View Larger Map
Barrow, Alaska proudly names itself “The Farthest North American City” so it’s no surprise that it would also be home to the northernmost federal lease. If you’ve ever visited Alaska you know that it’s lifeblood is a series of airports that connect cities throughout the state. Where there are commercial airports there is the Transportation Security Administration (TSA). In the case of Barrow, the TSA office is located at the Wiley Post – Will Rogers Airport (named after famed aviator Wiley Post and famed writer Will Rogers who died together in a plane crash just 9 miles from this airstrip).
The 800 square foot leased office leased on TSA’s behalf by the U.S. General Services Administration (GSA) can be found inside the Alaska Airlines terminal at 1741 Ahkovak Street, Barrow, AK 99723 (Lat 71.2876, Long -156.7844). The Lessor is the Arctic Slope Regional Corporation, a private, for-profit corporation that is owned by and represents the business interests of its 11,000 Iñupiat Eskimo shareholders.
Alaska Airlines Terminal at BRW Airport (Photo: Stephen Conn)
The cost of living in Barrow is so high that a Transportation Security Officer (TSO) fact sheet cautions applicants:
“Current commodity prices are as follows: $9.60 per gallon of milk, $5.50 per loaf of bread, $5.00 per dozen eggs, $12.50 per 12 pack of soda and $4.25 per gallon of gasoline.”
Rental housing is so difficult to find that most TSA workers live at the nearby Airport Inn, Barrow’s cheapest lodging, just two blocks from the airport.
TSA workers in action. We assume their 800 RSF is located through the door in the background.
Over the years, we’ve observed that government-leased build-to-suit (or, in GSA parlance, “lease-construct”) projects often seem to price at or near the prospectus-approved rent cap. We decided to take a look at the trend using the FBI’s field office construction program as our test bed. We did this largely because the FBI field office Program of Requirements has become well-defined and their projects are fundamentally homogenous.
So, we looked at this program and found that, indeed, the equalized rent for many of these buildings was exactly at the prospectus cap figure, or just a penny less. Does that mean that developers were setting their pricing as high as permissible? No, in fact the result was the opposite: many developers struggled to justify a financially-feasible project at GSA’s required rent; though, inevitably, someone would figure out a way to get there, just barely. Some would regard this as “Survival of the Fittest” while others would speculate that the “Greater Fool” theory consistently prevails. In either case, pricing to reach GSA’s maximum approved rent has often been a challenge.
As it turns out, pricing has been such a challenge that the FBI had to financially assist in several transactions. The most common means by which the FBI has done this is to agree to pay down the rent by reimbursing the developer, lump-sum, for tenant improvements. Typically, this amount has been enough to lower the developer’s required rent just enough to reach the prospectus figure. Thus, it is no coincidence that many rents are exactly at the prospectus figure.
One other observation we made when reviewing this data was to note that rents through most of 2011 and 2012 are exactly at prospectus but the leases before and after that period are below. In some cases the reason is the TI buy-down method described above, or mitigation of certain operating expenses. However, we theorize that the developers of these projects were also more bullish about the capital markets. Projects delivering in the 2005- 2009 time period were awarded at least two years earlier, in a much frothier period. Projects delivered in 2012 were awarded at a time when it was becoming clear that capital markets were improving. As we will explore in a future article, no factor has a greater impact on pricing than the developer’s exit cap rate assumption. Therefore, we think pricing in these periods was generally more aggressive.
Final note: we’re sure you recognized that one lease, Tucson, is above the prospectus rent. It’s an apparent “prospectus bust”. This isn’t supposed to happen and, in fact, the lease itself includes narrative meant to describe how the contract rent conplies with the prospectus limitation, but the calculation is apparently flawed.
It’s tough to be a government landlord in Northern Virginia these days, especially if your building is tenanted by a large federal tenant where the lease size is above the prospectus threshold. The reason is that OMB has established its current cap (for FY’14 leases) to a maximum full service rent of just $39.00.
What is the cap? Every time GSA has a large leasing need it must prepare a prospectus for approval by both the Office of Management and Budget (OMB) and Congress. OMB, through its approval of GSA’s rent requests, is largely responsible for setting the prospectus rent caps nationwide. However, nowhere is its scrutiny more draconian than in the National Capital Region where OMB sets one-size-fits all caps for leasing in Northern Virginia, the District of Columbia and Suburban Maryland. Ironically, these caps are often well below those approved in other parts of the country, despite the Washington region’s higher prevailing market rents. For example, the National Science Foundation (currently housed in Arlington County’s Ballston submarket) is determining whether to renew or move to another location, which could include build-to-suit options. This procurement currently has a rent cap approved by OMB at $39.00 whereas a similar lease requirement for an FAA regional office in Renton, Washington (the “other” Washington) is approved at $47.00. Having been to Renton, we can report that it is no Ballston. The prevailing market rents in the Renton market are nearly $20.00/SF less than Ballston, yet a similar project there is approved at a prospectus cap $8.00 higher. There really isn’t any logic to it but that isn’t the point of this article.
