Federal Office Space: More Businesslike Leasing Approach Could Reduce
Costs and Improve Performance (Chapter Report, 02/27/95, GAO/GGD-95-48).
The General Services Administration (GSA) has a virtual monopoly over
the provision of federal office space. GSA now spends $2 billion
annually for leased space and projects that these costs will rise to $3
billion by 2002 unless the ratio of federally owned to leased space is
increased. Also, federal agencies have been dissatisfied with GSA's
monopoly and the amount of time GSA takes to deliver requested space.
GAO concludes that a more businesslike approach to leasing could reduce
costs and improve performance. GAO makes several recommendations to
streamline GSA's leasing process, making it less costly and time
consuming, more responsive to the needs of federal agencies, and a
better value for taxpayers.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-95-48
TITLE: Federal Office Space: More Businesslike Leasing Approach
Could Reduce Costs and Improve Performance
DATE: 02/27/95
SUBJECT: Procurement practices
Real estate leases
Federal office buildings
Federal procurement
Cost control
Federal property management
Cost effectiveness analysis
Leasing policies
Comparative analysis
Procurement procedures
IDENTIFIER: National Performance Review
Dallas (TX)
New York (NY)
San Francisco (CA)
TQM
Federal Buildings Fund
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Cover
================================================================ COVER
Report to the Honorable
Daniel Patrick Moynihan, U.S. Senate
February 1995
FEDERAL OFFICE SPACE - MORE
BUSINESSLIKE LEASING APPROACH
COULD REDUCE COSTS AND IMPROVE
PERFORMANCE
GAO/GGD-95-48
Federal Office Space
(240091)
Abbreviations
=============================================================== ABBREV
CICA - Competition in Contracting Act
FAR - Federal Acquisition Regulation
FASA - Federal Acquisition Streamlining Act of 1994
FBF - Federal Buildings Fund
GPRA - Government Performance and Results Act of 1993
GSA - General Services Administration
GSAR - General Services Acquisition Regulation
NPR - National Performance Review
OMB - Office of Management and Budget
PBS - Public Buildings Service
SEC - Securities and Exchange Commission
Letter
=============================================================== LETTER
B-257561
February 27, 1995
The Honorable Daniel Patrick Moynihan
United States Senate
Dear Senator Moynihan:
As the former Chairman of the Water Resources, Transportation, Public
Buildings and Economic Development Subcommittee, you asked GAO to
assess the efficiency and effectiveness of the General Services
Administration's (GSA) traditional process-oriented approach for
leasing office space and contrast it with the more results-oriented
approach that is typically used by private industry. This report
concludes that a more businesslike approach to leasing could reduce
costs and improve performance. Accordingly, it makes a series of
recommendations to the Administrator of GSA that are aimed at
simplifying and streamlining GSA's leasing process, making it less
costly and time consuming, more responsive to federal agencies'
mission-support needs, and a better value for taxpayers.
We are sending copies of this report to the Chairman of the
Subcommittee on Transportation and Infrastructure, the Committee on
Environment and Public Works; the Administrator of GSA; the Director,
Office of Management and Budget; and other interested congressional
committees and subcommittees. Copies of this report will be made
available to others upon request.
If you have any questions or would like further information, please
contact me at (202) 512-8387. Major contributors to this report are
listed in appendix IV.
Sincerely yours,
J. William Gadsby
Director, Government Business
Operations Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The General Services Administration (GSA) has a virtual monopoly over
the provision of federal office space. Almost one-half of GSA's real
estate portfolio of 276 million square feet is leased, and leasing
costs are 30 percent of its total $7.3 billion public buildings
budget. GSA now spends $2 billion annually for leased space and
projects that these costs will rise to $3 billion by 2002, unless the
ratio of federally owned to leased space is increased. Also, federal
agencies have generally been dissatisfied with GSA's monopoly and the
amount of time GSA takes to deliver requested space.
Expressing concern about escalating lease costs and the continued
efficacy of GSA's leasing process, the former Chairman of the
Subcommittee on Water Resources, Transportation, Public Buildings and
Economic Development, Senate Committee on Environment and Public
Works, asked GAO to evaluate the efficiency and effectiveness of
GSA's policies, procedures, and practices for leasing office space
and how they compare with those of private industry.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
GSA uses a combination of federally owned and leased office space to
meet agencies' needs. GSA's costs of providing office space to
federal agencies, in federally owned as well as leased space, are
financed by rent payments from agencies for the space they occupy.
GSA's leasing process is guided by the Competition in Contracting Act
(CICA), Federal Acquisition Regulation (FAR), and other federal laws
and regulations governing the acquisition of goods and services and
various national policies aimed at furthering certain socioeconomic
goals. Basically, GSA prepares a detailed lease solicitation for
agencies' office space requirements that it decides will be met
through leased space, solicits offers from prospective landlords,
selects the winning offer, and awards and administers federal leases.
To address the Subcommittee's concerns, GAO (1) examined GSA's
leasing process and the federal laws, procurement regulations, and
other policies that guide it; (2) reviewed a judgmental sample of 34
GSA leases and compared them with similar private sector leases; (3)
interviewed almost one-half of the landlords or commercial brokers
that GSA solicited for offers on the 34 sampled leases to get their
views on GSA's leasing process; and (4) contacted 12 major private
sector firms with large portfolios of leased office space to discuss
their overall approach to leasing and identify their leasing
procedures and practices.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
In today's commercial real estate market, good leasing opportunities
come and go quickly. Getting a good value depends on being postured
to seize such opportunities as they become available. However, GSA
has a highly prescriptive and process-oriented leasing approach,
which is grounded in federal procurement law, uniformity, and
numerous procedural controls that have been added over the years.
GAO's work indicates that the cumulative effect of this approach and
its focus on controls is a leasing process that has become at odds
with the dynamic commercial real estate market. This process impedes
GSA's ability to get good, timely leasing values and may be causing
the government to pay too much for leased space.
In contrast, the 12 private sector firms GAO contacted use a
different approach that is simpler, more flexible and results
oriented, and less time consuming than GSA's. Also, most private
realty managers and commercial landlords and brokers GAO contacted
said that the private sector's approach gets overall leasing values
that are better than GSA's.
GSA acknowledges the need to improve its leasing performance and has
streamlined procedures for small leases; and in response to the
National Performance Review (NPR) and the President's recent
cost-savings initiative, it is exploring other changes.
Administratively, GSA could change some aspects of its leasing
process to improve timeliness and reduce costs. Alone, however, such
changes would not correct all the leasing problems that GAO
identified.
GAO believes that significant reductions in leasing costs and
improvements in GSA's overall leasing performance will require
fundamental changes in its traditional process-oriented approach,
organizational culture, and role in meeting federal office space
needs. Also, existing federal procurement laws and regulations and
other guiding national policies will need to be reexamined.
The more results-focused leasing approach and practices used by
private industry may provide ideas for improving GSA's process. They
deserve consideration and testing to evaluate their benefits, risks,
and potential federal application.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
GSA'S PROCESS IMPEDES TIMELY
SPACE DELIVERY AND GOOD
LEASING VALUES
-------------------------------------------------------- Chapter 0:4.1
GAO identified several characteristics of GSA's leasing process that
seem to put GSA at a distinct disadvantage in the commercial real
estate marketplace, cause it to pay more than is necessary for leased
space, impede timely space delivery, and discourage competition for
government leases. (See p. 17.)
Historically, GSA's leasing policies, procedures, and practices and
the federal laws and regulations that guide them have been focused on
process rather than on results. Over the years, numerous procedural
controls have been added to GSA's leasing process. Although such
controls are important, their cumulative effect is a leasing process
that has become rule-focused and inflexible, complex and cumbersome,
and time consuming and costly. (See pp. 17-19.)
This process-oriented approach is not well suited or effective in
helping GSA get good, timely leasing values in today's dynamic
commercial real estate market. For example, GSA's realty staff have
limited flexibility to modify space requirements or award criteria or
to bargain with landlords to take advantage of available leasing
opportunities, even those they believe would be good values for the
government. (See pp. 19-21.)
On average, GSA took 20 months to acquire office space and have it
available for occupancy on the 34 leases GAO sampled in New York, San
Francisco, and Dallas that GSA awarded between 1988 and 1992. These
34 leases represented all the leases GSA awarded in the central
business districts of these 3 cities during this period. (See pp.
14-15 and 22-23.)
GAO did not make independent real estate appraisals for these 34
leases. However, GSA had made or obtained market real estate
appraisals for 24 of them before lease award. GSA's own price
determinations acknowledged that the rates it paid for at least 10 of
the 24 leases exceeded their fair market values, as established by
these appraisals--2 leases were between 10 and 16 percent higher, 3
were between 5 and 10 percent higher, and 5 were higher by 5 percent
or less. (See p. 24.)
The 82 landlords and commercial real estate brokers GAO contacted
were highly critical of GSA's leasing process, and many of them said
that GSA pays too much for its leases. These landlords and brokers
said that GSA's lengthy lease solicitations and standard leases are
unconventional and confusing, and they do not understand the cost
implications of many lease clauses. For these and other related
reasons, many said they do not respond to GSA's solicitations or drop
out of competition before lease award. Those who do compete said
they often increase their proposed rates to compensate for the
uncertainties, added risks, and administrative red tape they perceive
are implicit in doing business with GSA. (See pp. 24-26.)
Also, GSA's leasing process seems to result in limited competition.
On the 34 leases GAO sampled, GSA issued a total of 261 solicitations
to 167 commercial landlords or brokers but received only 67
responsive offers and had only 1 or 2 competing offers for 24 (71
percent) of these leases. (See pp. 26-28.)
PRIVATE SECTOR APPROACH
COULD PROVIDE IDEAS FOR
IMPROVEMENT
-------------------------------------------------------- Chapter 0:4.2
There is no standard private industry leasing model, and practices
differ from firm to firm. But, the 12 private firms GAO contacted
use several common practices that seem to help them take advantage of
available market opportunities in a timely manner. Basically, these
firms use a results-oriented approach that relies on the expertise of
their realty staffs or on commercial brokers. (See p. 29.)
Unlike GSA, these firms generally do not establish highly
prescriptive and detailed space specifications or require extensive,
multilevel reviews of proposed lease contracts. Their lease
solicitations and contracts are much simpler and shorter than GSA's
and conform to customary commercial practices that landlords and
brokers said they are comfortable with and understand. Also, their
leases place more of the risks on tenants, and this seems to help
hold down rental rates. (See pp. 29-32.)
Also, these firms adjust their leased space requirements, if
necessary, and negotiate aggressively with landlords for concessions
and bargains, such as a few months' free rent or greater allowances
for customizing the space, to conclude an advantageous deal
expeditiously. Their more results-oriented approach typically
enables them to lease and occupy space in 6 months or less and get
overall leasing values they and many commercial landlords and brokers
said are better than GSA's. (See pp. 29-34.)
GSA HAS EFFORTS UNDERWAY TO
REENGINEER ITS LEASING
PROCESS
-------------------------------------------------------- Chapter 0:4.3
Over the past 4 years, GSA has initiated several actions aimed at
streamlining its leasing process and improving its leasing
performance. In response to NPR, GSA committed itself to and
developed plans for ending its long-standing service monopolies and
reengineering the way it does business, including leasing. As a part
of these reengineering efforts, GSA in January 1995 reorganized its
Public Buildings Service along business lines. (See pp. 35-42.)
In response to the President's recent initiative to reduce the size
of government and realize long-term cost savings, GSA in January 1995
also announced plans to accelerate and broaden its ongoing
reengineering efforts. Among other things, GSA committed itself to
identifying the most cost-effective method of carrying out its
various assigned responsibilities, including leasing. (See p. 42.)
The Federal Acquisition Streamlining Act of 1994 (FASA) and the
Government Performance and Results Act of 1993 (GPRA) may help
encourage and facilitate GSA's adoption of a more timely, efficient,
and cost-effective leasing process. For example, FASA contains
simplified procedures for leases having an average annual rent rate
of $100,000 or less. Among other things, GPRA allows certain federal
agencies to obtain a waiver of existing administrative procedural
requirements and controls to experiment with different approaches
aimed at improving agency performance by increasing managerial
accountability and flexibility. (See p. 43.)
