Government Leasing News Winter 2008

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© Copyright 2005–2008, Government Leasing LLC, all rights reserved. The materials contained herein, although deemed reliable, are the opinions of the contributing authors and are not necessarily those of Government Leasing LLC, which incurs no responsibility as to their accuracy and timeliness. Readers should consult with counsel before acting on information.

In this Issue

ISSN 1553-9571

This month’s featured article by outgoing PBS Commissioner David Winstead neatly sums up the challenges and problems currently facing GSA in its role as the Government’s Federal Civilian Landlord. We wish him well for a job well done.

Thanks also to Melton L. Spivak, Vice President in Financial Manage-ment with JPMorgan Chase, for his article on a topic not touched on before in Government Leasing News, that being tax management of government-leased buildings.

And thanks to Advisory Board member Dave Cunningham of Federal Lease Consultants for stepping up and addressing in the Ask the Expert column the thorny issue of lease renewals arising out of the recission of delegated leasing authority that took place in November of 2007.

Given the perfect storm that is being experienced in the worldwide credit markets, we thought it fitting to do a series on how the Troubled Assets Relief Program (TARP) being devel-

oped under the Emergency Economic Stabilization Act of 2008 will help resolve the situation and stabilize the credit markets. To provide a back-ground on the possible form the TARP regulations may take or borrow from, we will examine in this issue of Government Leasing News the manner in which the assets of insolvent banks were liquidated by the Resolution Trust Corporation during its six-year period of its operation from 1989 to 1995.

In particular, we’ll look at the RTC from two different aspects. First, how it functionally operated and liquidated assets; and second, as explained by Pat Keogh in his article on page 10, what factors accounted for its enormous success under the imposed mandate to liquidate those assets in as short a time as possible under very disruptive market conditions.

We again express our appreciation for the industry data contributed by Delta Associates, Transwestern, and the Korpacz Investor Survey contributed by PricewaterhouseCoopers.

Editors’ Welcome!

A QUARTERLY NEWSLETTER FOR OWNERS, MANAGERS AND DEVELOPERS OF GOVERNMENT-LEASED PROPERTY

VOL. 4, NO. 4 WINTER 2008

GOVERNMENT LEASING NEWS

Featured Article: Challenges Facing the Government’s Federal Civilian Landlord

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Real Property Tax Management for Gov’t-Leased Buildings 5

Cost-Benefit Analyses Need Only Be Reasonable 7

Ask the Expert 8 The Enormous Success of the RTC 10

The Resolution Trust Corpora-tion 1989-1995 11

Lease Construction: It’s Either New Tools or New Money 14

Call for Entries for the Annual Virgil W. Ostrander Award 17

Market Outlooks for Washington and Baltimore 19

Enhanced Use Leasing 21

Selected Vacancy Rates 24

Prospectus Corner 25

Recently Initiated GSA Leases 27

The Korpacz Investor Survey 28 A Limited Termination for Con- venience Clause? 30

The Lease Construction Semi- nar of December 4th 33

Spotlight: Newmark Knight Frank 36

Cumulative Index of Articles 39

This past fall, Government Leasing News sponsored a seminar on alterna-tive approaches to lease construction that was held at the Naval Heritage Center in Washington, DC. Your editor-in-chief, Dennis Eisen, had the distinct honor to serve as the moderator of that forum. The panel of experts who led the discussions consisted of five individuals drawn from the private sector who were

Notable and Newsworthy very experienced in the development, financing and procurement of govern-ment build-to-suit projects. They pre-sented their ideas to an invited group of over 70 senior government officials responsible for real estate acquisitions at their respective agencies. The meeting was in a very real sense a continuation of an industry roundtable

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Editor-in-Chief Dennis Eisen, Ph.D. 301-762-1441

Copy Editor Carolyn Hecht

Research Associate Marshall Benedict Board of Advisors David Cunningham, President, Federal Lease Consultants Greg Eden, President, Intercap Institutional Investors LLC Pat Keogh, President, AMV LLC Ken Kimbrough, President, Kimbrough & Associates; former Commissioner of Public Buildings Robert C. MacKichan, Jr., Partner, Holland & Knight, former General Counsel, GSA Thomas Peschio, former CEO, Government Properties Trust Tom Rochford, President, Federal Landlords Association Henry Schuldinger, Associate, Government Properties Group, Marcus & Millichap Peter Shanley, President, Phoenix Park Associates

Editorial Staff

WINTER 2008 GOVERNMENT LEASING NEWS

Sustainability Matters is the next in the series of recently published books by the Workplace and Research Staff of GSA’s Office of Applied Science. Two years ago we reviewed in these pages Workplace Matters, and like that earlier one, this book belongs on the bookshelf of all building owners, building manag-ers, architects and contractors. GSA developed this book as an aid to improving current practices and encour-aging continuing innovations that create and maintain sustainable work environ-ments. Whatever mission a Federal agency may have, the book presents an integrated approach, illustrated with numerous and various examples, that will improve buildings and workplaces and achieve dual legislative and execu-tive mandates: at best value to taxpayers and without compromising the quality of life of future Americans. The book begins by setting the stage for sustainability in the Federal govern-ment. The second chapter, “The Green-est Alternative,” highlights the impor-tance of the preservation of existing resources and the sustainability of not building at all. The third chapter ad-dresses the value proposition and prac-tical procurement practices for green buildings. The following five chapters, on Energy, Environmental Quality, Materials, Operations and Maintenance, and Beyond GSA: The Greening of America, offer proven examples of processes and techniques that GSA can and should be implementing. The strategies address the broad panoply of a building’s lifecycle—from choosing a site through operations, maintenance and renovation. Each chapter’s content is illustrated by case studies of GSA facilities that

emphasize the knowledge and strategies presented therein. In aggregate, they highlight the creativity, diligence and understanding of asset managers, pro-ject managers, property managers, and realty professionals. Their success should inspire project teams to solve the new challenges GSA faces, and im-prove each building through an inte-grated approach from the earliest phase.

Book Review: Sustainability Matters

The book’s concluding chapters ac-knowledge the green movement exter-nal to the Federal government, its influ-encers and GSA’s continuing and emerging efforts to participate in and, in fact, lead by deed and example. As seen in the charts illustrating the changes in global temperature and sea level and the growth in carbon dioxide, the world is taking notice of the ur-gency before us. Global scale environ-mental changes demand an examination of current practice and a vision for the future. It is in this context that GSA must make operational and design deci-sions to continue to meet the mission-related needs of customer agencies. Changing standard practices always involves risk. But the examples therein contain ideas and strategies that can reduce energy consumption, discourage resource depletion, increase productiv-ity, and create healthy work environ-ments. This is the legacy that GSA wishes to leave behind—buildings of today that incorporate our hopes for tomorrow.

The book’s 211 pages are crammed full of ideas, with many photographs accompanying each case study.

Did we mention the price? It’s free for the asking—but don’t wait too long before calling, as supplies are limited. Call GSA at 202-501-0353 to order your copy.

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For the past three years, I’ve had the unique privilege and challenge to run one of the largest and most diversified public real estate organizations in the world—the Public Buildings Service at the US General Services Administra-tion—managing a portfolio of 354 mil-lion rentable square feet in more than 8,600 assets across the nation, the work-place for one million employees. As the landlord to the federal civilian government, our customers include the Federal Judiciary, with its expanded courthouse program—including the completed Annex at the DC District Courthouse dedicated last year; and our work with the Department of Homeland Security’s Customs and Border Protec-tion with its expanded Land Ports of Entry Program at our Northern and Southern Borders. Other big national projects include the FBI’s expanded field office program. With the Bureau’s major shift in its mandate and opera-tions, GSA is working with them to deliver 30 plus projects across the coun-try totaling approximately 73 million rentable square feet of space in 37 US cities over the next several years. In addition, GSA is working with the Department of Homeland Security to build a new headquarters for the Coast Guard on the site at St. Elizabeths—a former mental hospital in the Anacostia section of Washington, DC, as well as completing the Food and Drug Admini-stration’s campus at White Oak, Mary-land. These headquarter projects are wonderful new additions to our owned inventory, and they are joined by the new San Francisco Federal Building and new courthouses in Cape Girardeau, Missouri; Springfield, Mas-sachusetts and Richmond, Virginia. GSA’s inventory is currently split between owned and leased space with the leased space growing at a signifi-cantly higher rate. Between 1967 and

Challenges Facing the Government’s Federal Civilian Landlord by David Winstead, GSA Commissioner of Public Buildings

2007, GSA-owned space has remained relatively constant while leased facili-ties have grown from 46 million to 178 million rentable square feet. In terms of construction activity, we have about 185 major projects under-way at a value of $12.5 billion. Our annual total budget is about $8 billion of which the funding dedicated to capi-tal construction has averaged a rela-tively constant $1.5 billion for the past four years. Within this budget, one shift has been to address a growing backlog of repair and alterations—currently estimated at $7 billion. In the President’s FY 09 funding request, for instance, $692 mil-lion of $1.3 billion for new construction is set aside for major Repair and Altera-tion projects. PRIORITIES PBS’s central business premise is offering best value, based on market knowledge of customer requirements, real estate and regulatory expertise, and market volume. I call this our “economic case.” Strengthening our economic case and operational excel-lence is essential for PBS to retain and

expand its customer base, while ensur-ing sufficient funds are available to re-invest in our real property assets, con-struct new assets for growing agency missions, and cover leased space and operating costs. The priorities that I’ve set out during my tenure as Commis-sioner captures PBS’s business direc-tion and the path that we must take to align resources, action and energy to accomplish our goals of providing supe-rior workplaces for federal customer agencies at good economies to the American taxpayer. Improving Real Property Capital Project Planning and Delivery This priority is geared to strengthen-ing GSA’s Capital program delivery to eliminate problems associated with pro-ject delays which can increase project costs by 5 percent per year. These de-lays have attributed to a number of fac-tors, including the escalating cost of construction materials, inconsistent business processes and timing and method of procuring design and con-struction services. Improvements in this area include developing consistent contract scopes of


David L. Winstead has been the PBS Commissioner since October 2005, and is responsible for the asset management and design, construction, leasing, operations, and disposal for a real estate portfolio of 347 million square feet in more than 8,600 public and private buildings ac-commodating one million federal work-ers. Before joining GSA, Mr. Winstead was a partner in a major Washington, DC, law firm practicing in the areas of real estate, transportation, public law, project development and procurement. Mr. Win-stead has served as the State of Mary-land’s Secretary of Transportation as well as Executive Director of the Washington/Baltimore Regional Association.

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work to use in capital design and con-struction contracts; updating our Facili-ties Standards Guidelines to incorporate the latest energy requirements as well as courthouse and land ports of entry de-sign criteria. Due to client operational issues, we have had recent successes in expediting the design and delivery cycle for GSA’s capital construction projects in our courthouse and land ports of en-try programs. In addition, we recently signed a new MOU with the Adminis-trative Offices of the Courts which sets the course for our partnership in the years ahead. Improve the Real Estate Leasing Program The amount of space that we lease from private landlords has almost quad-rupled over the last 40 years, reaching 178 million rentable square feet of space at the end of FY 2008. Today, half of the space occupied by our cus-tomer agencies is in leased facilities. PBS must excel at meeting customer’s leased space requirements by delivering superior space, in a timely fashion, at the best value for the taxpayer. Several years ago, PBS made a busi-ness decision to contract for profes-sional broker services to procure leases at no cost to the Government, known as the National Broker Contract. Our goal was to strengthen and improve our overall leasing program, augment a de-cline in the realty workforce, and free up our real estate professionals to focus more on customer requirements and strategic customer business planning. We have had good success with these contracts, in some cases, delivering rental rates that are below market and contributing rent credits from commis-sions. However, application nation-wide is still not even, and the processes and documentation of government leasing has been a challenge for the some bro-kerage firms working with us to meet

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Challenges Facing the Government (cont’d) the growing lease needs of the Govern-ment. We are continuing to work with our national brokers and PBS regions to achieve more consistent application and rent savings for our agency clients. In addition, the Office of Real Estate Acquisition is promoting consistent enterprise-wide operations and enhanc-ing communications with brokers and customers, while stressing both rents achieved and savings accrued. Particu-lar focus is being paid to increased effi-ciency dealing with the over 60 million square feet leased through NCR’s pro-grams in the Washington metropolitan area. Chip Morris, who heads up this new office, is working with senior leaders in PBS’s National Capital Regional office, to address these lease acquisition and administration problems. Towards that effort they are stripping back the acqui-sition and administration processes to identify problems and choke points in the system with the goal to improve timeliness and achieve increased effi-ciencies. We are committed to improv-ing our performance and feel confident that we can achieve these goals. One problem that we face is that the sheer size requires higher levels of review and approval for a larger percentage of leas-ing actions. Strengthen and Expand Work-space/Workplace Delivery In the face of increasing budget con-straints, customer agencies are in vari-ous stages of reassessing core mission work and their workplace needs. In the past five years, an increasing number of both corporate and governmental or-ganizations have recognized the value of a well-designed workplace in aiding the productivity of individuals and the effectiveness of organizations. To best meet changing customer needs, PBS has refocused its core value proposition from space transactions and being a “provider of space” to being a

“workplace solutions provider” with a customer-centric focus. This entails a detailed understanding of the custom-ers’ work needs to enable us to design a solution that, at a minimum, provides space that enables PBS customers to work effectively in their space. We have published a document entitled “Workplace Matters” with an accompa-nying implementation and consultation program for our clients. The ultimate goal is for PBS to provide a suite of services that together aid the customer in achieving an organizational shift more swiftly and effectively. Explore Ways to Leverage Fund-ing of Real Property Capital Pro-jects Federal investment capital is limited and increasingly insufficient to keep pace with the repair needs or new con-struction needs of GSA’s real property portfolio. We currently face over $7 billion in reinvestment needs for the PBS portfolio. At the same time con-struction costs continue to increase—up to 30 percent in the last five years alone. Current funding approaches include authorization to use available funds in the Federal Buildings Fund and addi-tional appropriation from Congress. In the past, predating budgetary scoring, GSA borrowed funds from the Depart-ment of Treasury through the Federal Finance Bank. Budgetary scoring treatment of lease purchases or financing through the Fed-eral Financing Bank continues to be problematic from a real property man-agement perspective. Budget authority for all purchases, including lease pur-chases and purchases financed through the Treasury, is scored in the year in which the authority to purchase is first made available in the amount of the Government’s estimated legal obliga-tions. Leases of projects constructed on government-owned land are generally considered “governmental” projects and


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Real Property Tax Management for Government-Leased Buildings By Melton L. Spivak, Vice President, JPMorgan Chase

Introduction Government-owned buildings that are used exclusively for governmental pur-poses are typically exempt from paying real property taxes in the United States, the logic being that it would be redun-dant to tax those buildings where the revenue would be used to support gov-ernmental activities. However, privately-owned buildings where the government leases space are not exempt from real property taxes, but are subject to the same process and scrutiny of real property assessment and tax collection as are all other taxable property. The tax revenue derived from real property taxes is used to pay for local (county and municipal) services such a public safety, public schools, recreation & parks. All other things being equal, taxes increase in direct proportion to the population density of the taxing juris-diction, as demand for local govern-mental services increases. This article is meant to be used as a primer for owners, managers, and users of government-leased property in the United States in making sure the prop-erty taxes on these properties are correct and properly allocated in accordance with the terms of the lease. The Math A real property tax bill is calculated by multiplying the tax assessment (a/k/a the “assessed value”) by the tax rate. The assessment is based upon the fair market value of the property as of a specific date, and is equal to a certain percentage of the fair market value of the property. The relationship between the two numbers is often expressed as the “assessment ratio”, i.e. assessed value divided by the fair market value = assessment ratio. Fair market value is determined by the assessor or an outside valuation company hired by the assessor, using

one or more of the three traditional ap-proaches to value: market, cost, and income. The tax rate is determined by dividing the annual expense budget of the taxing jurisdiction by the total assessed values within the taxing jurisdiction. For example, an office building with a fair market value of $25,000,000 in a jurisdiction with a 100% assessment ratio and a 4% tax rate would have a $1,000,000 tax bill. The calculation is simply: $25,000,000 x .04 = $1,000,000. As mentioned above, the assessment is a percentage of market value, and can be less than 100% of fair market value. A fractional assessment –less than 100% of market value-- may be pre-scribed by statute or may simply evolve with the passage of time if the market value increases but the assessment is held constant. In a perfect world, assessments accu-rately reflect market value. However, because there are different opinions of value of property, or of the ratio rela-tionship to like properties, taxpayers appeal assessments. Tax Appeals In some jurisdictions, where there is an annual assessment review, the prop-erty owner or his representative can meet with the tax assessor/tax appraiser by written request. If there is a simple objective issue, such as an incorrect square footage that impacts the property value, a correction can be made to the mutual satisfaction of both parties. However, if there is further difference in the opinion of value or there is no procedural way to meet with the tax assessor/tax appraiser, the owner can file an administrative appeal. Once a year, taxing jurisdictions al-low property owners or their representa-tives to file appeals before an adminis-trative board of review. Filing dates

must be met, or plaintiffs lose their right of appeal at that level. Based on evi-dence provided by the owner, and corre-spondingly by the tax assessor/tax ap-praiser, the administrative board of re-view will make its decision. If the property owner is not satisfied with the administrative board of re-view’s decision, he can engage an attor-ney to file a complaint with the judicial court overseeing tax appeals. There are variations in the appeal process, depending on the state where the appeal is filed. In fact, in some tax-ing jurisdictions, it may be best to use legal counsel throughout the entire ap-peal process. Government as Lessee If the government “net leases” an entire building and pays all the real property taxes thereon, it should have the right to appeal the assessment. This right should be clearly stated in the lease. The government should then use the right tax advisor or consultant to evaluate any tax reduction opportuni-ties. Where the government “gross leases”, i.e. is a partial tenant, the lease usually contains an escalation clause stating the government must pay its proportionate share of property taxes that exceed the taxes of its base year. “Proportionate share” is usually calculated by dividing the tenant’s rentable square footage by the total rentable square footage in the building. “Base year” is usually the tax year in which the lease commencement date falls. Thus, for example, if the gov-ernment leases 10,000 square feet in a 100,000 square foot building, and the lease commences on March 1, 2009 and the building is located in a jurisdiction that uses the calendar year as the tax year, its proportionate share is 10%, and its base year is 2009. If taxes are $500,000 for 2009 and $600,000 for 2010, then the government will pay a