We wanted to look at where the prospectus cap in Northern Virginia is headed. Theoretically, OMB sets prospectus rents based upon market rates, but its approach is pretty blunt, looking at the region rather than the pockets of buildings that the government currently occupies. There is no doubt that market rents in close-in Virginia – particularly Arlington’s Orange Line Corridor – have become largely uncoupled from the OMB trend. Market rents for some buildings in Rosslyn, for example, are now exceeding $50.00, full service, and these buildings have government tenancy. The $39.00 prospectus cap is well below market, especially when one considers that the prospectus cap is based on a non-escalating rent.
Will there be any relief? This is the question we are asked by property investors all the time. We’ll start by saying that there are techniques, through negotiation, to hope to achieve investor’s NOI goals in certain situations. Contact us if you are interested in those. But, simply speaking, it doesn’t look good overall and the graph above shows why.
If we look at the history of approved prospectus rent caps in Northern Virginia we’ll see that over 12 years the prospectus cap only grew by $5.00. That is a growth rate of 1.29% annually which, projected forward to 2021, would yield a prospectus cap of just $42.54. That is less than the asking rent for many of the better-quality buildings in Arlington today.
Alternatively, we note that each time OMB approves a prospectus it includes a growth rate to allow the cap to increase if the lease transaction is effective in a year later than anticipated in the prospectus resolution. That escalator has been 1.7% for the lease transactions intended in the FY’13 and FY’14 time period. If we improve the prospectus cap by that escalator we still only get to $44.04 in FY 2021.
Yes, it’s possible that there could be a near-term bump similar to the $3.00 increase which occurred in 2009-2010 but even that doesn’t get to the current market for many quality buildings. Ultimately, there is little historical precedent to indicate that OMB will dramatically accelerate rent cap growth. And that spells trouble for GSA and for government property investors.
Note: the rent figures in the spreadsheet illustrate the maximum prospectus rent approved for each fiscal year. In rare situations, some Department of Defense build-to-suits have been approved at slightly higher rents to accommodate the unique nature of those facilities and the larger site area required to accommodate DoD’s required security standoff distances. Those special rent approvals were omitted from the trend shown.
Rep. Howard “Buck” McKeon, sponsor of H.R. 4310 (AP photo/J. Scott Applewhite)
Yesterday, the House of Representatives voted 299-120 to pass the National Defense Authorization Act for Fiscal Year 2013 (H.R. 4310). The Act defies the President by adding $4 billion to the Administration’s requested budget and reversing planned cuts to certain weapons programs. However, for private-sector property investors with DoD tenants and contractors the most significant section of the bill is addressed on its 754th page. It reads, simply:
SEC. 2713 PROHIBITION ON CONDUCTING ADDITIONAL BASE REALIGNMENT AND CLOSURE
Nothing in this Act shall be construed to authorize an additional Base Realignment and Closure (BRAC) round, and none of the funds appropriated pursuant to the authorization of appropriations contained in their Act may be used to propose, plan for, or execute an additional BRAC round.
This language is, essentially, word for word, the Wittman Amendment that we reported on earlier this week. It remains to be seen if it will also survive the Senate mark-up but there are indications that there is support for quashing BRAC in that chamber as well. In a bi-partisan effort, 13 Senators crafted a recent letter requesting that DoD be required to report any force reduction measures to Congress prior to implementing those actions. This additional Congressional oversight at the outset of a BRAC request would weaken a core tenet of the BRAC process which establishes an independent BRAC Commission whose mission is to review and revise the DoD BRAC recommendations, followed by Presidential approval, after which Congress allowed the opportunity to disprove recommendations, but only by doing so en masse.
Private-sector landlords – especially those in the Washington, DC area – have come to fear the BRAC process. The 2005 BRAC served to clear DoD tenants out of more than five million square feet of office space in Northern Virginia, relocating them primarily to Ft. Belvoir, Ft. Meade and other bases. The previous BRAC round in 1995 relocated the NAVAIR, NAVSEA and SPAWARS commands, primarily from Arlington’s Crystal City submarket.