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
GAO makes a series of recommendations to GSA aimed at simplifying and
streamlining its leasing process and making it less costly, more
responsive to federal agencies' mission-support needs, and a better
value for taxpayers. (See pp. 46-47.)
More specifically, GAO recommends that the Administrator of GSA
-- test the benefits, risks, and potential federal application of
private industry leasing practices or other leasing alternatives
that are within GSA's authority and seek the authority from (1)
Congress to test other leasing practices or alternatives that
GSA believes would require legislation and (2) the Office of
Management and Budget to test any needed changes in federal
administrative procedural requirements and controls under the
managerial accountability and flexibility provisions of GPRA
(See p. 46.) and
-- adopt administratively or, if GSA determines that legislative
authority is needed, propose the necessary legislation to
Congress to enable GSA to adopt those private industry leasing
practices or other alternatives tested that result in documented
performance improvements, make sense, and are cost effective.
(See p. 46.)
GAO also recommends specific actions GSA should take to improve
selected aspects of its leasing process or practices, better track
and measure leasing performance, and share more leasing authority
with federal agencies that are capable of and willing to lease their
own space. (See pp. 46-47.)
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
In written comments on a draft of this report, GSA generally agreed
with the overall thrust and recommendations and said it will address
them as part of ongoing efforts to reengineer its real estate
program. However, GSA said that it cannot carry out leasing like a
private sector tenant unless it receives an exemption from CICA and
other statutory constraints that add time and costs to its leasing
process. GAO recognized these statutory provisions in its report,
acknowledged that legislative changes may be required, and structured
its recommendations accordingly. GSA's comments are discussed at the
end of chapter 5 and reproduced in appendix I. (See pp. 47-59.)
INTRODUCTION
============================================================ Chapter 1
As the federal government's principal real estate agent, the General
Services Administration (GSA) controls the largest office space
portfolio in the United States. More than 1 million federal
employees work in 276 million square feet of space that GSA controls
in about 7,800 buildings nationwide. GSA has a virtual monopoly over
the federal government's acquisition and management of general
purpose office space that is owned or leased to support federal
agencies' missions. Our earlier work has shown that federal agencies
have generally long been dissatisfied with GSA's monopoly as well as
the quality, condition, and costs of their office space and the
amount of time GSA takes to deliver it. Our key reports and
testimonies over the past 5 years on GSA's monopoly and various
public buildings issues are identified at the end of this report.
Once federal agencies report their office space requirements to GSA,
it decides whether those requirements will be met through government
owned or leased space. Of the 276 million square feet of space
nationwide that GSA controls, almost one-half--133 million square
feet--in over 6,000 buildings is leased. The rest--143 million
square feet--is in about 1,700 federally owned buildings. In recent
years, GSA has become increasingly dependent on leased office space.
Between 1975 and 1994, the amount of space GSA leased increased by 37
percent, and the overall ratio of leased to owned space rose from 40
percent to 48 percent. In fiscal year 1994, GSA expected to pay $2.1
billion for leased space, and these costs represented almost 30
percent of its total estimated $7.3 billion public buildings budget.
GSA projects that the costs of leased space will rise to $3 billion
annually by 2002 unless the ratio of federally owned to leased space
is increased.
GSA's costs of providing office space and related mission-support
services to federal agencies, in federally owned as well as leased
buildings, are financed by the Federal Buildings Fund (FBF). GSA
charges federal agencies rent for the space they occupy, which is
supposed to be comparable to local commercial rents; deposits these
rent receipts in the FBF; and uses them, subject to congressional
limitations in annual appropriation acts, to pay building capital and
operating expenses, including the costs of leased space.
GSA'S LEASING PROCESS
---------------------------------------------------------- Chapter 1:1
GSA's lease acquisition process involves five major phases: (1)
refining agencies' identified office space size, configuration, and
location requirements; (2) preparing a solicitation for offers
detailing the government's space requirements, describing the award
criteria to be used, and soliciting offers from prospective
landlords; (3) analyzing landlords' offers in accordance with the
specified award criteria and selecting the winning landlord; (4)
preparing, reviewing, and approving the formal lease agreement; and
(5) preparing space layouts and architectural plans and customizing
the space to meet the federal tenant agency's specific needs.
In leasing office space, GSA is to follow procedures prescribed in
the General Services Acquisition Regulation (GSAR). GSA's procedures
apply many of the procurement principles in the Federal Acquisition
Regulation (FAR), the primary federal procurement regulation
governing the acquisition of supplies and services, to its leasing
process. GSA also incorporated into GSAR, requirements contained in
the Competition in Contracting Act of 1984 (CICA) that seek to
achieve full and open competition for federal contracts.
In addition, GSA's leasing process is used to further national
policies and to enforce various federal socioeconomic mandates. For
example, GSA's lease award criteria incorporate Executive Order
12072, which promotes the economic development of the central
business districts of cities, and various Equal Employment
Opportunity requirements. Finally, GSA's leasing procedures
incorporate the principles of various other procurement laws,
executive orders, decisions of the federal courts and the Boards of
Contract Appeals, and the regulations of various agencies, such as
the Environmental Protection Agency or the Architectural and
Transportation Barriers Compliance Board.
GSA'S MONOPOLY
---------------------------------------------------------- Chapter 1:2
Congress created GSA in 1949 to centralize, in a single agency,
responsibilities for the housekeeping functions of the executive
branch--procurement, management of real and personal property,
records management, etc. The Federal Property and Administrative
Services Act of 1949 gave the Administrator of GSA broad authority
over the management of real property, including authority to (1)
prescribe regulations governing real property management and leasing,
(2) lease real property, and (3) delegate lease authority back to the
head of any federal agency.
As emphasized in our December 1992 Transition Report on General
Services Issues (GAO/OCG-93-28TR), GSA, since its establishment in
1949, has been torn between (1) an internal dynamic that emphasizes a
centralized approach to the direct provision and operation of office
space and other support services to federal client agencies and (2) a
largely external expectation that its primary role should be to set
governmentwide policy, provide effective and comprehensive oversight
of decentralized operations within the departments and agencies, and
directly operate activities only where it makes sense and is cost
effective to have a central agency involved. The latter view is
generally supported by the agencies, the Office of Management and
Budget (OMB), the Vice President's 1993 National Performance Review
(NPR), and by us. Over the years, a shift away from direct delivery
of services has resulted in a sharp reduction in GSA's employment
levels. GSA's Public Buildings Service decreased from over 18,000
employees in 1978 to about 9,000 employees in 1994.
Historically, GSA generally has been unwilling to delegate to other
agencies its authority to lease general purpose office space within
urban areas and has opposed agencies' efforts to obtain independent
public buildings authority. However, GSA has delegated day-to-day
buildings management and lease administration responsibilities to
federal agencies for about 2,000 of its 7,800 buildings. These
agencies are now handling (or contracting) functions previously
handled by GSA. However, GSA is responsible for providing
governmentwide guidance and overseeing these functions.
Over the years, we have generally supported decentralized real
property operations, GSA's delegations of authority to tenant
agencies, and taken the position that GSA should make greater use of
delegated authority.\1 To date, GSA has delegated lease acquisition
authority to some federal agencies. For the most part, however,
these delegations are for special-purpose space, such as military
recruiting offices, medical clinics or treatment centers, and storage
facilities or for general purpose office space in locations outside
major urban areas or areas where GSA controls less than 250,000
square feet of space.
Several federal agencies, boards, and commissions have independent
statutory leasing authority. Most of the agencies having such
authority are self-supporting, and their activities are not financed
by congressional appropriations. In many cases, this statutory
leasing authority is only for specific geographic areas or
special-purpose space. However, some agencies, such as the
Securities and Exchange Commission (SEC) have broad statutory leasing
authority. SEC received its statutory authority in 1990. At the
request of the Chairman, Senate Committee on Governmental Affairs, we
reported in November 1992 on SEC's independent statutory leasing
authority.\2 Given the small number of SEC leases and the difficulty
of finding comparable GSA leases, we were unable to determine
conclusively whether SEC's lease rates were higher or lower than
GSA's.
--------------------
\1 For example, see More Flexibility Needed By the General Services
Administration For Delegating Leasing Authority to Federal Agencies
(GAO/LCD-78-303, Jan. 9, 1978); More Effective Leasing Procedures
and Practices Could Help GSA Reduce Delays in Meeting Federal Space
Needs (GAO/PLRD-82-46, May 19, 1982); and Real Property Management
Issues Facing GSA and Congress (GAO/T-GGD-92-4, Oct. 30, 1991).
\2 SEC Independent Leasing Authority (GAO/GGD-93-3R, Nov. 16, 1992).
RELATED NPR RECOMMENDATIONS
---------------------------------------------------------- Chapter 1:3
Due primarily to GSA's long-standing monopoly and historical focus on
day-to-day real property operations at the expense of needed
governmentwide leadership and oversight, NPR concluded, as we did in
our December 1992 Transition Report on General Services Issues, that
GSA's long-standing methods of doing business should be replaced with
new methods that are based on entrepreneurial and competitive
principles. NPR recommended (1) ending GSA's office space monopoly;
(2) allowing federal agencies the choice of obtaining office space
and related mission-support services from GSA, other federal
entities, or the private sector; and (3) changing the way GSA does
business. Concerning office space leasing, NPR recommended
simplifying the procedures for acquiring leased office space of less
than 10,000 square feet and renewing existing leases.
NPR's September 7, 1993, report also concluded that the overall
federal procurement process had become "too complex, absurdly slow,
and frequently ineffective" and that "elaborate safeguards often cost
more money than they save." According to NPR, federal procurement
needs to be reshaped by decentralizing authority to line managers
letting them buy much of what they need, simplifying procurement
regulations and processes, and empowering the system's customers by
ending most government service monopolies, including those of GSA.
Besides recommending the revision of federal procurement regulations,
NPR made several other recommendations aimed at reforming federal
procurement policies, procedures, and practices.
After we completed our work and prepared a draft of this report,
Congress enacted procurement reform legislation. The Federal
Acquisition Streamlining Act of 1994 (P.L. 103-355), enacted on
October 13, 1994, seeks to enhance the federal acquisition process
through certain streamlining improvements and a wide-ranging set of
performance-based management goals and incentives. The act's leasing
provisions are highlighted at the end of chapter 4.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:4
Expressing concern about escalating federal lease costs and the
continued efficacy of GSA's leasing process, the former Chairman of
the Subcommittee on Water Resources, Transportation, Public Buildings
and Economic Development, Senate Committee on Environment and Public
Works, asked us to examine the efficiency and effectiveness of GSA's
policies, procedures, and practices for leasing office space and how
they compare with those of private industry.
To respond to these concerns, we identified and examined GSA's
leasing policies, procedures, and practices. We discussed their
efficiency and effectiveness with responsible GSA headquarters and
regional management officials and realty specialists and their legal
basis with representatives of GSA's Office of General Counsel.
Similarly, we reviewed and discussed with these GSA officials the
federal laws, procurement regulations, and other national policies
that guide GSA's leasing activities. These included FAR, GSAR, CICA,
and various other laws, policy directives, and legal decisions. We
also reviewed (1) earlier GAO, GSA Inspector General, and GSA
internal reviews and studies of GSA's leasing process, policies, and
practices; (2) available GSA data and statistics on its overall
leasing performance and its delegations of lease acquisition
authority to federal customer agencies; (3) the results of recent
surveys of federal customer agencies' satisfaction with GSA's
services; and (4) the findings, conclusions, and recommendations of
NPR dealing with the federal procurement process and GSA's leasing
and other real property activities.
We documented and flowcharted GSA's leasing process; examined GSA's
rationale for each of its major leasing steps and requirements; and
made comparative evaluations of GSA and private industry leasing
policies, procedures, and performance. We judgmentally selected and
reviewed a sample of 34 leases GSA awarded between 1988 and 1992--13
leases in San Francisco, CA; 12 leases in New York, NY; and 9 leases
in Dallas, TX. These 34 leases, identified in appendix III,
represented all the leases GSA awarded in the central business
districts of these 3 federal regional cities during this period and
included leases of varying sizes ranging from 540 square feet to
463,399 square feet. Our review of these leases focused on
-- GSA's timeliness in meeting federal agencies' office space
needs,
-- the nature and degree of competition for GSA's leases,
-- how GSA's procedures affected the level of competition, and
-- how GSA's lease rates compared to similar private sector leases
in the same building or geographic area that GSA had identified
for comparative purposes.
