GSA announced this afternoon that it has chosen the Trump Organization as the preferred team to redevelop the historic Old Post Office building. This apparently concludes an effort which has been going on for more than a decade. In December 2000 GSA submitted to Congress a plan for redevelopment of the Old Post Office; and, in 2004 GSA issued a Request for Expressions of Interest to redevelop the site, a process that was never successfully completed. In 2008 Congress expressed its frustration by passing the Old Post Office Building Redevelopment Act, Public Law 110-359, which chronicled GSA’s failure to address the asset and specifically directed the Administrator of General Services to proceed with redevelopment of the Old Post Office Building. Still unresolved, the issue culminated in October 2010 when the property was featured as an example of government waste in a U.S. House of Representatives Committee on Transportation and Infrastructure report (and subsequent congressional hearing) entitled “Sitting on Our Assets: The Federal Government’s Misuse of Taxpayer-Owned Assets“. Given the title, one can guess at the tone of both the report and hearing. The authors noted that operating the Old Post Office Building cost taxpayers $6.5 million annually.
With a follow-up hearing entitled “One Year Later: Still Sitting on Our Assets” scheduled to be hosted Thursday in the Old Post Office Building, is it any surprise that GSA hustled to select a developer?
Several other hoteliers and local developers submitted proposals, one from Hilton Worldwide that would have turned the building into a Waldorf Astoria, but GSA chose Trump’s offer because it “represented the strongest development team, the best long term potential for the local community, and most consistent stream of revenue for the Federal Government.”
According to GSA Public Buildings Service Commissioner Robert Peck, “Deciding to move forward with redeveloping this iconic property will save millions in taxpayer dollars. The tremendous response from the public sector allowed us to select a proposal that will provide a positive economic return for the Federal Government and better utilize a historic property on our nation’s Main Street.”
The Trump Organization’s proposal calls for converting the property to a 250+/- room luxury hotel to be known as Trump International Hotel, Old Post Office, Washington, D.C. Trump, in partnership with the Santa Monica, California–based private equity firm Colony Capital, plans to invest $200 million in acquiring and redeveloping the property.
GSA and Trump are expected to spend the next year negotiating a detailed agreement for the redevelopment project that will specify building usage, historic preservation requirements, and details of the government’s revenue stream. As negotiations proceed, GSA will relocate the building’s existing federal tenants, including the Advisory Council on Historic Preservation, the National Endowment for the Arts, and the National Endowment for the Humanities. If all goes as planned, construction is expected to begin in 2014 and be completed by 2016. At the end of the lease, control of the building will revert to the federal government.
This week Bureau of Labor Statistics (BLS) published its employment forecasts for the decade from 2010-2020. The good news is that BLS predicts an increase of nearly 20.5 million jobs over the course of this decade, this in contrast to a decrease of nearly 3.2 million jobs in the last decade (2000-2010). Unfortunately, the Federal Government sector does not fare as well. BLS predicts that federal government employment will shrink by 372,000 jobs by 2020. About half of this decline is attributable to job losses at the U.S. Postal Service (182,000 jobs) and much of the remainder is expected to come from non-defense federal employment (122,000 jobs).
Is this a concern for landlords? On the one hand, combined with the austerity and budget trends we are experiencing currently, the projected decline in actual federal employment presents a double-whammy: not only is the government tightening its space utilization per employee but it is also expecting a drop in the actual number of employees. However, on the other hand, we must note that federal employment has flexed up and down for decades and during that same period the demand for leased space has consistently grown (though the owned space inventory has remained relatively static).
News of declining federal employment doesn’t correlate directly with a reduction in space leased from the private-sector but it is certainly one more signal that future federal growth is no longer automatic.
What federal agency has shrunk to its smallest size in more than a century? The answer—the U.S. Government Printing Office (GPO)—is no surprise, given the huge changes in printing and information technology that have taken place in recent decades. The agency that once printed, bound, and distributed about 25,000 copies of the Congressional Record every morning now prints only 2,800 copies and has moved many of its operations online. Since 1980, GPO has reduced its workforce by 70%—a rate of change that is unparalleled among other legislative branch agencies. Buyouts and early retirements offered in the second half of 2011—as GPO celebrated its 150th anniversary—resulted in the elimination of 312 positions. The agency now has 1,920 employees, down from a peak of 8,500 in 1972.