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Real Property Tax Management (cont’d)

tax escalation of $10,000 in 2010, which is 10% of the $100,000 increase over the base year. Likewise, if the landlord files tax appeals and gets reductions in subse-quent years, the governmental tenant should be entitled to its proportionate share of tax refunds or rent credits (in lieu of tax refunds). On large-square foot leases, these tax refunds or rent credits can be quite significant. Scrutinizing gross leases can often be done through lease audits by experts that specialize in reviewing all lease escalation expenses and management fees. Landlords and Property Manag-ers Landlords and property managers need to be vigilant in reviewing tax assessments. Properties that are over-assessed require higher base rents, and thus can be less competitive than other properties available for lease. Likewise, assessments impact the sale price of the property. When real estate investors have ac-cess to low-cost financing, premium prices are often paid for desirable prop-erties with reliable tenants, like govern-ments. As a result, real estate assess-ments of these properties and compara-ble properties are subject to increases relative to the relationship (known as the capitalization rate) of the property income to the property sale price. In a speculative market, a compression of capitalization rates can lead to signifi-cant increases in assessed values. The property owner or manager needs to ensure that its properties are not over-assessed under these conditions. In the United States, property taxes are the largest occupancy cost after rent. For this reason, foreign investors, espe-cially if they hail from certain countries like France and Germany, where prop-

(Continued from page 5) erty taxes are not a significant operating expense, need to acquire a working knowledge of the process to make sure their asset managers are efficiently re-viewing the property tax liability of their real estate investments. Information Technology The internet has brought new tools to property tax managers, real estate tax consultants, real estate appraisers, asset managers and investors/landlords. Many taxing authorities and assessment jurisdictions have made assessment information available to the public, and their data bases are accessible twenty-four hours a day. To access this information on the taxing jurisdiction’s web site, a parcel identification number or “PIN” is re-quired. This number is unique to each property. Some tax jurisdictions require block and lot numbers, or map, parcel, and lot numbers. The terminology is different, but these account numbers function the same way in bringing up tax assessment information. Moreover, maps and satellite images of properties are also available over the internet. A property can often be ac-cessed by simply identifying its street address, municipality, state or province, and county. Internal databases are also being cre-ated by owners and managers of large real estate portfolios in order to manage administrative tasks and facilitate plan-ning and reporting functions. Software is available to share this information through the internet. This has become the most effective way to get assessment and tax informa-tion in order to do metrics for exploring and evaluating opportunities for assess-ment and tax reductions. Site Visits It cannot be overemphasized that any-one reviewing a real estate tax assess-ment should do a complete site inspec-

tion of the property in question. Over time, a number of factors can influence the value of a property. Everything from functional obsolescence to economic factors of the surrounding area can have a dramatic impact on a property’s value. Visiting the property often leads to questions relative to determining the “correct” tax assessment. Conclusion The best real estate professionals know the importance of ongoing prop-erty tax management. It is basic to “good housekeeping.” It pays to be knowledgeable on the subject. Additional information on property tax assessment and property tax man-agement can be obtained from the Inter-national Association of Assessing Offi-cers, the Society of Professional Asses-sors, the Institute for Professionals in Taxation, and the International Property Tax Institute. As landlords, corporations and insti-tutions become more sophisticated in budgeting, managing, controlling and reporting real estate operating expenses, government property managers, audi-tors, and supervisors will have to keep informed of conditions that impact gov-ernment occupancy costs. Managing property taxes in government-leased buildings is a necessary safeguard in controlling one major occupancy cost. Melton L. Spivak is a Vice President in Financial Management with JPMor-gan Chase (New York). His expertise is in real estate valuation and property tax management. Mr. Spivak has written a number of articles in various real estate and tax publications on property tax management, valuation and mergers. He received both his B.A. in Economics and MBA in Finance from the Univer-sity of Hartford. Mr. Spivak is on the Advisory Board of the International Property Tax Institute. His e-mail ad-dress is [email protected].

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FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS

A Succeeding GSA Lease Cost-Benefit Analysis on Protest Needs Only Be Reasonable

by Terrence M. O’Connor and Henry Schuldinger, Esquires Administration (DEA) the GSA went through the succeeding lease process only to conclude that DEA would have to pay significantly more over the 10-year lease term to move to comparable space. Moving office space for DEA headquarters would have cost the gov-ernment $77 million more over a 10 year lease term than staying put.

The succeeding lease process began with GSA issuing a pre-solicitation no-tice that it was looking for alternative locations to satisfy DEA’s requirements for a 10 year lease of almost 600,000 rentable square feet of office and related space in Northern Virginia. The incum-bent landlord and Eisenhower Real Es-tate Holdings, LLC responded with ac-ceptable proposals. Both offerors pro-posed rents meeting GSA’s $35 per rentable square foot rental rate maxi-mum.

The next step in the process was a GSA cost-benefit analysis performed pursuant to GSA regulations (GSAR) 48 C.F.R. Section 570.4 regarding suc-ceeding leases. The GSA evaluated the estimated cost of remaining at the pre-sent location versus relocating. Reloca-tion costs in this instance included re-quired security upgrades, telecommuni-cations cabling, design fees and buildout costs, fixtures, furniture and equipment, and the move itself. Eisen-hower claimed that the intangible bene-fits of its offered lease location were not properly quantified by GSA, such as a newer building offering space layout improvements to consolidate or accom-modate growth, state-of the art technol-ogy expansion options, a better location, and superior security setbacks. But a significant factor in the incumbent les-sor’s favor was that the government had made a number of upgrades and cus-

tomized the space for DEA, according to GAO "at substantial government ex-pense… and that substantial costs for the upgrades would be duplicated in a relocation.” The upgrades included the construction of command, communica-tion and conference centers, chambers and courtrooms, secured work areas, a museum, cafeteria, fitness center and health units, and an auditorium. GSA calculated that it would cost an addi-tional $86 million over the 10 year lease term to relocate to the Eisenhower site. Even after factoring in lower parking costs at the new proposed Eisenhower location, and restoration costs for re-quired repairs at the incumbent site, and physical move expenses (approximately $1.6 million)), the government con-cluded DEA would save a net of $77 million over the 10 year lease term by staying where it was. Since the cost-benefit analysis concluded that DEA could not expect to recover the reloca-tion costs through competition, the GSA proceeded to negotiate a sole-source follow-on lease with the incumbent lessor pursuant to GSAR Section 570.402-5(b). Eisenhower protested GSA’s conclusion to GAO but lost. Although Eisenhower had some crea-tive legal arguments, its best practical argument was that GSA did not prop-erly conduct the cost-benefit study. But GAO concluded that GSA had done it right. By law, the GSA decides whether relocation is cost effective. On protest to GAO, the authority of the GAO is limited to determining whether GSA’s decision was reasonable. In this case, the GAO determined that GSA had rea-sonably carried out the cost-benefit study, and therefore, had authority to issue a non-competitive lease renewal with the incumbent landlord.


Trying to win a lease renewal from an incumbent landlord may be a waste of time even if the competition offers space that meets all GSA criteria and may even offer better intangible bene-fits. If the government tenant, typically the General Services Administration (GSA), goes through the process cor-rectly, the government can justify stay-ing where it is as long as the GSA con-ducts a reasonable cost-benefit analysis. GSAR Section 570.402-1(b) provides that “[i]f a succeeding lease will exceed the simplified lease acquisition thresh-old, [the agency] may enter into the lease [if] . . . (2) [the agency] identify [ies] potential acceptable locations, but a cost-benefit analysis indicates that award to an offeror other than the pre-sent lessor will result in substantial relo-cation costs or duplication of costs to the Government, and the Government cannot expect to recover such costs through competition.”

How a cost-benefit plays out in favor of the incumbent lessor can be seen in a recent decision of the Government Ac-countability Office (GAO).* Eisen-hower Real Estate Holdings, LLC pro-tested a decision by the GSA to award a sole-source lease to the incumbent les-sor of office space for the headquarters location of the Drug Enforcement Ad-ministration (DEA). The protester as-serted that it could provide an accept-able alternative property offering cost savings to the agency including intangi-ble benefits, and challenged the reason-ableness of the cost-benefit analysis cited as the basis for GSA's justification for the use of noncompetitive proce-dures and determination that there was only one responsible source that could satisfy the needs of the agency.

On behalf of the Drug Enforcement

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Ask the Expert Dear Editor: I have been trying to get GSA to tell me if they intend to renew my lease which expires in less than two months. I can’t seem to get a response from any-one. I’ve received several promises that “someone” will get back to me, but time is running out, and I have no idea if I will have a valid lease contract in two months or not. I need six months mini-mum to find a new tenant and do altera-tions for them. Why won’t GSA give me a response, and what should I be do-ing? Response by Dave Cunningham, Fed-eral Lease Consultants: The GSA leasing program is in the midst of changes that have trickled down to the lowest level, your lease. For those who want a review of the complete background in the changes going on within GSA’s leasing pro-gram, see the excellent article in the Spring 2008 issue of Government Leas-ing News, titled “ Delegated Leasing Authority,” written by Robert C. MacKichan, Jr., and Patrick R. Tierney, of Holland and Knight LLP. In that arti-cle, MacKichan and Tierney describe the directive for GSA leasing that was published in the Federal Acquisition Circular, dated November 19, 2007. The changes are extensive, and will not be reiterated in this article. How-ever, in summary, GSA has made it much more difficult for other agencies to lease space. The result is that many leases that were handled by non-GSA agencies are now being given to GSA as they expire. This means that the GSA leasing workload has increased substan-tially, but unfortunately, the resources to handle the workload have not kept pace. As with any business, when work-load increases, but resources remain stagnant, something must give. And the results in your case—and many others, according to calls from my clients—is

that GSA has not negotiated an exten-sion or succeeding lease with you in a reasonable timeframe. Could it be that GSA is planning on moving out of your building in two months, and that’s why you haven’t heard from them about a lease exten-sion? My guess is that if GSA had awarded a new lease in another build-ing, and that is the reason they haven’t contacted you, you would have heard of this by now. You can check www.fbo.gov to determine if they have awarded a new lease contract in your city. But if they were building a new building, or remodeling for occupancy somewhere else, or if they were closing down the office, you would probably be aware of it as well. Such matters are not usually tightly-held secrets in the com-mercial real estate community. Assuming that the government is not moving out of your building, the most likely action by GSA will be that they request a short-term extension from you—probably one or two years. GSA’s problem is that they are required by law to open this lease up for competition. But to do so, they should have adver-tised it a year ago, and they apparently failed to do so. So now, they must use one of the exceptions to the Competi-tion in Contracting Act which allows them to negotiate with you on a non-competitive basis. But they will only negotiate for the time needed to adver-tise the requirement, and negotiate for a long-term lease with those who re-spond. In theory, they will then stay in your building for this resultant short term, while they use that time to solicit com-petitive offers for the amount of space needed for a long-term lease. If your building meets the requirements for a long-term lease, or is capable of being renovated to meet that need, then you should be allowed to compete for the award. Will they actually get around to

the advertisement and issuing a solicita-tion for offers within the short-term extension? It’s too soon to tell. Don’t be surprised if they come back to you in two years, asking for another short-term extension. This may all seem very un-fair, since it puts you in a bind in mak-ing long-term plans for a substantial capital investment. It might be slightly more palatable if you consider this ex-planation, presented from the GSA Contracting Officer’s point of view: “I have been given your lease that expires in two months. I don’t have time to publish it on the fbo.gov web-page and solicit competition, as I should do, and as I would do if they had as-signed this project to me a year ago. When the lease expires in two months, I can’t just tell the government agency to move out, because they have no place to go. So I’ll find some way to work around the problem. I’ll negotiate with this lessor for an extension just as soon as I finish the other five projects on my desk that expire in less than two months, or have already expired.” Viewed from this paradigm, you can see why GSA’s response is somewhat less than stellar. The reason for the shortage in GSA resources, and why they haven’t hired more government workers or brokers to handle the work-load could be the subject for another discussion, but for your case, the “insufficient resources” aspect is really the answer to the first part of your ques-tion. It may give you some minimal level of comfort to know you have plenty of company. The problem of resource shortage is also being seen in other agencies. An owner of a building leased to Bureau of Land Management that I know tells me of a post card he recently received from that agency informing him that he can expect his rent payment to be up to 45 days late. The purported


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Ask the Expert (cont’d)

reason is the implementation of a new financial accounting system. However, the bottom line is that there are insuffi-cient resources to adequately handle the transition. I know of another case where the Forest Service requested that GSA obtain leased space for them, to replace an expiring lease. The GSA official told Forest Service to do their own lease. This would seem to be a clear departure from the policy intent of the GSA Di-rective published on November 19, 2007, but it highlights the disconnect between the GSA Central Office, where taking over more leases is the goal, and the GSA regional offices, where the real work is done, and there aren’t enough people to do the work. With that as the general background for the problem you are facing, the sec-ond part of your question is what can you do? My suggestion is to do every-thing possible to have GSA make your lease the top priority. Contact the Con-tracting Officer repeatedly, by phone and in writing. Explain about funding issues with your bank. Explain about contracts for janitor service, or other services, such as maintenance contracts, that require a time commitment for you to obtain the services at reasonable rates. Bring up every possible issue to show it is to their advantage to make your lease the higher priority. And then do as much of the paperwork for them as possible.

(Continued from page 8) I helped a client in San Francisco negotiate a succeeding lease that ex-pired in mid-2007. It took over a year to get a succeeding lease written. Our ne-gotiation tactic was to be very aware of the government’s areas where they could “give,” and to basically write the new lease for them. We defined the reasonable rental range, and asked for a rent at the very top of that range. I ad-vised against asking for an unreasonable rate, but shooting for the absolute top of a reasonable range is just good negotia-tion tactics. In all of the expiring lease problems I’ve encountered, I’ve seen only one GSA Contracting Officer who refused to pay a reasonable rental rate for a succeeding lease or extension, when he based his offered rate on mar-ket rates in effect a decade previously when the original lease was negotiated. Most Contracting Officers are reason-able. In helping my client in San Fran-cisco, we wrote the clauses defining start and expiration dates, renewal dates, reduction in rent after the TI pay-off date, the payments clause, and 11 other related clauses in language that they were comfortable with. All the GSA Contracting Officer needed to do was a “cut-and-paste” to come up with a new lease. I believe that the result was the same as if they had drafted each clause themselves, but was achieved much sooner than if we had waited for them to do the work. We are still work-ing on remaining issues to be resolved,

but at least the building owner is now receiving a fair rental rate, instead of the below market rate that was in ef-fect for a portion of the hold-over pe-riod. Should you be required to draft clauses and do the work normally done by the Contracting Officer or broker? Obviously not. And I’m sure your Contracting Officer would agree with that. But if he or she has a work-load which is far more than one person could reasonably be expected to han-dle, and you go the extra mile to help them reach the end result that you are both striving for, then some extra work on your part may yield signifi-cant results. In summary, there appears to be a crisis of resources at the field level in GSA, and an abundance of work. Don’t expect things to get better soon. But be aware of their limitations, and what you can do to help minimize the impact of those limitations. Patience may be a virtue, but in dealing with GSA leases, it is also a requirement. David Cunningham worked as a Government Contracting Officer for almost 25 years, and now conducts in-depth reviews of GSA leases for build-ing owners to make sure they have been paid all they are due. He can be contacted through his company web-site at www.dcfedlease.com, or by email at [email protected].

*Eisenhower Real Estate Holdings, LLC, March 18, 2008,available at http:// www.gao.gov/decisions/bidpro/310941.htm Terrence M. O’Connor, Esq. is Special

(Continued from page 7) Counsel (Government Contracts) with Albo & Oblon LLP in Arlington, Vir-ginia. He is also an instructor for Man-agement Concepts, Inc. and has taught Federal Real Property Lease Law to government realty specialists for over 20 years.

Henry Schuldinger, Esq. is a com-mercial real estate agent with Marcus & Millichap in its Washington, D.C. office and specializes in investment sales and consulting for private land-lords of commercial properties leased to government agencies.