Because of the relatively small number of leases reviewed and
variations in the different real estate markets involved, the results
of our sample analyses are not projectable to GSA's nationwide
leasing activities.
As part of our review of these 34 GSA leases, we attempted to contact
the 167 commercial landlords or real estate brokers that GSA had
solicited for offers on these leases. We successfully contacted 82
of these landlords or brokers and obtained their views on GSA's
leasing process, practices, and performance; how they compare with
private industry leasing practices; and how they could be improved.
In 2 of the 3 federal regional cities where we did our fieldwork--San
Francisco and Dallas/Fort Worth--we judgmentally selected and
interviewed the real estate managers of 12 major private sector firms
with large portfolios of leased office space to discuss their leasing
approach and identify their leasing procedures and practices. At
their request, we agreed not to identify the 12 firms by name. In
selecting these firms, we used regional business directories to
identify the largest firms, in terms of sales and number of
employees, that were headquartered in or had offices in these two
cities. Our selection criteria were that the firm (1) had at least
500,000 square feet of leased commercial office space; (2) had leased
space in more than one geographic region of the United States; and
(3) was willing to discuss its leasing approach with us and provide
us information on its leasing practices. The 12 firms we selected
are major players in the commercial real estate leasing market; 5 of
them were on the 1993 Fortune 500 list, and the other 7 are
recognized leaders in their respective industries. Also, 7 of the 12
firms we selected had leased space portfolios exceeding 1 million
square feet. Using information obtained from the realty managers of
these 12 firms, we compared their leasing procedures and practices
with GSA's in terms of how they (1) identify potential space; (2)
establish award criteria; (3) determine whether to use commercial
real estate agents or in-house real estate staff; (4) negotiate lease
clauses, lease rates, and the costs of customizing office space; and
(5) evaluate whether the lease rate is fair and reasonable.
We discussed with responsible GSA program and legal officials (1) the
results of our comparative analyses of GSA and private industry
leasing practices; (2) the legal basis for and necessity of the GSA
lease clauses and requirements that private landlords or real estate
brokers/agents found most burdensome, cumbersome, or objectionable;
and (3) any statutory provisions that would prevent GSA from adopting
more expeditious, cost effective, and businesslike leasing practices.
Also, we identified, considered, and discussed with GSA leasing
officials several actions the agency has taken in the last 3 years to
improve its leasing process and various pilot projects and other
changes it is exploring or considering, in response to NPR, to
"reinvent" or "reengineer" its leasing policies, procedures, and
practices.
We did our work between October 1992 and April 1994 at GSA's central
office in Washington, D.C., and its regional offices in San
Francisco, CA; New York, NY; and Fort Worth, TX, in accordance with
generally accepted government auditing standards. We discussed the
results of our work with the Administrator and Deputy Administrator
of GSA as well as other responsible GSA officials and considered
their views in preparing this report. Also, we obtained GSA's
written comments on a draft of this report. GSA's written comments
are discussed at the end of chapter 5 and reproduced in appendix I.
GSA'S PROCESS-ORIENTED LEASING
APPROACH IMPEDES TIMELY SPACE
DELIVERY AND GOOD LEASING VALUES
============================================================ Chapter 2
-- An extraordinary example of bureaucratic red tape.
-- Too complex, absurdly slow, and frequently ineffective.
-- Relies on rigid rules and procedures; extensive paperwork;
detailed design specifications; and multiple levels of review,
inspections, and audits.
-- Not achieving what its customers want.
-- Ignores its customers' needs, pays higher prices than necessary,
is filled with peripheral objectives, and assumes that line
managers cannot be trusted.
-- Its complexity forces businesses to alter standard procedures
and raise prices when dealing with the government.
-- So process oriented as to minimize discretion and stifle
innovation.
These statements were made by the National Performance Review (NPR)
about the overall federal procurement process. These same statements
also characterize the General Services Administration's (GSA) leasing
process.
Historically, GSA's leasing policies, procedures, and practices and
the laws and federal regulations that guide them have been focused on
process rather than on results. Over the years, procedural control
after procedural control was added to GSA's leasing process in
response to GAO and Inspector General audits, congressional concerns,
and the laudable goals of ensuring compliance with overall federal
procurement rules and regulations, safeguarding the government's
interests, and minimizing fraud, abuse, and the number of bid
protests by unsuccessful offerors. Such procedural controls are
important and useful provided they are balanced with efficiency and
effectiveness and do not cause organizations to lose sight of their
basic missions. In the leasing area, however, the cumulative result
of these well-intended procedural controls is a leasing process that
has become rule-focused and inflexible, complex and cumbersome, and
time consuming and costly.
Our work showed that GSA's process-oriented approach does not work
very well in the dynamic commercial marketplace. It does not enable
GSA to respond quickly enough in today's competitive real estate
environment and impedes its ability to get the best available leasing
values. We identified several characteristics of GSA's leasing
process that seem to put GSA at a distinct disadvantage in the
commercial marketplace, cause it to pay more than necessary for
leased space, impede timely space delivery, and discourage
competition for government leases.
As discussed in chapter 4, GSA recognizes that its leasing process
takes too long, is too costly and inefficient, and inhibits its
ability to compete effectively for good leasing values in today's
dynamic commercial real estate market. To help overcome these
disadvantages, GSA has initiated several actions aimed at
streamlining its leasing process, reducing procedural controls that
are within its administrative authority, and improving its leasing
performance. In response to NPR, GSA is exploring other changes to
reengineer its leasing policies, procedures, and practices.
GSA'S PROCESS-ORIENTED APPROACH
IS AT ODDS WITH THE DYNAMIC
COMMERCIAL REAL ESTATE MARKET
---------------------------------------------------------- Chapter 2:1
Office space is a unique commodity. Each building has a different
combination of attributes and amenities, and commercial lease rates
are influenced by various factors, such as the overall business and
real estate conditions, location and quality of the building, length
and size of the lease, and cost of customizing space to meet tenants'
needs. Also, other factors, such as superior window views, influence
lease rates.
Since leased space is continually coming on and going off the market,
getting a good real estate leasing deal depends heavily on being
postured to seize available market opportunities. However, the
process-oriented nature of GSA's leasing approach makes it difficult
for GSA to move quickly. GSA's approach is at odds with the dynamic
commercial real estate market that rewards--with low lease rates and
good leasing values--those who move quickly, are aggressive and
innovative, seize available opportunities, and negotiate the best
deals. It impedes GSA's ability to get good, timely leasing values
in the highly competitive commercial marketplace.
As mentioned earlier, GSA's leasing policies, procedures, and
practices historically have focused on process rather than results.
According to responsible GSA officials, this focus occurred because
GSA employees were concerned that any noncompliance with established
procurement rules and regulations, fraud or abuse, bid protests from
unsuccessful offerors, or other public criticism implied weaknesses
in management controls or poor agency performance. In response to
GAO and Inspector General audits; congressional or media criticisms
over the years; and the laudable goals of minimizing adverse audit
findings, fraud and abuse, and the number of bid protests; additional
procedural safeguards and controls were added to more fully protect
the government's interests.
To help ensure compliance with established federal procurement rules
and regulations and avoid bid protests, GSA's leasing process
emphasizes full and open competition for federal leases and fair and
equal treatment of all potential bidders. In accordance with the
Competition in Contracting Act (CICA), GSA's policy is to explicitly
lay out federal space requirements when soliciting bids and choose
among competing offers strictly on the basis of specific, established
award criteria. Because firms can protest procurement decisions if
they feel they have been treated unfairly, GSA devotes much of its
time and efforts to ensure that they are treated fairly.
During the 5-year period covered by our review--1988 through
1992--GSA had an elaborate, time-consuming process for leasing office
space and obtaining internal GSA and external reviews and approvals
of proposed lease solicitations and agreements. As illustrated in
appendix II--an 11-page flowchart--GSA's leasing process included
hundreds of steps and involved dozens of independent reviews and
checks. GSA realty specialists said that they have limited
discretion to diverge from the prescribed process. According to
them, their role is to understand the process, work within it, and
ensure compliance. Typically, all steps must be completed before a
lease contract can be signed.
Depending on the value of the lease, GSA realty specialists had to
obtain information or approval from as many as 14 different offices.
In San Francisco, for example, leases costing more than $1 million
required an appraisal of the value of the proposed lease and preaward
approval from GSA's Office of Inspector General, Regional Counsel,
and the Regional Acquisition Management Staff, as well as the
Department of Labor's Office of Federal Contract Compliance Programs.
To facilitate these preaward reviews, GSA realty staff is to copy a
complete record of the proposed lease, which can involve boxes of
material, and provide it to reviewing offices.
Many of GSA's lease clauses, provisions, and specifications are
strictly controlled as a result of law, executive order, or external
regulation or are standards that have been requested by the customer
agency. As a consequence, GSA realty specialists have limited
flexibility to take advantage of available real estate market
opportunities. GSA specifies leased space requirements, as well as
the criteria that will be used to award a lease, months before
soliciting offers from landlords. Once the leasing process has
begun, GSA realty specialists have limited flexibility to modify
space requirements or award criteria to take advantage of available
market opportunities, even those that they believe could be extremely
good deals. GSA realty specialists are concerned that any change
could be construed as unfair or detrimental to or by some potential
landlords and could result in bid protests. For example, if GSA
receives two comparable offers and one building has a fitness center
but the other does not, GSA cannot consider this additional amenity
in selecting the winning bid, regardless of its desirability or
value, unless one of the award criteria was having a fitness center.
Similarly, GSA realty specialists have limited flexibility and have
been reluctant to modify standard lease clauses and provisions, even
those within GSA's discretion.
GSA's detailed space and geographic location requirements as well as
the criteria for awarding a prospective lease are specified in a
document called the solicitation for offers. GSA formally advertises
these office space leasing requirements and provides the solicitation
to commercial landlords or their broker representatives who may be
interested in competing for federal leases. Because the solicitation
specifies all requirements so that potential landlords have full
knowledge of what they are bidding on, it is complex and lengthy.
GSA's standard lease solicitation contains about 40 pages. It
contains at least 12 pages of general information about GSA's leasing
process and space needs, such as a description of the amount, type,
and location of needed space; the award factors; and how to prepare
and submit offers. This is followed by 26 pages of technical
specifications covering various matters, such as general
architectural standards and interior finishes; mechanical,
electrical, and plumbing systems; services, utilities, and
maintenance; and safety and environmental requirements.
Some of the specifications in the solicitation are basic and
straightforward, such as requiring walls around elevator shafts and
rest rooms or that work completed in connection with the lease be
done by skilled workers and mechanics. Others are more technical and
esoteric and highly prescriptive. For example, GSA's standard lease
solicitation
-- specifies the carpet pile yarn content, carpet pile
construction, pile weight, secondary back density, carpet
construction, and static buildup for carpet tiles installed in
the space;
-- defines acceptable noise levels in terms of a minimum ceiling
noise reduction coefficient and a minimum ceiling and partition
sound transmission class and includes more prescriptive noise
specifications when such requirements are of particular concern
to the customer agency;
-- contains seven pages of handicapped access standards; and
-- establishes a janitorial service schedule that details what must
be done daily, 3 times a week, weekly, every 2 weeks, monthly,
every 2 months, 3 times a year, twice a year, annually, every 2
years, and every 5 years.
This rigid, highly prescriptive approach carries over into GSA's
standard lease. GSA's standard lease incorporates, in full, the 40
pages of general information and technical specifications that were
included in the solicitation, plus varying numbers of additional
pages of lease provisions and specific requirements-- such as
performance, ethics, and labor standards as well as any other
requirements that include detailed specifications on how GSA wants
the landlord to customize the space--that are unique to the subject
lease. As with the solicitation, trying to cover all possible
contingencies results in a complex and lengthy lease document. For
example, the 34 leases we sampled averaged 90 pages. According to
GSA's Office of General Counsel, much of this length results from
lease clauses GSA has adopted administratively that are not
specifically required by law.
