be sent to
    interested congressional committees. We also will make copies available to
    others upon request, and the report will be available at no charge on the
    GAO Web site at [45]http://www.gao.gov .

    If you have any questions about this report, please contact me at (202)
    512-2834 or at goldsteinm@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff who made key contributions to this report are
    listed in appendix IV.

    Mark L. Goldstein
    Director, Physical Infrastructure Issues

    Appendix I: Objectives, Scope, and Methodology

    Our objectives were to identify (1) the profile of domestically held,
    federally leased space, including the overall amount and type of space
    agencies lease, and discuss any related trends; (2) the factors that drive
    agencies to lease space that may be more cost-effective to own; and (3)
    the actions, if any, the administration has taken, and what alternative
    approaches have been proposed, to address agencies' reliance on costly
    leased space.

    To identify the profile of domestically held, federally leased space, we
    examined the Federal Real Property Profile (FRPP), the government's real
    property database, and federal fiscal year 2006 leasing data and obtained
    breakouts of leased building space by federal agency and predominant
    usage. FRPP is maintained by the General Services Administration (GSA) on
    behalf of the Federal Real Property Council, which controls access to the
    data. We eliminated federal agencies from consideration that lease their
    building space overseas. We identified three civilian
    real-property-holding agencies that are the largest in terms of leased
    building space held within the United States and U.S. territories for a
    more detailed analysis and assessment of FRPP data. These agencies are
    GSA, the U.S. Postal Service (USPS), and the U.S. Department of
    Agriculture (Agriculture), which collectively hold 71 percent of domestic,
    federally leased space. We analyzed GSA's, USPS's, and Agriculture's
    fiscal year 2006 FRPP leasing data, including the data for elements such
    as real property type, use, legal interest, status, reporting agency,
    using organization, size, rate of utilization, value, condition index,
    mission dependency, annual operating and maintenance costs, and general
    location. To analyze the major trends in leased space, we were not able to
    use FRPP, since fiscal year 2005 was the first year federal agencies were
    required to submit information on their leased real property assets to
    FRPP. Therefore, we reviewed annually archived GSA leasing data for fiscal
    years 2003 through 2006, including analyses of certain aspects of the
    leased portfolio such as vacancy rates in leased buildings, lease
    extensions, and leases that are operating at a negative net operating
    income. Because GSA leases a variety of different space types for many
    government agencies, its leased portfolio provides a governmentwide
    perspective on federally leased building space. Issues related to
    collection techniques and availability precluded USPS and Agriculture from
    providing us with an electronic copy of annually archived leasing data,
    and therefore we could not include information from these agencies in our
    analysis of trends under this objective. We also reviewed GSA's System for
    Tracking and Administering Real Property and GSA-generated reports on real
    property, including the State of the Portfolio and the Lease Portfolio
    Reports. We assessed the reliability of the leasing data provided by the
    Office of Management and Budget (OMB) and GSA and interviewed OMB
    officials because OMB oversees the implementation of Executive Order
    13327, which addresses real property management and FRPP. We determined
    that these data were sufficiently reliable and valid for the purposes of
    this review.

    To determine the factors that drive agencies to lease building space that
    may be more cost-effective to own, we focused on GSA and USPS, the two
    agencies that lease the most building space. To determine the major
    factors that guide these decisions, we interviewed GSA and USPS
    headquarters and regional officials with authority over leasing building
    space. In addition, we visited GSA regional offices and USPS facility
    service offices that are either in the same metropolitan area or near to
    it. We visited GSA regional offices in Atlanta, Georgia; Chicago,
    Illinois; and Fort Worth, Texas; and USPS facility service offices in
    Lawrenceville, Georgia; Bloomingdale, Illinois; and Dallas, Texas. We
    selected these locations because they had space leased to multiple
    agencies and a high number of larger-dollar-value leases and were
    geographically diverse. The leases we selected were among the
    larger-dollar-value leases within these locations. To determine the cost
    of leasing versus the cost of new construction ownership, we selected
    seven GSA and three USPS building leases. For GSA buildings, we used GSA
    economic analyses we requested that compared the estimated costs of
    leasing with the estimated costs of ownership, while for USPS buildings,
    we reviewed analyses previously prepared by USPS officials comparing these
    estimated costs. For GSA properties, we worked with budget allocation
    specialists from GSA's real property division to estimate the costs of
    leasing versus ownership over a 30-year period. We developed this estimate
    through a net present value analysis of both leasing and purchasing using
    GSA's The Automated Prospectus System (TAPS). To estimate leasing costs,
    we used data from the selected leases for each of the sample buildings,
    such as usable square footage, tenant alteration costs, services and
    utilities, and lease terms. If this information could not be located on a
    particular GSA lease, TAPS program defaults were used. Certain rental
    rates, such as "step rents" that increase over a period of years, were
    adjusted to present-value terms, as appropriate. To estimate the costs of
    new construction ownership, we used cost data from GSA's General
    Construction Cost Review Guide (for estimated construction costs),
    commercial real estate data from CoStar (for estimated land costs), and
    the Public Building Service's Design and Construction Professional
    Services Budget Estimating Tool (for estimated design and review and
    management and inspection costs). All inputs for both estimated leasing
    and ownership costs were adjusted to 2005 dollars using OMB inflation and
    interest rate data and certain TAPS program defaults from that year. We
    selected 2005 as the base year because it was the most recent year for
    which the General Construction Cost Review Guide contained updated actual
    construction data, rather than estimates. After estimating the costs of
    both leasing and ownership, we compared these amounts to determine which
    method of financing would have greater financial savings over the long
    term. Our findings from visits to, and economic analyses of, federally
    leased space cannot be generalized to federally leased space nationwide.