A Lease Cost-Benefit Analysis Needs Only Be Reasonable (cont’d)

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The Enormous Success of the RTC By Patrick J. Keogh

A couple of years ago I wrote an article for the publication Military Engineer. It was entitled “Beyond BRAC: They’re Assets Not Problems.” BRAC stands for Base Realignment And Closure, the term to describe the military’s process for disposing of its excess installations. In that article, I cited the Resolution Trust Corporation as “the most successful rela-tionship between the public and private sectors since the ad-vent of the space program.” I went on to suggest that the per-spective and approaches employed by the RTC should be considered by the Department of Defense as it approached the challenges posed by BRAC. On April 12, 1961, Russian astronaut Yuri Gagarin took his infamous orbital space ride. And on May 25, 1961, President Kennedy spoke before a humbled joint session of Congress and promised that the country would send an American to the moon by the end of the decade. On February 9, 1989, Presi-dent George H.W. Bush signed into law the Financial Institu-tions Reform, Recovery, and Enforcement Act (FIRREA) creating the RTC and promising that the nation’s financial crisis would be resolved by December, 1995. The enormity of both enterprises required extraordinary cooperation between our public and private sectors. Both efforts started with an important first step in a national com-mitment to a goal and schedule. And both were enormous successes. For public real estate and financial practitioners the RTC experience represents a record of huge accomplishment. Even now it is hard to believe that $400 billion in assets and 750 failed financial institutions could be sold in so short a period of time by a new federal organization. It is important to re-member that it happened in an environment where real estate values had plummeted and equities in financial institutions were seriously depressed. Until the present day the RTC effort represented the largest privatization of public assets in history. For that reason, the RTC experience has been very much in recent news as a precedent for what has to be done to weather our current real estate and banking crisis. Now that we know the problems in the U.S. exist on a broader global scale it may be helpful to consider that other countries employed RTC-like solutions to the privatization of their public assets. Most notable in that regard was the almost contemporaneous (1990-1994) experi-ence of the Federal Republic of Germany’s Treuhandanstalt (translated as “Trustee Agency” and referred to as “THA”) in privatizing the public assets of East Germany upon the coun-try’s reunification. The THA successfully accomplished the privatization of 13,000 East German industrial firms in only four years. Taken together these two agencies in a relatively short period of time fulfilled their legislative mandates and divested what amounted to history’s greatest transfer of wealth from the public to the private sector.

FIRREA created a complex mandate for the RTC. The new organization was to quickly privatize failing thrifts and their assets. The RTC was to minimize the impact of its resolutions on local real estate and financial markets and maximize the availability of housing for low- and moderate-income indi-viduals. Finally, the agency was to maximize the opportunity for minority-and women-owned businesses to participate as contractors and purchasers of assets. So there was the com-pelling business mission of disposing of the assets for top dollar, but that was to be accomplished in the context of some important social goals. The record of the RTC seems to indicate that success was a function of a number of key factors: 1. As mentioned before, the legislative sunset date served as a Kennedyesque going-to-the-moon goal. It became the objec-tive of everyone in the organization. Unlike the standard per-ception of a bureaucracy where the goal is to perpetuate its own existence, the employees at RTC measured their success by their progress toward their going-out-of-business date. 2. They created a decentralized structure. Although RTC had a Washington headquarters, operations and responsibility were mostly managed in the field. Local personnel were charged with selling and making decisions based on local circumstances. 3. RTC had an entrepreneurial culture. There was a strong sense of mission and reliance on individual initiative rather than a reliance on prescribed processes and procedures. 4. The social objectives were initially subordinated. In the beginning, the goals of mitigating local market impact, ad-vancing home ownership and promoting MWOB interests were subordinated to the mission of moving assets. As RTC matured and honed its tools those objectives became more manageable and achievable. 5. Very significant private sector involvement. Although the original staff of the RTC came from the FDIC and elsewhere in government, those individuals were quickly replaced with private, contract employees. Similarly, the transaction struc-tures, like securitization of assets, represented the best tools then available in the private markets. We soon forgot how bad the real estate and financial asset crisis was in 1989. Our short memory may be the result of how smoothly and smartly the RTC conducted its business. Based on its record of accomplishment the RTC seems to be an important model for our current asset resolution problems. One final thing. If you ever get the opportunity to talk with alumni of the RTC experience I would encourage you to take it. It’s a bit like talking with a combination of a proud Marine and a Kennedy era NASA employee. If I were involved in the current plans for economic recovery I think I would hunt down some of those folks starting with the former Chairman of the RTC, Bill Seidman. He can be found today as a regular commentator on CNBC.

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tion efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship. The following is a summary description of RTC Equity Partnership Programs: Multiple Investor Fund (MIF) Under the MIF Program, the RTC established limited partnerships (each known as a “Multiple Investor Fund” or “MIF”) and selected private sector entities to be the general partner of each MIF. The MIF structure contemplated the following: •The RTC conveyed to the MIF a portfolio of assets (principally commercial non- and sub-performing mortgage loans) which were described generically, but which had not been identified at the time the MIF general partners were selected. The assets were delivered in separate pools over time, and there were separate closings for each pool. •The selected general partner paid the RTC for its limited partnership interest in the assets. The price was determined by the so-called Derived Investment Value (“DIV”) of the assets (an estimate of the liquidation value of assets based on a valuation formula developed by the RTC), multiplied by a percentage of DIV based on the bid of the selected gen-eral partner. The general partner paid its equity share relat-ing to each pool at the closing on the pool. The RTC re-tained a limited partnership interest in the MIF. •The MIF asset portfolio was leveraged by RTC-provided seller financing. The RTC offered up to 75% seller financ-ing, and one element of the bid was the amount of seller financing required by the bidder. Because of the leverage, the amount required to be paid by the MIF general partner on account of its interest was less than it would have been if the MIF had been an all-equity transaction. •The MIF general partner, on behalf of the MIF, engaged an asset manager (one or more entities of the MIF general partner team) to manage and liquidate the asset pool. The asset manager was paid a servicing fee out of MIF funds,


The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Associa-tion Insurance Fund of the Federal Deposit Insurance Cor-poration. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion. Equity partnerships The Resolution Trust Corporation pioneered the use of so-called “equity partnerships” to help liquidate real estate and financial assets which it inherited from insolvent thrift insti-tutions. While a number of different structures were used, all of the equity partnerships involved a private sector part-ner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and mak-ing distributions to the RTC reflective of the RTC’s retained interest. The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership pro-gram, the RTC had engaged in “bulk sales” of asset portfo-lios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for “unknowns” regarding the assets, and to reflect uncer-tainty at the time regarding the real estate market. By retain-ing an interest in asset portfolios, the RTC was able to par-ticipate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquida-

The Resolution Trust Corporation 1989-1995

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into law upon passage by the House and Senate, under which as much as $700 billion is being allocated for the purchase and acquisition of tainted assets from banks and other financial institutions. Government Leasing News thought it would be instructive to compare the proposed Troubled Assets Relief Program (TARP) being developed under the EESA Act of 2008 against the manner in which the assets of insolvent banks had been liquidated by the Resolution Trust Corporation during the six-year period of its opera-tion between 1989 and 1995. In this, the first of a two-part article, the organization and procedures of the RTC are de-scribed. Because the RTC came into existence exactly two decades ago, many of our (younger) readers have little knowl-edge of precisely how that institution did its job at the time. After an extensive search through published papers, it was though that the best, most concise explanation of the RTC was the one at Wikipedia. With minor formatting changes to improve readability, here is the article in full, with only hyperlinks and source references removed. —The editors

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The Resolution Trust Corporation 1989-1995(cont’d)

and used MIF funds to improve, manage and market the assets. The asset manager was responsible for day-to-day management of the MIF, but the general partner controlled major budgetary and liquidation decisions. The RTC had no management role. •After repayment of the RTC seller financing debt, net cash flow was divided between the RTC (as limited partner) and general partner in accordance with their respective per-centage interests (the general partner had at least a 50% in-terest). Each of the MIF general partners was a joint venture among an asset manager with experience in managing and liquidating distressed real estate assets, and a capital source. There were two MIF transactions involving over 1000 loans having an aggregate book value of slightly over $2 billion and an aggregate DIV of $982 million. N-Series and S-Series Mortgage Trusts The “N-Series” and “S-Series” programs were successor programs to the MIF program. The N-Series and S-Series structure was different from that of the MIF in that (i) the subject assets were pre-identified by the RTC—under the MIF, the specific assets had not been identified in advance of the bidding—and (ii) the interests in the asset portfolios were competitively bid on by pre-qualified investors and the highest bid won (the RTC’s process for selecting MIF gen-eral partners, in contrast, took into account non-price fac-tors). N-Series The N-Series structure contemplated the following: •The RTC would convey to a Delaware business trust (the “Trust”) a pre-identified portfolio of assets, mostly commer-cial non- and sub- performing mortgage loans. (The “N” of “N-Series” stood for “nonperforming.”) •Pre-qualified investor teams competitively bid for a 49% interest in the Trust, and the equity for this interest was pay-able to the RTC by the winning bidder when it closed on the acquisition of its interest. •The Trust, at its creation, issued a “Class A Certificate” to the private sector investor evidencing its ownership inter-est in the Trust, and a “Class B Certificate” to the RTC evi-dencing its ownership interest. The Class A Certificate holder exercised those management powers typically associ-ated with a general partner (that is, it controlled the opera-tion of the Trust), and the RTC, as the Class B Certificate holder, had a passive interest typical of a limited partner. •The Class A Certificate holder, on behalf of the Trust, engaged an asset manager (sometimes referred to as the “servicer”) to manage and liquidate the asset pool. The ser-vicer was paid a servicing fee out of Trust funds. Typically,

(Continued from page 11) the servicer was a joint venture partner in the Class A Cer-tificate Holder. The servicer used Trust funds to improve, maintain and liquidate Trust assets, and had day-to-day management control. The Class A Certificate Holder exer-cised control over major budgetary and disposition deci-sions. •The Trust, through a pre-determined placement agent designated by the RTC, leveraged its asset portfolio by issu-ing commercial mortgage backed securities (“CMBS”), the proceeds of which went to the RTC. Because of the lever-age, the amount required to be paid by the Class A Certifi-cate Holder on account of its interest was less than it would have been if the N-Trust had been an all-equity transaction. •Net cash flow was first used to repay the CMBS debt, after which it was divided between the RTC and Class A Certificate Holder at their respective equity percentages (51% RTC, 49% Class A). Each of the N-Series bid teams was a joint venture be-tween an asset manager with experience in managing and liquidating distressed real estate assets, and a capital source. There were a total of six N-Series partnership transactions in which the RTC placed 2,600 loans with an approximate book value of $2.8 billion and a DIV of $1.3 billion. A total of $975 million of CMBS bonds were issued for the six N-Series transaction, representing 60% of the value of N-Series trust assets as determined by the competitive bid process (the value of the assets implied by the investor bids was substantially greater than the DIV values calculated by the RTC). While the original bond maturity was 10 years from the transaction, the average bond was retired in 21 months from the transaction date, and all bonds were retired within 28 months. S-Series The S-Series program was similar to the N-Series pro-gram, and contained the same profile of assets as the N-Series transactions. The S-Series was designed to appeal to investors who might lack the resources necessary to under-take an N-Series transaction, and differed from the N-Series program in the following respects: •The S-Series portfolios were smaller. The “S” of “S-Series” stands for “small” -- the average S-Series portfolio had a book value of $113 million and a DIV of $52 million, whereas the N-Series average portfolio had a book value of $464 million and a DIV of $220 million. As a consequence, it required an equity investment of $4 to $9 million for in-vestor to undertake an S-Series transaction, versus $30 - $70 million for an N-Series transaction. •The S-Series portfolio was not leveraged through the issuance of CMBS, although it was leveraged through a


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The Resolution Trust Corporation 1989-1995(cont’d) •The general partner was authorized to develop the land parcels on a long term basis, and had comprehensive author-ity concerning the operation of the Land Fund. Costs to im-prove, manage and liquidate the assets were borne by the Land Fund. •Net cash flow from the Land Fund was distributable in proportion to the respective contributions of the general partner (25%) and RTC (75%). If and when the Land Fund partnership distributed to the RTC an amount equal to the RTC’s “capital investment” (i.e., 75% of the implied value of the Land Fund pool), from and after such point, net cash flow would be divided on a 50/50 basis. Land Fund general partners were joint ventures between asset managers, developers and capital sources. There were three land fund programs, giving rise to 12 land fund part-nerships for different land asset portfolios. These funds re-ceived 815 assets with a total book value of $2 billion and DIV of $614 million. JDC Program Under the JDC Program, the RTC established limited partnerships and selected private sector entities to be the general partner of each JDC Partnership. The JDC program was different from the MIF, N/S Series and Land Fund pro-grams in that (i) the general partner paid only a nominal price for the assets and was selected on a “beauty-contest” basis, and (ii) the general partner (rather than the partnership itself) had to absorb most operating costs. The JDC Partner-ship structure contemplated the following: •The RTC would convey to the limited partnership (the “JDC Partnership”) certain judgments, deficiency actions, and charged-off indebtedness (“JDCs”) and other claims which typically were unsecured and considered of question-able value. The assets were not identified in advance, and were transferred to the JDC Partnership in a series of con-veyances over time. •The general partner was selected purely on the basis of perceived competence. It made payments to the RTC in the amount of one basis point (0.01%) of the book value of the assets conveyed. •The general partner exercised comprehensive control in managing and resolving the assets. Proceeds typically were split 50/50 with the RTC. Operating costs (except under special circumstances) were absorbed by the general part-ner, not the JDC partnership. JDC general partners consisted of asset managers and collection firms. The JDC program was adopted by the FDIC and is still in existence.

60% RTC purchase money financing. It should be noted that in the N-Series program where CMBS were issued, the ser-vicers/asset managers had to be qualified by debt rating agencies (e.g., Standard and Poors) as a condition to the agencies’ giving a rating to the CMBS. This was not neces-sary in the S-Series program •Assets in the S-Series portfolios were grouped geo-graphically, so as to reduce the investors’ due diligence costs. There were nine S-Series transactions, into which the RTC contributed more than 1,100 loans having a total book value of approximately $1 billion and a DIV of $466 million. The RTC purchase money loans, aggregating $284 million for the nine S-transactions, were all paid off within 22 months of the respective transaction closing dates (on average, the purchase money loans were retired in 16 months). Land Fund The RTC Land fund program was created to enable the RTC to share in the profit from longer term recovery and development of land. Under the Land Fund Program, the RTC selected private sector entities to be the general part-ners of 30-year term limited partnerships known as “Land Funds.” The Land Fund program was different from the MIF and N/S-Series programs in that the Land Fund general partner had the authority to engage in long-term develop-ment, whereas the MIFs and N/S-Series Trusts were focused on asset liquidation. The Land Fund structure contemplated the following: •The RTC conveyed to the Land Fund certain pre-identified land parcels, and non/sub-performing mortgage loans secured by land parcels. •The selected general partner paid the RTC for its general partnership interest in the Land Fund. The winning bid for each Land Fund pool would determine the implied value of the pool, and the winning bidder, at closing, would pay to the RTC 25% of the implied value. (The land fund investors were given the option of contributing 25%, 30%, 35% or 40% of the equity for commensurate interest, but all chose to contribute 25% of the equity.) •The Land Fund general partner could, at its discretion, transfer assets in Land Fund pools to special-purpose enti-ties, and those entities could then borrow money collateral-ized by the asset to fund development. Furthermore, a third-party developer or financing source could acquire an equity interest in the special purpose entity in exchange for ser-vices or funding.