The standardized lease that GSA used for many of the 34 leases we
sampled contained well over 100 lease clauses that were designed to
comprehensively protect the government's interests. Some
clauses--such as those giving the government authority, without
penalty, to change tenants--transfer risk to the lessor. GSA revised
its standardized lease in August 1992 and eliminated or shortened
some lease clauses. However, it did not (1) determine whether all
standard lease clauses are needed, (2) identify how often particular
clauses are actually being used, or (3) target lease clauses that may
cost more than they save or otherwise need to be reexamined or
reconsidered.
Besides a rigorous and rigid leasing process, GSA relies on its
realty staff to identify available space for lease, solicit offers,
and award leases. However, GSA may not have enough leasing activity
in particular markets for its realty staff to remain sufficiently
knowledgeable of current market conditions and trends, space
availability, or good leasing values. In San Francisco, for example,
GSA awarded only three leases in fiscal year 1992 and four in fiscal
year 1993. Also, as discussed later in this chapter, GSA lacks a
complete and useful automated database on current commercial realty
activities and rates. Without such data, GSA cannot effectively
monitor market trends or evaluate the offers it receives from
prospective landlords.
GSA'S LEASING PROCESS IS TIME
CONSUMING AND MAY BE CAUSING IT
TO PAY INFLATED RATES
---------------------------------------------------------- Chapter 2:2
On 34 leases we sampled that were awarded in San Francisco, New York,
and Dallas between 1988 and 1992, GSA took an average of about 20
months to deliver office space to the requesting federal agency. As
table 2.1 shows, the amount of time GSA took to deliver space on the
sampled leases, from the date of the agency's request for space until
the date the space was available for agency occupancy, ranged from a
low of 4.8 months to a high of almost 66 months.
Table 2.1
Amount of Time GSA Took to Deliver Space
on 34 Sampled Leases
Elapsed time
City Lease number (months)
------------------------------ ------------------ ------------------
Dallas LTX13222 10.0
LTX13699 12.1
LTX13448 12.1
LTX13550 12.6
LTX13207 13.2
LTX13461 13.4
LTX13765 16.8
LTX13708 17.9
LTX13271 26.6
New York LNY22639 4.8
LNY22495 10.1
LNY22408 13.2
LNY22684 16.2
LNY22636 16.6
LNY22542 20.2
LNY22522 22.9
LNY22493 24.3
LNY22414 26.4
LNY22645 26.7
LNY22590 27.6
LNY22464 65.8
San Francisco LCA91070 10.9
LCA89240 12.4
LCA90062 14.3
LCA90017 14.8
LCA90473 16.5
LCA68302 17.1
LCA91267 17.1
LCA89959 20.6
LCA89509 21.6
LCA86796 22.9
LCA08058 31.0
LCA90430 39.6
LCA68322 41.9
Overall average 20.0
----------------------------------------------------------------------
Source: GSA data.
We did not make or obtain our own independent market real estate
appraisals for the 34 GSA leases we sampled. However, GSA had made
or obtained a market real estate appraisal for 24 of these leases
before lease award.\1 GSA's own price determinations acknowledged
that the rates it paid for at least 10 of these 24 leases exceeded
their fair market values as established by these appraisals--2 leases
were between 10 and 16 percent higher, 3 of them were between 5 and
10 percent higher, and the 5 others were higher by 5 percent or less.
GSA's stated reasons for awarding these leases at a higher rate were
that there were no alternative competing offers and an urgent need to
get the federal tenant agency into new space.
Using GSA's appraisals for these 24 leases, we attempted to compare
the lease rates GSA paid with those paid by the private sector.
However, we were not able to make conclusive comparisons because the
appraisals did not contain enough information for us to determine
whether (1) the private sector leases that GSA's appraisers used were
valid comparables or (2) the adjustments that GSA's appraisers made
to account for differences in the terms and conditions of the leases
and the quality, exact location, and amenities of the space involved
were appropriate and reasonable. In its October 19, 1994, written
comments on a draft of this report, GSA said it did not understand
why we could not use its appraisals to make conclusive comparisons.
We could not make conclusive comparisons because GSA's appraisals for
these leases did not contain enough data and supporting documentation
to permit us to independently verify their accuracy and validity.
The 82 commercial landlords and brokers we contacted that GSA had
solicited for offers on the 34 sampled leases generally were highly
critical of GSA's leasing process, and many of them said that GSA
pays too much for leased space. They characterized GSA's leasing
process and leases as overly prescriptive and bureaucratic, confusing
and time consuming, contrary to commercial real estate practices, and
transferring excessive risks to the lessor. Consequently, these
landlords and brokers said that they are reluctant to compete for
GSA's leases. Many of those who do compete said that they increase
their rental rates in order to compensate for the uncertainties,
added risks, and administrative red tape they perceive are implicit
in doing business with GSA.
Over one-half (45) of the 82 commercial landlords and brokers we
contacted specifically said that GSA pays inflated rental rates on
its leases. Basically, they said that GSA's leasing approach and
process cause it to pay more than necessary for leased space. They
generally attributed this to GSA's rigid, bureaucratic, and
time-consuming leasing process and resulting standardized leases,
which they view as cumbersome, confusing, and lengthy. Table 2.2
shows the specific reasons these 45 landlords and brokers cited for
this belief and the number of landlords or brokers that cited each
reason. Many of them cited more than one reason.
Table 2.2
Reasons Brokers and Landlords Cited for
GSA Paying Inflated Rates
Reasons Number
------------------------------------------------------------ --------
They find process for estimating the cost of customizing 27
space confusing
They object to standard federal lease 24
They find solicitations confusing and lengthy 16
They object to paperwork and bureaucracy 24
----------------------------------------------------------------------
Source: GAO interviews.
The landlords and brokers we contacted said that they typically
increase their proposed rental rates to GSA to compensate for
perceived added risks because they do not understand the cost
implications of many of GSA's standard lease clauses, technical
specifications, or space build-out requirements. Specifically, 27
brokers and landlords said that GSA pays too much for leased space
because of the way the agency approaches space customizing (buildout)
to meet the federal tenant agency's specific needs. Similarly, 24
landlords and brokers said that GSA pays more because it insists on
using a standard lease and 16 said that GSA pays too much because its
solicitations are confusing. Finally, 24 of them specifically said
that GSA pays more because many landlords and brokers increase their
rates to compensate for the time and effort involved in working their
way through federal paperwork requirements and bureaucracy. Those
landlords and brokers who said that GSA was getting reasonable rates
attributed this to a soft commercial real estate market. However,
they too cited several characteristics of GSA's leasing process and
leases that they said tend to increase federal lease rates.
The commercial landlords and brokers we contacted also said that
GSA's procedures for customizing or building out leased space to meet
federal tenant agency requirements--referred to as the leasehold
improvement process--add to the length and complexity of GSA's
standard lease and also transfer risk to the owner. GSA expects
prospective landlords to estimate these costs and include them in
their bids but does not provide architectural plans. Since
customizing the space to meet the federal agency's specific
requirements can be expensive, landlords are faced with considerable
financial uncertainty. This uncertainty is heightened by the fact
that some special federal space requirements, such as bullet-proof
glass for the Secret Service's offices or secure weapons storage
facilities for law enforcement agencies, are uncommon in the private
sector. Thus, landlords generally are unfamiliar with the costs of
such special federal requirements. To compensate for the
uncertainties and risks that are inherent in building out the space
to GSA's specifications, many of the commercial landlords and brokers
we contacted said that they increase their proposed rental rates to
GSA.
--------------------
\1 GSA did not make or obtain a real estate market appraisal for the
nine Dallas leases, which all involved less than 20,000 square feet,
and one of the New York leases, which was for 3,724 square feet.
GSA'S APPROACH SEEMS TO
DISCOURAGE COMPETITION
---------------------------------------------------------- Chapter 2:3
Full and open competition for GSA's leases is designed to ensure that
all responsible sources are allowed to compete. All competitors must
be provided the same information and judged on the same criteria.
Competition also serves as the government's primary price control
mechanism. However, GSA had relatively little competition for the 34
leases we sampled, and over 90 percent of the 82 commercial landlords
and brokers we contacted said that GSA's highly prescriptive and
process-oriented approach discourages competition for government
leases.
Our review of 34 GSA leases in San Francisco, New York, and Dallas
showed that many brokers and landlords who were invited to compete
for them did not respond. On these 34 leases, GSA issued a total of
261 solicitations to 167 brokers or owners but received only 67
responsive offers. As table 2.3 shows, GSA had only one or two
responsive offers to consider for 71 percent of these leases.
Table 2.3
Limited Competition for 34 Leases GAO
Sampled
Number of responsive offers Number Percent
------------------------------ ------------------ ------------------
1 17 50
2 7 21
3 4 12
4 2 6
5 3 9
6 1 3
----------------------------------------------------------------------
Source: GAO analysis.
To illustrate limited private sector response to GSA's leases, GSA
issued a lease solicitation in May 1988 for about 40,000 square feet
of space in New York to 11 prospective brokers or building
representatives, some of whom represented more than 1 building, but
received only 2 offers. GSA said this was because the real estate
market was strong at that time, and many landlords simply were not
interested in doing business with the government. Of the two
landlords who submitted an initial offer, one later withdrew from the
competition because he objected to some of the requirements in GSA's
lease clauses. GSA eventually awarded this lease to the sole
remaining landlord at a rate that was 16 percent above its own real
estate market appraisal.
As mentioned earlier, we contacted 82 of the 167 landlords or brokers
that GSA solicited for offers on the 34 leases we sampled. Almost
all of them (94 percent) said that GSA's process discourages
competition. While each landlord or broker we interviewed had a
slightly different story to tell about why GSA's leases attract
limited competitors, many of them cited dissatisfaction with some
aspects of GSA's leasing process and acknowledged that this affects
the nature and degree of competition as well as the lease rates that
GSA pays. Table 2.4 shows the reasons landlords and brokers cited
for limited competition for GSA's leases.
Table 2.4
Reasons Landlords and Brokers Cited for
Limited Competition
Reason Percent
------------------------------------------------------------ --------
Object to the bureaucratic nature of GSA's process 68
Find the solicitation confusing and too lengthy 43
Object to using the standard federal lease 43
----------------------------------------------------------------------
Source: GAO interviews.
Of the landlords and brokers we contacted, 68 percent said they are
reluctant to compete for federal leases because of the bureaucratic
and time-consuming nature of GSA's process. They said that GSA's
numerous internal reviews, coupled with the unfamiliar and
time-consuming paperwork requirements, make leasing to the federal
government a very frustrating experience. Also, they said that GSA
is reluctant to modify or eliminate lease clauses to recognize their
concerns. One broker commented, "Everyone's involved in the process,
but no one can make a decision."
Forty-three percent of the brokers and landlords we contacted said
that GSA's lease solicitation discourages competition. They said
that GSA's lease solicitation can be very daunting because of its
size and complexity. For example, one landlord commented that as
soon as he signed the lease he was probably out of compliance because
of the large number of GSA requirements involved. Also, these
landlords and brokers said they find GSA's lease solicitation to be
confusing because many of its requirements and specifications are
highly technical, esoteric, and differ from commercial market norms.
For example, one broker said that parts of GSA's solicitation are so
technical they are beyond the average broker's comprehension.
Similarly, 43 percent of the landlords and brokers we contacted
objected to GSA's standard lease. They find it unresponsive to their
concerns and difficult to understand and comply with. Many of them
said that GSA's standard lease clauses are cumbersome and confusing
because such clauses generally do not exist in private sector lease
contracts. Also, they pointed out that the effect of some GSA
clauses, such as those giving the government the option (without
penalty) to terminate the lease unilaterally after giving the owner
notice or to change tenants, is to transfer risk to the lessor.
Another clause frequently mentioned as problematic was the right to
substitute other federal tenants. Landlords are concerned that GSA
might transfer an agency into their building that would not be
consistent with the building's character, such as a law enforcement
agency in a downtown office building, and that they would have
little, if any, say in this.
