Federal Real Property:
Greater Transparency and Strategic Focus Needed for High-Value GSA Leases
GAO-13-744: Published: Sep 19, 2013. Publicly Released: Oct 23, 2013.
What GAO Found
The General Services Administration's (GSA) 218 high-value leases GAO reviewed represented only about 3 percent of the total number of GSA leases, yet made up about one-third of its leased portfolio in terms of cost and size. GSA has reduced the costs of its high-value leases in line with the administration's goal to reduce real property costs. GSA's efforts include helping agencies improve space utilization. However, for leases nearing expiration, GSA and tenant agencies have faced challenges in funding space renovations and moving costs. This lack of funds has contributed to delays and some cases in which GSA continues to occupy space after the lease expires.
GSA officials stated that for most high-value leases, federal ownership would be more cost effective over the long term, but GSA did not have the funding available to purchase, renovate, or construct a building. GAO found that GSA's capital-planning approach lacks transparency and a strategic focus that could support more informed decision making in this area. Specifically, GSA does not follow capital-planning practices involving alternatives evaluation, project prioritization, and long-term capital planning:
- GSA's lease prospectuses do not discuss the length of time of the space need or alternative approaches to meeting it--which are key to understanding whether leasing or owning would be more cost-effective. Twenty-seven of the prospectuses (for leases expiring from 2012 through 2027) contained an analysis that showed potential savings of over $866 million if the spaces were owned rather than leased. GSA and OMB have decided the analysis is no longer necessary in light of the lack of capital funding for acquisitions and construction. GAO's case studies highlighted long-term, mission critical space needs, such as a lease for the Environmental Protection Agency in Seattle for space it has occupied for over 40 years. Another high-value lease is for the State Department's diplomatic security bureau in Virginia. State invested at least $80 million in security upgrades into a facility that GSA leased for 10 years.
- Further, GAO found that nine ongoing high-value leases did not go through the prospectus process. For example, GSA mistakenly did not prepare a prospectus for a 10-year Los Angeles lease for the U.S. Army Corps of Engineers. GSA did not notify Congress of these leases, further limiting transparency.
- GSA has not systematically prioritized which space needs currently in high-value leases it would be most beneficial to move to federally-owned solutions. GSA has not incorporated space needs that are the highest priority for ownership investment into a long-term capital plan.
This lack of information on the long-term consequences, including costs and risks, of high-value leases could inadvertently contribute to the federal government's overspending on long-term space needs. In contrast, a strategic vision incorporating leading practices for capital decision making could better position the government to save money over time. Increased transparency could promote collaboration with decision makers, which could help GSA address challenges and identify cost savings opportunities as leases expire.
Why GAO Did This Study
Overreliance on costly leasing is one reason that federal real property has remained on GAO's high-risk list. GAO's work has shown that building ownership often costs less than leasing, especially for long-term space needs. For leases with a net annual rent above a threshold--$2.79 million in fiscal year 2012--GSA is required to submit a prospectus, or proposal, to Congress. GAO was asked to review these high-value leases. This report (1) identifies their characteristics and what GSA has done to reduce their cost and (2) assesses the extent to which GSA's capital-planning approach supports informed leasing decisions. GAO reviewed GSA data for all 218 active high-value leases as of November 2012 and selected 12 leases for case studies based on expiration dates, locations, and tenant agencies. GAO reviewed relevant legislation and guidance, interviewed agency officials, and compared GSA actions to leading practices.
What GAO Recommends
GSA should enhance the transparency of decision making for high-value leases by (1) including more information in the prospectus to Congress, such as the agency's prior and future need for the space, major investments needed, and an appropriate analysis of the cost of leasing versus the cost of ownership; (2) reporting to congressional committees about certain leases without a prospectus; and (3) prioritizing potential ownership solutions for current high-value leases to help create a long-term strategy for targeted ownership investments. GSA concurred with the recommendations.
For more information, contact David Wise at (202) 512-2834 or email@example.com.
Recommendations for Executive Action
Comments: In January 2016, GSA stated that it had not incorporated the recommended information into its fiscal year 2016 lease prospectuses. In March 2015, GAO reported that GSA planned to incorporate some of this information into its fiscal year 2016 lease prospectuses, including information on the length of time an agency estimates it will need the space, when that information is known; the length of time an agency has been in the particular building it is occupying; and, for space with a long-term projected need, an appropriate form of cost-to-lease versus cost-to-own analysis. However, in January 2016, GSA stated it had subsequently decided not to incorporate this information into the fiscal year 2016 prospectuses. Completing these steps as planned could have increased the transparency of lease prospectuses and facilitated more informed decision making by Congress. GAO continues to recommend that GSA include the additional recommended information in lease prospectuses, as such information could help inform decision makers on the extent to which leasing is the best alternative for the space .
