The widely used abbreviation for military construction is MILCON (also written variously as MilCon, Milcon or milcon). This typically refers to any construction, alteration, development, conversion or extension of any kind carried out with respect to a military installation, including those for the Army, Navy, Marine Corps and Air Force; the Department of Defense; the Army and Air National Guard; and the Army, Navy and Air Force reserves.
Interestingly, funding for MILCON does not come through the Defense Appropriations Bill. Instead, it is taken up by the House and Senate Appropriations Committees’ respective Subcommittees on Military Construction, Veterans Affairs, and Related Agencies. These subcommittees are responsible for funding the Department of Veterans Affairs as well as all construction activities within the Department of Defense, including military family housing. They also fund activities related to base closures and realignments (BRAC).
On May 31, the House approved a FY 2013 Military Construction and Veterans Affairs Appropriations bill, H.R. 5854, which totals $71.1 billion in discretionary funding, the same as that enacted in FY 2012 but $694 million below President Obama’s budget request. The Senate Appropriations Committee has introduced its own bill, S.3215, which provides for $71.9 billion in discretionary funding, $465.9 million below the president’s budget request and $227.7 million above the FY 2012 enacted level, but the Senate has not yet voted on this bill. Each of these bills aims to provide the nation’s military with the infrastructure needed to house, train and equip military personnel while also funding veterans’ benefits and programs.
The timeline for approval of a MILCON project is quite long, often at least three years from the initial service-specific review to approval by Congress. The service requesting approval must justify each request by filling out forms DD 1390 and DD 1391, which define the scope of work and its projected costs, and which ultimately are forwarded to Congress as part of the budget request. Thus the military often finds it quicker, easier, and less expensive to seek out alternative solutions to their space needs, including purchasing or leasing existing facilities. An Army pamphlet, for example, states that “the use of existing available facilities owned by the [Department of the Army], DOD, other Federal agencies, State and local governments, commercial establishments, and private entities should be evaluated before submitting requests for new or replacement facilities.” For this reason, MILCON generally is considered the facility solution of last resort.
Today we celebrate the signing of the Declaration of Independence and the birth of the United States of America. We thought it’s also worth recognizing another important birthday on this July 4th – that of Calvin Coolidge who was born July 4, 1872 and later went on to become the 30th president of our nation. Coolidge’s place in our nation’s history is noteworthy, especially considering the current budgetary environment.
Coolidge was Vice President in 1923 when Warren G. Harding died suddenly of a heart attack while on a speaking tour in California. Thrust into the presidency, Coolidge was faced with massive national debt accumulated through World War I. Instead of raising taxes, he cut the tax rate and government revenues increased. Federal spending remained flat during Coolidge’s administration, despite that he presided over the “Roaring 20s”. Ultimately, he retired one-fourth of the federal debt during his presidency, largely adhering to a policy of small government, especially at the federal level. He practiced a passive style of leadership leading political analyst Walter Lippmann to note that Coolidge’s political genius was his talent for effectively doing nothing:
“This active inactivity suits the mood and certain of the needs of the country admirably. It suits all the business interests which want to be let alone…. And it suits all those who have become convinced that government in this country has become dangerously complicated and top-heavy….”
More than 50 years later, President Reagan would order Coolidge’s portrait to be hung in his Cabinet Room, a symbol of his own laissez-faire vision that government that should regulate lightly and decrease taxes allowing for business to prosper and the economy to grow. However, Reagan’s debt reduction efforts would have disappointed Coolidge. The Reagan presidency marked a significant run-up in federal debt. This trend, save for a portion of the Clinton administration, has continued and accelerated to the present day where it stands as the highest level of debt since World War II.
Earlier this month, the Congressional Budget Office (CBO) released its Long Term Budget Outlook which provides a sobering estimate of the future path of our federal debt. The CBO Director wrote in his accompanying statement that “the path of debt under current law would still leave debt at a historically high level relative to GDP, and even achieving that path would require very large changes in current policies.”
Capitol Markets doesn’t engage in political editorial, instead we seek to understand the effect that politics and budgetary policy have on the government real estate inventory. In this case, it’s somewhat difficult to predict. On the one hand, growth in total spending and the federal leased inventory appear to correlate, both increasing nearly every year over the past four decades. This growth has been financed through increased public debt. Since 2001, U.S. federal debt has doubled from 33% of GDP to 68% of GDP. During the same period GSA’s leased inventory grew 27% nationally (and in the nation’s capital it has grown almost 50%).