Entrance to the Lenexa subsurface records facility owned by Meritex, Inc.
How and where do federal agencies keep their vast amounts of records? The Code of Federal Regulations authorizes the National Archives and Records Administration (NARA) to establish, maintain and operate records centers for federal agencies; it also empowers it to approve records centers that are maintained and operated by individual agencies. In addition, NARA can promulgate standards, procedures and guidelines to federal agencies with respect to the storage of their records in commercial records storage facilities. Since 1950, NARA’s Federal Records Centers (FRC) program has safeguarded the federal government’s records, including tax returns, official military records, blueprints of federal buildings and other structures, passport applications, inmate files on federal prisoners, maps of national parks and much more.
The FRC maintains facilities that protect records from fire, theft, pests, water damage and natural disasters. It provides high-quality, cost-effective storage and servicing of records for federal agencies and is developing state-of-the-art technology to ensure that it will be able to continue to serve these agencies’ needs for electronic records management in the digital era. It stores about 27 million cubic feet of records in 17 facilities nationwide. (If the boxes stored in FRCs could be stacked atop each other in a single column, they would be taller than 900 Mount Everests.) Approximately 1,100 federal employees work for the FRC, serving nearly 400 federal agencies. Since 1999, the FRC program has operated on a fee-for-service basis; it is now supported entirely by the fees it charges other agencies.
Some of the FRC’s most interesting facilities are located 80 feet underground, in retrofitted limestone mines. The Lee’s Summit, Mo., and Lenexa, Kan., FRCs feature cost-effective climate control, enabling them to store records at the proper temperature and humidity much less expensively than an above-ground facility. The Lenexa FRC houses a custom-built cold storage vault that stores film for the National Archives; its collection includes images from the nation’s first successful satellite reconnaissance system as well as combat films.
As more and more government records are created and stored in electronic form, FRCs are responding to the need to manage those electronic records by developing new facilities and services. In 2007, NARA opened two state-of-the-art electronic records vaults at the FRCs in Suitland, Md., and Fort Worth, Texas, both of which incorporate a non-aqueous fire suppression system, strict environmental controls and multiple levels of security. The FRC also has developed the Archives and Records Centers Information System (ARCIS), the online portal through which NARA’s customer agencies now do business with FRCs.
Which federal agency is both a military force and a law enforcement agency? The U.S. Coast Guard (USCG), one of the nation’s five armed forces and the only military organization within the Department of Homeland Security (DHS), “is simultaneously and at all times a military force and federal law enforcement agency dedicated to safety, security, and stewardship missions.” In times of peace, the Coast Guard operates as part of DHS, enforcing federal laws on the high seas, the nation’s coastal waters and its inland waterways; during wartime, or at the direction of the president, it serves under the Navy Department. It also performs missions that are not related to homeland security, including maritime search and rescue, marine environmental protection, fisheries enforcement and aids to navigation.
One of the oldest organizations within the federal government, the Coast Guard was founded by Alexander Hamilton on August 4, 1790, when the first Congress authorized the construction of ten vessels to enforce federal tariff and trade laws and to prevent smuggling. Known early on as the “revenue cutters,” the Revenue Marine and later the Revenue Cutter Service, it received its present name in 1915, when Congress merged the Revenue Cutter Service with the Life-Saving Service. The Coast Guard began maintaining the nation’s aids to maritime navigation—including operating its lighthouses—when President Franklin Roosevelt transferred the Lighthouse Service to the Coast Guard in 1939. In 1946, Congress permanently transferred the Commerce Department’s Bureau of Marine Inspection and Navigation to the Coast Guard, thereby placing merchant marine licensing and merchant vessel safety within its purview. It was transferred to the Department of Transportation in 1967 and to DHS on March 1, 2003.
The Coast Guard employs some 38,000 active-duty men and women as well as 8,000 reservists, 35,000 auxiliary personnel and more than 6,000 civilians. Congress appears poised to provide the service with more money than the White House requested for next year; while the President asked for $8.32 billion in discretionary funding for the Coast Guard in FY 2013 (3.3 percent below the enacted level for FY 2012), House Republicans unveiled a homeland security budget last week (May 8, 2012) that would give the Coast Guard $10 billion in discretionary funding, an increase of $211.7 million above the president’s request and $63 million below last year’s level, and the Senate appears ready to do the same.