Since landlords can maximize their profits by securing tenants
quickly, they said they prefer to rent to businesses that typically
move into space and begin paying rent much quicker than GSA. Some of
them said they simply refuse to do business with GSA. A few brokers
said that they would compete for a GSA lease only if they had no
other prospective tenant. Other brokers said that landlords may rent
to commercial tenants during the lengthy period GSA's leasing
decision is pending, and this also can reduce GSA's options in
choosing prospective buildings.
Landlords' and brokers' general reluctance to do business with GSA
could worsen. Brokers we contacted noted that, during this soft real
estate market when buildings are partially vacant and there are few
other potential tenants, landlords generally are willing to rent to
GSA because they are desperate for tenants. However, they said that
GSA will be at a greater disadvantage when the real estate market
improves.
PRIVATE INDUSTRY LEASING PRACTICES
ARE FOCUSED ON RESULTS INSTEAD OF
PROCESS
============================================================ Chapter 3
Although there is no standard private industry leasing model, and
practices differ from firm to firm, the practices of the 12 major
private sector firms with large portfolios of leased office space
that we contacted share several common characteristics that seem to
help them take advantage of available market opportunities and lease
space quickly. This chapter describes these firms' leasing approach
and practices on the basis of interviews with their realty managers,
who willingly provided us with information about the firms' leasing
activities.
Basically, these 12 private firms are results oriented, take a
flexible and practical approach to leasing, and treat each lease as a
unique case. Their leasing processes and practices generally are
simpler, less time consuming, and more cost efficient than the
General Services Administration's (GSA). In contrast to GSA, for
example, they do not (1) establish prescriptive, detailed technical
specifications or (2) require extensive, multilevel reviews of
proposed lease contracts. These firms rely on the expertise of their
in-house realty staffs or commercial brokers to lease space and are
willing to modify their requirements and negotiate trade-offs with
landlords to quickly conclude a deal. For these and other related
reasons, the realty managers we contacted said that they believe
their firms and most other private sector firms generally get better
overall leasing values than GSA. As discussed in chapter 2, this
belief is shared by many of the landlords and brokers GSA solicited
on 34 sampled leases.
PRIVATE SECTOR RELIES ON MARKET
EXPERTISE AND FLEXIBILITY TO
LEASE SPACE
---------------------------------------------------------- Chapter 3:1
The 12 private firms we contacted focus on results rather than on the
process when leasing space. Because leases have a direct impact on
profitability and productivity, their major concern, according to the
realty managers we contacted, is to quickly obtain space that meets
their operational needs and at a competitive rate. Most of these
realty managers said that their firms' total leasing process--from
identifying the space need to occupying leased space --typically
takes 6 months or less.
Rather than establishing mandatory guidelines or prescribing
step-by-step procedures, these private firms typically rely on the
expertise of their leasing staffs or commercial brokers and
flexibility to lease needed space. They do not place requirements on
their realty managers that may impinge on the firm's ability to
achieve results. For example, one realty manager explained his
firm's rationale for avoiding excessive controls over the leasing
process. This realty manager said that rigid procedures only
increase paperwork and discourage staff from taking initiative and
responsibility in meeting space needs. In addition, he said that if
leasing procedures are excessively prescriptive, his staff may become
overly concerned with following procedures rather than pursuing the
real objective of quickly obtaining space and at a competitive rate.
According to the private industry realty managers and commercial
brokers we contacted, getting a good value in real estate often
heavily depends on being postured to seize market opportunities as
they appear because good lease opportunities can and do come on and
go off the market quickly. Although the realty managers we contacted
said that some private firms continue to rely on their in-house
realty staffs to identify buildings and negotiate lease terms with
prospective landlords, they said that using commercial brokers has
two advantages, which are (1) gaining access to the brokers' market
knowledge and information networks and (2) reducing staffing costs.
According to these realty managers, most brokers develop and maintain
extensive databases on recent lease transactions. As a result, these
managers said that most brokers have complete, reliable, and
up-to-date information regarding recent actual lease rates, terms,
and rental concessions in various geographic areas. Such databases
give brokers easy access to the kind of information needed to assess
overall market trends, plan negotiation strategies, and evaluate
proposed lease terms. These realty managers said that such
information allows brokers to negotiate more aggressively for lower
lease rates and rental concessions.
Also, these realty managers said that private sector firms have found
they can reduce their costs substantially by using commercial brokers
to lease space for them in lieu of having their own large, full-time
realty staffs. In the commercial real estate industry, brokers
generally earn their commissions from landlords for locating tenants
and negotiating leases. Although brokers' fees are not paid directly
by private sector firms, the realty managers we contacted said that
brokers would still secure good deals for them to ensure their future
business. Some firms we contacted have given exclusive leasing
rights to specific brokers so that they will become more familiar
with the firms' operational needs for space.
PRIVATE SECTOR PRACTICES ARE
SIMPLER, MORE FLEXIBLE, AND
IMPOSE LESS RISKS ON LANDLORDS
---------------------------------------------------------- Chapter 3:2
The leasing practices of the 12 private firms we contacted are
simpler, more straightforward, and less rigid than GSA's because they
generally do not establish mandatory guidelines or prescribe
step-by-step procedures for leasing space. Similarly, these firms do
not require their realty staffs to develop detailed technical
specifications before soliciting offers from potential landlords.
Instead, their realty staffs typically meet with commercial brokers
to discuss, in general terms, the amount and type of space needed.
Their strategy is to be flexible and practical, determine what space
is available that could meet their needs, and adjust their space
requirements, if necessary, to get the best available leasing value.
This nonprescriptive approach is more sensitive to landlords'
concerns since it does not impose as many tenant requirements or
risks on them.
According to the realty managers we contacted, once commercial
brokers understand the firm's space needs and constraints, including
location and budgetary considerations, they begin to identify
potential buildings that could meet these needs. These managers said
their brokers are very knowledgeable about the commercial real estate
market and generally identify potential buildings quickly. Brokers
provide firms with a technical review of each building that
potentially could meet their needs, including studies of building
infrastructure and building systems as well as space efficiencies and
workflow. When initial offers are received from potential landlords,
brokers prepare a financial evaluation of each of the offers,
identifying the ones that offer the best overall value. After the
firm selects the building it wants, brokers try to negotiate for a
better lease rate or for additional concessions. If the broker
cannot successfully conclude negotiations for this building, he/she
negotiates for the next most favorable building.
The brokers we contacted emphasized that landlords do not want to
waste their time and resources pursuing a potential tenant unless
they have a realistic chance of getting the lease. Thus, brokers
generally zero in on a few buildings after their initial survey of
the space available in the market. Typically, one building emerges
as offering the best overall deal, and the firm lets the landlord or
broker know that this building is under serious consideration.
Typically, these private firms let the landlord or their broker know
what is needed to make the deal acceptable and whether the landlord
or broker has a good chance of getting the lease. Some of these
firms sign a letter of intent that, although not legally binding,
signifies a serious commitment to negotiate a deal. Thus, landlords
or their brokers are encouraged to spend the time necessary to put
together a deal because they realize they have a good chance of
getting the lease. Rather than risk losing an interested client, the
realty managers of the 12 firms we contacted believe that landlords
tend to be more willing to improve the lease package by offering
additional concessions.
These 12 private firms also recognize and are sensitive to landlords'
legitimate concerns about financial and other risks they incur when
leasing space to tenants. The realty managers we contacted said that
landlords are as eager to find a responsible tenant as tenants are to
find a cooperative landlord. These managers also believe that the
pressures of a competitive marketplace keep landlords from making
unreasonable demands of their tenants. These managers said that
sensitivity to landlord's needs is part of being a good tenant and
that it helps set a cooperative tone for future dealings.
Rather than being dogmatic about their needs and leasing procedures,
these private firms generally are willing to modify their
requirements if this approach will result in a lower lease rate, a
speedier transaction, or promote a better business relationship with
the landlord. For example, a firm that prefers indoor parking will
accept a building that can only provide outdoor parking if indoor
parking is scarce or commands a high price in the marketplace.
Similarly, an unexpected amenity, such as free parking, may be the
factor that causes a firm to make a deal for a particular building.
The 12 private firms we contacted said they also minimize the number
and nature of internal reviews of proposed leases and that their
reviews of proposed leases normally take 2 weeks or less. When these
firms and their landlords reach a tentative agreement, the lease is
reviewed at higher levels in the firm to determine its acceptability
from a legal and business perspective. The legal department reviews
the lease to determine if the landlord is shifting an unreasonable
amount of risk to the firm and may add or modify lease clauses to
protect the firm's interests. Similarly, a high ranking firm
official typically reviews the proposed lease from a business
perspective to assess the impact it is likely to have on the firm's
ability to achieve its business objectives. In its business review,
the firm looks at items such as the lease rate, the building's
location, the length of the lease, and whether the space meets the
firm's operational needs.
PRIVATE SECTOR LEASES CONFORM
TO PREVAILING INDUSTRY
PRACTICES AND ARE
STRAIGHTFORWARD AND
AGGRESSIVELY NEGOTIATED
---------------------------------------------------------- Chapter 3:3
The leasing requirements and lease agreements of the 12 private
sector firms we contacted usually are stated in relatively general
terms. These firms typically use the landlords' lease, which
generally conforms to customary and prevailing commercial real estate
practices and terminology. Although these firms have large
inventories of leased space, they seldom impose their lease contracts
on the landlords. Their realty managers acknowledged that private
firms would be better protected if they were to use their own lease.
However, they said that imposing their lease on landlords would
increase the time needed to close the deal, increase the lease rate,
and discourage some landlords from leasing to them. In effect, these
private firms are willing to trade an increase in risk to them for
timeliness, lower rates, and increased competition.
These realty managers said that using the landlord's lease is a
common and accepted practice in the private sector. They said that
landlords prefer to use their own lease because it generally is
standardized for all tenants in the building, and this gives
landlords a greater sense of control. These realty managers said
that private firms generally accept the landlord's basic lease
provided they can modify certain clauses as necessary to protect
their interests. Although the wording of leases differs from
landlord to landlord, these managers said that commercial leases
generally cover standard items and requirements.
Many of these realty managers said it is impossible to write a lease
that can anticipate and prevent all problems. They said that serious
disagreements with landlords seldom occur and most minor problems can
be resolved informally through discussions. If a serious
disagreement does occur, the wording of the lease will not prevent
the tenant or landlord from seeking legal remedies. As a result,
many of the realty managers we contacted believe a lease that is too
prescriptive and overly protective of the tenant will only raise
landlords' concern and slow down lease negotiation. Thus, these
managers said they resolve problems during lease administration
rather than trying to anticipate and preclude them in the lease
contract.
Typically, the lease contracts used by the 12 private firms we
contacted are relatively short--less than 40 pages. Many of their
terms and requirements are straightforward and not specified in great
detail. For example, the lease may state in general that
-- the landlord is responsible for providing repair and maintenance
in a timely manner unless the tenant damages the property
intentionally or through negligence,
-- the tenant may not sublet the space without the landlords'
consent, and
-- that the landlord is responsible for meeting the requirements of
the Americans with Disabilities Act.
To help simplify the lease negotiation process, save time, and hold
down leasing costs, the 12 private firms we contacted said they
typically follow the common commercial real estate market practice of
negotiating a tenant improvement allowance with the landlord.
According to these firms, the use of such allowances typically
enables them to customize or build out the space and have it ready
for occupancy in 16 weeks or less. Unlike GSA, these firms do not
ask landlords to assume the risks of customizing the space according
to their operational needs. They said that without investing
considerable time and effort in having their own engineers or
independent contractors review the tenant's proposed detailed
floorplan and specifications, landlords do not know how much it will
cost them to customize the space for the tenant. Space build-out
allowances limit landlords' total cost exposure. For example, an
allowance of $25 per square foot for a 10,000 square foot lease means
that as part of the rental rate the tenant is entitled to space
customizing improvements costing up to $250,000. Regardless of the
ultimate costs of customizing the space, landlords are committed to
pay only the first $250,000.
The realty managers of these 12 private sector firms said they try to
stay within the allowance limit. If these firms use less than the
amount of the build-out allowance, however, landlords typically
credit the balance toward their rent. Thus, many of them said they
will accept existing build-out or modify their requirements to lower
their leasing costs.
