Government Leasing News Winter 2008
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Spotlight: Newmark Knight Frank

Spotlight: Newmark Knight Frank
Article Title: Spotlight: Newmark Knight Frank
Source: Government Leasing News
Publication Date: January 6, 2009

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Government Leasing News Winter 2008 Government Leasing News Winter 2008 Document Transcript

  • ISSN 1553-9571 WINTER 2008 VOL. 4, NO. 4 G OVERNMENT L EASING N EWS A Q UARTERLY N EWSLETTER FOR O WNERS, M ANAGERS AND D EVELOPERS OF G OVERNMENT -L EASED P ROPERTY Editors’ Welcome! In this Issue This month’s featured article by oped under the Emergency Economic Featured Article: Challenges outgoing PBS Commissioner David Stabilization Act of 2008 will help Facing the Government’s 3 Winstead neatly sums up the challenges resolve the situation and stabilize the Federal Civilian Landlord and problems currently facing GSA in credit markets. To provide a back- its role as the Government’s Federal ground on the possible form the TARP Real Property Tax Management 5 Civilian Landlord. We wish him well regulations may take or borrow from, for Gov’t-Leased Buildings for a job well done. we will examine in this issue of Cost-Benefit Analyses Need Thanks also to Melton L. Spivak, Government Leasing News the manner 7 Only Be Reasonable Vice President in Financial Manage- in which the assets of insolvent banks ment with JPMorgan Chase, for his were liquidated by the Resolution Trust Ask the Expert 8 article on a topic not touched on before Corporation during its six-year period The Enormous Success of in Government Leasing News, that of its operation from 1989 to 1995. 10 the RTC being tax management of government- In particular, we’ll look at the RTC leased buildings. from two different aspects. First, how it The Resolution Trust Corpora- 11 And thanks to Advisory Board functionally operated and liquidated tion 1989-1995 member Dave Cunningham of Federal assets; and second, as explained by Pat Lease Construction: It’s Either Lease Consultants for stepping up and Keogh in his article on page 10, what 14 New Tools or New Money addressing in the Ask the Expert column factors accounted for its enormous Call for Entries for the Annual the thorny issue of lease renewals success under the imposed mandate to 17 Virgil W. Ostrander Award arising out of the recission of delegated liquidate those assets in as short a time leasing authority that took place in as possible under very disruptive market Market Outlooks for 19 November of 2007. conditions. Washington and Baltimore Given the perfect storm that is being We again express our appreciation for Enhanced Use Leasing 21 experienced in the worldwide credit the industry data contributed by Delta markets, we thought it fitting to do a Associates, Transwestern, and the Selected Vacancy Rates 24 series on how the Troubled Assets Korpacz Investor Survey contributed by Relief Program (TARP) being devel- PricewaterhouseCoopers. Prospectus Corner 25 Recently Initiated GSA Leases 27 Notable and Newsworthy The Korpacz Investor Survey 28 This past fall, Government Leasing very experienced in the development, News sponsored a seminar on alterna- financing and procurement of govern- A Limited Termination for Con- 30 tive approaches to lease construction ment build-to-suit projects. They pre- venience Clause? that was held at the Naval Heritage sented their ideas to an invited group of The Lease Construction Semi- Center in Washington, DC. Your editor- over 70 senior government officials 33 nar of December 4th in-chief, Dennis Eisen, had the distinct responsible for real estate acquisitions Spotlight: Newmark Knight honor to serve as the moderator of that at their respective agencies. 36 Frank forum. The panel of experts who led the The meeting was in a very real sense discussions consisted of five individuals a continuation of an industry roundtable Cumulative Index of Articles 39 drawn from the private sector who were (Continued on page 16) © 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. -1-
  • WINTER 2008 GOVERNMENT LEASING NEWS Book Review: Sustainability Matters Editorial Staff Sustainability Matters is the next in emphasize the knowledge and strategies the series of recently published books presented therein. In aggregate, they Editor-in-Chief Dennis Eisen, Ph.D. by the Workplace and Research Staff of highlight the creativity, diligence and 301-762-1441 GSA’s Office of Applied Science. Two understanding of asset managers, pro- years ago we reviewed in these pages ject managers, property managers, and Copy Editor Workplace Matters, and like that earlier realty professionals. Their success Carolyn Hecht one, this book belongs on the bookshelf should inspire project teams to solve the Research Associate of all building owners, building manag- new challenges GSA faces, and im- Marshall Benedict ers, architects and contractors. prove each building through an inte- GSA developed this book as an aid to grated approach from the earliest phase. improving current practices and encour- aging continuing innovations that create Board of Advisors and maintain sustainable work environ- David Cunningham, President, ments. Whatever mission a Federal Federal Lease Consultants agency may have, the book presents an Greg Eden, President, Intercap integrated approach, illustrated with Institutional Investors LLC numerous and various examples, that Pat Keogh, President, AMV LLC will improve buildings and workplaces The book’s concluding chapters ac- and achieve dual legislative and execu- knowledge the green movement exter- Ken Kimbrough, President, tive mandates: at best value to taxpayers nal to the Federal government, its influ- Kimbrough & Associates; former encers and GSA’s continuing and Commissioner of Public Buildings and without compromising the quality of life of future Americans. emerging efforts to participate in and, in Robert C. MacKichan, Jr., Partner, The book begins by setting the stage fact, lead by deed and example. Holland & Knight, former General for sustainability in the Federal govern- As seen in the charts illustrating the Counsel, GSA ment. The second chapter, “The Green- changes in global temperature and sea Thomas Peschio, former CEO, est Alternative,” highlights the impor- level and the growth in carbon dioxide, Government Properties Trust tance of the preservation of existing the world is taking notice of the ur- Tom Rochford, President, resources and the sustainability of not gency before us. Global scale environ- Federal Landlords Association building at all. The third chapter ad- mental changes demand an examination Henry Schuldinger, Associate, dresses the value proposition and prac- of current practice and a vision for the Government Properties Group, tical procurement practices for green future. It is in this context that GSA Marcus & Millichap buildings. The following five chapters, must make operational and design deci- Peter Shanley, President, on Energy, Environmental Quality, sions to continue to meet the mission- Phoenix Park Associates Materials, Operations and Maintenance, related needs of customer agencies. and Beyond GSA: The Greening of Changing standard practices always America, offer proven examples of involves risk. But the examples therein The book’s 211 pages are crammed processes and techniques that GSA can contain ideas and strategies that can full of ideas, with many photographs and should be implementing. The reduce energy consumption, discourage accompanying each case study. strategies address the broad panoply of resource depletion, increase productiv- Did we mention the price? It’s free a building’s lifecycle—from choosing a ity, and create healthy work environ- for the asking—but don’t wait too long site through operations, maintenance ments. This is the legacy that GSA before calling, as supplies are limited. and renovation. wishes to leave behind—buildings of Call GSA at 202-501-0353 to order Each chapter’s content is illustrated today that incorporate our hopes for your copy. by case studies of GSA facilities that tomorrow. -2-
  • WINTER 2008 GOVERNMENT LEASING NEWS Challenges Facing the Government’s Federal Civilian Landlord by David Winstead, GSA Commissioner of Public Buildings For the past three years, I’ve had the David L. Winstead has been the PBS unique privilege and challenge to run Commissioner since October 2005, and is one of the largest and most diversified responsible for the asset management and public real estate organizations in the design, construction, leasing, operations, world—the Public Buildings Service at and disposal for a real estate portfolio of the US General Services Administra- 347 million square feet in more than tion—managing a portfolio of 354 mil- 8,600 public and private buildings ac- lion rentable square feet in more than commodating one million federal work- 8,600 assets across the nation, the work- ers. place for one million employees. Before joining GSA, Mr. Winstead As the landlord to the federal civilian was a partner in a major Washington, DC, government, our customers include the law firm practicing in the areas of real Federal Judiciary, with its expanded estate, transportation, public law, project courthouse program—including the development and procurement. Mr. Win- completed Annex at the DC District stead has served as the State of Mary- Courthouse dedicated last year; and our land’s Secretary of Transportation as well work with the Department of Homeland as Executive Director of the Washington/ Security’s Customs and Border Protec- Baltimore Regional Association. tion with its expanded Land Ports of Entry Program at our Northern and 2007, GSA-owned space has remained expand its customer base, while ensur- Southern Borders. Other big national relatively constant while leased facili- ing sufficient funds are available to re- projects include the FBI’s expanded ties have grown from 46 million to 178 invest in our real property assets, con- field office program. With the Bureau’s million rentable square feet. struct new assets for growing agency major shift in its mandate and opera- In terms of construction activity, we missions, and cover leased space and tions, GSA is working with them to have about 185 major projects under- operating costs. The priorities that I’ve deliver 30 plus projects across the coun- way at a value of $12.5 billion. Our set out during my tenure as Commis- try totaling approximately 73 million annual total budget is about $8 billion sioner captures PBS’s business direc- rentable square feet of space in 37 US of which the funding dedicated to capi- tion and the path that we must take to cities over the next several years. tal construction has averaged a rela- align resources, action and energy to In addition, GSA is working with the tively constant $1.5 billion for the past accomplish our goals of providing supe- Department of Homeland Security to four years. rior workplaces for federal customer build a new headquarters for the Coast Within this budget, one shift has been agencies at good economies to the Guard on the site at St. Elizabeths—a to address a growing backlog of repair American taxpayer. former mental hospital in the Anacostia and alterations—currently estimated at Improving Real Property Capital section of Washington, DC, as well as $7 billion. In the President’s FY 09 Project Planning and Delivery completing the Food and Drug Admini- funding request, for instance, $692 mil- This priority is geared to strengthen- stration’s campus at White Oak, Mary- lion of $1.3 billion for new construction ing GSA’s Capital program delivery to land. These headquarter projects are is set aside for major Repair and Altera- eliminate problems associated with pro- wonderful new additions to our owned tion projects. ject delays which can increase project inventory, and they are joined by the PRIORITIES costs by 5 percent per year. These de- new San Francisco Federal Building PBS’s central business premise is lays have attributed to a number of fac- and new courthouses in Cape offering best value, based on market tors, including the escalating cost of Girardeau, Missouri; Springfield, Mas- knowledge of customer requirements, construction materials, inconsistent sachusetts and Richmond, Virginia. real estate and regulatory expertise, and business processes and timing and GSA’s inventory is currently split market volume. I call this our method of procuring design and con- between owned and leased space with “economic case.” Strengthening our struction services. the leased space growing at a signifi- economic case and operational excel- Improvements in this area include cantly higher rate. Between 1967 and lence is essential for PBS to retain and developing consistent contract scopes of (Continued on page 4) -3-