    To assess the actions, if any, the administration has taken, and what
    alternative approaches have been proposed, to address agencies' reliance
    on costly leased space, we reviewed previously issued GAO reports on real
    property management and leasing. We also reviewed past proposals for
    reforming federal leasing policy, including reports by the President's
    Commission to Study Capital Budgeting and by the Congressional Budget
    Office on budget scoring. We also interviewed OMB officials about efforts
    to address agencies' reliance on leasing as part of ongoing reform
    efforts. We conducted this performance audit from July 2006 to January
    2008 in accordance with generally accepted government auditing standards.
    Those standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.

    Appendix II: Comments from the Office of Management and Budget

    Executive Office Of The President:
    Office Of Management And Budget:
    WASHINGTON. D. C 20503:

    Mr. Mark Goldstein:
    Director, Physical Infrastructure:
    U.S. Government Accountability Office:
    440 G Street, NW:
    Washington, DC 20548:

    Dear Mr. Goldstein:

    Thank you for the opportunity to comment on the Government
    Accountability Office's (GAO's) draft report entitled "Federal Real
    Property: Strategy Needed to Address Agencies Long-standing Reliance on
    Costing Leasing" GAO-08-197. In general, the Office of Management and
    Budget (8&4B) agrees with your assessment of the need for a strategy to
    optimize agencies' use of and spending on leased space. We recommend
    that GAO narrow the scope of the recommendation to more specifically
    address how to identify those instances where agencies are relying on
    costly leasing. As GAO recognized in its report, the Federal government
    has built a strong foundation for right-sizing the government's real
    property inventory since the President signed Executive Order (EO)
    13327. Federal Real Property Management. Central to this foundation has
    been developing the tools to better manage this inventory. Since the
    President signed the EO:

    1. all agencies established Asset Management addressing maintenance,
    and disposition of their real property assets;

    2. the Federal Real Property Council (FRPC) established a standard
    taxonomy and identified 24 data elements. including four performance
    measures, that are captured on all assets in the Federal portfolio;

    3. all agencies, for the third consecutive year, reported the required
    constructed asset level inventory and performance data to the Federal
    Real Property Profile; and:

    4. agencies have reliable performance information to assist them in
    identifying underperforming assets suitable for investment or
    disposition.

    As a direct result of these accomplishments, we know what assets we
    own, their location, and how they are performing. This has led to the
    disposal of over $7 billion in unneeded assets since 2004. Congress
    also recently introduced legislation to further reform real property
    disposal by providing agencies needed authorities to expedite the
    disposal, through sale or demolition, of unneeded assets.

    Now that new tools for improved asset management are in place, OMB, the
    FRPC, and the Congress are better prepared to address more complex
    policy issues such as the leasing challenges raised in this report. Our
    plan is to separate our analysis and effort in two distinct pieces.
    First, we will identify opportunities to improve the management of
    existing leases, including opportunities to optimize the leases the
    government currently manages. Then. we will analyze prospects for
    improving the acquisition of new leases.