GSA HAS INITIATED SOME LEASING
IMPROVEMENTS AND IS EXPLORING
OTHERS
============================================================ Chapter 4
The General Services Administration (GSA) has acknowledged that its
leasing process is too time consuming, costly, and cumbersome to
permit it to compete efficiently and effectively in today's dynamic
commercial real estate market. In the 1990s, GSA has initiated
several actions aimed at streamlining its leasing process and
improving its leasing performance. In response to the National
Performance Review (NPR) and a recent initiative by the President,
GSA is exploring other changes in existing leasing policies,
procedures, and practices to improve its overall leasing efficiency
and effectiveness. Also, recent legislation may encourage and
facilitate improvements in GSA's leasing process and performance.
TIMELINESS HAS BEEN A
LONG-STANDING PROBLEM
---------------------------------------------------------- Chapter 4:1
GSA's inability to lease and deliver space to federal agencies in a
timely manner is not new. It is well documented in a series of GSA
studies and reviews dating back to the late 1970s when criticisms of
its performance first began to build. As early as 1978, agencies
were complaining about GSA's leasing monopoly, the timeliness of its
leasing process, and inconsistencies among GSA regions in responding
to their requests for space. Over the years, agencies' complaints
about GSA's time-consuming process and preoccupation with competition
and procedural requirements at the expense of service delivery have
become routine.
GSA's own studies of its leasing activities have expressed concerns
about overregulation, confusion in policy and direction, the lack of
adequate performance standards, hard data on workload and performance
measurement, and staffing models indicating the proper level of
resources GSA should devote to this function. GSA's latest
comprehensive study of its space delivery process in 1988 reached the
following conclusions:
"The space delivery process is unfocused, inefficient and
getting worse. The process is too slow, too confusing, and a
source of frustration to both our customers and the realty
specialists who are primarily responsible for the product . .
.
Perhaps the most disturbing implication of all is the pervasive
tone of defeat among so many of the participants in the space
delivery process. There is a widespread sense that no one can
change the process or make it work faster. We seem to have lost
our will to succeed. The truth is that we can and unless we
make substantial improvement in performance soon our customers
are going to mount a successful drive to obtain leasing
authority."
In 1988, GSA noted that it took an average of 307 days to deliver
requested space to federal agencies, compared to an average of 239
days in 1977. Although GSA's study emphasized that the exact causes
for this increase could not be empirically determined, it noted that
space requirements have become more sophisticated, the process more
complicated and technical, and regulation has increased. This study
made several recommendations for change that were aimed at improving
GSA's overall leasing performance. Most of the recommended changes
were within GSA's direct control.
GSA ACTIONS TO STREAMLINE ITS
LEASING PROCESS AND IMPROVE ITS
LEASING PERFORMANCE
---------------------------------------------------------- Chapter 4:2
In response to the 1988 internal study, GSA undertook three
initiatives aimed at improving the efficiency and effectiveness of
its leasing activities--streamlining procedures for certain small
leases, automating its database on commercial real estate market
activities, and experimenting with the use of commercial brokers.
Also, as indicated earlier, GSA eliminated or shortened some standard
lease clauses in August 1992 but did not systematically reassess the
basis for and continuing need for each standard lease clause. More
recently, GSA has reduced some procedural controls over leasing that
are within its administrative authority and changed its method of
measuring space to conform with typical private sector practice.
In August 1991, GSA established streamlined procedures for leases (1)
under 10,000 square feet or (2) with a total cost of less than
$25,000 or a term of less than 6 months. Since leases under 10,000
square feet comprise over 70 percent of GSA's inventory, this
expedited process was designed to be a faster, less complicated way
for GSA to handle the majority of its leasing transactions. GSA
intended to make this expedited process less formal, relying more on
the expertise of realty specialists than on detailed specifications
and contract requirements. However, GSA found that this expedited
process is suitable only for existing space that can meet agency
needs with minimal alterations. Therefore, it may be applicable only
to a few small leases. Social Security offices tend to be under
10,000 square feet, for example, but they typically require a number
of alterations to accommodate a high level of public contact and the
needs of an elderly clientele.
GSA monitored the use of this expedited leasing process for the
13-month period ended September 30, 1992, and found that it was used
to award 280 leases in an average of about 57 days. GSA believes
that the expedited process has been successful in reducing the amount
of time it takes to award a lease. However, GSA has not determined
this new expedited process' overall effectiveness in reducing the
total amount of time it takes to deliver occupiable space to the
requesting federal agency. Also, GSA did not determine how often it
could have used this expedited leasing process during that 13-month
period.
It should be noted that GSA no longer tracks or measures its overall
leasing performance in terms of the elapsed times between agencies'
requests for space and agencies' receipt of GSA-delivered space.
Thus, GSA lacks complete data on its actual overall leasing
performance, and it is not possible to compare its leasing
performance today with the past. As part of its agencywide efforts
under Total Quality Management to improve the responsiveness and
quality of its mission-support services to federal agency customers,
GSA began emphasizing a goal of delivering space when agencies
actually need it and tracking its performance in meeting these goals.
Second, GSA has begun developing a realty database using market
information gathered by GSA's appraisers. Although GSA's appraisers
gather information similar to that gathered by commercial brokers,
the data has been stored only in hard copy, making it difficult and
awkward for GSA's realty specialists to use effectively. Thus,
realty specialists typically get space availability and lease cost
information by doing a market survey, which involves physically
visiting the area and buildings where space is sought and talking
with building representatives to get the needed information. In
1992, GSA instructed its regional office staff to begin automating
the data so that its realty specialists would have easy access to
local market information, thereby improving their knowledge of market
conditions. As of May 1994, GSA had automated some data in 4 of its
11 regions. However, GSA has put further automation efforts on hold
until it finalizes its plans for incorporating NPR's recommended
principles into its leasing program.
Third, GSA has experimented with contracting for commercial brokers'
services. GSA's Philadelphia region has contracted with a nationwide
brokerage company that specializes in representing tenants to provide
space planning, appraisals, inspections, and real estate consulting
services (such as market surveys, financial analysis, and technical
support). Under this contract, the company was required to conform
to all federal leasing rules and procedures. A key anticipated
benefit was to use the private company to supplement GSA's in-house
staff when heavy workloads caused backlogs and prevented GSA from
responding to agency needs in a timely fashion.
According to a responsible GSA official, the region has used the
private company primarily for appraisals and does not feel that the
contract significantly reduced its leasing workload. GSA is leery of
using the company to negotiate rates because of concerns about the
potential for conflicts of interest. For example, GSA said that it
would be highly vulnerable to a bid protest if the company awarded a
GSA lease to an acquaintance and could not fully demonstrate that the
deal was fair to all competing landlords. Also, GSA officials said
that they were not satisfied with the results of earlier contracts
the agency awarded to commercial brokers in its Kansas City region in
1990 and its Fort Worth region in 1987. GSA felt that these brokers
did not adequately understand federal procurement requirements.
These three GSA initiatives are steps in the right direction.
However, they have not yet resolved federal agencies' or the
commercial real estate community's frustrations with GSA's leasing
process. In a July 1993 testimony before the Subcommittee on
Oversight of Government Management, Senate Committee on Governmental
Affairs, the International Building Owners and Managers Association
noted that commercial landlords and brokers remain frustrated by
GSA's complicated and convoluted real estate process, which
discourages competition for federal leases.
In this regard, GSA recently acknowledged that its adherence to the
overall federal procurement process has been a major obstacle in
making significant improvements. In April 1993, GSA prepared a plan
for "reinventing" GSA in anticipation of NPR's conclusions and
recommendations. This plan recognizes the need to reform federal
procurement, noting that
"Current statutory focus on process as a means to ensure ethical
standards, fairness, economy, and efficiency has, in part,
resulted in a system which is highly regulated, customer
insensitive, slow to innovate, and slower to deliver."
The plan concludes
" . . . concepts of full and open competition, level playing
field, maximizing sources, and removing barriers to competition
reflect the system's dominant concern with fairness to potential
offerors. Although fairness is certainly an important value in
public management, it may become an impediment to effective
management when it places contractor's interests ahead of the
purchaser and the taxpayer."
In its October 19, 1994, letter providing written comments on a draft
of this report (See app. I.), GSA identified two additional actions
it has taken to improve its leasing process. These actions are (1)
changing its method of measuring space to conform with typical
private sector practice and (2) reducing some procedural controls
over leasing that are within its existing administrative authority.
Prior to June 1, 1994, GSA acquired space using the "net usable"
measurement system, as opposed to the "rentable" measurement system
typically used by the private sector. Effective June 1, 1994, GSA
began to acquire space using the local "rentable" measurement system.
GSA pointed out that the rentable measurement system produces a lower
square-foot rental rate than the net usable measurement system.
According to GSA, the GSA vs. private sector leasing value
comparisons made by commercial landlords and brokers and private
industry realty managers, which were discussed in chapters 2 and 3
respectively, may not have taken into account the different methods
of measurement previously used by GSA and the private sector. Also,
GSA said it did not believe that the commercial landlords and brokers
we contacted took into account that GSA for over 20 years has been a
leader in the implementation of laws and regulations and agency
initiatives that require accessibility to the handicapped and
adherence to strict fire and life safety standards in leased space.
GSA acknowledged that these requirements often increase its leasing
costs but said that they provide a value and quality of space that is
expected and appreciated by its customer agencies.
A few of the commercial landlords and brokers and private industry
realty managers we contacted specifically mentioned GSA's method of
measuring space and its strict building accessibility and fire and
life safety standards as factors that contribute to GSA paying higher
lease rates. Typically, however, the landlords, brokers, and realty
managers we contacted included individual factors such as these as
part of their overall criticism of GSA's lengthy and confusing lease
solicitations and standard lease clauses. Accordingly, we summarized
their overall criticisms in the draft report that GSA commented on
and did not specifically mention space measurement differences,
fire/life safety standards, or other individual contributing factors.
Additionally, GSA's October 19, 1994, letter pointed out that, in the
1990s, it has reduced, not increased, procedural controls that are
within its authority. For example, GSA said that it has (1)
increased the dollar threshold for leases that require GSA Inspector
General review from $200,000 annual rent to $1 million annual rent in
its National Capital and San Francisco regions and to $400,000 annual
rent in all other regions and (2) eliminated the requirement for
Office of Acquisition Policy, Office of General Counsel, and regional
acquisition management staff preaward reviews of proposed leases.
However, GSA emphasized that there have been no reductions in
procedural controls that are mandated outside of the agency and that
it has seen no movement toward such reductions. In chapters 2 and 5
of this report, we acknowledge that such externally imposed
procedural controls also exist and need to be reexamined. In
addition, we recognize in chapter 2 that NPR was especially critical
of excessive federal procurement system rules, regulations, and
procedural controls. Later in this chapter, we discuss recently
enacted legislation that may encourage and facilitate reductions in
procedural controls and improvements in GSA's leasing process.
GSA'S INITIATIVES IN RESPONSE
TO NPR
---------------------------------------------------------- Chapter 4:3
In response to NPR, GSA committed itself to and developed plans for
ending its long-standing service monopolies, separating its
policymaking and oversight responsibilities from service delivery,
revising its organization to improve how it interfaces with customer
agencies, and using private sector practices as benchmarks to
reengineer the way it does business.
Also in response to NPR, GSA proposed total cost savings of $693
million in the leasing area in its March 1994 report on the results
of its "Time Out and Review" of major approved public building new
construction, modernization, and leasing projects. Of 64 leasing
projects that GSA reexamined under its time out and review
initiative, it proposed savings reductions on 26 of them--2 had
savings of $103 million from lease cancellation, 19 had savings of
$590 million from leased square footage reductions, and 5 had savings
that are to be determined through renegotiation. Also, GSA
identified 19 major space requirements now satisfied by leased space
where it believes that conversion to government ownership should be
considered because it potentially could save hundreds of millions of
additional federal dollars.
GSA has committed to "reinventing" itself so that it can provide
better services to its client agencies and, ultimately, the taxpayer.
Leasing is one area where GSA is exploring needed changes and
alternative ways of doing business to more fully satisfy federal
agencies' mission-support needs. Two of its regional
offices--Denver, CO and Auburn, WA--are involved in this effort.