  • WINTER 2008 GOVERNMENT LEASING NEWS Challenges Facing the Government (cont’d) (Continued from page 3) the growing lease needs of the Govern- “workplace solutions provider” with a work to use in capital design and con- ment. We are continuing to work with customer-centric focus. This entails a struction contracts; updating our Facili- our national brokers and PBS regions to detailed understanding of the custom- ties Standards Guidelines to incorporate achieve more consistent application and ers’ work needs to enable us to design a the latest energy requirements as well as rent savings for our agency clients. solution that, at a minimum, provides courthouse and land ports of entry de- In addition, the Office of Real Estate space that enables PBS customers to sign criteria. Due to client operational Acquisition is promoting consistent work effectively in their space. We have issues, we have had recent successes in enterprise-wide operations and enhanc- published a document entitled expediting the design and delivery cycle ing communications with brokers and “Workplace Matters” with an accompa- for GSA’s capital construction projects customers, while stressing both rents nying implementation and consultation in our courthouse and land ports of en- achieved and savings accrued. Particu- program for our clients. The ultimate try programs. In addition, we recently lar focus is being paid to increased effi- goal is for PBS to provide a suite of signed a new MOU with the Adminis- ciency dealing with the over 60 million services that together aid the customer trative Offices of the Courts which sets square feet leased through NCR’s pro- in achieving an organizational shift the course for our partnership in the grams in the Washington metropolitan more swiftly and effectively. years ahead. area. Explore Ways to Leverage Fund- Improve the Real Estate Leasing Chip Morris, who heads up this new ing of Real Property Capital Pro- Program office, is working with senior leaders in jects The amount of space that we lease PBS’s National Capital Regional office, Federal investment capital is limited from private landlords has almost quad- to address these lease acquisition and and increasingly insufficient to keep rupled over the last 40 years, reaching administration problems. Towards that pace with the repair needs or new con- 178 million rentable square feet of effort they are stripping back the acqui- struction needs of GSA’s real property space at the end of FY 2008. Today, sition and administration processes to portfolio. We currently face over $7 half of the space occupied by our cus- identify problems and choke points in billion in reinvestment needs for the tomer agencies is in leased facilities. the system with the goal to improve PBS portfolio. At the same time con- PBS must excel at meeting customer’s timeliness and achieve increased effi- struction costs continue to increase—up leased space requirements by delivering ciencies. We are committed to improv- to 30 percent in the last five years alone. superior space, in a timely fashion, at ing our performance and feel confident Current funding approaches include the best value for the taxpayer. that we can achieve these goals. One authorization to use available funds in Several years ago, PBS made a busi- problem that we face is that the sheer the Federal Buildings Fund and addi- ness decision to contract for profes- size requires higher levels of review and tional appropriation from Congress. In sional broker services to procure leases approval for a larger percentage of leas- the past, predating budgetary scoring, at no cost to the Government, known as ing actions. GSA borrowed funds from the Depart- the National Broker Contract. Our goal Strengthen and Expand Work- ment of Treasury through the Federal was to strengthen and improve our space/Workplace Delivery Finance Bank. overall leasing program, augment a de- In the face of increasing budget con- Budgetary scoring treatment of lease cline in the realty workforce, and free straints, customer agencies are in vari- purchases or financing through the Fed- up our real estate professionals to focus ous stages of reassessing core mission eral Financing Bank continues to be more on customer requirements and work and their workplace needs. In the problematic from a real property man- strategic customer business planning. past five years, an increasing number of agement perspective. Budget authority We have had good success with these both corporate and governmental or- for all purchases, including lease pur- contracts, in some cases, delivering ganizations have recognized the value chases and purchases financed through rental rates that are below market and of a well-designed workplace in aiding the Treasury, is scored in the year in contributing rent credits from commis- the productivity of individuals and the which the authority to purchase is first sions. However, application nation-wide effectiveness of organizations. To best made available in the amount of the is still not even, and the processes and meet changing customer needs, PBS has Government’s estimated legal obliga- documentation of government leasing refocused its core value proposition tions. Leases of projects constructed on has been a challenge for the some bro- from space transactions and being a government-owned land are generally kerage firms working with us to meet “provider of space” to being a considered “governmental” projects and (Continued on page 32) -4-
  • WINTER 2008 GOVERNMENT LEASING NEWS Real Property Tax Management for Government-Leased Buildings By Melton L. Spivak, Vice President, JPMorgan Chase Introduction one or more of the three traditional ap- must be met, or plaintiffs lose their right Government-owned buildings that are proaches to value: market, cost, and of appeal at that level. Based on evi- used exclusively for governmental pur- income. dence provided by the owner, and corre- poses are typically exempt from paying The tax rate is determined by dividing spondingly by the tax assessor/tax ap- real property taxes in the United States, the annual expense budget of the taxing praiser, the administrative board of re- the logic being that it would be redun- jurisdiction by the total assessed values view will make its decision. dant to tax those buildings where the within the taxing jurisdiction. If the property owner is not satisfied revenue would be used to support gov- For example, an office building with with the administrative board of re- ernmental activities. a fair market value of $25,000,000 in a view’s decision, he can engage an attor- However, privately-owned buildings jurisdiction with a 100% assessment ney to file a complaint with the judicial where the government leases space are ratio and a 4% tax rate would have a court overseeing tax appeals. not exempt from real property taxes, but $1,000,000 tax bill. The calculation is There are variations in the appeal are subject to the same process and simply: $25,000,000 x .04 = process, depending on the state where scrutiny of real property assessment and $1,000,000. the appeal is filed. In fact, in some tax- tax collection as are all other taxable As mentioned above, the assessment ing jurisdictions, it may be best to use property. is a percentage of market value, and can legal counsel throughout the entire ap- The tax revenue derived from real be less than 100% of fair market value. peal process. property taxes is used to pay for local A fractional assessment –less than Government as Lessee (county and municipal) services such a 100% of market value-- may be pre- If the government “net leases” an public safety, public schools, recreation scribed by statute or may simply evolve entire building and pays all the real & parks. All other things being equal, with the passage of time if the market property taxes thereon, it should have taxes increase in direct proportion to the value increases but the assessment is the right to appeal the assessment. This population density of the taxing juris- held constant. right should be clearly stated in the diction, as demand for local govern- In a perfect world, assessments accu- lease. The government should then use mental services increases. rately reflect market value. However, the right tax advisor or consultant to This article is meant to be used as a because there are different opinions of evaluate any tax reduction opportuni- primer for owners, managers, and users value of property, or of the ratio rela- ties. of government-leased property in the tionship to like properties, taxpayers Where the government “gross leases”, United States in making sure the prop- appeal assessments. i.e. is a partial tenant, the lease usually erty taxes on these properties are correct Tax Appeals contains an escalation clause stating the and properly allocated in accordance In some jurisdictions, where there is government must pay its proportionate with the terms of the lease. an annual assessment review, the prop- share of property taxes that exceed the The Math erty owner or his representative can taxes of its base year. “Proportionate A real property tax bill is calculated meet with the tax assessor/tax appraiser share” is usually calculated by dividing by multiplying the tax assessment (a/k/a by written request. If there is a simple the tenant’s rentable square footage by the “assessed value”) by the tax rate. objective issue, such as an incorrect the total rentable square footage in the The assessment is based upon the fair square footage that impacts the property building. “Base year” is usually the tax market value of the property as of a value, a correction can be made to the year in which the lease commencement specific date, and is equal to a certain mutual satisfaction of both parties. date falls. Thus, for example, if the gov- percentage of the fair market value of However, if there is further difference ernment leases 10,000 square feet in a the property. The relationship between in the opinion of value or there is no 100,000 square foot building, and the the two numbers is often expressed as procedural way to meet with the tax lease commences on March 1, 2009 and the “assessment ratio”, i.e. assessed assessor/tax appraiser, the owner can the building is located in a jurisdiction value divided by the fair market value = file an administrative appeal. that uses the calendar year as the tax assessment ratio. Once a year, taxing jurisdictions al- year, its proportionate share is 10%, and Fair market value is determined by low property owners or their representa- its base year is 2009. If taxes are the assessor or an outside valuation tives to file appeals before an adminis- $500,000 for 2009 and $600,000 for company hired by the assessor, using trative board of review. Filing dates 2010, then the government will pay a (Continued on page 6) -5-
  • WINTER 2008 GOVERNMENT LEASING NEWS Real Property Tax Management (cont’d) (Continued from page 5) erty taxes are not a significant operating tion of the property in question. Over tax escalation of $10,000 in 2010, expense, need to acquire a working time, a number of factors can influence which is 10% of the $100,000 increase knowledge of the process to make sure the value of a property. Everything from over the base year. their asset managers are efficiently re- functional obsolescence to economic Likewise, if the landlord files tax viewing the property tax liability of factors of the surrounding area can have appeals and gets reductions in subse- their real estate investments. a dramatic impact on a property’s value. quent years, the governmental tenant Information Technology Visiting the property often leads to should be entitled to its proportionate The internet has brought new tools to questions relative to determining the share of tax refunds or rent credits (in property tax managers, real estate tax “correct” tax assessment. lieu of tax refunds). On large-square consultants, real estate appraisers, asset Conclusion foot leases, these tax refunds or rent managers and investors/landlords. The best real estate professionals credits can be quite significant. Many taxing authorities and assessment know the importance of ongoing prop- Scrutinizing gross leases can often be jurisdictions have made assessment erty tax management. It is basic to done through lease audits by experts information available to the public, and “good housekeeping.” It pays to be that specialize in reviewing all lease their data bases are accessible twenty- knowledgeable on the subject. escalation expenses and management four hours a day. Additional information on property fees. To access this information on the tax assessment and property tax man- Landlords and Property Manag- taxing jurisdiction’s web site, a parcel agement can be obtained from the Inter- ers identification number or “PIN” is re- national Association of Assessing Offi- Landlords and property managers quired. This number is unique to each cers, the Society of Professional Asses- need to be vigilant in reviewing tax property. Some tax jurisdictions require sors, the Institute for Professionals in assessments. Properties that are over- block and lot numbers, or map, parcel, Taxation, and the International Property assessed require higher base rents, and and lot numbers. The terminology is Tax Institute. thus can be less competitive than other different, but these account numbers As landlords, corporations and insti- properties available for lease. Likewise, function the same way in bringing up tutions become more sophisticated in assessments impact the sale price of the tax assessment information. budgeting, managing, controlling and property. Moreover, maps and satellite images reporting real estate operating expenses, When real estate investors have ac- of properties are also available over the government property managers, audi- cess to low-cost financing, premium internet. A property can often be ac- tors, and supervisors will have to keep prices are often paid for desirable prop- cessed by simply identifying its street informed of conditions that impact gov- erties with reliable tenants, like govern- address, municipality, state or province, ernment occupancy costs. Managing ments. As a result, real estate assess- and county. property taxes in government-leased ments of these properties and compara- Internal databases are also being cre- buildings is a necessary safeguard in ble properties are subject to increases ated by owners and managers of large controlling one major occupancy cost. relative to the relationship (known as real estate portfolios in order to manage Melton L. Spivak is a Vice President the capitalization rate) of the property administrative tasks and facilitate plan- in Financial Management with JPMor- income to the property sale price. In a ning and reporting functions. Software gan Chase (New York). His expertise is speculative market, a compression of is available to share this information in real estate valuation and property tax capitalization rates can lead to signifi- through the internet. management. Mr. Spivak has written a cant increases in assessed values. The This has become the most effective number of articles in various real estate property owner or manager needs to way to get assessment and tax informa- and tax publications on property tax ensure that its properties are not over- tion in order to do metrics for exploring management, valuation and mergers. assessed under these conditions. and evaluating opportunities for assess- He received both his B.A. in Economics In the United States, property taxes ment and tax reductions. and MBA in Finance from the Univer- are the largest occupancy cost after rent. Site Visits sity of Hartford. Mr. Spivak is on the For this reason, foreign investors, espe- It cannot be overemphasized that any- Advisory Board of the International cially if they hail from certain countries one reviewing a real estate tax assess- Property Tax Institute. His e-mail ad- like France and Germany, where prop- ment should do a complete site inspec- dress is melton.l.spivak@jpmchase.com. -6-