However, common sense tells us that this can’t possibly continue. Increased government spending primarily serves entitlement programs and interest payments on the growing national debt. While this may contribute somewhat to federal inventory growth, we note that mandatory spending is sure to crowd out discretionary spending. In fact, this has already begun leading both the Executive and Legislative branches to institute austerity measures including a freeze on inventory growth, substantial reductions in space utilization and more activist oversight of prospectus leases.
Half of the discretionary budget is defense spending, which by current estimates is likely to decrease substantially. For markets such as Northern Virginia this could have a substantial impact on the office market. More likely, the effects of austerity will be felt across the board. All agencies are already under acute pressure to reduce costs, including those for real estate leases. The expanding federal debt has been astonishing, as has been the expanding federal leased inventory. By all accounts, we are due for a correction, and when it comes it will impact federal demand for leased space.
Coolidge was nicknamed “Silent Cal” for his typical demeanor. At one dinner the matron seated next to him told Coolidge that she had bet that she could get him to say at least three words that night. His response: “You lose.” A comedienne of the era noted that Coolidge’s pursed lips and dour expression made him look as though he had been “weaned on a pickle”. Were Coolidge alive today his expression would surely remain unchanged, though he’d have plenty to say about the present fiscal policy.
“I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form.”
– Calvin Coolidge
Yesterday (Monday, July 2, 2012), the U.S. Patent and Trademark Office (PTO) announced plans to open regional offices in or around Dallas, Denver, and Silicon Valley, Calif. These offices are in addition to the agency’s already announced first satellite office, scheduled to open in Detroit next week, on July 13. According to the USPTO press release, all four offices will “function as hubs of innovation and creativity, helping protect and foster American innovation in the global marketplace, helping businesses cut through red tape, and creating new economic opportunities in each of the local communities.” Next week, Acting U.S. Commerce Secretary Rebecca Blank and PTO Director David Kappos will travel to the newly selected cities to meet with local businesses, entrepreneurs and public officials to discuss the new office openings (and, we presume, potential locations for those offices, which have not yet been determined).
The regional offices are mandated by the Leahy-Smith America Invents Act of 2011 (H.R. 1249), a sweeping overhaul of the U.S. patent system that President Obama signed into law last September, which calls for three or more satellite offices to be opened by September 2014. The goal of the act is to help modernize the patent system, which now has a backlog of more than 600,000 applications.
The PTO chose the four sites based on an analysis of numerous criteria, including geographical diversity, regional economic impact, the ability to recruit and retain employees and the ability to engage the intellectual property (IP) community. The U.S. Department of Commerce, the PTO’s parent agency, received more than 600 public comments on the satellite offices.
PTO headquarters—which represent the largest GSA lease in the nation and the largest lease-construct project in GSA’s history—will remain in Alexandria, Va. Each of the satellite offices is expected to house about 100 patent examiners and a handful of administrative patent judges. The offices also will serve examiners taking part in the PTO’s popular telework program. In addition, the satellite offices are expected to feature state-of-the-art teleconferencing equipment that examiners can use to conduct interviews with patent applicants and that applicants can use to argue for appeals even when decision makers remain in PTO headquarters. The three new satellite offices are expected to open in early 2013.
“Intellectual property protection and innovation are engines of economic growth and the bedrock of America’s private sector,” said Blank. “These new offices are an historic step toward further advancing our world’s best IP system, and reinforcing the United States as the number one destination for innovation capital, and research and development around the world.”
The PTO is one of the few government agencies that is still expanding. It continues to hire new patent examiners, administrative patent judges, mechanical and electrical engineers, and chemists. “By expanding our operation outside of the Washington metropolitan area for the first time in our agency’s 200-plus year history, we are taking unprecedented steps to recruit a diverse range of talented technical experts, creating new opportunities across the American workforce,” noted Kappos.
Both the House and Senate have been working on their respective versions of legislation designed to improve the process by which the federal government can dispose of unneeded and underutilized properties. This legislation has bi-partisan support and it is likely that a bill will eventually be passed.
Improving asset management, disposing of unneeded assets, reducing operating costs and raising capital to pay down the national deficit – this is the focus of Congress’ legislative efforts and few would deny that it is truly noble stuff. Unfortunately, versions of this bill emerging from both the House and Senate include a provision meant to curtail or fully eliminate the ability of many independent federal agencies to lease space under their own authority.