The USCG Headquarters Building, at 2100 Second Street, SW, in Washington D.C., is the organization’s administrative and operational command and control center. A new USCG headquarters currently is under construction on the historic St. Elizabeths West Campus in southeast Washington, D.C.; the project is the first stage of a long-term effort to consolidate DHS facilities on the site. When it is completed in the first quarter in 2013, the new USCG Headquarters will feature an 11-story, 1.2 million-square-foot office building that will house about 3,860 employees, a separate central utility plant, and two seven-story parking garages. (The President’s FY 2013 budget request includes $24.5 million to support the Coast Guard’s relocation to the St. Elizabeths site.)
In addition to the headquarters, the Coast Guard operates facilities throughout the country, including air and shore stations. It is divided into nine regions, with one or more regional offices located in each. The Coast Guard also maintains a surprisingly significant presence in landlocked West Virginia, where the late Sen. Byrd applied his influence to make his state home to the Coast Guard’s National Maritime Center and its Operations Systems Center.
Aerial rendering of USCG’s St. Elizabeths headquarters
OMB Acting Director Jeffrey Zients
On Friday, Office of Management and Budget (OMB) Acting Director, Jeffrey Zients, issued a memorandum effectively freezing the federal inventory of leased space. The memorandum entitled “Promoting Efficient Spending to Support Agency Operations” addressed a wide range of cost reduction initiatives including reductions in travel costs, conference expenditures and more efficient management of the fleet of government-owned vehicles.
From our view, of course, the most interesting aspect was the memorandum’s directives relating to real property. Specifically, the memo urges aggressive disposition of excess property and, more notably, declares that “as of the date of this memorandum, agencies shall not increase the size of their civilian real estate inventory.” Henceforth, approval for acquisition of net new space will only be granted where the total square footage is offset through consolidation, co-location or disposition of space from that same agency. The memo goes on to observe that exceptions will be made in instances where the government’s space need is to protect national security, reduce costs, allow for the “effective accomplishment of agency missions” or comply with legal requirements.
In many respects, OMB’s pronouncement has been expected and it simply builds on earlier Executive Branch directives including President Obama’s June 10, 2010 memorandum that ordered federal agencies to produce $3 billion in civilian real property costs savings by the end of this fiscal year. This memorandum and other policy and legislation issued over the past two years have already begun to reduce square footage used per employee, increase teleworking and backfill vacant space in federal buildings.
So, what does it mean for the federal leasing market on the broad scale?
First, it is a good time to be an incumbent landlord. Property owners with contemporary, functional and efficient buildings will find that government tenants are less likely to relocate. One significant caveat, however, is that agencies are tending to consolidate into fully-leased buildings. So, in those instances where an agency leases all of one building and a small portion of another building nearby, the “nearby” building is at significant risk of losing its tenant upon lease expiration.
Second, owners with vacant space will find that leasing to federal tenants is much more difficult. This is largely because agencies aren’t growing but also due to budget uncertainty that often leads agencies to seek shorter renewal terms. When GSA performs its analysis of competing lease offers, it adds space replication and relocation costs to the other landlords’ proposals. Especially where the lease term is relatively short, the amortization of this cost makes it very difficult to underbid the incumbent lessor.
Anyone involved with government contract administration can attest to the staggering number of online systems used by the government to support vendor-related functions, such as business registration, small business subcontracting, past performance and contracting opportunities. Simply keeping track of all the usernames, passwords and registration renewal dates is a test of organizational skills and discipline.
Using a typical government lease as an example, a business might register on FBO to identify specific opportunities, obtain a DUNS number, then register in CCR, then register in ORCA and then register in ESRS. Each system requires a separate username and password combination and has different registration, renewal and reporting requirements. GSA has long recognized has recognized the inefficiencies of the current approach to procurement and vendor management and has undertaken a major overhaul, which will be rolled out in 4 phases. This new system is called “SAM”, or System for Award Management.
The official implementation of Phase 1 will take place later this month. On May 29th, the CCR, ORCA, FedReg, and EPLS will disappear. They will be centralized into one system, which will require ONE username and ONE password. The functions covered by Phase 1 relate to business entity registration and certifications. Phase 2, expected sometime in late 2013, will eliminate ESRS, WDOL, CFDA and the venerable FBO, wrapping their functionality into SAM. Phases 3 and 4 will eliminate FPDS and PPIRS and consolidate these data and past-performance functions into SAM.
The purpose of SAM is to consolidate multiple procurement related data systems into a single platform. This is not a portal with links to existing systems, but an entirely new system unto itself. Eleven websites will be reduced to one. On paper, this sounds like a great idea. In practice, we have learned that a wait-and-see posture is most prudent. We will be in a better position to comment on its practical effectiveness once we have had the opportunity to give it a test-drive.
UPDATE: GSA announced that the implementation date for SAM has been moved to the end of July.
