GSA's Reform on Office Leasing

For those who are familiar with the U.S. General Services Administration (GSA) leasing process, you will find GSA is making considerable changes to make it easier on all parties involved.  Please read on...

Looking to bring its leasing procedures more in line with market conditions and correct inconsistencies with market practices, the U.S. General Services Administration just released its final Lease Reform Implementation Report.

According the GSA, the process of offering to lease space to the federal government differs so much from the process in the private commercial real estate sector that it discourages many building owners or developers from offering space in their buildings to the government. In particular, the GSA report identified such problems as:

• The length of time it requires to conclude a lease from end to end;
  
• The high cost to offerors to compete for GSA leases;
  
• Delays and inconsistencies in the requirements development process; and
  
• The detrimental effects that holdovers and extensions have on lessors' abilities to refinance or sell their GSA-occupied buildings.

The report links these issues with a lack of response from the open market, and limited offerings translate into higher rates, the GSA has said.

The reforms are important to the market given the amount of space the GSA leases across the country. At the end of FY 2010, the GSA lease inventory rose to 191.4 million rentable square feet consisting of 9,285 leases in 8,094 buildings.

The largest share of the inventory by lease count - 82% - is vested in smaller leases, up to $500,000 net annual rent (total rent less operating expense rent). These leases account for only 30.2% of total square footage and 24.4% of rent.

Conversely, leases in excess of $1 million net annual rent represent 9% of the lease count but 56% of the square footage and 61% of total annual rent.

GSA's reinvention seeks to "streamline, standardize, and simplify" the process for both large and small leases, and thus the results could signal major beneficial changes for all concerned.

"The final report and the associated Leasing Desk Guide provide the details on the much-anticipated GSA leasing process overhaul that has been underway for the past 18 months or so," said Darian A. LeBlanc, senior managing director, Government Services Group of Cassidy Turley in Washington, DC. "My initial impressions are that the changes are more than superficial and provide some much-needed streamlining to the federal leasing process. The modified process and lease forms will be comfortable and 'user friendly' to those familiar with past GSA practices.

GSA will gradually pilot their new process to the real estate industry over the coming months to identify possible improvements and troubleshoot potential problems.

"The older process will still be used, in parallel, for most lease procurements during this period. Eventually the new process will become the standard," LeBlanc added. "There will be a learning curve, but otherwise I don't see many negatives to the new process. It certainly can't be any worse than the current process."

The GSA hopes to have some of the changes in effect soon. Others, such as those requiring statutory changes, will take longer.

GSA's includes many aspects that are GSA-internal, such as establishing teams and sub-teams for different aspects of review and follow-up, but many of the aspects are directly related to how the private sector will compete for GSA leases. Some of the more interesting proposals include the following.

• The simplified lease model for leases up to the SLAT (Simplified Lease Acquisition Threshold), currently $150,000 net average annual rent;
  
• A petition to increase the SLAT to $500,000;
  
• Applying industry space measurement technology consistently by specifying ABOA (ANSI/BOMA Office Area) as the GSA standard for the area where people and furniture
  are housed;
  
• A "one and done" acquisition plan, no longer a living document that must be revised; and
  
• Adoption of the Master Format standard for costing and pricing tenant improvement construction costs.

Adjusting lease terms is also up for major changes. GSA has traditionally negotiated a 10-year lease term with five years firm, providing the government with termination rights any time after the fifth full year of occupancy. The rest of the market, typically signs 3- to 5-year leases with the right to renew for additional periods at the end.

Under the new plan, GSA is examining the cost impact of termination rights. Among other options the GSA will consider is allowing for longer firm terms beyond five years (6, 7, 8, 9, or 10-plus years, not to exceed 20 years firm). These options would enable lessors to arrange better cash flow for financing, GSA to better manage project workload, and customers to lease space according to true need. If the Simplified Lease Model is used, the standard default for leases with terms of five years or less will be firm, with no termination rights.

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