    As we perform our review. we will keep in mind a number of factors that
    we believe should influence the decision as to whether the Government
    should own or lease space. GAO's report, which is based on a review of
    several carefully selected long term lease arrangements, suggests that
    the Government is overly reliant on long-term leasing to its financial
    detriment. We believe there are broader considerations in evaluating
    the Federal government's approach to leasing that are not addressed in
    your report. Specifically:

    * As your report recognizes 80 percent of GSA leases are for 20,O00
    square feet or less. In cases where the space needs are relatively
    small in scale, the economic analysis more typically points to a lease
    arrangement as the most practical or viable option. Therefore, for a
    significant percentage of GSA's lease inventory, the leasing
    alternative is a sensible option.

    * A 30-year economic comparison of leasing to ownership w ill almost
    always show that ownership is more cost effective than leasing due to
    the residual value of appreciated land values. However, agencies' needs
    are not static: they need to grow. decline and move operations to
    better meet their needs. Leasing affords agencies the flexibility to
    adapt to changing requirements. Such flexibility is not contemplated in
    a 30-year comparison where value is derived from ownership.

    * Further, productive ownership depends upon the owners' ability to
    dispose of the asset when requirements change or better economic
    options are available. As GAO has noted, the Federal Government faces
    challenges in disposing of assets. While we are making strides in
    improving the management of the owned inventory, historical experience
    suggests that there can be additional costs that may not included in
    the owned to leased comparison. In an ownership scenario, the Federal
    Government may not ultimately recoup the value that a 30-year
    comparison suggests.

    * Ownership also requires periodic investment to maintain physical
    infrastructure. Agencies and Congress often defer needed maintenance to
    fund other needs, resulting in facilities that require greater repair'
    and renovation costs than would have been needed if properly
    maintained. As an alternative, leasing can offer a consistent level of
    service.

    * Government ownership is advantageous in cases where there is a
    Government need for facilities that are not available on the leasing
    market. However, if general purpose office space is available in a
    competitive marketplace, leasing is typically a cost effective option.

    * Finally the budget scorekeeping rules referred to in the draft report
    are modeled on the Financial Accounting Standards Boards' standards for
    operating and capital leases. They are designed to ensure that capital
    leases and purchase options are treated the same way. The scoring rules
    encourage agencies to seek the lower cost option when acquiring
    space by requiring the full cost of capital leases to be scored upfront
    in the same manner as purchase and construction.

    We agree with GAO that there are some instances where the Government
    should have pursued ownership rather than leasing an asset. However,
    the assumption should not be made that the information available today
    was known at the time the leasing decision was made. In instances where
    there is a long term need or there is a need for a special purpose
    facility that is not readily available in the leasing market, we
    believe that acquisition is an appropriate strategy and that agencies
    should budget accordingly. We believe GAO, along with the Executive
    branch, would be well served to consider how to identify instances
    where operating leases are most likely to be misused to the
    Government's financial detriment.

    We are continuing our work to ensure that government-wide efforts will
    ultimately lead to improved asset management and the removal of Federal
    real property management from the GAO High Risk list. We want to thank
    GAO for the opportunity to comment on this draft report and we look
    forward to our continuing work in the area of improving Federal Real
    Property Asset Management.

    Sincerely,

    Signed by:

    Danny Werfel:

    Acting Controller:

    Appendix III: Comments from the General Services Administration

    GSA Administrator:

    January 7, 2008:

    The Honorable David M. Walker:
    Comptroller General of the United States:
    Government Accountability Office:
    Washington, DC 20548:

    Dear Mr. Walker:

    The U.S. General Services Administration (GSA) appreciates the
    opportunity to review and comment on the U.S. Government Accountability
    Office's (GAO) draft report, "Federal Real Property: Strategy Needed to
    Address Agencies' Long-standing Reliance on Costly Leasing," (GAO-08-
    197). GAO recommends that the U.S. Office of Management and Budget
    (OMB), in conjunction with the Federal Real Property Council, consult
    with key stakeholders and Congress and develop a strategy to reduce
    agencies' reliance on leased space for long-term needs when ownership
    would be less costly.

    GSA agrees with GAO's findings and recommendation, and, as appropriate,
    we will work with OMB and the Federal Real Property Council to support
    real property reform efforts. We have enclosed technical comments that
    update and clarify statements in the draft report.

    If you would like to discuss the contents of this letter further, or if
    you have any additional questions or concerns, please do not hesitate
    to contact me. Staff inquiries may be directed to Mr. Kevin Messner,
    Associate Administrator, Office of Congressional and Intergovernmental
    Affairs, at (202) 501-0563.