In the Senate bill there is a requirement that independent agencies must receive prospectus authorization from Congress for its large leases. There is great irony in this provision because it is Congress that has been sitting on a backlog of prospectus approvals, some for almost two years.
The House version reaches further: It seeks to transfer all leasing authority to GSA. There is great irony in this too since this legislation stems from the same House committee that makes sport of browbeating GSA over its inability to get things done.
Why then would Congress be pushing this issue? There is no doubt it is legislative backlash from SEC’s Constitution Center lease. Even outside of the Washington, DC area most people have heard about the $550 million, 20 year lease SEC signed for 900,000 SF in the the newly renovated Constitution Center building. It was almost immediately recognized as a bad deal because SEC wildly overestimated its space needs (in anticipation of Dodd-Frank) and, worse yet, it executed a contract prior to receiving budget appropriations. Since then, SEC has been forced to relinquish its leasing authority to GSA.
Yet, there are any number of independent agencies that continue to manage their own leasing responsibly. They start their procurements early, they carefully evaluate options and costs, they receive input from all stakeholders and, far more often than not, they do this without going into holdover. We can’t pretend the SEC Constitution Center lease never happened, but we must recognize that many other agencies – whether operating under independent, statutory or delegated authority – manage their space needs effectively.
The federal government’s selection of a green building certification system for the next five years has become a controversial issue, with no clear resolution in sight. The Energy Independence and Security Act of 2007 (EISA) requires GSA to evaluate green building certification systems every five years, in order to identify one that is “deem[ed] to be most likely to encourage a comprehensive and environmentally sound approach to certification of green buildings.” The first evaluation, conducted in 2007, resulted in GSA using the U.S. Green Building Council’s (USGBC) LEED (Leadership in Energy and Environmental Design) program as the federal government’s exclusive green building standard. This time around, GSA commissioned Pacific Northwest National Laboratory to conduct the 2012 review; its report, which compared several standards, determined that the Green Building Initiative’s Green Globes system aligns somewhat better with federal requirements for new construction, while LEED 2009 (the third and most recent version of LEED) is most compatible with existing building rehabs.
The federal government has been one of LEED’s earliest and strongest supporters. It began using LEED in 2006 and, by one estimate, one-quarter of all LEED-certified buildings today were built or renovated for federal use, either by direct federal construction or by private sector construction of properties sold or leased to the federal government. Yet we’ve been seeing significant pushback against the system within the past year. Last December, Congress embedded a provision deep within the 565-page National Defense Authorization Act for FY 2012 that prohibits the spending of any additional federal money to achieve LEED Gold or Platinum certification. This was the result, at least in part, of a longstanding dispute by the timber industry about LEED’s treatment of domestic wood products.
Now, groups representing plastics and chemical manufacturers have taken over the push against the federal government’s use of an updated LEED system. (Originally called LEED 2012, the new, still-under-construction version is now known as LEED v4.) According to industry representatives, provisions in a draft version of LEED v4, made public during a recent comment period, could discourage the use of myriad materials and products (including insulation and energy-efficient windows) that contain certain chemicals. A group of more than 70 (mostly Republican) members of Congress wrote to Acting GSA Administrator Dan Tangherlini on May 18, criticizing the proposed new LEED credits on building materials, while a bipartisan group of senators echoed that point in a June 12 letter. The USGBC has responded to those criticisms by stating that “some industry trade associations have deployed false rhetoric about job losses, chemical bans, and high costs to the taxpayer” and noted that the materials credits contemplated for LEED v4 will be completely voluntary and will not ban any chemicals or products. Earlier this month (on June 4), the USGBC had announced that it will delay balloting on LEED v4 until June 1, 2013, and that it has opened a fifth comment period (now scheduled to run from Oct. 2 through Dec. 10, 2012) for the revised standard.
What will happen next? Environmental Building News (EBN) reports that , according to Joni Teter, GSA project lead for the rating system review, an interagency discussion group will hold six meetings and GSA will be conducting listening sessions with private sector stakeholders. The first of those took place this past week (on June 25) at GSA headquarters; the second, which will be webcast, will be held on July 10. Teter told EBN that she expects GSA to make a final recommendation in the fall.