With full acknowledgment to Wikipedia (www.wikipedia.com)

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Lease Construction: It’s Either New Tools or New Money by Patrick Keogh, AMV, LLC

The elevator speech on GSA’s Public Building Service goes something like this. PBS is in the business of acquiring and managing space and services for federal agencies. It has two main ways to acquire space: by direct construction and by leasing. “Direct construction” as used by PBS means the project is pub-licly funded and owned. A direct con-struction project is delivered by con-tracting with the private sector using a number of variants on the basic design-bid-build-operate delivery system. Leased space is also delivered by pri-vate owners with ownership remaining with a private owner. Leased space is delivered using a single solicitation for a lessor. As PBS was merged into the new GSA in 1949 things might have seemed simple. More permanent, larger and perhaps unique requirements of govern-ment would be delivered by direct con-struction. Smaller and perhaps more uncertain requirements would be leased in the market. It makes sense, but would it were that simple. As every public real estate profes-sional knows, funding for capital im-provements is the first thing to go when competition for public funds intensifies. As was discussed in our previous article on GSA’s Lease Construction Program that appeared in Government Leasing News [Fall 2008, Vol. 4, No. 3], that is exactly what happened as a result of the Korean War, Viet Nam War, the Cold War, and now during the War on Ter-ror. As backlogs of directly funded pro-jects grew during those times GSA de-vised a series of methods for privately financing and owning its projects in-tended for direct construction. Things changed in the early 1990s with the advent of the budget scoring rules. Those rules were installed at least partially in response to GSA’s use of these methods for privately financing owned facilities. The nature of the scor-ing rules is not the subject of this arti-cle. We will deal with that in a later

piece. Suffice it to say that the scoring rules effectively dictated that GSA could not own any leased property built to suit GSA’s requirements. GSA is unique among federal agen-cies in that it has multiyear real property leasing authority. In fact, GSA has leas-ing authority for terms as long as 20 years. Most other federal agencies, like governments generally, are limited to annual authority. Legislatures like our own Congress are very particular about not tying the budgetary hands of future legislatures. So here’s where GSA is in 2008. Budget pressures from the War in Iraq, the War on Terror, and other challenges have limited the funding for direct con-struction. GSA has agencies clamoring for facilities that in more normal times would be directly funded and as a result GSA is mostly limited to its basic leas-ing authority for delivery. Budget pres-sures cannot reasonably be expected to be reduced any time soon. So the “more money option” is nowhere on the hori-zon. Let’s talk a bit about the leasing de-livery system. The authority to enter into a lease of any significant size origi-nates with a congressionally approved prospectus. That prospectus limits the amount that may be spent to satisfy the requirement. That limit is usually set at GSA’s estimate of rents in the market where the space is to be procured. GSA has historically used a single solicitation for the turnkey delivery of space subject to the terms of the GSA lease and the prospectus cost limitation. Lease offer-ors are required to tailor their space to the public tenant’s needs, and the lessor usually operates the space for the term of the lease. This is common enough and usually works where existing space is to be leased. But now consider the current chal-lenge. GSA is being asked to provide larger and more complex projects and is essentially limited to leasing. In re-sponse, GSA has attempted to use its

standard lease solicitation approach to define the relationship with a developer-lessor. The space requirements are such that the lessor must undertake a build-to-suit in order to meet the project re-quirements. This may involve providing the site, designing, constructing, financ-ing, operating and owning the com-pleted facility. And all this for a fixed rental rate set several years prior based on anticipated market rates. “The largest purchase we make in our lifetimes is usually our home.” We hear that said so often we tend to accept it as fact. The truth usually is that the largest purchase any of us make is the mort-gage necessary to purchase our home. This holds just as true for GSA’s leased build-to-suits or what is also referred to as lease construction projects. The les-sor must arrange financing in order to fund the delivery of the facility—and financing is often the largest component of cost. The risks involved in fixing a construction cost, particularly based on anything less than detailed plans and specs, are tough enough. Just imagine trying to fix the financing rate months ahead of when the financing is re-quired? That’s what the current ap-proach to lease construction projects requires. Let’s pursue the financing issue a little further. As we are all aware, rates change over time. GSA lease construc-tion projects are often priced as spreads over Treasury rates. After all, a long-term GSA lease represents a federal agency obligation and pegging rates to Treasuries makes sense. The problem is that Treasuries vary over time and spreads also change over time. Spreads vary as a function of a variety of fac-tors, including the specific nature of the risks associated with a particular lease. But rates vary depending on the vaga-ries of the market as well. This is espe-cially apparent at this writing as the capital markets experience an unprece-dented flight to quality best represented


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Lease Construction: It’s Either New Tools or New Money (cont’d)

by Treasuries but where spreads have widened significantly. In some cases, there simply is no credit available to fund certain obligations. So what is one to do? The current system of burdening the offerors with taking all the rate risk is to ignore the basic issues. If rates go up, the success-ful offeror will either seek changes in the lease to cover the additional cost or will attempt to abandon the deal. If rates go down, the lessor reaps a windfall profit. We have seen lessors walk away from closing with very large checks. The government can’t win under the current system. There are, of course, financial market tools for hedging rate fluctuations. But they are expensive and it is impractical to burden offerors with yet another pursuit cost. To hedge rates would also require a date certain for funding and GSA’s procurement proc-ess does not lend itself to committing to such a fixed schedule. Accepting a vari-able rate would also undermine GSA’s assurance that the deal can be com-pleted at the approved rental rate. GSA’s standard lease solicitation tools work reasonably well for procur-ing smaller increments of space in exist-ing buildings. Under the best of circum-stances for larger lease construction projects, it works poorly even under stable circumstances. In current markets it is largely unusable. That is the reason that private enterprise never uses the GSA approach to its privately financed build-to-suits. Nowhere in the Federal Acquisition Regulations is GSA required to use the current procurement system for build-to-suits. The FAR is often blamed when the government deals in a ham-handed manner with private markets. It may be of surprise that the FAR in 1.102(d) states: The role of each member of the Ac-quisition Team is to exercise personal initiative and sound business judgment in providing the best value product or service to meet the customer’s needs. In

(Continued from page 14) exercising initiative, Government mem-bers of the Acquisition Team may as-sume if a specific strategy, practice, policy or procedure is in the best inter-ests of the Government and is not ad-dressed in the FAR, nor prohibited by law, Executive order or other regula-tion, that the strategy, practice, policy or procedure is a permissible exercise of authority. Is this a great country or what? The FAR simply says if there is no law against it and it looks like a good idea, then give it a try. Interestingly, else-where in the FAR the Acquisition Team is defined to include “… the customers they serve, and the contractors who provide the products and services.” GSA is to be commended for its recent lease construction roundtable that was held on June 11, 2008, soliciting agency and industry input. So GSA needs new tools. The exist-ing system does not work well and cur-rent markets may have rendered it unus-able. Our earlier article in Government Leasing News [Summer 2008, Vol. 4, No. 2] detailed the system used at the National Institutes of Health Bayview Research Center in Baltimore. The pro-curement structure there was patterned somewhat on the delivery system em-ployed by GSA in the $300 million Ar-chives II project in College Park, Mary-land, in the late 1980s. Although Archives II was accom-plished before the scoring rules, both projects were privately financed. Most importantly, both projects borrowed their delivery system largely from the standard direct construction design-bid-build-operate model. After all, these were really privately financed public building developments. The fact that the final form of the transaction had to be a lease does not alter that fact. Using a more direct construction approach, both projects were designed and built to the budget. At the risk of oversimplifying, the “budget” in both cases was the amount available at prevailing rates to fund the project. Using this delivery

method the budget for a lease construc-tion project will be more dynamic than a direct construction project because of fluctuating rates. Dynamic in the sense that construction plans and financing structures must be readily changeable as rates and requirements change. That’s the environment in which the private world must and does operate. The new tools must be based, not on rigid pre-scribed procurement systems, but on the kind of public-private partnering and relationships that was at the center of both Archives II and Bayview. The public-private partnering model is the long-term answer to the govern-ment’s challenge for the best tool for meeting its current backlog. More im-mediate benefits can be achieved by modifying current solicitations to pro-vide the government with the opportu-nity to provide its own financing. It is a principle of economic efficiency that the entities causing the risks should manage the risk and sustain the cost or benefits of their own actions. The risks associated with the financing and the resulting rates are almost exclusively within the government’s control. To the extent the government causes rates to increase, it should incur those costs. Similarly, any lower rate advantage achieved from improving the deal should accrue to the government. As described in our Fall 2008 article on GSA’s Lease Construction Program, this is an approach used during a transi-tion period in a prior program of private financing of public buildings. We all know that in the options of new tools or new money, it really is a Hobson’s choice. There will be no new money for public buildings develop-ment for a very long time. So to get the job done we need new and better tools. The tools are there and they have been used successfully before in government. The tools are also based on the best private sector practices. And if there is no law against the new tools and they make sense, the FAR tells us to give them a go.

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FALL 2008 GOVERNMENT LEASING NEWS


Notable and Newsworthy (cont’d)

convened by GSA on June 11, 2008, to address the severe difficulties facing the government’s lease construction pro-gram. For a variety of reasons, the lease construction program has slowed down significantly. This is a matter of grave concern not just to government agencies that require new and replacement facili-ties, but to the private sector as well that supplies the financing and construction expertise. I was at that roundtable and noted that very few fresh ideas on how the situation could be alleviated were advanced. Shortly after that meeting, however, I was approached in my capacity as pub-lisher of Government Leasing News by industry representatives, who explained to me some alternative approaches to the current procurement process for lease construction. Now let me tell you, I’m a tough guy to convince. I listened closely, and the more I heard the more I realized that what was being described to me was not just an alternative ap-proach, but a viable alternative ap-proach. And by viable I mean one that didn’t craftily get around the rules and regulations, but was completely in con-formance with them all, whether budg-etary, scoring or procurement related. Perhaps most importantly, an approach that was routinely used in the private sector and had been successfully imple-

(Continued from page 1) mented in government not once but twice. In my judgment, based on more than three decades of involvement with GSA and other federal agency real es-tate departments, this was the real thing. With this is mind I agreed to serve as the sponsor of and moderator for the December 4th seminar. As an important afterthought, it oc-curs to me that the ideas presented at that seminar are an ideal complement to the economic stimulus package that is already in place and being imple-mented, as well to the stimulus package to be introduced by the incoming ad-ministration. Appearing elsewhere in this issue is a summary by lead panelist Pat Keogh of AMV, LLC of that semi-nar on alternatives to GSA’s current lease construction program. As he de-scribes, the current approach is not working very well and projects have not been getting done. That’s the bad news. The good news is there is now a back-log of as many as three dozen or so such projects amounting to approximately $5 billion. These are OMB approved and congressionally authorized projects that are ready to go. But that may not be the best part: these are also privately fi-nanced development deals that must be structured in such a way as to have no immediate budgetary impact. The seminar detailed the kinds of public-private partnering tools that need

to be employed to get these deals going. They are the same kinds of tools that commercial peers would use if they were doing privately financed build-to-suits. The government has been trying to get these projects done using an ap-proach unique to the Federal govern-ment. That is not the way for the United States government to get its best deal. There are far more efficient and effec-tive approaches to lease construction in the private market and the government needs to find the way to get its business done the same way that its commercial tenant peers do. If the government can get these pro-jects moving using the tools detailed in the December 4th seminar it will gener-ate work immediately. And that’s work in the commercial real estate market that is increasingly suffering under the weight of the recession. A significant number of the current (and prospective) backlog of build-to-suit projects are for our national security agencies. These are critically needed facilities justified and approved long before the govern-ment recognized a need for economic stimulus. These are not make-work pro-jects. We are currently experiencing tough economic times, but I believe this adversity can be turned to the public’s advantage by using the environment to introduce boldly better ideas and busi-


HPI Capital Inc. Ready to Purchase and Actively Searching for

Properties Under Short- and Long-Term Government Leases

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- 17 -


Government Leasing News is pleased to announce the establishment of the annual

Virgil W. Ostrander Award for the most innovative lease procurement

under Section 1.102(d) of the Federal Acquisition Regulations

Nominations for the best innovation in leasing should include the names of the government ac-quisition team, including contracting officer, realty specialist(s) and other members of the acquisition team on the government side who were directly involved in the procurement. In 1,000 words or less, describe the deal and the specific aspects that made that deal innovative. Leases can be those made by any agency, civil-ian or military, and can be operating, capital, lease purchase, enhanced use, lease construc-tion, or build-to-suit, and can reflect both recent and past procurements. Do not submit a copy of the lease itself, as it will likely contain proprie-tary information. Do include a link to any report or document describing the deal that’s in the public domain, and in the case of GSA leases, the GSA lease number.

Section 1.102(d) of the FAR says that members of Federal acquisition teams are encouraged to exercise initiative in finding better ways to con-duct the government’s business. Precisely:

Section 1.102(d) The role of each member of the Acquisition Team is to exercise personal ini-tiative and sound business judgment in provid-ing the best value product or service to meet the customer’s needs. In exercising initiative, Gov-ernment members of the Acquisition Team may assume if a specific strategy, practice, policy or procedure is in the best interests of the Govern-ment and is not addressed in the FAR, nor pro-hibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority.

Virgil W. Ostrander is a former assistant com-missioner for procurement for GSA’s Public Building Service, and did his job so well that he was detailed to the Resolution Trust Corporation to head up its procurement activities. Returning to GSA as the director of the Office of Public Utilities, he was responsible for the procurement of government-wide utilities for the nation’s federal agencies. Throughout his long career in public service, he was an outspoken advocate for inno-vative procurement procedures.

Submit all entries in Word format (with any ac-companying photo(s) in jpeg format) to Govern-ment Leasing News at [email protected], or call 301-762-1441 with questions. The winner will be selected by the Advisory Board, and all selections are final. Nominations for this year’s award are due by July 1, 2009.

AUTHORITY NOMINATIONS

VIRGIL W. OSTRANDER

SUBMISSIONS

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ness practices. I firmly believe those practices will survive our current terri-ble financial circumstances and become a permanent improvement approach to the government’s lease construction program.

And speaking of government procure-ment, the reference to the innovative procedures clause in Section 1.102(d) of the Federal Acquisition Regulations got us to thinking that there ought to be some sort of recognition to government acquisition teams that have saved the government time, effort and dollars through legitimate innovative proce-dures in doing lease procurements. As a private sector enterprise, Government Leasing News can’t give a cash award to federal employees, but we certainly can give recognition to government

(Continued from page 16) acquisition teams that in our judgment have used best innovative practices to accomplish their mission.

The call for the first such annual award is described on page 17. The first problem we faced was naming it. Call-ing it the Section 1.102(d) FAR Award hardly did the trick. But one person’s name leaped out at us when we thought about it, which is why we’re calling it the Virgil W. Ostrander Award. Mr. Ostrander spent over 30 years in federal procurement, working his way up after joining GSA as a management intern in 1965 to become the Assistant Commis-sioner for Procurement for the Public Buildings Service. Virgil was an out-spoken advocate of innovative procure-ment; so much so that when the RTC was established in 1989, he was asked to head up its procurement activities

Providing structured financial advisory services, mortgage and privately placed debt and equity financing on governmental and credit-leased facilities

Thomas P. Zarrilli CTL CAPITAL, LLC Paul B. Penney Tel: 212.792.7861 230 Park Avenue Tel: 212.792.7863

[email protected] New York, NY [email protected]

CTL CAPITAL, LLC

$25,000,000 Bond Financing for a Lease with the

Regional Transportation Commission

for an inter-modal terminal located in Las Vegas, NV

Recent Financings


U.S. Department of Energy

on a 148,700 to-be-built laboratory located in Richland, WA


Robert Wood Johnson Hospital

on a 125,000 to-be-built medical office located in New Brunswick, NJ

Notable and Newsworthy (cont’d)

Virgil W. Ostrander, as a dashing management intern

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Economic Highlights The Washington area economy continued to grow jobs at 66% of its long term average rate – 35,400 jobs in the 12 months ending in July – com-pared to a long term average of 53,400 per annum. With a low unemployment rate and one of the strongest economic bases, the metro area remains one of the top economic centers in the nation. Among major metro areas, only the oil-patch communities of Dallas and Houston exceeded Washington in job growth. Job Growth The Washington metro area experi-enced a 1.2% rate of job growth over the past 12 months, compared to a decline of 0.2% nationally. The Washington metro area is no longer first in job growth. However, it is the only large metro that produced more jobs in the past 12 months compared to the year prior. This is due to the stability created by the core industries hosted here – led by the Federal government. Consumer Price Index Overall inflation in the Washington/Baltimore region increased to 5.7% during the 12 months ending July 2008, from 3.6% during the 12 months of 2007. Surging gasoline prices aided the rise, as gas prices increased 38.5% during the 12 months ending July 2008. Housing Prices House prices declined 9.1% in the Washington metro area during the 12 months ending June 2008, according to the Office of Federal Housing Enter-prise Oversight (OFHEO). This compares to the national decline of 4.8% during the same period. In our view, improving market conditions will appear in 2009 in closer in submarkets and 2011 in farther out submarkets. Pay Raises Despite slowing economic conditions, the Washington metro area ranked number one for salary budget increases in 2008, according to World at Work.

The metro area increased salary budgets by 4.0%, compared to other metro areas raising budgets by 3.7% to 3.9%. According to the Human Resource Association of the National Capital Area, which conducts its own survey of area companies, employers are offering average pay raises of 4.7%, up from 3.5% in 2007. Washington Area Outlook We expect the Washington metro area economy to make modest gains during the balance of 2008, as the aftermath of the Credit Crunch continues to unfold. Although we expect growth to slow this year, we anticipate modestly improving conditions in 2009, with healthier progress in 2010 as the economy regains its footing. The Government and Professional and Business Services sector should continue to lead job growth. The Financial and Construction sectors should start to see improvement in the near-term as the market recovers from the impact of the Credit Crunch. Net absorption improved from the first half of the year, is still below the long-term average. With a large pipeline of development, vacancy increased and rent growth halted. Although annualized groundbreakings have eased compared to 2007, they remain high, particularly in the District. Despite softening conditions, the metro area remains one of the top performing markets in the nation. Market Highlights •Net absorption: 1.4 million SF, compared to the long-term quarterly average of 2.0 million SF. •Sublease space: Increased by 12,000 SF. Sublease space represents just 1.2% of the standing inventory. •Overall vacancy rate: 10.1%, up from 8.6% one year ago. Fourth lowest rate in the nation. •Direct vacancy rate: 8.9%, up from 7.4% one year ago. •Pipeline (U/C and U/R): 18.3 million SF, unchanged from one year ago.