    Cordially,

    Signed by:

    Lurita Doan:
    Administrator:

    Enclosure:

    cc: Mark L. Goldstein, Director, Physical Infrastructure
    Administration:

    Appendix IV: GAO Contact and Staff Acknowledgments

    GAO Contact

    Mark Goldstein, (202) 512-2834 or [46]goldsteinm@gao.gov

    Staff Acknowledgments

    In addition to the contact person named above, Elizabeth Repko, Susan
    Michal-Smith, David Sausville, Gary Stofko, and Adam Yu also made key
    contributions to this report.

    Related GAO Products

    Federal Real Property: Progress Made toward Addressing Problems, but
    Underlying Obstacles Continue to Hamper Reform. [47]GAO-07-349 .
    Washington, D.C.: April 13, 2007.

    High-Risk Series: An Update. [48]GAO-07-310 . Washington, D.C.: January
    2007.

    Federal Real Property: NIH Has Improved Its Leasing Process, but Needs to
    Provide Congress with Information on Some Leases. [49]GAO-06-918 .
    Washington, D.C.: September 8, 2006.

    Federal Real Property: Reliance on Costly Leasing to Meet New Space Needs
    Is an Ongoing Problem. [50]GAO-06-136T . Washington, D.C.: October 6,
    2005.

    Federal Real Property: Further Actions Needed to Address Long-standing and
    Complex Problems. [51]GAO-05-848T . Washington, D.C.: June 22, 2005.

    U.S. Postal Service: Bold Action Needed to Continue Progress on Postal
    Transformation. [52]GAO-04-108T . Washington, D.C.; November 5, 2003.

    Budget Issues Alternative Approaches to Finance Federal Capital.
    [53]GAO-03-1011 . Washington, D.C.: August 21, 2003.

    General Services Administration: Factors Affecting the Construction and
    Operating Costs of Federal Buildings. [54]GAO-03-609T . Washington, D.C.:
    April 2, 2003.

    High-Risk Series: Federal Real Property. [55]GAO-03-122 . Washington,
    D.C.: January 2003.

    Budget Scoring: Budget Scoring Affects Some Lease Terms but Full Extent Is
    Uncertain. [56]GAO-01-929 . Washington, D.C.: August 31, 2001.

    General Services Administration: Comparison of Space Acquisition
    Alternatives--Leasing to Lease-Purchase and Leasing to Construction.
    [57]GAO/GGD-99-49R . Washington, D.C.: March 12, 1999.

    General Services Administration Opportunities for Cost Savings in the
    Public Buildings Area. [58]GAO/T-GGD-95-149 . Washington, D.C.: July 13,
    1995.

    Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings.
    [59]GAO/T-AIMD-94-189 . Washington, D.C.: September 20, 1994.

    Public Buildings Budget Scorekeeping Prompts Difficult Decisions,
    [60]GAO/T-AIMD-GGD-94-43 . Washington, D.C.: October 28, 1993.

    Federal Office Space Increased Ownership Would Result in Significant
    Savings. [61]GAO/GGD-90-11 . Washington, D.C.: December 22, 1989.

    (543177)

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    and methodology, click on [68]GAO-08-197 .

    For more information, contact Mark Goldstein at (202) 512-2834 or
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    Highlights of [69]GAO-08-197 , a report to the Subcommittee on Federal
    Financial Management, Government Information, Federal Services, and
    International Security, Committee on Homeland Security and Governmental
    Affairs, U.S. Senate

    January 2008

    FEDERAL REAL PROPERTY

    Strategy Needed to Address Agencies' Long-standing Reliance on Costly
    Leasing

    In January 2003, GAO designated federal real property as a high-risk area,
    citing the government's overreliance on costly, long-term leasing as one
    of the major reasons. GAO's work over the years has shown that building
    ownership often costs less than operating leases, especially for long-term
    space needs. GAO was asked to identify (1) the profile of domestically
    held, federally leased space including the overall amount and type of
    space agencies lease, and any related trends; (2) the factors that drive
    agencies to lease space that may be more cost-effective to own; and (3)
    any actions taken by the administration and alternative approaches
    proposed to address this issue. GAO reviewed fiscal year 2006 Federal Real
    Property Profile (FRPP) leasing data and relevant documents and
    interviewed officials from the General Services Administration (GSA), the
    Office of Management and Budget (OMB), and the U.S. Postal Service (USPS).
    GAO also reviewed 10 building leases that were among those with the
    largest dollar value in 3 locations GAO visited.