Rep. Rob Wittman (R-VA)
Have we seen the last of BRAC? Although the Defense Department has used the Base Realignment and Closure (BRAC) process five times within the past 15 years, and although President Obama and Defense Secretary Leon Panetta have proposed sixth and seventh rounds of BRAC commissions (in 2013 and 2015)—and have said that these efforts will be vital to cutting infrastructure costs in response to tighter defense budgets—it’s beginning to look like Congress will make sure those rounds never take place.
Democrats and Republicans in both chambers have been saying for months that they oppose reactivating the BRAC process. Senator Claire McCaskill (D-Mo.), chair of the Senate Armed Services Committee panel that has jurisdiction over military installations, has said she is willing to allow the closing of U.S. military bases overseas, but not domestic bases. “There is one area where there is absolutely no room for compromise this year, and that is BRAC,” said McCaskill at a hearing of the Senate Armed Services Readiness and Management Support subcommittee on March 21.
The House Armed Services Committee, meeting yesterday (Wednesday, May 9) to discuss details of its version of the 2013 defense budget, firmly rejected the administration’s call for two new rounds of BRAC and voted to add a provision to the 2013 defense authorization bill that would specifically bar spending any money next year even “to propose, plan for or execute” the BRAC process. (In other words, don’t even think about it.) Representative Rob Wittman (R-Va.), who proposed the amendment, said that the five previous rounds of base closings have demonstrated that the process has upfront costs, and that base closings “could cost billions of dollars and thousands of jobs.” It thus appears unlikely that any final budget bill will include new BRAC commissions.
Sequestration—originally a legal term referring to an agent of the court taking valuable property into custody to prevent it from being disposed of or abused before a dispute over its ownership can be resolved—has been adapted by Congress in more recent years to describe a new fiscal policy procedure first provided for by the Gramm-Rudman-Hollings Deficit Reduction Act of 1985. If the many separate appropriation bills passed by Congress call for the federal government to spend a total amount higher than the limit set by Congress in its annual budget resolution, and if Congress cannot agree on ways to cut that total—or does not pass a higher budget resolution—then an “automatic” form of spending cutback takes place. This automatic spending cut is called “sequestration.”
Sequestration therefore is the process through which across-the-board spending cuts would be applied to government programs in a uniform fashion to meet budget reduction goals. It was agreed to through the Budget Control Act of 2011 when a “supercommittee” (the Joint Select Committee on Deficit Reduction) failed to strike a deal on $1.2 trillion of savings. This legal requirement of the Budget Control Act will kick in on January 2, 2013—if Congress cannot reach agreement before then about the $1.2 trillion in cuts or added revenue needed over the next decade (including roughly $98 billion in FY2013 alone), and if it does not pass legislation to undo the legal requirement for sequestration—or if President Obama fails to sign that legislation. If that does not happen, on January 2 the federal government must begin imposing the first of ten years of across-the-board discretionary spending cuts for defense ($500 billion) and non-defense ($700 billion) budgets.
Under sequestration, an amount of money equal to the difference between the cap set in the budget resolution and the amount actually appropriated is “sequestered” by the U.S. Treasury and not handed over to the agencies to which it was originally appropriated by Congress. In theory, the same percentage would be withheld from every agency. Congress, however, has chosen to exempt some enormous programs from the sequestration process—including parts of the Defense budget, Medicaid, unemployment insurance, Social Security, and more—meaning that sequestration would have to take back devastatingly large shares of the budgets of the remaining programs in order to achieve the total cutbacks required. Broadly speaking, the across-the-board cuts are expected to result in roughly an 8.4 percent cut in most affected non-defense discretionary programs, a 7.5 percent cut in affected defense programs, an 8.0 percent cut in affected mandatory programs other than Medicare and a 2.0 percent cut in Medicare provider payments for FY2013.
Most House Republicans voted today (Thursday, May 10) to override the steep defense cuts that would be mandated by sequestration and replace them with spending reductions to food stamps and other mandatory social programs. The Sequester Replacement Reconciliation Act passed by a 218–99 vote; only 16 Republicans opposed it and no Democrats supported it. This “butter for guns” swap faces a veto threat from the White House and rejection by the Democratic Senate, both of which claim that the GOP measure unfairly targets the middle class and the poor. The resulting deadlock is highly unlikely to be resolved before Election Day. This means that a legislative “perfect storm” could develop in December, when a lame duck Congress may be faced with approving a continuing resolution to cover FY2013 appropriations, the need to increase the debt ceiling, and legislation to stave off sequestration.