  • 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 Trying to win a lease renewal from an Administration (DEA) the GSA went tomized the space for DEA, according incumbent landlord may be a waste of through the succeeding lease process to GAO "at substantial government ex- time even if the competition offers only to conclude that DEA would have pense… and that substantial costs for space that meets all GSA criteria and to pay significantly more over the 10- the upgrades would be duplicated in a may even offer better intangible bene- year lease term to move to comparable relocation.” The upgrades included the fits. If the government tenant, typically space. Moving office space for DEA construction of command, communica- the General Services Administration headquarters would have cost the gov- tion and conference centers, chambers (GSA), goes through the process cor- ernment $77 million more over a 10 and courtrooms, secured work areas, a rectly, the government can justify stay- year lease term than staying put. museum, cafeteria, fitness center and ing where it is as long as the GSA con- The succeeding lease process began health units, and an auditorium. GSA ducts a reasonable cost-benefit analysis. with GSA issuing a pre-solicitation no- calculated that it would cost an addi- GSAR Section 570.402-1(b) provides tice that it was looking for alternative tional $86 million over the 10 year lease that “[i]f a succeeding lease will exceed locations to satisfy DEA’s requirements term to relocate to the Eisenhower site. the simplified lease acquisition thresh- for a 10 year lease of almost 600,000 Even after factoring in lower parking old, [the agency] may enter into the rentable square feet of office and related costs at the new proposed Eisenhower lease [if] . . . (2) [the agency] identify space in Northern Virginia. The incum- location, and restoration costs for re- [ies] potential acceptable locations, but bent landlord and Eisenhower Real Es- quired repairs at the incumbent site, and a cost-benefit analysis indicates that tate Holdings, LLC responded with ac- physical move expenses (approximately award to an offeror other than the pre- ceptable proposals. Both offerors pro- $1.6 million)), the government con- sent lessor will result in substantial relo- posed rents meeting GSA’s $35 per cluded DEA would save a net of $77 cation costs or duplication of costs to rentable square foot rental rate maxi- million over the 10 year lease term by the Government, and the Government mum. staying where it was. Since the cost- cannot expect to recover such costs The next step in the process was a benefit analysis concluded that DEA through competition.” GSA cost-benefit analysis performed could not expect to recover the reloca- How a cost-benefit plays out in favor pursuant to GSA regulations (GSAR) tion costs through competition, the GSA of the incumbent lessor can be seen in a 48 C.F.R. Section 570.4 regarding suc- proceeded to negotiate a sole-source recent decision of the Government Ac- ceeding leases. The GSA evaluated the follow-on lease with the incumbent countability Office (GAO).* Eisen- estimated cost of remaining at the pre- lessor pursuant to GSAR Section hower Real Estate Holdings, LLC pro- sent location versus relocating. Reloca- 570.402-5(b). Eisenhower protested tested a decision by the GSA to award a tion costs in this instance included re- GSA’s conclusion to GAO but lost. sole-source lease to the incumbent les- quired security upgrades, telecommuni- Although Eisenhower had some crea- sor of office space for the headquarters cations cabling, design fees and tive legal arguments, its best practical location of the Drug Enforcement Ad- buildout costs, fixtures, furniture and argument was that GSA did not prop- ministration (DEA). The protester as- equipment, and the move itself. Eisen- erly conduct the cost-benefit study. But serted that it could provide an accept- hower claimed that the intangible bene- GAO concluded that GSA had done it able alternative property offering cost fits of its offered lease location were not right. By law, the GSA decides whether savings to the agency including intangi- properly quantified by GSA, such as a relocation is cost effective. On protest ble benefits, and challenged the reason- newer building offering space layout to GAO, the authority of the GAO is ableness of the cost-benefit analysis improvements to consolidate or accom- limited to determining whether GSA’s cited as the basis for GSA's justification modate growth, state-of the art technol- decision was reasonable. In this case, for the use of noncompetitive proce- ogy expansion options, a better location, the GAO determined that GSA had rea- dures and determination that there was and superior security setbacks. But a sonably carried out the cost-benefit only one responsible source that could significant factor in the incumbent les- study, and therefore, had authority to satisfy the needs of the agency. sor’s favor was that the government had issue a non-competitive lease renewal On behalf of the Drug Enforcement made a number of upgrades and cus- with the incumbent landlord. (Continued on page 9) -7-
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS Ask the Expert Dear Editor: that GSA has not negotiated an exten- the advertisement and issuing a solicita- I have been trying to get GSA to tell sion or succeeding lease with you in a tion for offers within the short-term me if they intend to renew my lease reasonable timeframe. extension? It’s too soon to tell. Don’t be which expires in less than two months. I Could it be that GSA is planning on surprised if they come back to you in can’t seem to get a response from any- moving out of your building in two two years, asking for another short-term one. I’ve received several promises that months, and that’s why you haven’t extension. This may all seem very un- “someone” will get back to me, but time heard from them about a lease exten- fair, since it puts you in a bind in mak- is running out, and I have no idea if I sion? My guess is that if GSA had ing long-term plans for a substantial will have a valid lease contract in two awarded a new lease in another build- capital investment. It might be slightly months or not. I need six months mini- ing, and that is the reason they haven’t more palatable if you consider this ex- mum to find a new tenant and do altera- contacted you, you would have heard of planation, presented from the GSA tions for them. Why won’t GSA give me this by now. You can check Contracting Officer’s point of view: a response, and what should I be do- www.fbo.gov to determine if they have “I have been given your lease that ing? awarded a new lease contract in your expires in two months. I don’t have city. But if they were building a new time to publish it on the fbo.gov web- Response by Dave Cunningham, Fed- building, or remodeling for occupancy page and solicit competition, as I should eral Lease Consultants: somewhere else, or if they were closing do, and as I would do if they had as- The GSA leasing program is in the down the office, you would probably be signed this project to me a year ago. midst of changes that have trickled aware of it as well. Such matters are not When the lease expires in two months, I down to the lowest level, your lease. usually tightly-held secrets in the com- can’t just tell the government agency to For those who want a review of the mercial real estate community. move out, because they have no place to complete background in the changes Assuming that the government is not go. So I’ll find some way to work going on within GSA’s leasing pro- moving out of your building, the most around the problem. I’ll negotiate with gram, see the excellent article in the likely action by GSA will be that they this lessor for an extension just as soon Spring 2008 issue of Government Leas- request a short-term extension from as I finish the other five projects on my ing News, titled “ Delegated Leasing you—probably one or two years. GSA’s desk that expire in less than two Authority,” written by Robert C. problem is that they are required by law months, or have already expired.” MacKichan, Jr., and Patrick R. Tierney, to open this lease up for competition. Viewed from this paradigm, you can of Holland and Knight LLP. In that arti- But to do so, they should have adver- see why GSA’s response is somewhat cle, MacKichan and Tierney describe tised it a year ago, and they apparently less than stellar. The reason for the the directive for GSA leasing that was failed to do so. So now, they must use shortage in GSA resources, and why published in the Federal Acquisition one of the exceptions to the Competi- they haven’t hired more government Circular, dated November 19, 2007. tion in Contracting Act which allows workers or brokers to handle the work- The changes are extensive, and will them to negotiate with you on a non- load could be the subject for another not be reiterated in this article. How- competitive basis. But they will only discussion, but for your case, the ever, in summary, GSA has made it negotiate for the time needed to adver- “insufficient resources” aspect is really much more difficult for other agencies tise the requirement, and negotiate for a the answer to the first part of your ques- to lease space. The result is that many long-term lease with those who re- tion. leases that were handled by non-GSA spond. It may give you some minimal level agencies are now being given to GSA as In theory, they will then stay in your of comfort to know you have plenty of they expire. This means that the GSA building for this resultant short term, company. The problem of resource leasing workload has increased substan- while they use that time to solicit com- shortage is also being seen in other tially, but unfortunately, the resources petitive offers for the amount of space agencies. An owner of a building leased to handle the workload have not kept needed for a long-term lease. If your to Bureau of Land Management that I pace. As with any business, when work- building meets the requirements for a know tells me of a post card he recently load increases, but resources remain long-term lease, or is capable of being received from that agency informing stagnant, something must give. And the renovated to meet that need, then you him that he can expect his rent payment results in your case—and many others, should be allowed to compete for the to be up to 45 days late. The purported according to calls from my clients—is award. Will they actually get around to (Continued on page 9) -8-
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS Ask the Expert (cont’d) (Continued from page 8) I helped a client in San Francisco but at least the building owner is now reason is the implementation of a new negotiate a succeeding lease that ex- receiving a fair rental rate, instead of financial accounting system. However, pired in mid-2007. It took over a year to the below market rate that was in ef- the bottom line is that there are insuffi- get a succeeding lease written. Our ne- fect for a portion of the hold-over pe- cient resources to adequately handle the gotiation tactic was to be very aware of riod. transition. I know of another case where the government’s areas where they Should you be required to draft the Forest Service requested that GSA could “give,” and to basically write the clauses and do the work normally obtain leased space for them, to replace new lease for them. We defined the done by the Contracting Officer or an expiring lease. The GSA official told reasonable rental range, and asked for a broker? Obviously not. And I’m sure Forest Service to do their own lease. rent at the very top of that range. I ad- your Contracting Officer would agree This would seem to be a clear departure vised against asking for an unreasonable with that. But if he or she has a work- from the policy intent of the GSA Di- rate, but shooting for the absolute top of load which is far more than one person rective published on November 19, a reasonable range is just good negotia- could reasonably be expected to han- 2007, but it highlights the disconnect tion tactics. In all of the expiring lease dle, and you go the extra mile to help between the GSA Central Office, where problems I’ve encountered, I’ve seen them reach the end result that you are taking over more leases is the goal, and only one GSA Contracting Officer who both striving for, then some extra the GSA regional offices, where the real refused to pay a reasonable rental rate work on your part may yield signifi- work is done, and there aren’t enough for a succeeding lease or extension, cant results. people to do the work. when he based his offered rate on mar- In summary, there appears to be a With that as the general background ket rates in effect a decade previously crisis of resources at the field level in for the problem you are facing, the sec- when the