•Pipeline pre-lease rate: 23%, compared to 24% a year ago. •Rents: Up 0.2% YTD, compared to rising 2.2% in all of 2007. •Investment sales: $2.9 billion YTD. Compared to $10.6 billion YTD in 2007. Average sale price: $412/SF compared to $368 last year at this time Leasing Deals The most notable lease deal of the quarter was GSA’s renewal of 525,000 SF at 2530 Crystal Drive, after renew-ing 236,000 SF at 400 Army-Navy Drive during the 2nd quarter. Under the BRAC decision, the GSA needs to vacate this space by September 2010. However, the GSA had to renew both leases, for five years, as the relocation space is currently in the early stages of construction. Due to the delay in construction on the bases, DoD has been forced to renew lease deals for five years as landlords, during the current economic slowdown, are reluctant to ink deals for three years at lower rents. Northern Virginia Northern Virginia experienced higher absorption levels YTD primarily due to two pre-leased projects. During the 1st quarter, the Waterview project delivered 633,000 SF at 98% pre-leased to the Corporate Executive Board. Randolph Square delivered 202,000 SF at 81% preleased to the Patent and Trademark Office, during the 3rd quarter. We expect the Northern Virginia office market to experience moderating conditions during the balance of 2008 and into 2009. Although jobs continue to be added to the Northern Virginia economy, albeit at a reduced pace, there will not be enough demand to keep pace with the amount of available supply. These conditions will cause vacancy to edge up over the next 24 months and rent growth to stall in some submarkets. Despite softening conditions, the Northern Virginia office market remains a strong player due to the


The Metropolitan Washington Area 3rd Quarter 2008

Source: The Washington/Baltimore Office Market 3rd Quarter 2008 Report, courtesy of Delta Associates and Transwestern

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Economic Highlights The Baltimore metro area economy experienced slowing conditions during the 3rd quarter of 2008. Although over 8,000 new jobs were created during the 12 months ending July 2008, unemploy-ment increased 80 basis points during the past year. The Education/Health and Professional/Business services continue to fuel job growth in the metro – with both sectors outpacing their 15-year averages. Overall, the Baltimore area economy is expected to remain stable in the near-term. Job Growth With 1.3 million payroll jobs, the Baltimore area ranks the second largest job base among comparable metros, slightly behind St. Louis. The Baltimore metro area added 8,300 new payroll positions during the 12 months ending July 2008, compared to the 15-year average of 15,300 per annum. The Bal-timore suburbs added 59% of the total new payroll jobs in the metro area. Unemployment Rate The Baltimore area unemployment rate was 4.9% in July 2008, up from 4.1% one year prior. The current rate is the lowest among comparable metro areas and compares favorably to the

The Baltimore Metropolitan Area 3rd Quarter 2008 national rate of 5.7% in July 2008Sector Consumer Price Index Overall inflation in the Washington/Baltimore region increased to 5.7% during the 12 months ending July 2008, from 3.6% during the 12 months of 2007. Surging gasoline prices aided the rise, as gas prices increased 38.5% dur-ing the 12 months ending July 2008. Housing Prices House prices ticked down 2.1% dur-ing the 12 months ending June 2008 in the Baltimore metro area, according to the Office of Federal Housing Enter-prise Oversight (OFHEO). This com-pares to the national decline of 4.8% during the same period. We believe increased demand and a decline in con-struction will stabilize pricing, leading to an up-tick in sales activity, with im-provement in market conditions appear-ing in 2009. Construction Activity The good news is that construction activity is easing; the pipeline has not grown over the past year. Pre-leasing is up while the vacancy rate holds steady. On the other hand, with annualized ab-sorption running at 82% of its historic average, rents are flat YTD. Overall, the Baltimore metro area is poised for sta-

ble but slowing conditions in the near-term. Market Highlights •Net absorption: 301,000 SF, compared to the long-term quarterly average of 425,000 SF. •Sublease space: Decreased by 96,000 SF. Sublease space is just 0.7% of standing inventory. •Overall vacancy rate: 12.0%, up from 11.9% one year ago. •Direct vacancy rate: 11.3%, up from 10.9% one year ago. •Pipeline (U/C and U/R): 3.3 million SF, unchanged from one year ago. •Pipeline pre-lease rate: 44%, up from 33% one year ago. •Rents: Flat YTD, compared to 0.8% growth in 2007. •Investment sales: $305 million YTD. Average sales price: $216/SF. Baltimore Area Outlook We expect the Baltimore metro area to continue its steady but slow growth during the remainder of 2008. We an-ticipate employment will increase gradually this year and in 2009, particu-larly in the Professional/Business Ser-vices and Education/Health sectors. Growth should pick up notably during 2010, as the national economy picks up.

Source: The Washington/Baltimore Office Market 3rd Quarter 2008 Report, courtesy of Delta Associates and Transwestern

concentration of defense agencies and contractors, and should continue to attract some District tenants with its competitive buildings at lower rents. Suburban Maryland Suburban Maryland regained its footing after experiencing negative absorption during the first half of the year. The Suburban Maryland office market experienced improving condi-tions during the 3rd quarter of 2008, as absorption surpassed the quarterly long-

(Continued from page 19) term average and vacancy edged down. However, annualized absorption remains below the yearly long-term average and vacancy is up over the past year, as Prince George’s County continues to recover from large tenants vacating space during the first half of the year. Overall, conditions are steady in Suburban Maryland. District of Columbia The District of Columbia’s office market experienced slow absorption during the 3rd quarter of 2008.

Although overall vacancy edged down during the past three months, it has risen over the past year. We expect the District’s office market to experience sluggish conditions during the balance of the year and into 2009, as the economy slowly recovers and tenants regain confidence in the market. Overall, the outlook for the District remains positive, as it currently retains one of the lowest vacancy rates and the most premier space options for tenants.

The Metropolitan Washington Area 3rd Quarter 2008 (cont’d)

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Federal Agency Enhanced Use Leasing Government Leasing News monitors active Federal agency enhanced use leasing projects, including those under way or con-templated by the various branches of the Department of Defense and the Department of Veterans Affairs. As time goes on, we’ll add enhanced use leasing activities on the part of other Federal agencies as well. Blanks typically indicate parameters being developed, or information that is privileged, restricted, or for other reasons cannot be publicly released until plans are completed and appropriate approvals made. Items in blue represent changes noted since the previous issue of the newsletter.

Base State Acres Scope Status Ft. Richardson AK Removed from the Army EUL List Redstone Arsenal AL 422 Offices, R&D, Academic, Conference Center In lease negotiation with LW Redstone Buckeye-National Guard AZ Project Identification (Pending) Camp Navajo AZ 815 Intermodal Transportation & Industrial Park In lease negotiation with Federal Development Yuma Proving Ground AZ 2400 Hot Weather Testing Center In lease admin. with General Motors Corp.

Los Alamitos CA Concept Package Prep & Approval Ft. Irwin CA Concept Package Prep & Approval Sierra Army Depot CA Concept Package Prep & Approval Ft. Carson CO Removed from the Army EUL List Walter Reed AMC DC Building 40 Lease Administration Snake Creek Nat'l Guard Site FL 100 R&D, Light Industrial and Flex Space In lease negotiation with Federal Development Ft. Stewart GA Concept Package Prep & Approval Ft. Riley KS Project Identification (Pending) Rock Island Arsenal IL 190 Historic Preservation and Golf Course In lease negotiation Rock Isl. Arsenal Golf Club Ft. Knox KY Concept Package Prep & Approval Natick MA Project Identification (Pending) Army Laundries Many Project Identification (Pending)

Aberdeen PG/Lauderick Creek MD 1300 Law Enforcement Training Facility In lease administration with APG Devel. Ptnrs Ft. Detrick Gateways MD 24 Hotel Conference Center/Office/Labs In lease administration with Detrick Properties Ft. Meade MD 540 Office Buildings and Golf Courses In lease negotiation with Trammell Crow Co. Aberdeen PG/Maryland Blvd. MD Lease Administration

Ft. Detrick MD Co-Generation Power Plant In lease admin. w/ Chevron-Texaco Keenan

Selfridge Air National Guard MI 500 Mixed-Use Community and Golf Course In lease negotiation w/ Communities by Beztak Ft. Leonard Wood MO Lease Administration Wetlands Mitigation Banking NJ Project Identification (Pending) Picatinny Arsenal NJ Lease Administration Watervliet Arsenal NY Light Ind. & Lab Space Developer Acquisition West Point/Highland Falls NY Developer Acquisition (NOL/Industry Forum/SSEB) Ft. Bliss/Beaumont Hospital TX Lease Administration Ft. Sam Houston TX Lease Administration Radford VA Developer Acquisition (NOL/Industry Forum/SSEB

U.S. Army Enhanced Use Lease Opportunities

For further detail on U.S. Army EUL’s, consult the agency’s Website at http://eul.army.mil.

- 22 -

For further detail on U.S. Air Force EUL’s, consult the agency’s Website at http://www.safie.hq.af.mil/afrpa/index.asp.


U.S. Air Force Enhanced Use Lease Opportunities

Base State Size Scope Status

Barksdale AFB LA TBD Phase I – Basewide Studies Charleston AFB SC TBD Phase I – Basewide Studies Creech AFB NV TBD Phase I – Basewide Studies Davis-Monthan AFB AZ TBD Phase I – Basewide Studies Dobbins AFB TX TBD Phase I – Basewide Studies Dover AFB DE TBD Phase I – Basewide Studies Elmondorf AFB AK TBD Phase I – Basewide Studies Fairchild AFB WA TBD Phase I – Basewide Studies Keesler AFB MS TBD Phase I – Basewide Studies Lackland AFB TX TBD Phase I – Basewide Studies Maxwell AFB AL TBD Phase I – Basewide Studies McGuire AFB NJ TBD Phase I – Basewide Studies Offut AFB NE TBD Phase I – Basewide Studies Patrick AFB FL TBD Phase I – Basewide Studies Peterson AFB CO TBD Phase I – Basewide Studies Pope AFB NC TBD Phase I – Basewide Studies Randolph AFB TX TBD Phase I – Basewide Studies Scott AFB IL TBD Phase I – Basewide Studies Tinker AFB OK TBD Phase I – Basewide Studies Wright-Patterson AFB OH TBD Phase I – Basewide Studies Charleston AFB SC 40.8 Light Ind. & Airfield Compatible Structures Phase II - Acquisition

Air Force Academy CO TBD Senior Housing Phase II - Acquisition Andersen AFB GU TBD Mixed Use—Industrial Phase II - Acquisition Beale AFB CA 334 Mixed Use (Mining, Light industrial, Lodging) Phase II - Acquisition Edwards AFB - Energy CA 3288 Commercial grade utility scale solar energy Phase II - Acquisition

Luke AFB - Energy AZ 1000 Commercial grade utility scale solar energy Phase II - Acquisition

MacDill AFB FL TBD 300 – 400 Room Hotel Phase II - Acquisition

Malmstrom AFB MT TBD Coal to Liquid Plant Phase II - Acquisition

Santa Rosa Island FL 17 Recreational Complex in Okaloosa County Phase II - Acquisition

Nellis AFB NV 41 Wastewater Treatment Plan Phase II - Acquisition

Vandenberg AFB - Energy CA TBD Commercial grade utility scale wind energy Phase II - Acquisition

Selfridge AFB MI 800 TBD Phase III - Lease Negotiation & Signing

Andrews AFB MD 60 Mixed Use (Office, Retail, Residential, Hotel) Phase III - Lease Negotiation & Signing

Eglin AFB FL 17 Business Technology Park Phase III - Lease Negotiation & Signing

Kirtland AFB (Project 2) NM 120 Research and Development Park Phase III - Lease Negotiation & Signing Hill AFB UT 550 Falcon Hill Research and Development Park Completed Kirtland AFB 1 - Energy NM TBD Commercial grade utility scale solar energy Completed

See Page 29 for the U.S. Navy Enhanced Use Lease Opportunities

- 23 -


Base State Acres Scope Status Albany NY 2.5 Parking Public Hearing 24-Sep-07 Albuquerque NM 11 Assisted Living Public Hearing 25-Jan-01 Batavia NY Homeless Housing Winner selected; Notice of Intent 15-Feb-08 Battle Creek MI Laundry Winner selected but lease not yet awarded Battle Creek MI 6 Transitional Housing CP Approved 4-Feb-08; Public Hearing 5/21/08 Brevard FL 15 Assisted Living Winner selected; Notice of Intent 27-Sep-07 Butler PA 30 Hospital, Med. Office Cp Approved 23-Sep-04; Lease awarded 17-Apr-07 Canandaigua NY Nursing Home & Rehab Center Listed 6-Aug-07 Castle Point NY Mixed Use & Continuing Care Listed 18-Oct-07 Chillicothe OH Mixed Use Winner selected but lease not yet awarded Cleveland OH 102 Re-use/Campus Realignment Winner selected; Notice of Intent 27-Feb-07 Dayton OH 6 Senior Housing Winner selected; Notice of Intent 17-Mar-08 Dayton OH Homeless Housing Winner selected but lease not yet awarded Hines IL School of Nursing Bldg. 51 CP Approved 4-Feb-08 Houston TX 12.3 Clinical / Ambulatory Space Winner selected but lease not yet awarded Lebanon KY 94 Golf Course Public Hearing 6-Sep-06 Lincoln NE 59.7 Outpatient Clinic Public Hearing 12-Nov-07 Los Angeles CA RO Collocation Listed 2-Aug-02 Marion, IL IL 10 Hotel, Mixed Use CP Approved 4-Feb-08 Marion, IN IN 7 Senior Housing CP Approved 4-Feb-08 Memphis TN 1 Parking Facility CP Approved 22-May-08 Milwaukee WI Mixed Use Public Hearing June-08 Montrose NY Assisted Living Public Hearing #5, 28-Jan-08 Murfreesboro TN Golf Course Winner selected but lease not yet awarded Nashville TN 3 Research Winner selected but lease not yet awarded Newington CT Assisted Living Public Hearing 24-May-01 Palo Alto CA Research Center with Stanford University CP Approved 28-Mar-07

Perry Point MD Mixed Use CP Approved 31 Jan-07 Portland-Vancouver OR 2.17 Transitional Housing for 25-40 Units Listed 7–Dec-07 Riverside CA Transitional Housing Listed 24-Aug-04 Sacramento CA 2.02 Assisted Living Winner selected but lease not yet awarded Saint Louis MO 3.2 Parking Winner selected but lease not yet awarded San Francisco CA Research Public Hearing 8-Jan-03 Solano County CA 20 Water Supply & Property Development Listed 20-Jul-06 St. Albans NY 25 Mixed Use Public Hearing 29-May-07 Syracuse NY 0.73 Research Winner selected but lease not yet awarded

Walla Walla WA Mixed Use CP Approved 6-Jul-06 Washington DC 5.63 Mixed Use Listed 28-Aug-07 White City OR 28 Community College Public Hearing 14-Mar-02 Wilkes Barre & other sites PA Co-generation Plants in 5 Locations Public Hearings Jun-04

Tomah WI Office Building & Parking Listed 29-Feb-08

Alexandria & other sites VA 34 Identified Sites for Homeless Housing Listed 5-May-08

Lyons & other sites VA 15 Identified Sites for Mixed Use Listed 5-May-08

Department of Veterans Affairs Enhanced Use Lease Opportunities

The action “Pending Source Determination” means that the VA is in the process of determining whether the award in those instances can be made on a sole source basis. For a complete list of VA EUL projects under way, see the list maintained by the VA Office of Asset Enterprise Management at www.va.gov/oaem/docs/00_approved-Current-Public.xls, and associated updates compiled at www.va.gov/oaem.

- 24 -


Metro Area Vacancy Rate Year-End 2005

Vacancy Rate Year-End 2006

Vacancy Rate Year-End 2007

Vacancy Rate 1st Q 2008

Vacancy Rate Mid-Year 2008

Orange County, CA 6.4% 6.8% 10.0% 11.7% 12.9%

Washington, DC 7.9% 8.5% 9.1% 9.7% 10.0%

New York 8.9% 7.5% 7.8% 8.4% 7.8%

South Florida 8.9% 7.6% 8.6% 9.2% 8.6%

Los Angeles 8.9% 7.6% 7.7% 8.2% 8.5%

National Average 11.7% 10.4% 11.1% 11.3% 11.4%

Phoenix 11.8% 10.4% 13.0% 14.5% 16.0%

San Francisco Bay 12.1% 10.2% 8.4% 9.6% 8.4%

Boston 12.4% 11.1% 9.8% 9.7% 9.8% Atlanta 14.1% 12.9% 13.5% 14.1% 13.5% Houston 14.5% 12.1% 10.9% 10.9% 10.7%

Denver 14.9% 13.1% 12.6% 12.2% 12.3%

Chicago 15.5% 13.4% 12.8% 12.7% 12.8%

Dallas/Ft. Worth 18.5% 17.3% 17.1% 16.9% 17.2%

Austin – – 11.9% 13.2% 11.4%

San Antonio – – 11.0% 11.1% 10.5%

Vacancy Rate 3rdQ 2008

13.4%

10.1%

9.0%

10.4%

9.0%

12.0%

16.5%

9.5%

10.2% 14.4% 11.4%

12.7%

12.6%

17.0%

12.6%

10.8%

Overall Office Vacancy Trends in Selected Metro Areas

Source: Delta Associates, Transwestern, and CoStar. Data is from the Washington, DC, Metro Area report for the 3rd Quarter 2008.

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During calendar 2008, GSA has so far submitted a total of 48 prospectuses to Congress for FY 2009 for major alteration, leasing and construction projects. For convenience, we have split them into two tables: Construction or construction-related projects (including alteration, site acquisition, design, and lease alteration), and Leasing (including amendments to prior lease prospectuses). For reference purposes, we have preserved GSA’s index numbers in the tables. Check marks in the columns headed House and Senate indicate authorizing resolutions have been adopted by the House Committee on Transportation & Infrastructure and the Senate Committee on Environment & Public Works by when Government Leasing News went to press. Note that the dollar amounts requested for FY 2009 may reflect only a portion of total project development costs. Subscribers can order copies of any of the construction or lease prospectuses by contacting Government Leasing LLC at 301-762-1441.