Within the limitations of the Competition in Contracting Act (CICA)
and other statutory provisions, GSA has empowered these two regional
offices to identify and experiment with various leasing innovations.
GSA's objective is to collect enough data to document and validate
the success or failure of each effort, identify specific factors that
affected its success or failure, and determine which innovations
worked.
When these reinvention laboratory efforts began in September 1993,
responsible GSA officials said that each new and existing lease would
be considered as a potential candidate for testing specific changes
in its traditional leasing process and standardized lease
solicitations and agreements. Aspects of GSA's leasing process that
it has identified for testing include (1) waiving certain General
Services Acquisition Regulation provisions, (2) reducing required
documentation, (3) simplifying transaction forms, (4) working closer
with federal agencies to develop their space requirements, and (5)
delegating lease acquisition authority to selected federal agencies.
Also, GSA plans to test private sector practices for leasing space.
GSA regional participants said that it will take at least 2 years to
accumulate enough evidence for GSA to draw any meaningful conclusions
from these experiments.
To date, the Denver region's reinvention efforts have focused on
analyzing GSA's leasing process from three perspectives--federal
customer agencies, the commercial real estate community, and GSA's
guiding policies and procedures. The region has used surveys, focus
groups, and meetings to better identify and understand federal
agencies' space needs. Similarly, the region has interviewed several
local real estate brokers and private developers to discuss GSA's
leasing process and how it can/should be improved. Finally, the
region has examined GSA's traditional leasing policies, procedures,
and practices and researched the basis for each GSA step in the
leasing process.
According to an interim paper that the Denver region prepared in
April 1994, its reinvention efforts to date have produced promising
results. For example, the region reported reductions in the time
required to complete major leasing steps, such as developing space
requirements, surveying the marketplace, and preparing and
negotiating the solicitation for offers. Also, the region reported
benefits from the use of space layout drawings in lieu of the
traditional quantified narrative requirements to communicate
agencies' space customizing requirements to lessors. In the policies
and procedures area, the region found that most GSA leasing steps are
not required by law but have evolved from past GSA practices. In
this regard, the region concluded that GSA has continued to follow
many of these institutional practices because they were convenient,
and GSA employees--from regional realty specialists to central office
legal counsel--had become comfortable with them. The region already
has begun testing some process reengineering proposals and is
considering the use of several others.
As part of its reengineering efforts, GSA reorganized its Public
Buildings Service (PBS) along business lines effective January 8,
1995, to separate its policymaking/oversight and service provider
responsibilities and help facilitate the delivery of real estate
services to federal agencies. PBS's new organizational structure
consists of (1) three policy and oversight components--
Governmentwide Real Property Policy, Portfolio Management, and
Business Development; (2) five service provider components-- Property
Management, Commercial Broker, Fee Developer, Federal Protective
Service, and Property Disposal; and (3) three support
components--Controller, Chief Information Officer, and Acquisition
Executive. GSA's leasing of federal office space is now handled by
the Office of the Commercial Broker.
Also in January 1995, in response to the President's recent
initiative to reduce the size of government and realize long-term
cost savings, GSA announced plans to accelerate and broaden its
ongoing reengineering efforts. GSA committed itself to identifying
the most cost-effective method of carrying out each of its assigned
mission-support responsibilities, including leasing, and seeking the
authority to implement the most cost-effective solution. Also, GSA
identified a number of potential internal and governmentwide
long-term cost-savings opportunities in various support services
areas and plans to establish--by October 1, 1995--a separate Office
of Policy and Oversight to strengthen its capability to carry out
governmentwide policy and oversight functions.
RECENT LEGISLATION MAY
ENCOURAGE AND FACILITATE
IMPROVEMENTS IN GSA'S LEASING
PROCESS AND PERFORMANCE
---------------------------------------------------------- Chapter 4:4
The Federal Acquisition Streamlining Act of 1994 provides some of the
tools needed to begin addressing the underlying problems with GSA's
leasing process that are discussed in this report. This act (P.L.
103-355, enacted on Oct. 13, 1994) authorizes simplified acquisition
procedures for leases having an average annual rent of $100,000 or
less and could result in performance improvements for GSA. Also, the
act would entitle losing offerors to debriefings after an award, and
these debriefings may reduce the number of bid protests.
Furthermore, the act seeks to enhance the federal acquisition process
through a wide-ranging set of performance-based management goals and
incentives. However, GSA believes that two additional provisions
that congressional conferees eliminated from the original legislative
proposal--a succeeding lease provision and a two-step contracting
provision that GSA intended to apply to its lease construction
activities--could have facilitated further improvements in its
performance.
Finally, GSA could experiment with any needed related changes in
federal procedural requirements and controls under the Government
Performance and Results Act of 1993--P.L. 103-62. This act
authorizes pilot projects for better performance goals and
measurements and for increased managerial accountability and
flexibility. GSA has been designated by OMB as one of the pilot
agencies for performance plans and program performance reports and
likely will also be a pilot agency for managerial accountability and
flexibility. Under the act's managerial accountability and
flexibility provisions, established administrative procedural
requirements and controls can be waived for up to 3 years, in return
for specific accountability to achieve a designated performance goal.
Participating federal agencies will have to demonstrate the expected
effects on their performance resulting from greater flexibility,
discretion, and authority and the improvements in performance
resulting from the waiver. The expected improvements are to be
compared to current and projected performance without the waiver.
After 3 years, the agency can propose that the waiver be made
permanent.
CONCLUSIONS, RECOMMENDATIONS, AND
AGENCY COMMENTS
============================================================ Chapter 5
CONCLUSIONS
---------------------------------------------------------- Chapter 5:1
In today's commercial real estate market, good leasing opportunities
come and go quickly, and getting a good value depends on being
postured to seize market opportunities as they become available.
However, the General Services Administration's (GSA) highly
prescriptive and process-oriented leasing approach--grounded in
federal procurement law, uniformity, and numerous well-intended
procedural controls added over the years--has become at odds with the
dynamic commercial real estate market. It impedes GSA's ability to
get good, timely leasing values and may be causing the government to
pay more than is necessary for leased space.
Over the years, GSA's leasing policies, procedures, and practices
have become preoccupied with process at the expense of results, as
numerous procedural controls were added to help (1) safeguard the
government's interests; (2) ensure compliance with federal
procurement laws and regulations and other national policies; and (3)
minimize fraud, abuse, and the number of bid protests. These goals
are important, but the cumulative result of these well-intended
procedural controls is a time-consuming and costly leasing process
that does not work very well in today's competitive commercial real
estate market. GSA has begun reducing procedural controls that are
within its authority but continues to focus primarily on process
rather than results.
In contrast, the more results-oriented approach that private sector
firms typically use is much simpler, more flexible, and takes less
time. The private realty managers and commercial landlords and
brokers we contacted generally believe that this approach results in
better overall leasing values. Although there is no standard private
industry leasing model, and practices differ from firm to firm, the
practices of the 12 private firms we contacted share several common
characteristics that help them take advantage of available market
opportunities and lease space quickly. For example, these private
firms
-- are focused almost exclusively on results,
-- take a flexible and pragmatic approach and rely on the market
expertise of their in-house realty staffs or on commercial
brokers to lease space,
-- are willing to modify their requirements to conclude an
advantageous deal expeditiously,
-- aggressively seek and negotiate bargains and concessions from
landlords, and
-- minimize the number and nature of internal reviews of proposed
leases.
GSA recognizes the need to improve the timeliness and cost
effectiveness of its leasing process, has already adopted streamlined
procedures for certain small leases, and is exploring other changes
in response to the National Performance Review (NPR) and the
President's recent initiative to reduce the size of government and
realize long-term cost savings. Administratively, GSA could change
some aspects of its leasing process that seem to discourage
competition for its leases, impede timely space delivery, and
contribute to higher than necessary federal leasing costs. For
example, GSA could (1) simplify and streamline its standard lease
solicitation and lease agreement, (2) adopt the private sector
practice of negotiating a tenant improvement or space build-out
allowance, and (3) finish developing a complete and useful automated
realty database on commercial real estate market activities and
prices. Such changes would be steps in the right direction. Alone,
however, such changes would not (1) fully and effectively resolve the
long-standing, systemic leasing problems discussed in this report or
(2) result in significant improvements in the overall timeliness,
responsiveness, and cost effectiveness of GSA's leasing activities.
We believe that a more timely, responsive, and cost-effective GSA
leasing process will require fundamental changes in the traditional
federal leasing paradigm, GSA's organizational culture, and its role
in meeting agencies' office space needs. GSA will need to reengineer
its leasing process and implement policies and procedures to achieve
those results and improve its overall leasing performance and
responsiveness. In this regard, private industry leasing practices,
such as those of the 12 private firms discussed in chapter 3, deserve
consideration. These leasing practices may provide ideas for
streamlining and simplifying GSA's leasing process and making it more
responsive to federal agencies' mission-support needs and a better
value for taxpayers. These practices could be tested to evaluate
their benefits, risks, and potential federal application. GSA could
seek legislative authority from Congress to test any alternative
leasing practices for which it determines that such authority would
be required. Any needed changes in federal procedural requirements
and controls could be tested under the managerial accountability and
flexibility provisions of the Government Performance and Results Act
(GPRA).
Federal agencies and the commercial real estate community have an
important stake in GSA's leasing policies, procedures, and practices.
They can help GSA identify key problem areas and the most critical
"pain points," design needed improvements, and test and evaluate
possible solutions. In the interim, while long-term improvements are
being considered and tested, GSA could delegate more of its leasing
authority to other federal agencies, as it has successfully done in
the buildings management area. This could help mitigate the negative
effects of GSA's monopoly by providing the stimulus of competition
and alternative experiences from which GSA and other federal agencies
could learn.
Finally, the federal laws, regulations, and other national policies
that now influence GSA's leasing process, especially the Competition
in Contracting Act (CICA) and other statutory provisions, will need
to be reexamined. The recently enacted Federal Acquisition
Streamlining Act provides some of the tools needed to begin
reengineering GSA's leasing activities and making them more
businesslike. However, this act was not designed to and did not
address all the leasing problems identified in this report.
RECOMMENDATIONS TO THE
ADMINISTRATOR OF GSA
---------------------------------------------------------- Chapter 5:2
We recommend that the Administrator of GSA fully explore
opportunities to simplify and streamline GSA's leasing process and
make it less costly and time consuming, more responsive to federal
agencies' mission-support needs, and a better value for taxpayers.
In this regard, GSA should
-- work closely with federal customer agencies and the commercial
real estate community to more fully explore their concerns about
the existing leasing process, identify alternative ways of
carrying out the leasing function, and test and evaluate their
use and potential adoption;
-- test the benefits, risks, and potential federal application of
the private industry leasing practices discussed in chapter 3 of
this report that are within its authority and seek the necessary
authority from (1) Congress to test other practices and
alternatives that GSA believes would require legislation and (2)
the Office of Management and Budget to test any needed changes
in federal procedural requirements and controls under the
managerial accountability and flexibility provisions of GPRA;
and
-- adopt administratively or, if GSA determines that legislation is
needed, propose to Congress the necessary legislation to enable
it to adopt those private industry practices or other
alternatives tested that result in documented improvements in
GSA's leasing performance, make sense, and are cost effective.
In addition, GSA should
-- reexamine its standard lease solicitation and lease agreement
clauses and provisions and eliminate any of those within its
administrative authority that are no longer needed, are of
questionable utility, or are seldom used;
-- within the limitations of CICA and other statutory provisions,
empower and encourage its leasing officials to modify lease
clauses and provisions as necessary and negotiate aggressively
with prospective landlords for bargains and concessions to
obtain good, timely leasing values;
-- adopt the private sector practice of negotiating a specified
dollar per square foot tenant improvement or space build-out
allowance to eliminate the uncertainties and perceived added
risks associated with GSA's existing process and help hold down
leasing costs;
-- finish developing and implement an automated realty database on
commercial real estate leasing activities and rates to help
leasing officials evaluate the reasonableness of landlords'
proposed offers; and
-- establish performance goals for its leasing activities and
measurement systems to track progress in meeting those goals.