original lease was negotiated. GSA, and an abundance of work. ond part of your question is what can Most Contracting Officers are reason- Don’t expect things to get better soon. you do? My suggestion is to do every- able. In helping my client in San Fran- But be aware of their limitations, and thing possible to have GSA make your cisco, we wrote the clauses defining what you can do to help minimize the lease the top priority. Contact the Con- start and expiration dates, renewal impact of those limitations. Patience tracting Officer repeatedly, by phone dates, reduction in rent after the TI pay- may be a virtue, but in dealing with and in writing. Explain about funding off date, the payments clause, and 11 GSA leases, it is also a requirement. issues with your bank. Explain about other related clauses in language that contracts for janitor service, or other they were comfortable with. All the David Cunningham worked as a services, such as maintenance contracts, GSA Contracting Officer needed to do Government Contracting Officer for that require a time commitment for you was a “cut-and-paste” to come up with a almost 25 years, and now conducts in- to obtain the services at reasonable new lease. I believe that the result was depth reviews of GSA leases for build- rates. Bring up every possible issue to the same as if they had drafted each ing owners to make sure they have show it is to their advantage to make clause themselves, but was achieved been paid all they are due. He can be your lease the higher priority. And then much sooner than if we had waited for contacted through his company web- do as much of the paperwork for them them to do the work. We are still work- site at www.dcfedlease.com, or by as possible. ing on remaining issues to be resolved, email at fedlease@msn.com. A Lease Cost-Benefit Analysis Needs Only Be Reasonable (cont’d) (Continued from page 7) Counsel (Government Contracts) with Henry Schuldinger, Esq. is a com- Albo & Oblon LLP in Arlington, Vir- mercial real estate agent with Marcus *Eisenhower Real Estate Holdings, ginia. He is also an instructor for Man- & Millichap in its Washington, D.C. LLC, March 18, 2008,available at http:// agement Concepts, Inc. and has taught office and specializes in investment www.gao.gov/decisions/bidpro/310941.htm Federal Real Property Lease Law to sales and consulting for private land- government realty specialists for over lords of commercial properties leased Terrence M. O’Connor, Esq. is Special 20 years. to government agencies. -9-
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS The Enormous Success of the RTC By Patrick J. Keogh A couple of years ago I wrote an article for the publication FIRREA created a complex mandate for the RTC. The new Military Engineer. It was entitled “Beyond BRAC: They’re organization was to quickly privatize failing thrifts and their Assets Not Problems.” BRAC stands for Base Realignment assets. The RTC was to minimize the impact of its resolutions And Closure, the term to describe the military’s process for on local real estate and financial markets and maximize the disposing of its excess installations. In that article, I cited the availability of housing for low- and moderate-income indi- Resolution Trust Corporation as “the most successful rela- viduals. Finally, the agency was to maximize the opportunity tionship between the public and private sectors since the ad- for minority-and women-owned businesses to participate as vent of the space program.” I went on to suggest that the per- contractors and purchasers of assets. So there was the com- spective and approaches employed by the RTC should be pelling business mission of disposing of the assets for top considered by the Department of Defense as it approached dollar, but that was to be accomplished in the context of some the challenges posed by BRAC. important social goals. On April 12, 1961, Russian astronaut Yuri Gagarin took his The record of the RTC seems to indicate that success was a infamous orbital space ride. And on May 25, 1961, President function of a number of key factors: Kennedy spoke before a humbled joint session of Congress 1. As mentioned before, the legislative sunset date served as a and promised that the country would send an American to the Kennedyesque going-to-the-moon goal. It became the objec- moon by the end of the decade. On February 9, 1989, Presi- tive of everyone in the organization. Unlike the standard per- dent George H.W. Bush signed into law the Financial Institu- ception of a bureaucracy where the goal is to perpetuate its tions Reform, Recovery, and Enforcement Act (FIRREA) own existence, the employees at RTC measured their success creating the RTC and promising that the nation’s financial by their progress toward their going-out-of-business date. crisis would be resolved by December, 1995. 2. They created a decentralized structure. Although RTC had The enormity of both enterprises required extraordinary a Washington headquarters, operations and responsibility cooperation between our public and private sectors. Both were mostly managed in the field. Local personnel were efforts started with an important first step in a national com- charged with selling and making decisions based on local mitment to a goal and schedule. And both were enormous circumstances. successes. 3. RTC had an entrepreneurial culture. There was a strong For public real estate and financial practitioners the RTC sense of mission and reliance on individual initiative rather experience represents a record of huge accomplishment. Even than a reliance on prescribed processes and procedures. now it is hard to believe that $400 billion in assets and 750 4. The social objectives were initially subordinated. In the failed financial institutions could be sold in so short a period beginning, the goals of mitigating local market impact, ad- of time by a new federal organization. It is important to re- vancing home ownership and promoting MWOB interests member that it happened in an environment where real estate were subordinated to the mission of moving assets. As RTC values had plummeted and equities in financial institutions matured and honed its tools those objectives became more were seriously depressed. manageable and achievable. Until the present day the RTC effort represented the largest 5. Very significant private sector involvement. Although the privatization of public assets in history. For that reason, the original staff of the RTC came from the FDIC and elsewhere RTC experience has been very much in recent news as a in government, those individuals were quickly replaced with precedent for what has to be done to weather our current real private, contract employees. Similarly, the transaction struc- estate and banking crisis. Now that we know the problems in tures, like securitization of assets, represented the best tools the U.S. exist on a broader global scale it may be helpful to then available in the private markets. consider that other countries employed RTC-like solutions to We soon forgot how bad the real estate and financial asset the privatization of their public assets. Most notable in that crisis was in 1989. Our short memory may be the result of regard was the almost contemporaneous (1990-1994) experi- how smoothly and smartly the RTC conducted its business. ence of the Federal Republic of Germany’s Treuhandanstalt Based on its record of accomplishment the RTC seems to be (translated as “Trustee Agency” and referred to as “THA”) in an important model for our current asset resolution problems. privatizing the public assets of East Germany upon the coun- One final thing. If you ever get the opportunity to talk with try’s reunification. The THA successfully accomplished the alumni of the RTC experience I would encourage you to take privatization of 13,000 East German industrial firms in only it. It’s a bit like talking with a combination of a proud Marine four years. Taken together these two agencies in a relatively and a Kennedy era NASA employee. If I were involved in the short period of time fulfilled their legislative mandates and current plans for economic recovery I think I would hunt divested what amounted to history’s greatest transfer of down some of those folks starting with the former Chairman wealth from the public to the private sector. of the RTC, Bill Seidman. He can be found today as a regular commentator on CNBC. - 10 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 The Resolution Trust Corporation (RTC) was a United tion efforts of their private sector partners, and the structure States Government-owned asset management company helped assure an alignment of incentives superior to that charged with liquidating assets (primarily real estate-related which typically exists in a principal/contractor relationship. assets, including mortgage loans) that had been assets of The following is a summary description of RTC Equity savings and loan associations (S&Ls) declared insolvent by Partnership Programs: the Office of Thrift Supervision, as a consequence of the Multiple Investor Fund (MIF) savings and loan crisis of the 1980s. It also took over the Under the MIF Program, the RTC established limited insurance functions of the former Federal Home Loan Bank partnerships (each known as a “Multiple Investor Fund” or Board. It was created by the Financial Institutions Reform “MIF”) and selected private sector entities to be the general Recovery and Enforcement Act (FIRREA), adopted in 1989. partner of each MIF. The MIF structure contemplated the In 1995, its duties were transferred to the Savings Associa- following: tion Insurance Fund of the Federal Deposit Insurance Cor- •The RTC conveyed to the MIF a portfolio of assets poration. Between 1989 and mid-1995, the Resolution Trust (principally commercial non- and sub-performing mortgage Corporation closed or otherwise resolved 747 thrifts with loans) which were described generically, but which had not total assets of $394 billion. been identified at the time the MIF general partners were Equity partnerships selected. The assets were delivered in separate pools over The Resolution Trust Corporation pioneered the use of so- time, and there were separate closings for each pool. called “equity partnerships” to help liquidate real estate and •The selected general partner paid the RTC for its limited financial assets which it inherited from insolvent thrift insti- partnership interest in the assets. The price was determined tutions. While a number of different structures were used, by the so-called Derived Investment Value (“DIV”) of the all of the equity partnerships involved a private sector part- assets (an estimate of the liquidation value of assets based ner acquiring a partial interest in a pool of assets, controlling on a valuation formula developed by the RTC), multiplied the management and sale of the assets in the pool, and mak- by a percentage of DIV based on the bid of the selected gen- ing distributions to the RTC reflective of the RTC’s retained eral partner. The general partner paid its equity share relat- interest. ing to each pool at the closing on the pool. The RTC re- The RTC used equity partnerships to achieve a superior tained a limited partnership interest in the MIF. execution through maintaining upside participation in the •The MIF asset portfolio was leveraged by RTC-provided portfolios. Prior to introducing the equity partnership pro- seller financing. The RTC offered up to 75% seller financ- gram, the RTC had engaged in “bulk sales” of asset portfo- ing, and one element of the bid was the amount of seller lios. The pricing on certain types of assets often proved to financing required by the bidder. Because of the leverage, be disappointing because the purchasers discounted heavily the amount required to be paid by the MIF general partner for “unknowns” regarding the assets, and to reflect uncer- on account of its interest was less than it would have been if tainty at the time regarding the real estate market. By retain- the MIF had been an all-equity transaction. ing an interest in asset portfolios, the RTC was able to par- •The MIF general partner, on behalf of the MIF, engaged ticipate in the extremely strong returns being realized by an asset manager (one or more entities of the MIF general portfolio investors. Additionally, the equity partnerships partner team) to manage and liquidate the asset pool. The enabled the RTC to benefit by the management and liquida- asset manager was paid a servicing fee out of MIF funds, (Continued on page 12) - 11 -