Building/Address City State Type $ Requested House Senate

1. National Energy Program Various Locations Alt/Mod $36,647,000 ü ü

2. Dwight D. Eisenhower E.O.B. Washington DC Alt/Mod $14,700,000 ü ü

3. Dwight D. Eisenhower E.O.B. Phase III Washington DC Alt/Mod $51,075,000 ü ü

4. West Wing Infrastructure Replacement Washington DC Alt/Mod $162,932,000 ü ü

5. Everett Dirksen Courthouse Chicago IL Alt/Mod Amend. $56,254,000 ü ü

6. U.S. Post Office & Courthouse New Bern NC Alt/Mod $10,640,000 ü ü

7. United States Land Port of Entry San Ysidro CA Construction $343,323,000 ü ü

8. U.S. Courthouse Annex San Diego CA Const. Amend. $110,362,000 ü

9. Denver Federal Center Remediation Lakewood CO Construction $10,472,000 ü ü

10. DHS Consol/Dev. of St. Elizabeth’s Campus* Washington DC Const. Amend. $1,648,937,000 ü ü

11. Food & Drug Administration White Oak MD Construction $78,532,000 ü ü

12. United States Land Port of Entry Portal ND Construction $15,204,000 ü ü

48. U.S. Courthouse & Roybal Fed. Bldg. Alt/Mod Los Angeles CA Construction $701,135,000

GSA Construction Prospectuses for FY 2009

*Although in the President’s budget request for FY 2008, and subsequently authorized by the House and Senate, this project never made it into the Omnibus bill for FY2008.

GSA Lease Prospectuses for FY 2009 We include for lease prospectuses the space size (as expressed in Rentable Square Feet) and the maximum leasing author-

ity (Term) in years. The dollar amounts shown in all instances reflect the projected annual lease payment, not the overall cost over the term of the lease. Lease terms of 20 years are typically indicative of lease procurements that are likely to be fulfilled through build-to-suits or similar construction-to-lease arrangements arising out of major agency consolidations, campus-like developments, or security considerations.

Building/Address City State Type RSF Term $ Requested House Senate

13. National Park Service Lakewood CO Lease 176,542 10 $6,002,428 ü ü

14. Equal Employment Opportunity Comm. Washington DC Lease Amend. 161,000 10 $7,567,000 ü ü

15. GSA Federal Acquisition Service Burlington County NJ Lease 1,100,000 10 $8,800,000 ü ü

16. U.S. Army Corps of Engineers Sacramento CA Lease 227,490 10 $6,824,700 ü ü

17. Department of Homeland Security - ICE Washington DC Lease 136,500 10 $6,688,500 ü ü

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GSA Lease Prospectuses for FY 2009 (cont’d)

Building/Address City State Type RSF Term $ Requested House Senate

20. Small Business Administration Washington DC Lease 254,267 10 $12,459,083 ü

21. Department of Health and Human Services Chicago IL Lease 192,970 10 $10,613,350 ü ü

22. Department of Treasury Plantation FL Lease 140,853 15 $4,789,002 ü ü

23. Defense Intelligence Agency P.G. County MD Lease 266,000 10 $4,788,000 ü ü

24. National Institutes of Health Suburban MD MD Lease 159,731 5 $5,430,854 ü

25. Federal Aviation Administration Kansas City MO Lease 204,607 10 $5,933,603 ü ü

26. Federal Emergency Management Agency Arlington VA Lease 102,238 10 $3,885,044 ü

27. Dept of Defense - Missile Defense Agency Northern VA VA Lease 132,516 4 $4,505,544 ü ü

28. Dept of Defense - Hoffman I Northern VA VA Lease 312,976 5 $10,641,184 ü

29. Dept of Defense - Hoffman II Northern VA VA Lease 204,783 5 $6,962,622 ü

30. Federal Aviation Administration Fort Worth TX Lease 530,039 20 $18,551,365 ü

31. U.S. Attorneys Office Houston TX Lease 132,539 10 $4,638,865 ü ü

32. Federal Aviation Administration Renton WA Lease 518,865 20 $24,386,655 ü

33. Dept of Defense- Missile Defense Agency Huntsville AL Lease 386,832 4 $7,736,420 ü ü

34. Environmental Protection Agency San Francisco CA Lease Amend. 290,950 15 $17,457,000 ü ü

35. Dept of State Washington DC Lease 288,000 15 $13,248,000 ü ü

36. Dept of Agriculture Washington DC Lease 136,787 10 $6,702,563 ü

37. Dept of Homeland Security– OIG Washington DC Lease 121,000 10 $5,963,300 ü ü

38. Dept of Homeland Security– USCG Washington DC Lease Amend. 577,000 10 $21,917,986 ü ü

39. Dept of Justice Washington DC Lease 214,398 5 $10,505,502 ü ü

40. Dept of Justice Washington DC Lease 176,822 5 $8,8664,278 ü ü

41. Dept of Justice-DEA Miami/Dade/Broward FL Lease 150,273 15 $5,259,555 ü ü

42. Environmental Protection Agency Kansas City KS Lease 203,475 20 $6,205,987 ü ü

43. Dept of Defense-DIA Northern Virginia VA Lease 523,482 20 $20,939,280 ü ü

44. GSA-Federal Acquisition Service Northern Virginia VA Lease 92,992 3 $3,533,696 ü ü

45. Dept of Labor Seattle WA Lease 85,608 15 $4,109,184 ü

46. Federal Bureau of Investigation Seattle WA Lease 130,876 10 $4,589,821 ü ü

47. Social Security Administration Seattle WA Lease 104,841 15 $5,032,368 ü ü

19. Internal Revenue Service Washington DC Lease 100,500 10 $4,924,500 ü

18. Federal Emergency Mgmt Agency Washington DC Lease 101,111 10 $4,954,439 ü ü


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New, Recently Initiated GSA Leases The table below shows the 43 new and new/replacing leases in the GSA data base of active leases as of November 15,

2008, having start dates in the 3-month period from August 15, 2008 through November 14 2008, for leases of 2,000 or more RSF that were 100 percent devoted to office space, had lease terms of five years or more, were full-service leases, and were located in their respective Central Business Districts. They are ordered by size. Bear in mind that the award dates for these leases may have taken place many months prior to the start-up date of the lease.

Building Address City State CBD Service Term RSF Rent/RSF Office Lessor/Owner 2100 AIRPARK ALBUQUERQUE NM Y Y 5 2,156 $44.35 100% GEPT ASSOCIATES 1000 RIVERWALK DRIVE IDAHO FALLS ID Y Y 10 2,479 $25.85 100% CNW 1339 S. WESTERN ROAD STILLWATER OK Y Y 10 3,000 $41.28 100% FOUNTAIN SQUARE GROUP 1949 SUGARLAND DRIVE SHERIDAN WY Y Y 5 3,000 $18.00 100% COTTONWOOD CENTER 1701 RIVER DRIVE MOLINE IL Y Y 10 3,532 $24.44 100% CAXTON ON BASS STREET 2440 TULARE STREET FRESNO CA Y Y 15 3,763 $39.31 100% TUTELIAN HOLDINGS I 17801 PACIFIC HWY SOUTH SEATTLE WA Y Y 5 3,768 $97.66 100% PORT OF SEATTLE 2 RIVERSIDE DRIVE CAMDEN NJ Y Y 5 3,940 $35.94 100% DELAWARE RIVER PORT AUTHORITY 1 COMMERCE STREET MONTGOMERY AL Y Y 10 3,960 $25.05 100% COLONIAL CENTER 1401 H ST NW WASHINGTON DC Y Y 10 4,085 $52.00 100% TREA 1401 H 79 WINSTON DR. ROCK SPRINGS WY Y Y 5 4,461 $16.00 100% GATEWAY INC. 3857 BIRCH STREET NEWPORT BEACH CA Y Y 10 5,121 $42.47 100% PMO A CALIFORNIA 444 ENTERPRISE PKWAY RAVENNA OH Y Y 12 5,517 $29.95 100% RAVENNA SSA 123 GILLESPIE ST PAMPA TX Y Y 15 5,565 $25.75 100% SIGHTS WOLTERS L.L.C 1900 CHURN CREEK ROAD REDDING CA Y Y 10 5,658 $32.23 100% SHASTA EXECUTIVE PLAZA 120 MONTGOMERY SAN FRANCISCO CA Y Y 8 6,650 $56.95 100% 120 MONTGOMERY ASSOCIATES 3400 E. TAHQUITZ CANYON PALM SPRINGS CA Y Y 5 6,653 $47.82 100% CITY OF PALM SPRINGS 4000 N. CENTRAL AVENUE PHOENIX AZ Y Y 10 7,313 $26.36 100% PACIFIC OFFICE PROPERTIES TRUST 252 VENTURE PLACE LANCASTER OH Y Y 12 7,331 $38.90 100% WSSA LANCASTER 3810 CALUMET AVENUE VALPARAISO IN Y Y 10 8,100 $38.77 100% VALPARAISO SSA 115 TABLE MOUNTAIN BLVD OROVILLE CA Y Y 15 8,347 $39.00 100% OROVILLE SERVICE PARTNERS 1500 BLOCK, FLYNT ST GRIFFIN GA Y Y 10 8,369 $28.59 100% LBA-GSA GRIFFIN 3971 S. RESEARCH PK DR ANN ARBOR MI Y Y 10 9,163 $25.25 100% WSSA ANN ARBOR 8131 KLAMATH CT KENNEWICK WA Y Y 10 10,183 $26.74 100% GRANDRIDGE INVESTORS 129 SCOTT STATION RD JEFFERSON CITY MO Y Y 10 10,239 $26.12 100% VERMAAS AND SONS 3769 PARKER BLVD PUEBLO CO Y Y 10 10,523 $28.13 100% SIMCO VENTURES WEST 8898 RIO SAN DIEGO DRIVE SAN DIEGO CA Y Y 10 12,195 $37.43 100% HYUNDAI RIO VISTA INC. 1671 BELLE ISLE AVENUE MT PLEASANT SC Y Y 15 12,275 $26.97 100% 1671 BELLE ISLE 8808 RIO SAN DIEGO DRIVE SAN DIEGO CA Y Y 10 12,341 $33.22 100% RUBICON GSA I SAN DIEGO 201 ST LOUIS MOBILE AL Y Y 10 12,995 $18.99 100% ST LOUIS CONCEPTION ST. JV 88 WEST 38TH STREET SOUTH TUCSON AZ Y Y 15 13,000 $35.84 100% B77 DEVELOPMENT 3511 MARKET STREET PINE BLUFF AR Y Y 15 13,792 $19.46 100% WESLEYAN CORPORATION 5701 EXECUTIVE CTR DR CHARLOTTE NC Y Y 10 14,890 $27.70 100% CHARLOTTE EAST 3611 ALEX MUXO JR. BLVD. HOMESTEAD FL Y Y 20 17,151 $55.25 100% HOMESTEAD DE XIV ROUTE 22 PLATTSBURGH NY Y Y 10 18,640 $34.75 100% DHC OF PLATTSBURGH 1500 CHAMPA STREET DENVER CO Y Y 10 20,984 $38.00 100% M.R. CHAMPA 801 INTERNATIONAL DRIVE LINTHICUM HEIGHTS MD Y Y 10 22,973 $29.01 100% BWI CORPORATE CENTER ONE 3300 WATTERS ROAD PASADENA TX Y Y 15 26,385 $25.35 100% PASADENA SSA LCC ONE TECHNOLOGY PARK GREENSBORO NC Y Y 10 30,123 $30.00 100% GATEWAY UNIV. RESEARCH PARK 6680 CORP CENTER BLVD ORLANDO FL Y Y 15 43,668 $34.95 100% THE OXFORD FUND/ ORLANO L.P. 5880 NW 183 STREET HIALEAH FL Y Y 15 44,936 $51.73 100% S. FLORIDA FED PARTNERS-HIALEAH 14675 SW 120 TH STREET MIAMI FL Y Y 15 45,911 $50.72 100% SOUTH FLORIDA FEDERAL PRTNERS 21 CHURCH STREET ROCKVILLE MD Y Y 10 75,307 $40.25 100% 21 CHURCH STREET

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SPRING 2008 GOVERNMENT LEASING NEWS


The Korpacz survey published by PricewaterhouseCoop-ers tracks each quarter six major parameters for commercial properties of importance to real estate investors, lenders and appraisers, including discount rates, overall cap rates, resid-ual cap rates, market rent change rates, expense change rates, and average marketing time in months.

In addition to retail, R&D, warehouse, apartment, net lease and lodging markets, it tracks these parameters in the specific office markets of Atlanta, Boston, Charlotte, Chi-cago, Dallas, Denver, Houston, Los Angeles, Manhattan, Northern Virginia, Pacific Northwest, Philadelphia, Phoenix, San Diego, San Francisco, Southeast Florida, Suburban Maryland, and Washington, DC. Shown in the table are the average capitalization rates for the first three quarters of 2008. As stated in the Survey: Within the District, the Class-A office sector continues to outperform the market as a whole and posted an impressive 10.0% vacancy rate at midyear 2008. Despite a dip in de-mand, many landlords have maintained rental rates, espe-cially for quality space in the best locations. At midyear 2008, the average asking rental rate was $50.20 per square foot for all classes of space and $57.22 per square foot for Class-A space. Both of these averages represent new records for this market. Looking ahead, leasing activity is expected to continue to slow and cause market conditions to shift further in favor of tenants. As a result, investors are being more conservative with their market rent growth rate assumptions. This quarter, the average initial-year market rent change rate held steady at 3.65%, the lowest average for this market in almost two years. Rental rates, as well as growth rate assumptions, could decline in this market over the near term due to a slowdown in demand being met with speculative additions to supply. In fact, three new projects broke ground in the Capital Hill/NOMA submarket in the second quarter of 2008 – 145 N Street, NE, 1275 First Street, NE, and 20 F Street. And in the Southwest submarket, two projects are underway with deliv-ery set for late 2009. With investors continuing to flock to long-standing domi-nant markets, cap rates have yet to dramatically increase in this market as they have in secondary and tertiary ones. Par-ticipants expect cap rates to increase as much as 50 basis points in this market over the next six months. The average expected increase is 25 basis points.

The Korpacz survey is published four times a year and a one-year electronic subscription is $465. For further infor-mation go to www.pwcreval.com, or call 1-973-236-4830.

The Korpacz Real Estate Investor Survey

Office Market Cap Rate 1st Qtr

Cap Rate 2nd Qtr

Atlanta 7.08% 7.25%

Boston 7.34% 7.43% Charlotte 7.27% 7.56%

Chicago 7.00% 6.96%

Dallas 7.95% 7.75%

Denver 6.63% 6.52% Houston 7.25% 7.27%

Los Angeles 6.16% 6.20%

Manhattan 5.55% 5.67% Northern Virginia 6.83% 6.94% Pacific Northwest 7.81% 7.31%

Philadelphia 8.15% 8.25%

Phoenix 6.55% 6.90%

San Diego 6.08% 6.06%

San Francisco 6.11% 6.14%

Southeast Florida 7.80% 8.00%

Suburban Maryland 6.92% 7.02%

Washington, DC 6.16% 6.23%

Cap Rate 3rd Qtr

7.33%

7.39% 7.60%

7.03%

7.67%

6.54% 7.27%

6.20%

5.70% 6.95% 7.31%

8.13%

6.90%

6.16%

6.09%

8.00%

7.02%

6.23%

Source: Korpacz Real Estate Investor Survey, First, Second, and Third Quarters, 2008, with permission.

Office Market Cap Rates, 1st, 2nd, and 3rd Quarters

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- 29 -

Jeanne Arand 1-800-726-0366 [email protected]



U.S. Navy Enhanced Use Lease Opportunities Base State Size Scope Status

Newport Naval Station RI Pier II Phase I Studies Underway or Planned Annapolis Light Craft Repair Center MD North Severn River Complex Phase I Studies Underway or Planned Yorktown Naval Weapons Station VA 500 Phase I Studies Underway or Planned New London Submarine Base CT 4.34 Retail Corner Site Phase I Studies Underway or Planned

Large Cavitation Channel TN Removed from the Navy EUL List Norfolk Naval Shipyard VA 75 Willoughby Bay Annex Phase I Studies Underway or Planned Whidbey Island Naval Air Station WA Phase I Studies Underway or Planned Craney Island VA Phase I Studies Underway or Planned

Pearl Harbor Naval Complex HI Phase I Studies Underway or Planned Navy Recreations Center - Solomons MD Phase I Studies Underway or Planned

Point Loma Naval Base CA Phase I Studies Underway or Planned

Great Lakes Naval Station IL 60 Marina Site Phase I Studies Completed

South Depot Annex VA Phase II Solicitation Pensacola Naval Air Station FL 86 Saulfey Field Phase II Solicitation Portsmouth Naval Shipyard ME Phase II Solicitation New London Submarine Base CT Energy Phase II Solicitation

For further detail on the U.S. Navy EUL’s, go to the U.S. Naval Facilities Engineering Command Website at: http://www.navfac.navy.mil, and click on Enhanced Use Lease in the Main Business Line menu on the right.

With the AUSPL Insurance Program, coverage can provide immediate protection from weather damage, bodily injury lawsuits, floods, fire and other unexpected and expensive damages.

We insure more than 7,000 government-leased buildings nationwide. No wonder so many owners choose AUSPL Insurance coverage to protect their investment.

Get a free quote today with just one phone call. No complicated applications, no questionnaires, no inspections and no delays.

Is Your Government-Leased Building at Risk? Is Your Government-Leased Building at Risk?

