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Since I became chairman of the Subcommittee, we have worked with GSA on reducing the cost of leased space by negotiating better deals and reducing the real estate footprint.  We held a hearing and a series of roundtables with GSA, tenant agencies, and real estate experts on the large number of GSA leases expiring in the next five years and how we can take advantage of the current market to reduce costs to the taxpayer.  We could save $500 million annually just by negotiating better lease deals.

As a result of these efforts, we introduced and the House passed, H.R. 4487, the Public Buildings Reform and Savings Act, which includes a leasing pilot program which will give GSA the tools it needs to more effectively lock in good lease deals.

But while we have been working to improve how GSA manages its leases, there are more than 50 other agencies with their own authority to lease office and warehouse space.  And half of those agencies don’t even have to comply with OMB’s directives to reduce space or report their leases to the government-wide Federal Real Property database.  For many of these agencies, there is little oversight of how they manage their leases.

That is why the Committee requested that the GAO do a review of these independent leasing authorities, including how they are used and managed, whether these agencies are getting good deals for the taxpayer, whether agencies are reducing their costs and space footprint, and whether agencies are acting within their legal authority.

While the GAO found that some of these agencies were able to get comparable leasing rates or better than GSA, in part due to their use of real estate brokers, very often they leased more space than they needed.  In addition, there are serious questions about whether some of these agencies are exceeding their leasing authority, potentially running afoul of key laws such as the Anti-Deficiency Act.

The Committee’s investigation of the Securities and Exchange Commission’s use of its leasing authority in 2011 revealed the pitfalls agencies can fall into.  The SEC exceeded its leasing authority and wound up committing the taxpayers to a $500 million lease that it did not need and, ultimately, had to be bailed out with help from GSA.  The SEC, the Commodity Futures Trading Commission, and the VA are just a few agencies that have run afoul of laws limiting their leasing authorities.

Intentional or not, agencies that do not have real property as their primary mission face serious legal risks. And it is critical – starting with this hearing – that this message is made clear to them.

Before an agency signs a lease, there are three basic questions it should ask.  Does the agency have leasing authority?  Does the agency have either no-year funding or explicit authority to enter into multi-year leases?  Does the agency have an exemption from the Anti-Deficiency Act and the recording statute?

While there are a few exceptions, if the answer to any of these questions is “no” the agency may not have the legal authority to sign a lease or may have to obligate the full amount of the lease upfront.

This analysis is separate from the analysis for whether or not a lease is a capital lease for scoring purposes. 

We hope to hear more from GAO about its findings and learn how agencies with their own leasing authorities are managing and using their leasing authorities.

We also asked the GAO to review the use of purchase options in GSA leases.  If used strategically, purchase options could save significant taxpayer dollars.

The budgetary scoring rules enacted in the 1990s effectively ended the practice of negotiating discounted purchase options in lease agreements by labeling them as capital leases.  As capital leases, the full cost of the lease must be obligated upfront, creating a disincentive to use them.

The result has been the taxpayer paying for a building several times over through lease payments without ever being able to gain an equity interest.  For example, we will have paid nearly $2 billion for headquarters space for DoT when the current lease expires without accruing any equity.

By identifying and reviewing a number of purchase options in GSA leases, GAO found that in the options exercised in recent years there was an $80 million benefit to the taxpayer.  The Public Buildings Reform and Savings Act includes a provision that would provide GSA with the ability to again include these options, where appropriate, in its leases.

I look forward to hearing more from GAO and our other witnesses today on these issues.

Click here for additional information from today’s hearing, including testimony, video, and background information.

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