While long-term improvements are being considered and tested, GSA
should delegate more leasing authority to federal agencies that are
ready, willing, and able to lease their own office space and monitor
and oversee agencies' use of that delegated authority.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 5:3
In written comments dated October 19, 1994, on a draft of this
report, GSA agreed with its general thrust and said that it
highlights the problems that hamper effective delivery of space.
Except for the recommendation on space build-out, GSA also generally
agreed with the thrust of the recommendations and said it will
address them as part of ongoing efforts to reengineer its overall
real estate program. However, GSA said that our recommendations
cannot be fully implemented unless Congress grants it an exemption
from CICA and other existing statutory constraints. Finally, GSA
provided comments on several statements in the draft report and
updated information on its leasing program and reengineering efforts,
which we have included in this report where appropriate. GSA's
written comments are reproduced in appendix I.
GSA stressed that, under present law, it cannot carry out leasing as
would a private sector tenant. For example, GSA emphasized that it
must comply with CICA and a host of other statutory constraints and
that the costs of such compliance are time and money. GSA pointed
out that these costs are not borne by the private sector against
which it is being compared. We agree that the federal laws,
procurement regulations, and other national policies that now guide
and influence GSA's leasing process, especially CICA, will need to be
reexamined. In the draft report that GSA commented on, we recognized
these statutory provisions and acknowledged that administrative
changes, alone, will not fully and effectively resolve the identified
leasing problems or result in significant improvements in the overall
timeliness, responsiveness, and cost effectiveness of GSA's leasing
activities. As a consequence, we recommended that GSA seek the
necessary authority from Congress to (1) test those private industry
leasing practices and other leasing alternatives that it believes
would require legislation and (2) adopt those practices or other
alternatives tested that result in documented leasing improvements,
make sense, and are cost effective. We have retained these same
recommendations in this report.
Within the limitations of CICA and other statutory constraints, GSA
said that it has already addressed many of the leasing problems
discussed in this report and is in the process of reengineering its
overall real estate program to (1) improve the quality of service to
customer agencies, (2) make it easier for building owners to do
business with the government, and (3) improve cost effectiveness.
According to GSA, the target date for initiating its new real estate
program is January 1995.\1 In the leasing area, GSA said that several
reinvention labs have been organized to test alternative ways of
acquiring leased space. Also, GSA said that its reengineering
efforts are emphasizing the consideration and testing of private
industry practices and that, within the limitations of CICA and the
other statutory and regulatory constraints, it will (1) reexamine its
standard lease solicitation and lease agreement with the goal of more
streamlining, (2) extend the authority of its leasing officials to
modify lease clauses and provisions to get better values, (3)
research the availability of data on commercial real estate leasing
activities and rates for use on a nationwide or regional level, and
(4) address the development of performance goals and measurement
systems for its leasing activities.
Concerning the recommendation on space build-out, we believe that GSA
may have misunderstood our intent. Our draft report recommended that
GSA adopt the private sector practice of negotiating the costs of
space build-out. In its written comments on this recommendation, GSA
acknowledged that it expects landlords to estimate the costs of
build-out without architectural plans but said that its existing
space build-out methodology limits the landlord's risks. GSA said
that it negotiates with the lessor the estimated scope and unit costs
of build-out and that both of these are included in the lease. GSA
said that, upon completion of build-out, the lessor is paid a lump
sum amount to cover any construction build-out above the negotiated
scope or the government receives a credit if the scope of build-out
is less than the level provided for in the lease. According to GSA,
the alternative to this methodology would be to prepare architectural
plans for each offeror, which would both further slow the leasing
process and add costs that could not be expected to be recovered in
the lease.
In recommending that GSA adopt the private sector practice of
negotiating the costs of space build-out, we did not intend that GSA
prepare architectural plans for each offeror or even for each space
build-out requirement. As discussed in chapters 2 and 3, the typical
private sector practice is to negotiate a specified dollar per square
foot tenant improvement or space build-out allowance that places a
limit or cap on the landlord's share of such costs. Under this
approach, the landlord is not required to estimate the actual costs
associated with any specified level of build-out. Several of the
commercial landlords and brokers we contacted were specifically
critical of GSA's existing process that requires landlords to
estimate and bid on the costs of space build-out and said that it is
one of several factors that cause GSA to pay more than necessary for
leased space. These landlords and brokers said that GSA's space
build-out procedures add costs, time, and uncertainty to the leasing
process and transfer risk to the landlord. To compensate for these
uncertainties and perceived added risks, many of the landlords and
brokers we contacted said that they increase their proposed rental
rates to GSA. Accordingly, we recommended in the draft report, and
continue to believe, that GSA should adopt the private sector
approach to space build-out. Most commercial landlords and brokers
and private sector realty managers we contacted said that the private
sector approach simplifies the lease negotiation process, saves time,
and helps hold down leasing costs. In view of GSA's written
comments, we have reworded this recommendation to clarify our intent.
Finally, GSA's written comments did not address our last
recommendation that, while long-term improvements are being
considered and tested, it delegate more leasing authority to federal
agencies that are capable of and willing to lease their own space.
In subsequent discussions, responsible GSA officials said that GSA
declines to take a position on this recommendation at this time.
According to these officials, GSA will (1) take a position on this
recommendation after it has implemented its new real estate program
in January 1995 and (2) include that position in its formal response
to the House Committee on Government Reform and Oversight, Senate
Committee on Governmental Affairs, and House and Senate Committees on
Appropriations on this report. It should be noted that the NPR
report on Reinventing Support Services recommended that GSA delegate
to all federal agencies the authority to lease their own
general-purpose space as part of giving agencies greater authority to
choose their sources of real property services.
(See figure in printed edition.)Appendix I
--------------------
\1 As acknowledged in chapter 4, GSA reorganized its Public Buildings
Service along business lines effective January 8, 1995, to separate
its policymaking/oversight and service provider roles and improve its
delivery of real estate services.
COMMENTS FROM THE GENERAL SERVICES
ADMINISTRATION
============================================================ Chapter 5
See pp. 7
and 47-48.
See pp. 40-42 and 47-48.
(See figure in printed edition.)
See pp. 40-42
and 47-48.
(See figure in printed edition.)
See pp. 40-42
and 44-45.
See pp. 13
and 44-45.
(See figure in printed edition.)
See pp. 21, 36
and 47-48.
See pp. 19-21
and 47-48.
(See figure in printed edition.)
See pp. 25-26
and 47-49.
See pp. 47-48.
See pp. 47-48.
(See figure in printed edition.)
Now on p. 3.
See p. 39.
Now on pp. 4,
17 and 18.
See pp. 17-18,
and 39-40.
(See figure in printed edition.)
Now on p. 24.
See p. 24.
Now on p. 4.
See pp. 24
and 39.
Now on p. 5.
See pp. 2, 7,
19-20, 40-42,
and 47-48.
(See figure in printed edition.)
Now on p. 20.
See p. 20.
FLOWCHART OF GSA'S LEASING PROCESS
========================================================== Appendix II
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed
edition.)
SAMPLED GSA LEASES
========================================================= Appendix III
No. of
Lease square
number Address City feet
---------- --------------------------------- ----------- ----------
LTX13207 400 S. Record Street Dallas 6,092
LTX13222 1400 Parker Street Dallas 540
LTX13448 1801 N. Lamar Street Dallas 15,418
LTX13765 717 N. Harwood Street Dallas 17,844
LTX13271 1545 Mockingbird Lane Dallas 8,200
LTX13461 1499 Regal Row Dallas 9,510
LTX13550 8625 King George Drive Dallas 13,338
LTX13699 6303 Harry Hines Blvd. Dallas 16,453
LTX13708 10325 Lake June Road Dallas 6,300
LNY22408 4288 Broadway New York 15,850
LNY22414 110 E. 59th Street New York 7,466
LNY22464 99 10th Avenue New York 463,399
LNY22493 150 William Street New York 6,900
LNY22495 120 Church Street New York 365,128
LNY22522 No. 7 World Trade Center New York 39,542
LNY22542 237 W. 48th Street New York 11,700
LNY22590 100 Church Street New York 34,283
LNY22636 80 Broad Street New York 11,954
LNY22639 866 UN Plaza New York 3,724
LNY22645 231-235 Grand Street New York 5,352
LNY22684 120 W. 45th Street New York 7,173
LCA08058 1700 Montgomery Street San 14,950
Francisco
LCA68302 550 Kearny Street San 5,630
Francisco
LCA68322 75 Hawthorne Street San 95,229
Francisco
LCA86796 120 Howard Street San 15,726
Francisco
LCA89240 75 Hawthorne Street San 141,595
Francisco
LCA89509 301 Howard Street San 23,810
Francisco
LCA89959 600 Harrison Street San 47,831
Francisco
LCA90017 71 Stevenson Street San 9,663
Francisco
LCA90062 101 Spear Street San 111,059
Francisco
LCA90430 600 Harrison Street San 21,945
Francisco
LCA90473 345 Spear Street San 11,392
Francisco
LCA91070 235 Pine Street San 5,323
Francisco
LCA91267 71 Stevenson Street San 126,188
Francisco
----------------------------------------------------------------------
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
-------------------------------------------------------- Appendix IV:1
Gerald Stankosky, Assistant Director, Government Business
Operations Issues
Robert B. Mangum, Assignment Manager
William J. Dowdal, Senior Evaluator
Kenneth E. John, Senior Social Science Analyst
Katherine M. Wheeler, Publishing Consultant
Lessie M. Burke, Writer-Editor
SAN FRANCISCO REGIONAL OFFICE
-------------------------------------------------------- Appendix IV:2
Donald L. Miller, Core Group Leader
Jonda Van Pelt, Evaluator-in-Charge
Susan S. Mak, Evaluator
Jonathan M. Silverman, Reports Analyst
OFFICE OF THE CHIEF ECONOMIST
-------------------------------------------------------- Appendix IV:3
James R. White, Acting Chief Economist
Harold J. Brumm, Economist
OFFICE OF THE GENERAL COUNSEL
-------------------------------------------------------- Appendix IV:4
Alan Belkin, Assistant General Counsel
James M. Rebbe, Attorney
RELATED GAO PRODUCTS
=========================================================== Appendix 1
Budget Issues: Budget Scorekeeping for Acquisition of Federal
Buildings (GAO/T-AIMD-94-189, Sept. 20, 1994).
Federal Real Property: National Performance Review Recommendations
(GAO/T-GGD-93-47, Sept. 21, 1993).
Federal Real Property: Key Acquisition and Management Obstacles
(GAO/T-GGD-93-42, July 27, 1993).
Federal Buildings Fund Limitations (GAO/GGD-93-34R, Apr. 5, 1993).
General Services Issues (GAO/OCG-93-28TR, Dec. 1992).
General Services Administration: Actions Needed to Improve
Protection Against Fraud, Waste, and Mismanagement (GAO/GGD-92-98,
Sept. 30, 1992).
Federal Office Space: Obstacles to Purchasing Commercial Properties
From RTC, FDIC, and Others (GAO/GGD-92-60, Mar. 31, 1992).
Real Property Management Issues Facing GSA and Congress
(GAO/T-GGD-92-4, Oct. 30, 1991).
GSA: A Central Management Agency Needing Comprehensive Congressional
Oversight (GAO/T-GGD-92-3, Oct. 29, 1991).
Long-term Neglect of Federal Building Needs (GAO/T-GGD-91-64, Aug.
1, 1991).
Federal Buildings: Actions Needed to Prevent Further Deterioration
and Obsolescence (GAO/GGD-91-57, May 13, 1991).
Facilities Location Policy: GSA Should Propose a More Consistent and
Businesslike Approach (GAO/GGD-90-109, Sept. 28, 1990).
The Disinvestment in Federal Office Space (GAO/T-GGD-90-24, Mar. 20,
1990).
Federal Office Space: Increased Ownership Would Result in
Significant Savings (GAO/GGD-90-11, Dec. 22, 1989).
Building Purchases: GSA's Program Is Successful but Better Policies
and Procedures Are Needed (GAO/GGD-90-5, Oct. 31, 1989).
Public Buildings: Own or Lease? (GAO/T-GGD-89-42, Sept. 26, 1989).
*** End of document. ***