  • WINTER 2008 GOVERNMENT LEASING NEWS The Resolution Trust Corporation 1989-1995(cont’d) (Continued from page 11) the servicer was a joint venture partner in the Class A Cer- and used MIF funds to improve, manage and market the tificate Holder. The servicer used Trust funds to improve, assets. The asset manager was responsible for day-to-day maintain and liquidate Trust assets, and had day-to-day management of the MIF, but the general partner controlled management control. The Class A Certificate Holder exer- major budgetary and liquidation decisions. The RTC had no cised control over major budgetary and disposition deci- management role. sions. •After repayment of the RTC seller financing debt, net •The Trust, through a pre-determined placement agent cash flow was divided between the RTC (as limited partner) designated by the RTC, leveraged its asset portfolio by issu- and general partner in accordance with their respective per- ing commercial mortgage backed securities (“CMBS”), the centage interests (the general partner had at least a 50% in- proceeds of which went to the RTC. Because of the lever- terest). age, the amount required to be paid by the Class A Certifi- Each of the MIF general partners was a joint venture cate Holder on account of its interest was less than it would among an asset manager with experience in managing and have been if the N-Trust had been an all-equity transaction. liquidating distressed real estate assets, and a capital source. •Net cash flow was first used to repay the CMBS debt, There were two MIF transactions involving over 1000 loans after which it was divided between the RTC and Class A having an aggregate book value of slightly over $2 billion Certificate Holder at their respective equity percentages and an aggregate DIV of $982 million. (51% RTC, 49% Class A). N-Series and S-Series Mortgage Trusts Each of the N-Series bid teams was a joint venture be- The “N-Series” and “S-Series” programs were successor tween an asset manager with experience in managing and programs to the MIF program. The N-Series and S-Series liquidating distressed real estate assets, and a capital source. structure was different from that of the MIF in that (i) the There were a total of six N-Series partnership transactions in subject assets were pre-identified by the RTC—under the which the RTC placed 2,600 loans with an approximate MIF, the specific assets had not been identified in advance book value of $2.8 billion and a DIV of $1.3 billion. A total of the bidding—and (ii) the interests in the asset portfolios of $975 million of CMBS bonds were issued for the six N- were competitively bid on by pre-qualified investors and the Series transaction, representing 60% of the value of N- highest bid won (the RTC’s process for selecting MIF gen- Series trust assets as determined by the competitive bid eral partners, in contrast, took into account non-price fac- process (the value of the assets implied by the investor bids tors). was substantially greater than the DIV values calculated by N-Series the RTC). While the original bond maturity was 10 years The N-Series structure contemplated the following: from the transaction, the average bond was retired in 21 •The RTC would convey to a Delaware business trust (the months from the transaction date, and all bonds were retired “Trust”) a pre-identified portfolio of assets, mostly commer- within 28 months. cial non- and sub- performing mortgage loans. (The “N” of S-Series “N-Series” stood for “nonperforming.”) The S-Series program was similar to the N-Series pro- •Pre-qualified investor teams competitively bid for a 49% gram, and contained the same profile of assets as the N- interest in the Trust, and the equity for this interest was pay- Series transactions. The S-Series was designed to appeal to able to the RTC by the winning bidder when it closed on the investors who might lack the resources necessary to under- acquisition of its interest. take an N-Series transaction, and differed from the N-Series •The Trust, at its creation, issued a “Class A Certificate” program in the following respects: to the private sector investor evidencing its ownership inter- •The S-Series portfolios were smaller. The “S” of “S- est in the Trust, and a “Class B Certificate” to the RTC evi- Series” stands for “small” -- the average S-Series portfolio dencing its ownership interest. The Class A Certificate had a book value of $113 million and a DIV of $52 million, holder exercised those management powers typically associ- whereas the N-Series average portfolio had a book value of ated with a general partner (that is, it controlled the opera- $464 million and a DIV of $220 million. As a consequence, tion of the Trust), and the RTC, as the Class B Certificate it required an equity investment of $4 to $9 million for in- holder, had a passive interest typical of a limited partner. vestor to undertake an S-Series transaction, versus $30 - $70 •The Class A Certificate holder, on behalf of the Trust, million for an N-Series transaction. engaged an asset manager (sometimes referred to as the •The S-Series portfolio was not leveraged through the “servicer”) to manage and liquidate the asset pool. The ser- issuance of CMBS, although it was leveraged through a vicer was paid a servicing fee out of Trust funds. Typically, (Continued on page 13) - 12 -
  • WINTER 2008 GOVERNMENT LEASING NEWS The Resolution Trust Corporation 1989-1995(cont’d) (Continued from page 12) •The general partner was authorized to develop the land 60% RTC purchase money financing. It should be noted that parcels on a long term basis, and had comprehensive author- in the N-Series program where CMBS were issued, the ser- ity concerning the operation of the Land Fund. Costs to im- vicers/asset managers had to be qualified by debt rating prove, manage and liquidate the assets were borne by the agencies (e.g., Standard and Poors) as a condition to the Land Fund. agencies’ giving a rating to the CMBS. This was not neces- •Net cash flow from the Land Fund was distributable in sary in the S-Series program proportion to the respective contributions of the general •Assets in the S-Series portfolios were grouped geo- partner (25%) and RTC (75%). If and when the Land Fund graphically, so as to reduce the investors’ due diligence partnership distributed to the RTC an amount equal to the costs. RTC’s “capital investment” (i.e., 75% of the implied value There were nine S-Series transactions, into which the RTC of the Land Fund pool), from and after such point, net cash contributed more than 1,100 loans having a total book value flow would be divided on a 50/50 basis. of approximately $1 billion and a DIV of $466 million. The Land Fund general partners were joint ventures between RTC purchase money loans, aggregating $284 million for asset managers, developers and capital sources. There were the nine S-transactions, were all paid off within 22 months three land fund programs, giving rise to 12 land fund part- of the respective transaction closing dates (on average, the nerships for different land asset portfolios. These funds re- purchase money loans were retired in 16 months). ceived 815 assets with a total book value of $2 billion and Land Fund DIV of $614 million. The RTC Land fund program was created to enable the JDC Program RTC to share in the profit from longer term recovery and Under the JDC Program, the RTC established limited development of land. Under the Land Fund Program, the partnerships and selected private sector entities to be the RTC selected private sector entities to be the general part- general partner of each JDC Partnership. The JDC program ners of 30-year term limited partnerships known as “Land was different from the MIF, N/S Series and Land Fund pro- Funds.” The Land Fund program was different from the grams in that (i) the general partner paid only a nominal MIF and N/S-Series programs in that the Land Fund general price for the assets and was selected on a “beauty-contest” partner had the authority to engage in long-term develop- basis, and (ii) the general partner (rather than the partnership ment, whereas the MIFs and N/S-Series Trusts were focused itself) had to absorb most operating costs. The JDC Partner- on asset liquidation. The Land Fund structure contemplated ship structure contemplated the following: the following: •The RTC would convey to the limited partnership (the •The RTC conveyed to the Land Fund certain pre- “JDC Partnership”) certain judgments, deficiency actions, identified land parcels, and non/sub-performing mortgage and charged-off indebtedness (“JDCs”) and other claims loans secured by land parcels. which typically were unsecured and considered of question- •The selected general partner paid the RTC for its general able value. The assets were not identified in advance, and partnership interest in the Land Fund. The winning bid for were transferred to the JDC Partnership in a series of con- each Land Fund pool would determine the implied value of veyances over time. the pool, and the winning bidder, at closing, would pay to •The general partner was selected purely on the basis of the RTC 25% of the implied value. (The land fund investors perceived competence. It made payments to the RTC in the were given the option of contributing 25%, 30%, 35% or amount of one basis point (0.01%) of the book value of the 40% of the equity for commensurate interest, but all chose assets conveyed. to contribute 25% of the equity.) •The general partner exercised comprehensive control in •The Land Fund general partner could, at its discretion, managing and resolving the assets. Proceeds typically were transfer assets in Land Fund pools to special-purpose enti- split 50/50 with the RTC. Operating costs (except under ties, and those entities could then borrow money collateral- special circumstances) were absorbed by the general part- ized by the asset to fund development. Furthermore, a third- ner, not the JDC partnership. party developer or financing source could acquire an equity JDC general partners consisted of asset managers and interest in the special purpose entity in exchange for ser- collection firms. The JDC program was adopted by the vices or funding. FDIC and is still in existence. With full acknowledgment to Wikipedia (www.wikipedia.com) - 13 -
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS Lease Construction: It’s Either New Tools or New Money by Patrick Keogh, AMV, LLC The elevator speech on GSA’s Public piece. Suffice it to say that the scoring standard lease solicitation approach to Building Service goes something like rules effectively dictated that GSA define the relationship with a developer- this. PBS is in the business of acquiring could not own any leased property built lessor. The space requirements are such and managing space and services for to suit GSA’s requirements. that the lessor must undertake a build- federal agencies. It has two main ways GSA is unique among federal agen- to-suit in order to meet the project re- to acquire space: by direct construction cies in that it has multiyear real property quirements. This may involve providing and by leasing. “Direct construction” as leasing authority. In fact, GSA has leas- the site, designing, constructing, financ- used by PBS means the project is pub- ing authority for terms as long as 20 ing, operating and owning the com- licly funded and owned. A direct con- years. Most other federal agencies, like pleted facility. And all this for a fixed struction project is delivered by con- governments generally, are limited to rental rate set several years prior based tracting with the private sector using a annual authority. Legislatures like our on anticipated market rates. number of variants on the basic design- own Congress are very particular about “The largest purchase we make in our bid-build-operate delivery system. not tying the budgetary hands of future lifetimes is usually our home.” We hear Leased space is also delivered by pri- legislatures. that said so often we tend to accept it as vate owners with ownership remaining So here’s where GSA is in 2008. fact. The truth usually is that the largest with a private owner. Leased space is Budget pressures from the War in Iraq, purchase any of us make is the mort- delivered using a single solicitation for the War on Terror, and other challenges gage necessary to purchase our home. a lessor. have limited the funding for direct con- This holds just as true for GSA’s leased As PBS was merged into the new struction. GSA has agencies clamoring build-to-suits or what is also referred to GSA in 1949 things might have seemed for facilities that in more normal times as lease construction projects. The les- simple. More permanent, larger and would be directly funded and as a result sor must arrange financing in order to perhaps unique requirements of govern- GSA is mostly limited to its basic leas- fund the delivery of the facility—and ment would be delivered by direct con- ing authority for delivery. Budget pres- financing is often the largest component struction. Smaller and perhaps more sures cannot reasonably be expected to of cost. The risks involved in fixing a uncertain requirements would be leased be reduced any time soon. So the “more construction cost, particularly based on in the market. It makes sense, but would money option” is nowhere on the hori- anything less than detailed plans and it were that simple. zon. specs, are tough enough. Just imagine As every public real estate profes- Let’s talk a bit about the leasing de- trying to fix the financing rate months sional knows, funding for capital im- livery system. The authority to enter ahead of when the financing is re- provements is the first thing to go when into a lease of any significant size origi- quired? That’s what the current ap- competition for public funds intensifies. nates with a congressionally approved proach to lease construction projects As was discussed in our previous article prospectus. That prospectus limits the requires. on GSA’s Lease Construction Program amount that may be spent to satisfy the Let’s pursue the financing issue a that appeared in Government Leasing requirement. That limit is usually set at little further. As we are all aware, rates News [Fall 2008, Vol. 4, No. 3], that is GSA’s estimate of rents in the market change over time. GSA lease construc- exactly what happened as a result of the where the space is to be procured. GSA tion projects are often priced as spreads Korean War, Viet Nam War, the Cold has historically used a single solicitation over Treasury rates. After all, a long- War, and now during the War on Ter- for the turnkey delivery of space subject term GSA lease represents a federal ror. As backlogs of directly funded pro- to the terms of the GSA lease and the agency obligation and pegging rates to jects grew during those times GSA de- prospectus cost limitation. Lease offer- Treasuries makes sense. The problem is vised a series of methods for privately ors are required to tailor their space to that Treasuries vary over time and financing and owning its projects in- the public tenant’s needs, and the lessor spreads also change over time. Spreads tended for direct construction. usually operates the space for the term vary as a function of a variety of fac- Things changed in the early 1990s of the lease. This is common enough tors, including the specific nature of the with the advent of the budget scoring and usually works where existing space risks associated with a particular lease. rules. Those rules were installed at least is to be leased. But rates vary depending on the vaga- partially in response to GSA’s use of But now consider the current chal- ries of the market as well. This is espe- these methods for privately financing lenge. GSA is being asked to provide cially apparent at this writing as the owned facilities. The nature of the scor- larger and more complex projects and is capital markets experience an unprece- ing rules is not the subject of this arti- essentially limited to leasing. In re- dented flight to quality best represented cle. We will deal with that in a later sponse, GSA has attempted to use its (Continued on page 15) - 14 -