Recommendation: To enhance transparency and allow for more informed decision making related to the appropriate role of leasing in GSA's real property portfolio, the Administrator of GSA should include in the lease prospectus a description of the length of time that an agency estimates it will need the space, an historical account of how long the agency has been in the particular building it is occupying at the time of the prospectus, and any major investments the agency will have to make to the leased space to meet its mission. For those spaces for which the agency has a long-term projected need, also include an appropriate form of cost-to-lease versus cost-to-own analysis.
Agency Affected: General Services Administration
Comments: In 2013, GAO found two main circumstances in which GSA had leases above the prospectus threshold that did not follow the congressional prospectus process. The first circumstance was that in three cases, GSA mistakenly did not provide a prospectus to Congress, according to GSA officials. The second circumstance was that in four other cases, the lease started below the prospectus threshold, but over time new space was added in supplemental lease agreements that put the lease over the prospectus threshold. To address this recommendation with regard to the leases in the first circumstance, GSA wrote a letter to the Chairman of the Senate Committee on Environment and Public Works dated December 18, 2014, notifying the Committee that GSA had not submitted prospectuses to the Committee for three leases that exceeded the prospectus threshold. In the letter, GSA stated that for these three leases, its original lease evaluations had erroneously determined that the net annual rent fell below the prospectus threshold. GSA also stated in the letter that it had revised its lease portfolio planning process to ensure that all prospectus-level leases are properly authorized. GSA also sent an email to GSA staff in July 2014 to implement a new procedure designed to improve internal controls to avoid future instances of mistakenly not preparing prospectuses. Informing appropriate congressional committees about the three prospectus-level leases for which GSA mistakenly did not follow the prospectus process should help improve the transparency with which GSA works with Congress on prospectus-level leases. Improving internal controls in this area is a positive additional step that could improve accountability going forward. However, GSA has not taken action to inform Congress about the four high-value leases that GAO identified that started below the prospectus threshold but grew over the prospectus threshold due to expansions of space in supplemental lease agreements. As of November 2015, GSA officials stated that according to GSA's policy, if a modification to a lease after occupancy causes a below-prospectus lease to exceed the prospectus threshold, a new prospectus is not necessary unless the changes were foreseeable before occupancy. For example, according to GSA officials, if after occupancy an agency were to receive a new mission authorization that required additional space, a new prospectus would not be necessary. GAO found in September 2013 that the result of this situation is a further limitation on the transparency of the prospectus process in providing decision makers information on the full scope of GSA's high-value leased portfolio--information that could be used to analyze the extent to which leasing is the best alternative in these cases. Not submitting a prospectus for congressional approval hinders the ability of the appropriate congressional committees to fulfill their oversight responsibilities for all prospectus-level leases. As a result of GSA's decision not to inform Congress of those high-value leases that started off under the prospectus threshold but grew above the threshold over time, the transparency of the high-value lease portfolio remains limited.
Recommendation: To enhance transparency and allow for more informed decision making related to the appropriate role of leasing in GSA's real property portfolio, the Administrator of GSA should report to the appropriate congressional committees any leases above the prospectus-threshold that did not follow the congressional prospectus process.
Agency Affected: General Services Administration
Comments: GSA agreed with the recommendation to develop and use clear criteria to rank and prioritize potential long-term ownership solutions for current high-value leases among other capital investments. In June 2016, GSA told us that it has implemented a number of improvements in their leasing program. Specifically, GSA stated that it continues to evaluate potential ownership solutions to high value leases among other capital investments. Further, GSA has prioritized and included lease purchases in the budgets from fiscal year 2010 through 2017. Although GSA has developed criteria, we maintain that it has not fully implemented use of clear criterial to rank and prioritize potential long-term ownership solutions for current high-value leases. Although GSA developed and provided us a list of criteria to rank and prioritize space needs that are currently being met in high-value leases to determine which would benefit most from converting to a federally-owned solution, it has not actively used these criteria to rank and prioritize space needs or to develop a strategy to facilitate consideration of targeted investments in ownership. Instead, for its 5-year capital plan, which includes new construction and repair and alteration projects, GSA has implemented a software program that uses different criteria to rank projects. This software program considers lease-cost avoidance as one criteria among many in prioritizing projects for the capital plan, with lease-cost avoidance been weighted at about 5 percent. GSA's incorporation of lease-cost avoidance into its decision making tool for developing its capital plan is potentially a positive step towards rationalizing its real property portfolio. However, GSA has not yet taken the steps of using the criteria it developed specifically related to its high-value lease portfolio to rank and prioritize potential long-term ownership solutions to current high-value leases, as we recommended. As of October 20, 2016, GSA had not provided GAO with additional updates to the status of this recommendation.
Recommendation: To enhance transparency and allow for more informed decision making related to the appropriate role of leasing in GSA's real property portfolio, the Administrator of GSA should develop and use criteria to rank and prioritize potential long-term ownership solutions to current high-value leases among other capital investments. Use this ranking to create a long-term, cross-agency strategy that facilitates consideration of targeted investments in ownership. This strategy could be incorporated initially as a separate but related part of the capital plan we previously recommended that GSA develop in 2012, or integrated into the capital plan itself.
Agency Affected: General Services Administration