- 30 -


Recent decisions issued by the Gov-ernment Accountability Office (“GAO”) and the U.S. Court of Federal Claims (“CFC”) suggest that it may be time for the General Services Admini-stration (“GSA”) to seriously consider incorporating a limited termination for convenience clause that would allow GSA to terminate a lease for conven-ience if a protest is sustained. Such a limited termination for convenience clause would assure more rigorous com-petition for GSA leases, lead to better value for the Government, and could save the GSA from significant damages if it must breach a lease by court order to ensure a fair competition. Background Traditionally, when a private contrac-tor does business with the Government, it can expect to have a termination for convenience clause in its contracts that allows the Government to terminate a contract with little notice, for any rea-son. In these standard procurement con-tracts, boards and courts will incorpo-rate a termination for convenience pro-vision by operation of law even if the Government fails to include such a pro-vision in the contract. Not so with lessors who rent space to the Government (at least using a GSA lease). GSA generally takes the position that real property leases do not need to adhere to the Federal Acquisition Regu-lation’s requirement that a termination for convenience clause be included in contracts. Most courts, boards, and the GAO have agreed—and for good rea-son. By statute, GSA leases can last for 20 years. These leases often require the construction or renovation of buildings, which usually entails the use of financ-

Should GSA Add a Limited Termination for Convenience Clause To Its Leases? Some Recent Decisions Counsel that it Should.

by Alex D. Tomaszczuk & Daniel S. Herzfeld, Esquires

ing to raise sufficient funds. Even in the sunniest of financial times, no lender would provide financing for the con-struction of a building that will depend on rental payments when the Govern-ment tenant can terminate at any time, for any reason. Thus, in most of its leases, GSA willingly and justifiably deletes the termination for convenience clause seen on GSA’s Standard Form 2 that is available online.* Recent Cases Some recent cases explore how GAO and the CFC respond to the absence of a termination for convenience clause in an awarded lease and, taken together, strongly suggest that GSA and offerors would be better served by including some limited termination for conven-ience clause in future leases. In New Jersey & H St., LLC, No. B-311314.3, June 30, 2008, 2008 CPD ¶ 133 and Trammell Crow Co., B-311314.2, June 20, 2008, 2008 CPD ¶ 129, GAO heard two challenges to GSA’s award of a lease to a lessor to provide up to 524,000 BOMA rentable square feet of space to combine and house various sections of the U.S. De-partment of Justice in Washington, DC. GAO sustained the two protests, con-cluding that GSA had improperly con-ducted the procurement by relaxing the requirements for the awardee’s pro-posal, but failing to give the protesters’ proposals the same benefit and credit. Additionally, GAO found that GSA failed to discuss certain proposal weak-nesses regarding New Jersey & H Street’s access to amenities and Trammell Crow’s key personnel. De-spite its conclusion that GSA conducted the procurement improperly, GAO did

not require GSA to correct the errors in the procurement and make a new award decision as GAO normally would do in this circumstance. Instead, GAO ex-plained: The lease here has been awarded and signed by the agency and awardee, and the lease does not contain a termination for convenience clause. In the absence of a termination for convenience clause, we ordinarily do not recommend termination of an awarded lease, even if we sustain a protest and find the award improper. Here, we do not think there is any basis to recommend termination. Ultimately, GAO only awarded bid preparation and proposal costs and the costs of protesting the award to the suc-cessful protesters. Protesters have avoided this fate by making it to the courthouse or GAO before a challenged lease has been signed. In Fedcar Co., Ltd., B-310980 et al., Mar. 25, 2008, 2008 CPD ¶ 70 and Hunt Building Co., Ltd. v. United States, 61 Fed. Cl. 243 (2004), modi-fied, 63 Fed. Cl. 141 (2004), the protest-ers both succeeded in overturning the award and getting another shot of being awarded the lease because no fully signed lease existed. In Fedcar Co., the protester challenged GSA’s award of a 15-year lease for the construction and lease of a dedicated facility of 6–9 acres (including the development of 110,531 rentable square feet of office and related space) to be used by the Federal Bureau of Investigation in Indianapolis, Indi-ana. GAO sustained the protest because GSA failed to properly calculate the awardee’s price and, therefore, also failed to properly conduct a price/technical tradeoff analysis of the two


*See http://contacts.gsa.gov/webforms.nsf/0/57A58CDEC8239E0485256BFA004F65F3/$file/

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Should GSA Add A Limited Termination for Convenience Clause (cont’d)

offerors. While it appeared that the lease had already been signed by GSA and the awardee, GAO disagreed be-cause GSA had proposed several changes to the draft lease and sent the lease to the awardee for its signature and agreement. GSA failed to produce the signed lease as part of the record before GAO, which concluded that the record showed “GSA’s conditional ac-ceptance of [awardee’s] offer did not form a legally binding lease contract.” Thus, GAO concluded that GSA should re-evaluate the proposals and make a new award. In Hunt Building, the CFC heard a protest of the Air Force’s award of a military privatization project lease at Hickam Air Force Base, Hawaii. The CFC issued an injunction ordering the Air Force to amend the solicitation, re-evaluate proposals, and allow the pro-tester to compete in the re-evaluation. The CFC enjoined the Air Force from entering a contract with the awardee because the Air Force unfairly relaxed a term of the solicitation for only the awardee and also allowed only the awardee to negotiate changes to the form agreement that had governed all offerors after the awardee was selected. The CFC noted that the lease did not include a termination for convenience clause. The CFC, however, recognized that it could issue its injunction because the parties had not closed and executed the lease. The above cases stand for the princi-ple that GAO and the CFC generally will not read a termination for conven-ience clause into an executed lease that does not include such a clause and, be-cause of the absence of such a clause, will not disturb the award of a lease even where the tribunal finds GSA (or another agency) has acted improperly in awarding the lease. However, while this

(Continued from page 30) principle generally applies, there exists at least one CFC decision that runs counter to this principle. In 210 Earll, LLC v. United States, 77 Fed. Cl. 710 (2006), the CFC was un-concerned with the absence of a termi-nation for convenience clause. The pro-tester challenged GSA’s award of a lease of office and related rental space in Phoenix, Arizona, to be occupied by the U.S. Internal Revenue Service. The CFC found that “GSA committed re-versible error when it completely failed to consider the non-price factors, as required under the [Solicitation for Of-fers], in its analysis of the offers.” The CFC vacated GSA’s award decision and ordered it to correct its evaluation errors and make a new source selection deci-sion. In coming to this conclusion, the CFC swept aside concerns voiced by GSA and the awardee that the executed lease lacked a termination for conven-ience clause and that the CFC would effectively require GSA to breach its contract to afford injunctive relief: The Government and [awardee] again raised the question of whether an enforce-able contract existed between [awardee] and GSA in this litigation. They argue that the existence of an enforceable contract affects what relief should be provided by the Court because it is not in the public interest to require the Government to breach a contract. However, whether there is an enforceable contract between these parties does not change this Court’s jurisdiction to give appropriate relief, including vacating the award, if we con-clude that the Government committed reversible error in the procurement proc-ess. Thus, the CFC in 210 Earll turned conventional wisdom on its head. Rather than reading a termination for convenience clause into the executed lease (as would be the case in other types of procurement contracts), which

would allow the Government to limit its damages to minimal termination costs, the CFC exposed the Government to potentially significant damages for breach of contract (which could include any lost profits expected for the life of a lease). Conclusion GSA has placed itself in a quandary when an unsuccessful offeror success-fully challenges an award. As with New Jersey & H Street and Trammell Crow, GSA risks awarding a lease to an of-feror that does not truly represent the best value to the Government. Also, as 210 Earll demonstrates, GSA may face the risk of significant damages for breach of contract where it does not include a termination for convenience clause that would minimize any costs to the Government. Rather than facing these concerns or making GAO and the CFC tip-toe around whether a lease has been executed as reflected in FedCar and Hunt Building, GSA should con-sider placing a limited termination for convenience clause in its leases pending the resolution of any protest. The Fed-eral Acquisition Regulation—clause 52.233-3 (“Protest After Award”)—contemplates termination of a contract after receipt of a final decision in a pro-test. In most cases, GSA already honors any stays of performance pending the resolution of a protest. For this reason, the limited termination clause should not prevent lessors from obtaining fi-nancing. Because performance is stayed during this time period, there is less risk to a lender that money lent will be spent —and financing institutions could themselves craft a clause in their lend-ing agreements requiring lessors to honor any stay honored by GSA. More-over, the larger concern that the Gov-ernment could terminate for any reason, at any time and risk the lender’s stream of repayments midway through a 20-


- 32 -


are therefore treated for budgetary scor-ing purposes as capital leases, unless the lease term is extremely short term. Several years ago, PBS received re-tention of proceeds authority as well as expanded options under Section 412 of the 2005 Omnibus Appropriations Bill. Since then, we have been working hard with the Office of Management and Budget and Congress on the applica-tions of Section 412 to our portfolio and building modernization needs. It is ex-tremely important that PBS continues this effort as a priority, as well as seek increased direct appropriations to the Federal Buildings Fund to sustain the viability of our 175 million square feet of federal building inventory. Continue to Implement the Presi-dent’s Management Agenda This priority is about good govern-ance and instituting good management practices. PBS is the scorecard owner for the Real Property Asset Manage-ment initiative. In 2006 we were the first agency to achieve a “Green” status on the scorecard for real property asset


Challenges Facing the Government (cont’d) management. We maintained that status for the past three years. As chair of the Federal Real Property Council’s asset management committee, we’ve been working hard to improve and standardize the way land-holding agencies are managing their real estate portfolio. To date, the Council has fo-cused on developing the government-wide inventory of federal real property with specific emphasis placed on the disposing of unneeded assets and main-taining or improving the condition of mission-critical assets. The FRPC in-tends to expand its focus to lease acqui-sition, management and disposition. This effort is focusing on two areas: improved management and oversight of existing leases and ensuring compliance with current rules governing the acqui-sition of new leases. For existing leases, the primary em-phasis will be placed on maximizing the utilization of existing leased space and terminating unneeded leases. Perform-ance goals and targets will be estab-lished to facilitate lease space consoli-

dation and usage maximization within and across Departments. GSA is also working to implement the lease delega-tion program in a manner that maxi-mizes the achievement of government-wide performance leasing goals and targets. For new leases, the emphasis is being placed on agencies rigorous application of current OMB guidelines when deter-mining whether to secure new space through a lease or capital acquisition. These guidelines serve as important budget controls that help federal agen-cies make smart business decisions when entering into complex real estate transaction. The FRPC intends to pro-vide federal agencies with best practices and suggested approaches for identify-ing real property needs that are best met through a lease versus new construc-tion . SUSTAINABILITY GSA is a leader in sustainability, but is facing challenging goals mandated by the Energy Security and Independence Act of 2007. The bill required GSA to establish an Office of Federal High-Performance Green Buildings within PBS which was accomplished earlier this year. The mission of the office is to bring together federal agencies and in-dustry to advance sustainable design and energy conservation in federal fa-cilities. For the first time, it requires GSA to reduce consumption of fossil fuel-generated energy in new buildings and major renovations. For new de-signs, our target is to be 55% below comparable commercial buildings, which may be difficult to achieve using today’s technology. Much more diffi-cult is the goal of using 100 percent non-fossil fuel generated energy by 2030 in new buildings. We are working with a broad and diverse group of or-ganizations both inside and outside the Federal community. This includes the Departments Defense and Energy, the


We are a buyer of existing government-leased buildings

• Single assets of $25 Million + • Forward commitments • Please submit to:

[email protected] or

Call: Richard Mark 310-589-3344 www.usrealco.com

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On 4 December, 2008, the Naval Heritage Center on Pennsylvania Ave-nue was the scene of an active engage-ment. This one did not involve the navy, however; it was all about ideas. Govern-ment Leasing News, together with AMV, LLC, sponsored a seminar on Alternative Lease Construction Meth-ods. AMV assembled a team of invest-ment bankers, lawyers, developers and public procurement experts and pre-sented a variety of new methods for doing lease construction projects to a wide range of Federal agency real estate professionals. A preview of the seminar has appeared in a series of articles ap-pearing in GLN throughout 2008. In recent years, Federal agencies have had to rely increasingly on lease con-struction methods to meet their space requirements. “Lease construction” is a term somewhat unique to government that means a privately financed leased

build-to-suit project. The cost of the ongoing war on terrorism has dimin-ished the funds available for the capital building assets required by Federal agencies. This comes at a time when the cost of public buildings is otherwise increasing as a result of the added em-phasis on security and green building

Seminar on Alternative Lease Construction Methods

standards. Add to that the destabilized credit markets and it’s the perfect storm. And all that combined with the intrinsic difficulties of the procurement system currently employed by GSA has re-

sulted in the government’s lease con-struction efforts having ground to a halt. AMV has assembled a team of firms to bring a more commercial approach to the Federal lease construction market. Current estimates of the backlog in lease construction projects are in the $4 to $5 billion range. AMV outlined a public-private partnering alternative to the current conventional contracting approaches. Patrick J. Keogh, the Presi-dent of AMV, argued that more conven-tion Federal contracting practices tended to promote an adversarial envi-ronment. This is compounded by the extraordinarily high pursuit costs re-quired by the current procurement proc-ess. Tom Regan of the Herndon Vir-ginia development firm, Regan Associ-ates LLC, said offerors on GSA’s lease construction projects routinely expend between $500,000 to $1 million or more in their attempt to win a deal. Keogh and Regan were joined in the day-long series of presentations and panel discussions by David Miller of the law offices of Pillsbury Winthrop

Shaw Pittman LLP. Also on the panel were Tom Zarrilli and Paul Penney of the New York City–based investment banking firm of CTL Capital, LLC. Panelists recommended to the govern-ment attendees that the current package system of procurement be replaced with a process for disaggregating the compo-nents of a major development project. At a minimum, they advocated the dis-aggregation of the financing which comprises the single largest component of project cost. Tom Zarrilli said that requiring the developer to provide the financing saddled the contractor with a cost that was mostly under the control of the government tenant. Zarrilli fur-ther indicated that existing lease con-struction solicitations could easily be amended to provide the government with the right to arrange separate fi-nancing. Tom Zarrilli’s presentation was par-ticularly interesting to seminar atten-

dees in light of the significant market changes experienced in recent months. He demonstrated graphically the inter-relationship of financing rates, develop-ment costs, and real property market valuations in explaining the recent rash of failed procurements. Zarrilli made


Pat Keogh of AMV, LLC

Tom Zarrilli of CTL Capital, LLC Tom Regan of Regan Associates, LLC

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Seminar on Alternative Lease Construction Methods (cont’d)

and editor of Government Leasing News announced the establishment of the Virgil W. Ostrander Award for in-novation in lease procurement. The in-

spiration for the “Virgil” award comes from Section 1.102(d) of the Federal Acquisition Regulations. That section encourages all members of the acquisi-tion team, including private sector con-tractors, to exercise innovation in find-ing better, less costly ways to conduct the government’s business. As Dr. Eisen told the audience, Mr. Ostrander worked his way up from management intern to become the Assistant Commis-sioner for Procurement in GSA’s Public Buildings Service. He was then detailed to fill a similar position at the Resolu-tion Trust Corporation (see elsewhere in this issue for a discussion of the enor-mous success of the RTC), and then returned to GSA as director of the Of-fice of Public Utilities. Eisen quoted Ostrander, who attended the seminar, as being remembered for saying that “’deal’ should not be a four letter word in government procurement.” Seminar attendees were given a pres-entation at lunch on the redevelopment of Pennsylvania Avenue by Tom

Regan, the former head of the Pennsyl-vania Avenue Development Corpora-tion. Rear Admiral Richard A. Bu-chanan, USN (ret.), who serves as Presi-dent and CEO of the Navy Memorial delighted the crowd with a talk on the importance of our Navy in America’s defense and global business activities. The Admiral shared many of the tradi-tions and Navy values incorporated into the Navy Memorial. In concluding the panel’s presenta-tions, Keogh mentioned that AMV has a GSA multiple award schedule contract which covers all the professional ser-vices provided by panel member firms in representing government agencies on build-to-suit deals. A GSA schedule contract is a master contract that can be used by any Federal agency and some local governments as well to procure services at prearranged rates and terms. The AMV schedule contract was the vehicle used by NIH to access the vari-ous firms’ services in completing the

Bayview transaction. For those of you who were not able to attend the seminar, do not despair. You can order a copy of the slides and plan to attend the next session in the series. See the next page for details.

some particularly interesting points on the budgetary scoring rules and how they are influenced by other market factors such as capitalization rates. David Miller of Pillsbury Winthrop gave a fascinating presentation of the role of public-private partnerships in federal contracting, emphasizing the cooperative nature of the PPP approach vs. the often adversarial nature of con-ventional contracting. The panel’s key recommendation was that GSA employ a more total disaggre-gation approach to its lease construction procurements. This approach would be patterned on the procurement structure employed by the $300 million Archives II project in College Park, MD. Most recently, this approach was employed for the $250 million National Institutes of Health Research Center on the east Baltimore Bayview campus of Johns Hopkins. Members of the AMV team advised NIH on the Bayview deal. Tom

Regan’s presentation presented data to show that the disaggregated procure-ment structure most closely parallels the best practices currently in use among major corporate credit tenants. Dr. Dennis Eisen the founder, owner


Paul Penney of CTL Capital, LLC David Miller of Pillsbury Winthrop

Shaw Pittman LLP

Rear Admiral Richard Buchanan, USN (ret.), President and CEO

of the Navy Memorial

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The initial seminar on Lease Construction held in December 2008 in Washington, DC, proved so popular that a more comprehensive course on public-private partnerships that builds upon lease construction and other pri-vately financed public property projects will be offered in the late spring or early summer of 2009. The seminar this time will be a 2-day event, with the first day focused on the public procurement aspects of transactions and attendance limited to government personnel, and the second day offered by invitation to select members of the private sector. As public-private partnership arrangements gain acceptance and are adopted, it becomes impera-tive that all members of government acquisition teams, including realty specialists, contracting officers, attor-neys, and planning and customer relation staffs become familiar with the procurement processes involved. It is equally imperative that private sector participants, including developers, architects, construction managers, and subcontractors understand the alternative approaches as well. Because of the expanded content and evolving methodologies, even those who attended the earlier seminar will benefit from attending this next one in the se-ries. To receive advance notice of the seminar, including location, dates, fee schedule, and proposed agenda, please supply us with the contact information, below.