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS Lease Construction: It’s Either New Tools or New Money (cont’d) (Continued from page 14) exercising initiative, Government mem- method the budget for a lease construc- by Treasuries but where spreads have bers of the Acquisition Team may as- tion project will be more dynamic than widened significantly. In some cases, sume if a specific strategy, practice, a direct construction project because of there simply is no credit available to policy or procedure is in the best inter- fluctuating rates. Dynamic in the sense fund certain obligations. ests of the Government and is not ad- that construction plans and financing So what is one to do? The current dressed in the FAR, nor prohibited by structures must be readily changeable as system of burdening the offerors with law, Executive order or other regula- rates and requirements change. That’s taking all the rate risk is to ignore the tion, that the strategy, practice, policy the environment in which the private basic issues. If rates go up, the success- or procedure is a permissible exercise world must and does operate. The new ful offeror will either seek changes in of authority. tools must be based, not on rigid pre- the lease to cover the additional cost or Is this a great country or what? The scribed procurement systems, but on the will attempt to abandon the deal. If rates FAR simply says if there is no law kind of public-private partnering and go down, the lessor reaps a windfall against it and it looks like a good idea, relationships that was at the center of profit. We have seen lessors walk away then give it a try. Interestingly, else- both Archives II and Bayview. from closing with very large checks. where in the FAR the Acquisition Team The public-private partnering model The government can’t win under the is defined to include “… the customers is the long-term answer to the govern- current system. There are, of course, they serve, and the contractors who ment’s challenge for the best tool for financial market tools for hedging rate provide the products and services.” meeting its current backlog. More im- fluctuations. But they are expensive and GSA is to be commended for its recent mediate benefits can be achieved by it is impractical to burden offerors with lease construction roundtable that was modifying current solicitations to pro- yet another pursuit cost. To hedge rates held on June 11, 2008, soliciting agency vide the government with the opportu- would also require a date certain for and industry input. nity to provide its own financing. It is a funding and GSA’s procurement proc- So GSA needs new tools. The exist- principle of economic efficiency that ess does not lend itself to committing to ing system does not work well and cur- the entities causing the risks should such a fixed schedule. Accepting a vari- rent markets may have rendered it unus- manage the risk and sustain the cost or able rate would also undermine GSA’s able. Our earlier article in Government benefits of their own actions. The risks assurance that the deal can be com- Leasing News [Summer 2008, Vol. 4, associated with the financing and the pleted at the approved rental rate. No. 2] detailed the system used at the resulting rates are almost exclusively GSA’s standard lease solicitation National Institutes of Health Bayview within the government’s control. To the tools work reasonably well for procur- Research Center in Baltimore. The pro- extent the government causes rates to ing smaller increments of space in exist- curement structure there was patterned increase, it should incur those costs. ing buildings. Under the best of circum- somewhat on the delivery system em- Similarly, any lower rate advantage stances for larger lease construction ployed by GSA in the $300 million Ar- achieved from improving the deal projects, it works poorly even under chives II project in College Park, Mary- should accrue to the government. As stable circumstances. In current markets land, in the late 1980s. described in our Fall 2008 article on it is largely unusable. That is the reason Although Archives II was accom- GSA’s Lease Construction Program, that private enterprise never uses the plished before the scoring rules, both this is an approach used during a transi- GSA approach to its privately financed projects were privately financed. Most tion period in a prior program of private build-to-suits. importantly, both projects borrowed financing of public buildings. Nowhere in the Federal Acquisition their delivery system largely from the We all know that in the options of Regulations is GSA required to use the standard direct construction design-bid- new tools or new money, it really is a current procurement system for build- build-operate model. After all, these Hobson’s choice. There will be no new to-suits. The FAR is often blamed when were really privately financed public money for public buildings develop- the government deals in a ham-handed building developments. The fact that the ment for a very long time. So to get the manner with private markets. It may be final form of the transaction had to be a job done we need new and better tools. of surprise that the FAR in 1.102(d) lease does not alter that fact. Using a The tools are there and they have been states: more direct construction approach, both used successfully before in government. The role of each member of the Ac- projects were designed and built to the The tools are also based on the best quisition Team is to exercise personal budget. At the risk of oversimplifying, private sector practices. And if there is initiative and sound business judgment the “budget” in both cases was the no law against the new tools and they in providing the best value product or amount available at prevailing rates to make sense, the FAR tells us to give service to meet the customer’s needs. In fund the project. Using this delivery them a go. - 15 -
  • FALL 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS Notable and Newsworthy (cont’d) (Continued from page 1) mented in government not once but to be employed to get these deals going. convened by GSA on June 11, 2008, to twice. In my judgment, based on more They are the same kinds of tools that address the severe difficulties facing the than three decades of involvement with commercial peers would use if they government’s lease construction pro- GSA and other federal agency real es- were doing privately financed build-to- gram. For a variety of reasons, the lease tate departments, this was the real thing. suits. The government has been trying construction program has slowed down With this is mind I agreed to serve as to get these projects done using an ap- significantly. This is a matter of grave the sponsor of and moderator for the proach unique to the Federal govern- concern not just to government agencies December 4th seminar. ment. That is not the way for the United that require new and replacement facili- As an important afterthought, it oc- States government to get its best deal. ties, but to the private sector as well that curs to me that the ideas presented at There are far more efficient and effec- supplies the financing and construction that seminar are an ideal complement to tive approaches to lease construction in expertise. I was at that roundtable and the economic stimulus package that is the private market and the government noted that very few fresh ideas on how already in place and being imple- needs to find the way to get its business the situation could be alleviated were mented, as well to the stimulus package done the same way that its commercial advanced. to be introduced by the incoming ad- tenant peers do. Shortly after that meeting, however, I ministration. Appearing elsewhere in If the government can get these pro- was approached in my capacity as pub- this issue is a summary by lead panelist jects moving using the tools detailed in lisher of Government Leasing News by Pat Keogh of AMV, LLC of that semi- the December 4th seminar it will gener- industry representatives, who explained nar on alternatives to GSA’s current ate work immediately. And that’s work to me some alternative approaches to lease construction program. As he de- in the commercial real estate market the current procurement process for scribes, the current approach is not that is increasingly suffering under the lease construction. Now let me tell you, working very well and projects have not weight of the recession. A significant I’m a tough guy to convince. I listened been getting done. That’s the bad news. number of the current (and prospective) closely, and the more I heard the more I The good news is there is now a back- backlog of build-to-suit projects are for realized that what was being described log of as many as three dozen or so such our national security agencies. These to me was not just an alternative ap- projects amounting to approximately $5 are critically needed facilities justified proach, but a viable alternative ap- billion. These are OMB approved and and approved long before the govern- proach. And by viable I mean one that congressionally authorized projects that ment recognized a need for economic didn’t craftily get around the rules and are ready to go. But that may not be the stimulus. These are not make-work pro- regulations, but was completely in con- best part: these are also privately fi- jects. We are currently experiencing formance with them all, whether budg- nanced development deals that must be tough economic times, but I believe this etary, scoring or procurement related. structured in such a way as to have no adversity can be turned to the public’s Perhaps most importantly, an approach immediate budgetary impact. advantage by using the environment to that was routinely used in the private The seminar detailed the kinds of introduce boldly better ideas and busi- sector and had been successfully imple- public-private partnering tools that need (Continued on page 18) HPI Capital Inc. Ready to Purchase and Actively Searching for Properties Under Short- and Long-Term Government Leases For Information, Contact Stacy Zaeh 704-343-9334 szaeh@hesta.com - 16 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 AUTHORITY NOMINATIONS Section 1.102(d) of the FAR says that members Nominations for the best innovation in leasing of Federal acquisition teams are encouraged to should include the names of the government ac- exercise initiative in finding better ways to con- quisition team, including contracting officer, duct the government’s business. Precisely: realty specialist(s) and other members of the Section 1.102(d) The role of each member of acquisition team on the government side who the Acquisition Team is to exercise personal ini- were directly involved in the procurement. In 1,000 words or less, describe the deal and the tiative and sound business judgment in provid- specific aspects that made that deal innovative. ing the best value product or service to meet the Leases can be those made by any agency, civil- customer’s needs. In exercising initiative, Gov- ian or military, and can be operating, capital, ernment members of the Acquisition Team may lease purchase, enhanced use, lease construc- assume if a specific strategy, practice, policy or tion, or build-to-suit, and can reflect both recent procedure is in the best interests of the Govern- and past procurements. Do not submit a copy of ment and is not addressed in the FAR, nor pro- the lease itself, as it will likely contain proprie- hibited by law (statute or case law), Executive tary information. Do include a link to any report order or other regulation, that the strategy, or document describing the deal that’s in the practice, policy or procedure is a permissible public domain, and in the case of GSA leases, exercise of authority. the GSA lease number. VIRGIL W. OSTRANDER Virgil W. Ostrander is a former assistant com- missioner for procurement for GSA’s Public SUBMISSIONS Building Service, and did his job so well that he Submit all entries in Word format (with any ac- was detailed to the Resolution Trust Corporation companying photo(s) in jpeg format) to Govern- to head up its procurement activities. Returning ment Leasing News at DennisE@aol.com, or to GSA as the director of the Office of Public call 301-762-1441 with questions. The winner Utilities, he was responsible for the procurement of will be selected by the Advisory Board, and all government-wide utilities for the nation’s federal selections are final. Nominations for this year’s agencies. Throughout his long career in public award are due by July 1, 2009. service, he was an outspoken advocate for inno- vative procurement procedures. - 17 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Notable and Newsworthy (cont’d) (Continued from page 16) acquisition teams that in our judgment ness practices. I firmly believe those have used best innovative practices to practices will survive our current terri- accomplish their mission. ble financial circumstances and become The call for the first such annual a permanent improvement approach to award is described on page 17. The first the government’s lease construction problem we faced was naming it. Call- program. ing it the Section 1.102(d) FAR Award And speaking of government procure- hardly did the trick. But one person’s ment, the reference to the innovative name leaped out at us when we thought procedures clause in Section 1.102(d) of about it, which is why we’re calling it the Federal Acquisition Regulations got the Virgil W. Ostrander Award. Mr. us to thinking that there ought to be Ostrander spent over 30 years in federal some sort of recognition to government procurement, working his way up after acquisition teams that have saved the joining GSA as a management intern in government time, effort and dollars 1965 to become the Assistant Commis- through legitimate innovative proce- sioner for Procurement for the Public dures in doing lease procurements. As a Buildings Service. Virgil was an out- private sector enterprise, Government spoken advocate of innovative procure- Virgil W. Ostrander, as a Leasing News can’t give a cash award ment; so much so that when the RTC dashing management intern to federal employees, but we certainly was established in 1989, he was asked can give recognition to government to head up its procurement activities CTL CAPITAL, LLC Recent Financings $25,000,000 $74,948,000 $32,000,000 Bond Financing for a Lease with the Bond Financing for a Lease with the Bond Financing for a Lease with the Regional Transportation Commission U.S. Department of Energy Robert Wood Johnson Hospital for an inter-modal terminal located in on a 148,700 to-be-built laboratory located in on a 125,000 to-be-built medical office located in Las Vegas, NV Richland, WA New Brunswick, NJ 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 tom@ctlcapital.com New York, NY paul@ctlcapital.com - 18 -