GPO is the federal government’s primary centralized resource for “producing, procuring, cataloging, indexing, authenticating, disseminating, and preserving the official information products of the U.S. Government.” The agency is responsible for the production and distribution of information products for all three branches of the federal government, including the official publications of Congress, the White House, other federal agencies, and the courts—as well as Trusted Traveler Program cards and U.S. passports. In addition to selling its publications to the public—in both digital and printed formats, primarily via its online bookstore (bookstore.gpo.gov)—GPO provides permanent, free public access to federal government information through its Federal Digital System (www.fdsys.gov) and through partnerships with the approximately 1,220 libraries nationwide that participate in the Federal Depository Library Program.
GPO headquarters has been located at 732 North Capitol Street, NW, at the corner of North Capitol and H Street, since the agency opened on March 4, 1861. The agency currently occupies four buildings, three on the west side of North Capitol and one on the east, including a bookstore at 710 North Capitol that has been in existence since 1921 and was updated in 2010. This real estate is well situated near both Union Station and the U.S. Capitol and it has significant redevelopment value, especially when one also factors in the huge surface parking lots servicing the GPO facilities. For years, there has been discussion of the possibility that the value of this property would somehow be monitized. Given GPO’s rapidly changing operational needs and reduced space requirements, we would expect GPO’s complex to be among the real estate ultimately targeted for disposition if the Civilian Property Realignment Act is passed.
One of the great frustrations landlords encounter with GSA is the Government’s frequent and seemingly reflexive insistence on termination rights. We conducted a quick analysis of 1,165 procurements conducted by GSA in the past 7 years and found that in 70% of them GSA requested a termination right. GSA’s default expectation for most of these is that they will be structured as rolling rights providing GSA with an ongoing right to terminate, usually with just a few months’ notice. These rights aren’t necessarily situated near the expiration date either. Our analysis found that, on average, the requested firm term was just 57% of the total lease term (and, yes, our analysis didn’t count short-term extensions, nor any transactions relating to the decennial census).
In certain cases, termination rights make a lot of sense for tenants – they are a great means by which to “sync” leases in instances where a broader consolidation is contemplated. They also provide flexibility when it’s known that an agency will move but the exact date is uncertain. But, still, why does GSA seek termination rights in nearly three-fourths of all leases? The answer is simple: GSA leases space on behalf of other federal agencies and their Occupancy Agreement (OA) with each tenant agency includes a standard clause that allows the agency to cancel its Agreement with GSA at any time with 120 days notice. That’s right, if the tenant agency cancels its OA then GSA is on the hook for the lease. So, GSA hedges its exposure by negotiating termination rights. The problem is that termination rights are more difficult to finance, and up-front costs (TIs and commissions) are generally amortized only over the firm term, front-loading costs. These factors serve to increase rents and decrease competition. From GSA’s standpoint, it’s not a big deal because those increased rents are passed through to the tenant agencies. The tenant agencies must value the flexibility but probably don’t truly understand the premium price the are paying. Agencies can agree to modify the OA to eliminate their right to terminate and seek a better rent but they rarely do. In any case, from a taxpayer perspective the whole thing doesn’t make much sense.
This is where the House Committee on Transportation and Infrastructure has missed a great opportunity to reduce federal real estate costs. In it’s October 2010 report, Stop Sitting on Our Assets: The Federal Government’s Misuse of Taxpayer-Owned Assets, the House Republican leadership outlined wide-ranging recommendations including a plan to reduce reliance on private leasing to house federal employees. The rationale was that leasing is more expensive than ownership. Often that is probably true, but the House is comparing apples and oranges because the Government’s risks under its prototypical lease structure are nothing like the inherent financial risks of property ownership. The prevalence of termination rights is one such example of the difference.
If the House wants to reduce real estate costs on a broad scale, it can do so with the stroke of a pen. All it needs to do is to better align GSA’s interest with those of its tenant agencies to dramatically reduce the number of portfolio termination rights. An improved, more financeable lease structure would result in an immediate and significant reduction in overall rent.