Preliminary Announcement of the Next Seminar

Dozens of slides were presented at the professional seminar on Lease Construction held in December 2008, and seminar attendees automatically received a copy of those slides in pdf format via email. A copy of the slides in pdf format can be purchased by subscribers to Government Leasing News for $95 for electronic delivery as well. Whether you’re a government employee who couldn’t make it to the seminar, or a private-sector devel-oper, contractor, lender, investor, leasing agent, architect, appraiser, attorney, space planner, or real estate con-sultant, this important reference material should be on your desk or in your corporate library. To order a copy of the slides, fill out the form below and enclose it with your check for $95 payable to Government Leasing News. To pay by credit card (Visa, MasterCard or Discover), call 301-762-1441. Not a subscriber? Fill out the sub-scription form on the back page and send it in as well with the appropriate subscription fee.

To Order the Slides

Request Form NAME: _________________________________________ TEL.: _____________________________________________

AGENCY/COMPANY ______________________________ EMAIL: ___________________________________________

ADDRESS: _____________________________________ CITY: ____________________ STATE: ____ ZIP: ________

¨ Yes, I’m a subscriber and I’d like to order an email copy of the slides for $95 in pdf format.

¨ Yes, please notify me when plans for the next seminar in 2009 are firmed up. Make checks payable to Government Leasing News or call 301-762-1441 to pay by credit card

Mail to: Government Leasing News § 13408 Glen Lea Way § Rockville, MD 20850-3638

For further information, call or Email [email protected]

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Government Leasing News: I understand Newmark Knight Frank has ramped up its federal and GSA leasing and facility service capabilities. Can you explain this new initia-tive?

Bank: We have been one of the largest independent real

estate service firms in the world. However, until recently, we have not operated with a specific concentration of providing services to the federal government and its various agencies. Realizing the importance of servicing this sector effectively, we have brought on a number of GSA leasing specialists with vast experience in dealing with government agencies and now have a strong focus on providing a wide array of commercial real estate services to GSA and other federal agencies.

GLN: Besides its Washington D.C. office, what markets

does Newmark Knight Frank have offices in? Bell: We are headquartered in New York, and operate from

over 195 offices in key markets on six different continents. Last year, our transactions were valued at more than $47 bil-lion. Our current staff is more than 6,900, which is significant because we have the resources to be a major force in real estate while meeting the local and global needs of owners, tenants, investors and developers worldwide.

GLN: What are some of the key facets of your practice that

make you unique in terms of tenant representation? Bank: We have consistently focused on developing and

expanding our service lines in order to optimally meet the changing needs of our clients. We have been successful over the last five years in building an integrated real estate prac-tice. We realized the need for this by listening to our clients and realizing that there was a gap in the communication be-tween their strategic planners and the final executers of the transactions. The fact that the consulting and execution groups were separate often led to plans that were unable to be implemented effectively. Recognizing this, we have devel-oped a practice that includes specialists in the full range of workplace solutions: logistics experts, strategic planners, project and construction managers, and real estate specialists, all under one roof. Combining these services within a cus-tomized and streamlined process ensures significant savings in time and money for our clients.

Spotlight: Newmark Knight Frank An interview with Larry Bank, managing principal, and Theo Bell,

senior managing director, Newmark Knight Frank’s Washington D.C. office

Bell: With these full capabilities in house, Newmark Knight Frank’s Integrated Management Services platform offers clients seamless, beginning-to-end solutions for every phase of occupying a property, from strategic planning, de-sign, construction and initial occupancy to ongoing cost-effective management. When employed in complement to our real estate advisory services, our consulting and management capabilities allow us to serve our clients as a full service real estate department, offering optimal value and efficiency.

GLN: So this new platform offers a lot more than just pro-

viding short-term leasing services, am I right? Bank: Absolutely. Looking beyond real estate, Newmark

Knight Frank’s strategy-to-implementation model offers a single source solution for every step in the process. This inte-grated methodology takes a holistic view of each client’s overall objectives and business practices, and implements strategies that provide exponential value by reducing costs and thereby increasing profitability. Our approach is founded in the belief that real estate decisions should be made with consideration of long-term goals, and not just as reactive measures driven by lease expirations and other immediate needs. By looking past near-term solutions, we provide crea-tive, analytically derived platforms for long-term strategy development. Some companies believe that you have to sepa-rate the leasing from the strategic consulting and execution phases; we specifically do not.


Larry Bank is a managing principal of Newmark Knight Frank’s Washington D.C. office. He founded The Bank

Companies/Oncor International in 1993 and molded it into one of the most prominent representatives of tenants in the Washington metro-politan region. In June 2000, The Bank Companies merged with Newmark Knight Frank. Mr. Bank is responsible in part for managing the day-to-day activities of the office, as well as focusing on the entire scope of consulting, broker-age and investment sales activi-ties.

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GLN: What are some of the specific areas that this plat-form can provide tangible benefits to clients?

Bell: Our clients benefit through reduced operation costs

such as: direct and indirect labor, transportation, energy, oc-cupancy, supply-chain and distribution costs. We approach every assignment as a trusted advisor and partner, and we supplement and leverage each client’s internal capabilities in a consensus-building environment.

Bank: If I may add to that, the basis of our services comes

from recognizing what is needed to provide our clients with the information to make confident decisions about their facil-ity needs. For example, we have developed several types of proprietary software that help define the criteria which the facility solution will be measured against. We are now able to provide analytic tools to our clients that allow them to ana-lyze and weigh different locations and solutions. As their project manager, Newmark Knight Frank can utilize its vast transactional experience to implement what we recommend, which ultimately leads to reduced risk and accelerated sav-ings that are all ensured by a single point of accountability.

GLN: How will this platform specifically benefit GSA and

other federal agencies? Bell: Our integrated platform optimally positions Newmark

Knight Frank to meet the specific requirements that this sec-tor demands. During my tenure as a board member of the Federal Real Property Association (FRPA), I have witnessed an impressive trend in federal real estate: departments and agencies are now more focused on optimizing their business operations, and integrating the workplace with both process and workflow for their diverse workforce. Increasingly, there is a demand within the government sector for higher quality portfolio advisory services for their tenant agencies.

GLN: Can you describe one of your more interesting or unusual leasing situations where you provided services on behalf of a federal agency?

Bank: Yes, one interesting case arose when I was fortu-nate enough to be doing a transaction for the investment banking firm of Goldman Sachs at 1101 Pennsylvania Ave-nue. We had leased some additional space for them and had gutted it for them, their intention being to expand operations and extend in the space. Goldman ultimately decided that


Spotlight: Newmark Knight Frank (cont’d)

instead of expanding into that space to relocate to 101 Consti-tution Avenue, thus leaving behind a significant amount of gutted space that had less then two years remaining on the term. It seemed a nearly impossible task to find someone who would be interested in subleasing short-term, gutted space—considering that at that time landlords were only of-fering about $35 per square foot for improvements—and Goldman had been planning on sacrificing the rent. But I then ran into someone from the FBI at a seminar who men-tioned they were looking for space in that area. The agency was interested in what we had available with Goldman, and I was able to arrange a long-term lease for them with the prime landlord. As you are well aware, the FBI has some interesting safety issues and requirements that needed to be worked out. We were able to accomplish all of the security measures, and through the use of very aggressive economics, arrange for a buyout of the Goldman lease, which was utilized to lower the FBI’s rental rate and obtain a long-term lease with the land-lord. We are proud of the fact that we were able to success-fully complete the transaction in less then 60 days; and, by the way, the FBI still resides in that space.

GLN: Thank you, gentlemen. See you at the next FRPA

meeting. For further information about Newmark Knight Frank’s

Washington D.C. office, call Mr. Bank at (202) 292-0100 or via Email to [email protected], or call Mr. Bell at (202) 292-0123 or via Email to [email protected].

Theo Bell joined Newmark Knight Frank in 2008 as senior managing director at the firm’s Washington, D.C. office,

with 18 years experience in com-mercial market presence expan-sion and government contracts management. Prior to joining Newmark Knight Frank, Mr. Bell held senior-level executive positions with corporate and commercial real estate service firms, including most recently as senior vice president to the Gov-ernment Services Group at UGL Equis, where he managed key account relationships with agen-

cies such as DOD, GSA, FBI, IRS, IMF, the Census Bu-reau, Department of Homeland Security and the Depart-ment of State.

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Environmental Protection Agency, ASHRAE, the American Institute of Architects, the Alliance to Save Energy, the Commercial Buildings Initiative, Congress, and others—to explore both technology and techniques for achiev-ing the goals in a cost effective way. In December 2007, PBS issued Green Lease Policies and Procedures for Lease Acquisition. This document is applica-ble to all types of lease procurements and requires LEED Silver—the US Green Building Council’s rating sys-tem—for new lease construction over 10,000 square feet (where the federal government is the sole occupant). It also added additional energy efficiency and environmentally sustainable require-ments for leased space and updated many existing sustainability require-ments in place since 2000. In an upcom-ing amendment to the December Green


Challenges Facing the Government (cont’d) Lease Policy, the lease requirements of the Energy Independence and Security Act of 2007 will be addressed which include a mandate for all new leases, with few exceptions, to be obtained in Energy Star-rated buildings by the year 2010. Our work at GSA is important, espe-cially in these challenging economic times. It is also innovative and exciting. We are a leader in the real estate indus-try in general and certainly in the Na-tional Capital Region. We have a tal-ented, hard-working and dedicated staff and I am honored to have had the privi-lege of serving as Commissioner for the past three years. As the landlord to the civilian federal government, PBS con-tinues to play a critical role in support-ing agencies with their space needs so that they can concentrate on their core missions for the American people.

Financing CTL CAPITAL, LLC Tom Zarrilli 212-792-7861 Paul Penny 212-792-7863 Investors HPI CAPITAL INC. Stacy Zaeh 704-343-9334 SALUS PROPERTY INVESTMENTS, LLC James M. Jacobson 704-333-4340 USAA REAL ESTATE COMPANY Richard Mark 310-589-3344 Property & Casualty Insurance AUSPL INSURANCE PROGRAM Jeanne Arand 800-726-0366 Radon Testing TRS DESIGN & CONSULTING Tom Rochford 925-299-2380 Technical Advisors FEDERAL LEASE CONSULTANTS Dave Cunningham 303-903-9570 JONES LANG LASALLE Kim Burke 202-719-5613

Advertiser Index

year lease would be checked to just this one limited and mostly predictable cir-cumstance at the beginning of perform-ance. Ultimately, including a limited termination provision pending the out-come of any protests would allow GSA to obtain best value, reduce GSA’s risk

(Continued from page 31) of significant breach damages, and would not adversely affect a lessor’s ability to obtain financing. Alex Tomaszczuk is a partner and Daniel Herzfeld a senior associate in the law firm of Pillsbury Winthrop Shaw Pittman LLC. They are members of the

Termination for Convenience Clause (cont’d) firm’s Government Contracts & Dis-putes team, representing clients in a wide variety of government contract matters including GSA leasing matters. T h e y c a n be c on t a c t e d v i a [email protected] and [email protected], re-spectively.

Salus Property Investments, LLC Seeking to Acquire GSA-Leased Properties

$5 million to $100 million

For Information, Contact James M. Jacobson Jr., Managing Principal

704-333-4340 [email protected]

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Cumulative Index of Articles Vol. 1 No. 1 (Spring 2005) Executive Order 13327: Federal Real Property Asset Management Classification of Federal Leases Enhanced Use Leasing on Military Bases Data Integration in Real Property Asset Management Leased Area by Agency in the United States Better, Faster Ways to do Build-to-Suits GSA Leases after 9/11 Leased Area by State in the United States GSA’s National Brokers Contract Vol. 1 No. 2 (Summer 2005) Claims of Waste or Restoration in Government Leases New Opportunities in Property Management Economic Parameters for Federal R.E. Analysis for FY‘06 and FY‘07 Innovative Financing of Government-Leased Real Estate Vol. 1 No. 3 (Fall 2005) Recent Changes to the Scoring Rules for Federal Leases GSA Lease Action Glossary Federal RPM–An IT Solution for the Federal Enterprise An Insurance Claim Checklist for Hurricane Katrina Victims New Opportunities in Property Management – Part 2 Vol. 1 No. 4 (Winter 2005) Financing Reconstruction of Government-Leased Buildings Managing Your GSA Rent Bill Don’t Leave Money on the Table! New Opportunities in Property Management – Part 3 Letter to the Editor on Reimbursement Clauses The New Automated Advanced Acquisition Program Katrina: The Math and Aftermath Vol. 2 No. 1 (Spring 2006) Reading Between the Lines: Interpreting GSA’s Space Advertisements New GSA Portal and Web Site Energy Management: A Key Component of Asset Management Public-Private Partnerships in USPS-Owned Buildings Interagency Security Committee Standards for Leased Space Vol. 2 No. 2 (Summer 2006) FAA’s Construction-Leaseback Program Meeting Summary on Financial Performance Letter to the Editor on Foreign Leases Vol. 2 No. 3 (Fall 2006) Planning for Emergencies – Can You Afford Not To? GSA’s Present Value Analysis Model Don’t Leave Money on the Table – Part II Vol. 2 No. 4 (Winter 2006) Negotiating Space Alterations with GSA New Directions in Building Telecom Design Vol. 3 No. 1 (Spring 2007) Ask the Expert: Multiple IRR’s Keeping your Government Tenant when the Lease Expires New Accessibility Standards for GSA-Leased Facilities Consolidation of the Civilian Boards of Contract Appeals

Vol. 3 No. 2 (Summer 2007) GSA’s Securitized Credit Lease Sustainability Practices for Federal Real Property Ask the Expert: Building Transfer and Novation Agreements Vol. 3 No. 3 (Fall 2007) Book Review: The Site Security Design Guide Insights into GSA Form 1217 Challenges in Public Housing IV Section 412 Sale-Leasebacks for GSA? Economic Parameters for Federal R. E. Analysis FY’06 to FY’09 GSA Lease Distribution by Procurement Action Largest GSA Leases over 250,000 Rentable Square Feet Vol. 3 No. 4 (Winter 2007) Insights into GSA Form 1364A Spotlight: UGL Equis Telecommunication Rings in Government Buildings GSA’s Inventory of Owned and Leased Property Vol. 4 No. 1 (Spring 2008) The Government’s Novation Agreement—What Does it Really Mean? Implications of the Recent GSA Directive on Delegated Leasing Authority Challenges in Public Housing V The GSA Cost Per Person Model Recovery of DOI’s Gulf of Mexico Regional Office Vol. 4 No. 2 (Summer 2008) The NIH Bayview Research Center -- A New Model for Lease-Construction Partnering with the Market to Meet Federal Real Estate Needs Better Asset Management: How to Do it and How it Helps GSA Real Property Disposal Process Chart The Korpacz Real Estate Investor Survey The Transparency Act of 2006: www.USASpending.gov Vol. 4 No. 3 (Fall 2008) Greening of the Duncan Federal Building The Past is Prologue for GSA’s Lease Construction Program Recent Innovation in Security Blinds DoD Real Property – An Overlooked Opportunity On Liquidated Damages Challenges in Public Housing VI Vol. 4 No. 4 (Winter 2008) Book Review: Sustainability Matters Challenges Facing the Government’s Federal Civilian Landlord Real Property Tax Management for Government-Leased Buildings Succeeding Lease Cost-Benefit Analysis Needs Only Be Reasonable Ask the Expert on GSA Lease Renewals and Extensions Enormous Success of the RTC The Resolution Trust Corporation 1989–1995 Lease Construction: It’s Either New Tools or New Money Establishment of the Virgil W. Ostrander Award for Innovative Procurement Should GSA Add a Limited Termination for Convenience Clause? Summary of the Seminar on Alternative Lease Construction Methods Spotlight: Newmark Knight Frank

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Yes, please enter my E-mail subscription to Government Leasing News, and send me at no additional cost a copy of the recently published 17-inch by 22-inch wall chart on the multi-year processing path that GSA prospectus-level, build-to-suit projects must take, from conception and planning through construction and occupancy.

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Federal LeaseFederal Lease Consultants, IncConsultants, Inc

FF

CC LL Maximizing Profits

For Building Owners Who Lease to the Federal Government

The vast majority of Government Contracting Officers are honest, hard-working, and fair to building owners. But—your Contracting Officer is not Santa Claus—there is no tooth fairy, and yes, unfortunately even the best Government Contracting Officers sometimes do make mistakes! As an ex-Government Lease Contracting Officer, I find many leases where mistakes made by the Government have gone undetected for years. Mistakes that cost the build-ing owner substantial amounts. I will find any mistakes in the administration of your lease that the Government made, and get you paid for them, or my fee is zero. Period. It’s an honest no-risk proposition, with nothing but potential benefits for you. Has your lease expired, or will it be expiring soon, and you haven’t been able to get a satisfactory response from the government? If so, check out the helpful article on my website regarding expiring leases, and what you can do about it. Information is available on my website at www.dcfedlease.com, or call me at 303-903-9570 to discuss what I can do for you. Dave Cunningham, President Federal Lease Consultants, Inc.

3877 W Kenyon Ave Denver, CO 80236 Fax 303-806-0740

Email: [email protected]

Government Leasing News Winter 2008

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