  • WINTER 2008 GOVERNMENT LEASING NEWS The Metropolitan Washington Area 3rd Quarter 2008 Economic Highlights The metro area increased salary budgets •Pipeline pre-lease rate: 23%, compared The Washington area economy by 4.0%, compared to other metro areas to 24% a year ago. continued to grow jobs at 66% of its raising budgets by 3.7% to 3.9%. •Rents: Up 0.2% YTD, compared to long term average rate – 35,400 jobs in According to the Human Resource rising 2.2% in all of 2007. the 12 months ending in July – com- Association of the National Capital •Investment sales: $2.9 billion YTD. pared to a long term average of 53,400 Area, which conducts its own survey of Compared to $10.6 billion YTD in per annum. With a low unemployment area companies, employers are offering 2007. Average sale price: $412/SF rate and one of the strongest economic average pay raises of 4.7%, up from compared to $368 last year at this time bases, the metro area remains one of the 3.5% in 2007. Leasing Deals top economic centers in the nation. Washington Area Outlook The most notable lease deal of the Among major metro areas, only the oil- We expect the Washington metro area quarter was GSA’s renewal of 525,000 patch communities of Dallas and economy to make modest gains during SF at 2530 Crystal Drive, after renew- Houston exceeded Washington in job the balance of 2008, as the aftermath of ing 236,000 SF at 400 Army-Navy growth. the Credit Crunch continues to unfold. Drive during the 2nd quarter. Under the Job Growth Although we expect growth to slow this BRAC decision, the GSA needs to The Washington metro area experi- year, we anticipate modestly improving vacate this space by September 2010. enced a 1.2% rate of job growth over conditions in 2009, with healthier However, the GSA had to renew both the past 12 months, compared to a progress in 2010 as the economy leases, for five years, as the relocation decline of 0.2% nationally. The regains its footing. The Government space is currently in the early stages of Washington metro area is no longer first and Professional and Business Services construction. Due to the delay in in job growth. However, it is the only sector should continue to lead job construction on the bases, DoD has large metro that produced more jobs in growth. The Financial and Construction been forced to renew lease deals for five the past 12 months compared to the year sectors should start to see improvement years as landlords, during the current prior. This is due to the stability created in the near-term as the market recovers economic slowdown, are reluctant to by the core industries hosted here – led from the impact of the Credit Crunch. ink deals for three years at lower rents. by the Federal government. Net absorption improved from the first Northern Virginia Consumer Price Index half of the year, is still below the long- Northern Virginia experienced higher Overall inflation in the Washington/ term average. With a large pipeline of absorption levels YTD primarily due to Baltimore region increased to 5.7% development, vacancy increased and two pre-leased projects. During the 1st during the 12 months ending July 2008, rent growth halted. Although annualized quarter, the Waterview project delivered from 3.6% during the 12 months of groundbreakings have eased compared 633,000 SF at 98% pre-leased to the 2007. Surging gasoline prices aided the to 2007, they remain high, particularly Corporate Executive Board. Randolph rise, as gas prices increased 38.5% in the District. Despite softening Square delivered 202,000 SF at 81% during the 12 months ending July 2008. conditions, the metro area remains one preleased to the Patent and Trademark Housing Prices of the top performing markets in the Office, during the 3rd quarter. We House prices declined 9.1% in the nation. expect the Northern Virginia office Washington metro area during the 12 Market Highlights market to experience moderating months ending June 2008, according to •Net absorption: 1.4 million SF, conditions during the balance of 2008 the Office of Federal Housing Enter- compared to the long-term quarterly and into 2009. Although jobs continue prise Oversight (OFHEO). This average of 2.0 million SF. to be added to the Northern Virginia compares to the national decline of •Sublease space: Increased by 12,000 economy, albeit at a reduced pace, there 4.8% during the same period. In our SF. Sublease space represents just 1.2% will not be enough demand to keep pace view, improving market conditions will of the standing inventory. with the amount of available supply. appear in 2009 in closer in submarkets •Overall vacancy rate: 10.1%, up from These conditions will cause vacancy to and 2011 in farther out submarkets. 8.6% one year ago. Fourth lowest rate edge up over the next 24 months and Pay Raises in the nation. rent growth to stall in some submarkets. Despite slowing economic conditions, •Direct vacancy rate: 8.9%, up from Despite softening conditions, the the Washington metro area ranked 7.4% one year ago. Northern Virginia office market number one for salary budget increases •Pipeline (U/C and U/R): 18.3 million remains a strong player due to the in 2008, according to World at Work. SF, unchanged from one year ago. (Continued on page 20) Source: The Washington/Baltimore Office Market 3rd Quarter 2008 Report, courtesy of Delta Associates and Transwestern - 19 -
  • WINTER 2008 GOVERNMENT LEASING NEWS The Metropolitan Washington Area 3rd Quarter 2008 (cont’d) (Continued from page 19) term average and vacancy edged down. Although overall vacancy edged down concentration of defense agencies and However, annualized absorption during the past three months, it has contractors, and should continue to remains below the yearly long-term risen over the past year. We expect the attract some District tenants with its average and vacancy is up over the past District’s office market to experience competitive buildings at lower rents. year, as Prince George’s County sluggish conditions during the balance Suburban Maryland continues to recover from large tenants of the year and into 2009, as the Suburban Maryland regained its vacating space during the first half of economy slowly recovers and tenants footing after experiencing negative the year. Overall, conditions are steady regain confidence in the market. absorption during the first half of the in Suburban Maryland. Overall, the outlook for the District year. The Suburban Maryland office District of Columbia remains positive, as it currently retains market experienced improving condi- The District of Columbia’s office one of the lowest vacancy rates and the tions during the 3rd quarter of 2008, as market experienced slow absorption most premier space options for tenants. absorption surpassed the quarterly long- during the 3rd quarter of 2008. The Baltimore Metropolitan Area 3rd Quarter 2008 Economic Highlights national rate of 5.7% in July 2008Sector ble but slowing conditions in the near- The Baltimore metro area economy Consumer Price Index term. experienced slowing conditions during Overall inflation in the Washington/ Market Highlights the 3rd quarter of 2008. Although over Baltimore region increased to 5.7% •Net absorption: 301,000 SF, compared 8,000 new jobs were created during the during the 12 months ending July 2008, to the long-term quarterly average of 12 months ending July 2008, unemploy- from 3.6% during the 12 months of 425,000 SF. ment increased 80 basis points during 2007. Surging gasoline prices aided the •Sublease space: Decreased by 96,000 the past year. The Education/Health and rise, as gas prices increased 38.5% dur- SF. Sublease space is just 0.7% of Professional/Business services continue ing the 12 months ending July 2008. standing inventory. to fuel job growth in the metro – with Housing Prices •Overall vacancy rate: 12.0%, up from both sectors outpacing their 15-year House prices ticked down 2.1% dur- 11.9% one year ago. averages. Overall, the Baltimore area ing the 12 months ending June 2008 in •Direct vacancy rate: 11.3%, up from economy is expected to remain stable in the Baltimore metro area, according to 10.9% one year ago. the near-term. the Office of Federal Housing Enter- •Pipeline (U/C and U/R): 3.3 million Job Growth prise Oversight (OFHEO). This com- SF, unchanged from one year ago. With 1.3 million payroll jobs, the pares to the national decline of 4.8% •Pipeline pre-lease rate: 44%, up from Baltimore area ranks the second largest during the same period. We believe 33% one year ago. job base among comparable metros, increased demand and a decline in con- •Rents: Flat YTD, compared to 0.8% slightly behind St. Louis. The Baltimore struction will stabilize pricing, leading growth in 2007. metro area added 8,300 new payroll to an up-tick in sales activity, with im- •Investment sales: $305 million YTD. positions during the 12 months ending provement in market conditions appear- Average sales price: $216/SF. July 2008, compared to the 15-year ing in 2009. Baltimore Area Outlook average of 15,300 per annum. The Bal- Construction Activity We expect the Baltimore metro area timore suburbs added 59% of the total The good news is that construction to continue its steady but slow growth new payroll jobs in the metro area. activity is easing; the pipeline has not during the remainder of 2008. We an- Unemployment Rate grown over the past year. Pre-leasing is ticipate employment will increase The Baltimore area unemployment up while the vacancy rate holds steady. gradually this year and in 2009, particu- rate was 4.9% in July 2008, up from On the other hand, with annualized ab- larly in the Professional/Business Ser- 4.1% one year prior. The current rate is sorption running at 82% of its historic vices and Education/Health sectors. the lowest among comparable metro average, rents are flat YTD. Overall, the Growth should pick up notably during areas and compares favorably to the Baltimore metro area is poised for sta- 2010, as the national economy picks up. Source: The Washington/Baltimore Office Market 3rd Quarter 2008 Report, courtesy of Delta Associates and Transwestern - 20 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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. U.S. Army Enhanced Use Lease Opportunities 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 For further detail on U.S. Army EUL’s, consult the agency’s Website at http://eul.army.mil. - 21 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 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. See Page 29 for the U.S. Navy Enhanced Use Lease Opportunities - 22 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Department of Veterans Affairs Enhanced Use Lease Opportunities 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 Tomah WI Office Building & Parking Listed 29-Feb-08 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 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 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. - 23 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Overall Office Vacancy Trends in Selected Metro Areas Vacancy Rate Vacancy Rate Vacancy Rate Vacancy Rate Vacancy Rate Vacancy Rate Metro Area Year-End 2005 Year-End 2006 Year-End 2007 1st Q 2008 Mid-Year 2008 3rdQ 2008 Orange County, CA 6.4% 6.8% 10.0% 11.7% 12.9% 13.4% Washington, DC 7.9% 8.5% 9.1% 9.7% 10.0% 10.1% New York 8.9% 7.5% 7.8% 8.4% 7.8% 9.0% South Florida 8.9% 7.6% 8.6% 9.2% 8.6% 10.4% Los Angeles 8.9% 7.6% 7.7% 8.2% 8.5% 9.0% National Average 11.7% 10.4% 11.1% 11.3% 11.4% 12.0% Phoenix 11.8% 10.4% 13.0% 14.5% 16.0% 16.5% San Francisco Bay 12.1% 10.2% 8.4% 9.6% 8.4% 9.5% Boston 12.4% 11.1% 9.8% 9.7% 9.8% 10.2% Atlanta 14.1% 12.9% 13.5% 14.1% 13.5% 14.4% Houston 14.5% 12.1% 10.9% 10.9% 10.7% 11.4% Denver 14.9% 13.1% 12.6% 12.2% 12.3% 12.7% Chicago 15.5% 13.4% 12.8% 12.7% 12.8% 12.6% Dallas/Ft. Worth 18.5% 17.3% 17.1% 16.9% 17.2% 17.0% Austin – – 11.9% 13.2% 11.4% 12.6% San Antonio – – 11.0% 11.1% 10.5% 10.8% Source: Delta Associates, Transwestern, and CoStar. Data is from the Washington, DC, Metro Area report for the 3rd Quarter 2008. Put the Private Sector to Work for You. Private sector best practices can add real value to public sector portfolios. Subscribe to Real Solutions, published by Jones Lang LaSalle, and learn how to help transform your properties into working assets. Each quarter Jones Lang LaSalle’s government real estate experts explore opportunities such as enhanced-use leasing, workplace strategy and stakeholder management. To subscribe to this complimentary newsletter, please contact: Kim Burke +1 202 719 5613 kim.burke@am.jll.com WW W .J ON E S L AN G L A S A L LE .C O M ©2008 Jones Lang LaSalle IP, Inc. - 24 -