    [70]What GAO Recommends

    OMB, in conjunction with the Federal Real Property Council (established by
    the administration to help support reform efforts in real property), and
    in consultation with key stakeholders, should develop a strategy to reduce
    agencies' reliance on leased space for long-term needs when ownership
    would be less costly. OMB generally agreed with the report and GAO's
    recommendation.

    Federal agencies rely extensively on leasing, occupying about 398 million
    square feet of leased building space domestically in fiscal year 2006,
    according to FRPP data. GSA, USPS, and the U.S. Department of Agriculture
    lease about 71 percent of this space, mostly for offices, with the
    military services leasing another 17 percent. GSA is increasing its use of
    leased space and predicts that in 2008 it will, for the first time, lease
    more space than it owns.

    In the 10 GSA and USPS leases GAO examined, decisions to lease space that
    would be more cost-effective to own were driven by the limited
    availability of capital for building ownership and other considerations,
    such as operational efficiency and security. For example, for four of the
    seven GSA leases GAO analyzed, leasing was more costly over time than
    construction--by an estimated $83.3 million over 30 years. Although
    ownership through construction is often the least expensive option,
    federal budget scorekeeping rules require the full cost of this option to
    be recorded up-front in the budget, whereas only the annual lease payment
    plus cancellation costs need to be recorded for operating leases, making
    them "look cheaper" in any year even though they generally are more costly
    over time. USPS is not subject to the scorekeeping rules and cited
    operational efficiency and limited capital as its main reasons for
    leasing.

    While the administration has made progress in addressing long-standing
    real property problems, efforts to address the leasing challenge have been
    limited. GAO has raised this issue for almost 20 years. Several
    alternative approaches have been discussed by various stakeholders,
    including scoring operating leases the same as ownership, but none have
    been implemented. The current real property reform initiative, however,
    presents an opportunity to address the leasing challenge.

    GSA Operating Leases for the Federal Bureau of Investigation (FBI) Field
    Offices in Chicago, Illinois, and Tampa, Florida

    References

    Visible links
      31. http://www.gao.gov/cgi-bin/getrpt?GAO-03-122
      32. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-95-149
      33. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-99-49R
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-349
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-349
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-349
      37. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
      38. http://www.gao.gov/cgi-bin/getrpt?GAO-04-108T
      39. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-90-11
      40. http://www.gao.gov/cgi-bin/getrpt?GAO/T-AIMD-GGD-94-43
      41. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-95-149
      42. http://www.gao.gov/cgi-bin/getrpt?GAO-03-609T
      43. http://www.gao.gov/cgi-bin/getrpt?GAO-07-349
      44. http://www.gao.gov/cgi-bin/getrpt?GAO-05-249
      45. http://www.gao.gov
      46. mailto:goldsteinm@gao.gov
      47. http://www.gao.gov/cgi-bin/getrpt?GAO-07-349
      48. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
      49. http://www.gao.gov/cgi-bin/getrpt?GAO-06-918
      50. http://www.gao.gov/cgi-bin/getrpt?GAO-06-136T
      51. http://www.gao.gov/cgi-bin/getrpt?GAO-05-848T
      52. http://www.gao.gov/cgi-bin/getrpt?GAO-04-108T
      53. http://www.gao.gov/cgi-bin/getrpt?GAO-03-1011
      54. http://www.gao.gov/cgi-bin/getrpt?GAO-03-609T
      55. http://www.gao.gov/cgi-bin/getrpt?GAO-03-122
      56. http://www.gao.gov/cgi-bin/getrpt?GAO-01-929
      57. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-99-49R
      58. http://www.gao.gov/cgi-bin/getrpt?GAO/T-GGD-95-149
      59. http://www.gao.gov/cgi-bin/getrpt?GAO/T-AIMD-94-189
      60. http://www.gao.gov/cgi-bin/getrpt?GAO/T-AIMD-GGD-94-43
      61. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-90-11
      62. http://www.gao.gov/
      63. http://www.gao.gov/
      64. http://www.gao.gov/fraudnet/fraudnet.htm
      65. mailto:fraudnet@gao.gov
      66. mailto:jarmong@gao.gov
      67. mailto:youngc1@gao.gov
      68. http://www.gao.gov/cgi-bin/getrpt?GAO-08-197
      69. http://www.gao.gov/cgi-bin/getrpt?GAO-08-197
    *** End of document. ***