  • WINTER 2008 GOVERNMENT LEASING NEWS GSA Construction Prospectuses for FY 2009 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 *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 - 25 -
  • WINTER 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS GSA Lease Prospectuses for FY 2009 (cont’d) Building/Address City State Type RSF Term $ Requested House Senate 18. Federal Emergency Mgmt Agency Washington DC Lease 101,111 10 $4,954,439 ü ü 19. Internal Revenue Service Washington DC Lease 100,500 10 $4,924,500 ü 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 - 26 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 - 27 -
  • SPRING 2008 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS The Korpacz Real Estate Investor Survey The Korpacz survey published by PricewaterhouseCoop- ers tracks each quarter six major parameters for commercial Office Market Cap Rates, 1st, 2nd, and 3rd Quarters properties of importance to real estate investors, lenders and appraisers, including discount rates, overall cap rates, resid- Cap Rate Cap Rate Cap Rate Office Market 1st Qtr 2nd Qtr 3rd Qtr ual cap rates, market rent change rates, expense change rates, and average marketing time in months. Atlanta 7.08% 7.25% 7.33% In addition to retail, R&D, warehouse, apartment, net Boston 7.34% 7.43% 7.39% lease and lodging markets, it tracks these parameters in the Charlotte 7.27% 7.56% 7.60% specific office markets of Atlanta, Boston, Charlotte, Chi- cago, Dallas, Denver, Houston, Los Angeles, Manhattan, Chicago 7.00% 6.96% 7.03% Northern Virginia, Pacific Northwest, Philadelphia, Phoenix, Dallas 7.95% 7.75% 7.67% San Diego, San Francisco, Southeast Florida, Suburban Denver 6.63% 6.52% 6.54% Maryland, and Washington, DC. Shown in the table are the average capitalization rates for the first three quarters of Houston 7.25% 7.27% 7.27% 2008. As stated in the Survey: Los Angeles 6.16% 6.20% 6.20% Within the District, the Class-A office sector continues to Manhattan 5.55% 5.67% 5.70% outperform the market as a whole and posted an impressive Northern Virginia 6.83% 6.94% 6.95% 10.0% vacancy rate at midyear 2008. Despite a dip in de- mand, many landlords have maintained rental rates, espe- Pacific Northwest 7.81% 7.31% 7.31% cially for quality space in the best locations. At midyear Philadelphia 8.15% 8.25% 8.13% 2008, the average asking rental rate was $50.20 per square Phoenix 6.55% 6.90% 6.90% foot for all classes of space and $57.22 per square foot for Class-A space. Both of these averages represent new records San Diego 6.08% 6.06% 6.16% for this market. San Francisco 6.11% 6.14% 6.09% Looking ahead, leasing activity is expected to continue to slow and cause market conditions to shift further in favor of Southeast Florida 7.80% 8.00% 8.00% tenants. As a result, investors are being more conservative Suburban Maryland 6.92% 7.02% 7.02% with their market rent growth rate assumptions. This quarter, Washington, DC 6.16% 6.23% 6.23% the average initial-year market rent change rate held steady at 3.65%, the lowest average for this market in almost two Source: Korpacz Real Estate Investor Survey, First, Second, years. and Third Quarters, 2008, with permission. 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- NATIONWIDE ery set for late 2009. RADON TESTING With investors continuing to flock to long-standing domi- nant markets, cap rates have yet to dramatically increase in SERVICES this market as they have in secondary and tertiary ones. Par- 925-299-2380 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. TRS DESIGN & CONSULTING SERVICES The Korpacz survey is published four times a year and a PO BOX 6809, one-year electronic subscription is $465. For further infor- MORAGA, CA 94570 mation go to www.pwcreval.com, or call 1-973-236-4830. - 28 -
  • FALL 2007 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS 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. Is Your Government-Leased Building at Risk? Is Your Government-Leased Building at Risk? 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. Jeanne Arand 1-800-726-0366 jeanne@auspl.com - 29 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 Recent decisions issued by the Gov- ing to raise sufficient funds. Even in the not require GSA to correct the errors in ernment Accountability Office sunniest of financial times, no lender the procurement and make a new award (“GAO”) and the U.S. Court of Federal would provide financing for the con- decision as GAO normally would do in Claims (“CFC”) suggest that it may be struction of a building that will depend this circumstance. Instead, GAO ex- time for the General Services Admini- on rental payments when the Govern- plained: stration (“GSA”) to seriously consider ment tenant can terminate at any time, The lease here has been awarded and incorporating a limited termination for for any reason. Thus, in most of its signed by the agency and awardee, and convenience clause that would allow leases, GSA willingly and justifiably the lease does not contain a termination GSA to terminate a lease for conven- deletes the termination for convenience for convenience clause. In the absence of a ience if a protest is sustained. Such a clause seen on GSA’s Standard Form 2 termination for convenience clause, we limited termination for convenience that is available online.* ordinarily do not recommend termination clause would assure more rigorous com- Recent Cases of an awarded lease, even if we sustain a petition for GSA leases, lead to better Some recent cases explore how GAO protest and find the award improper. value for the Government, and could and the CFC respond to the absence of a Here, we do not think there is any basis to save the GSA from significant damages termination for convenience clause in recommend termination. if it must breach a lease by court order an awarded lease and, taken together, Ultimately, GAO only awarded bid to ensure a fair competition. strongly suggest that GSA and offerors preparation and proposal costs and the Background would be better served by including costs of protesting the award to the suc- Traditionally, when a private contrac- some limited termination for conven- cessful protesters. tor does business with the Government, ience clause in future leases. Protesters have avoided this fate by it can expect to have a termination for In New Jersey & H St., LLC, No. B- making it to the courthouse or GAO convenience clause in its contracts that 311314.3, June 30, 2008, 2008 CPD ¶ before a challenged lease has been allows the Government to terminate a 133 and Trammell Crow Co., B- signed. In Fedcar Co., Ltd., B-310980 contract with little notice, for any rea- 311314.2, June 20, 2008, 2008 CPD ¶ et al., Mar. 25, 2008, 2008 CPD ¶ 70 son. In these standard procurement con- 129, GAO heard two challenges to and Hunt Building Co., Ltd. v. United tracts, boards and courts will incorpo- GSA’s award of a lease to a lessor to States, 61 Fed. Cl. 243 (2004), modi- rate a termination for convenience pro- provide up to 524,000 BOMA rentable fied, 63 Fed. Cl. 141 (2004), the protest- vision by operation of law even if the square feet of space to combine and ers both succeeded in overturning the Government fails to include such a pro- house various sections of the U.S. De- award and getting another shot of being vision in the contract. partment of Justice in Washington, DC. awarded the lease because no fully Not so with lessors who rent space to GAO sustained the two protests, con- signed lease existed. In Fedcar Co., the the Government (at least using a GSA cluding that GSA had improperly con- protester challenged GSA’s award of a lease). GSA generally takes the position ducted the procurement by relaxing the 15-year lease for the construction and that real property leases do not need to requirements for the awardee’s pro- lease of a dedicated facility of 6–9 acres adhere to the Federal Acquisition Regu- posal, but failing to give the protesters’ (including the development of 110,531 lation’s requirement that a termination proposals the same benefit and credit. rentable square feet of office and related for convenience clause be included in Additionally, GAO found that GSA space) to be used by the Federal Bureau contracts. Most courts, boards, and the failed to discuss certain proposal weak- of Investigation in Indianapolis, Indi- GAO have agreed—and for good rea- nesses regarding New Jersey & H ana. GAO sustained the protest because son. By statute, GSA leases can last for Street’s access to amenities and GSA failed to properly calculate the 20 years. These leases often require the Trammell Crow’s key personnel. De- awardee’s price and, therefore, also construction or renovation of buildings, spite its conclusion that GSA conducted failed to properly conduct a price/ which usually entails the use of financ- the procurement improperly, GAO did technical tradeoff analysis of the two (Continued on page 31) *See http://contacts.gsa.gov/webforms.nsf/0/57A58CDEC8239E0485256BFA004F65F3/$file/ - 30 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Should GSA Add A Limited Termination for Convenience Clause (cont’d) (Continued from page 30) principle generally applies, there exists would allow the Government to limit its offerors. While it appeared that the at least one CFC decision that runs damages to minimal termination costs, lease had already been signed by GSA counter to this principle. the CFC exposed the Government to and the awardee, GAO disagreed be- In 210 Earll, LLC v. United States, 77 potentially significant damages for cause GSA had proposed several Fed. Cl. 710 (2006), the CFC was un- breach of contract (which could include changes to the draft lease and sent the concerned with the absence of a termi- any lost profits expected for the life of a lease to the awardee for its signature nation for convenience clause. The pro- lease). and agreement. GSA failed to produce tester challenged GSA’s award of a Conclusion the signed lease as part of the record lease of office and related rental space GSA has placed itself in a quandary before GAO, which concluded that the in Phoenix, Arizona, to be occupied by when an unsuccessful offeror success- record showed “GSA’s conditional ac- the U.S. Internal Revenue Service. The fully challenges an award. As with New ceptance of [awardee’s] offer did not CFC found that “GSA committed re- Jersey & H Street and Trammell Crow, form a legally binding lease contract.” versible error when it completely failed GSA risks awarding a lease to an of- Thus, GAO concluded that GSA should to consider the non-price factors, as feror that does not truly represent the re-evaluate the proposals and make a required under the [Solicitation for Of- best value to the Government. Also, as new award. fers], in its analysis of the offers.” The 210 Earll demonstrates, GSA may face In Hunt Building, the CFC heard a CFC vacated GSA’s award decision and the risk of significant damages for protest of the Air Force’s award of a ordered it to correct its evaluation errors breach of contract where it does not military privatization project lease at and make a new source selection deci- include a termination for convenience Hickam Air Force Base, Hawaii. The sion. In coming to this conclusion, the clause that would minimize any costs to CFC issued an injunction ordering the CFC swept aside concerns voiced by the Government. Rather than facing Air Force to amend the solicitation, re- GSA and the awardee that the executed these concerns or making GAO and the evaluate proposals, and allow the pro- lease lacked a termination for conven- CFC tip-toe around whether a lease has tester to compete in the re-evaluation. ience clause and that the CFC would been executed as reflected in FedCar The CFC enjoined the Air Force from effectively require GSA to breach its and Hunt Building, GSA should con- entering a contract with the awardee contract to afford injunctive relief: sider placing a limited termination for because the Air Force unfairly relaxed a The Government and [awardee] again convenience clause in its leases pending term of the solicitation for only the raised the question of whether an enforce- the resolution of any protest. The Fed- awardee and also allowed only the able contract existed between [awardee] eral Acquisition Regulation—clause awardee to negotiate changes to the and GSA in this litigation. They argue that 52.233-3 (“Protest After Award”)— form agreement that had governed all the existence of an enforceable contract contemplates termination of a contract offerors after the awardee was selected. affects what relief should be provided by after receipt of a final decision in a pro- The CFC noted that the lease did not the Court because it is not in the public test. In most cases, GSA already honors include a termination for convenience interest to require the Government to any stays of performance pending the clause. The CFC, however, recognized breach a contract. However, whether resolution of a protest. For this reason, that it could issue its injunction because there is an enforceable contract between the limited termination clause should the parties had not closed and executed these parties does not change this Court’s not prevent lessors from obtaining fi- the lease. jurisdiction to give appropriate relief, nancing. Because performance is stayed The above cases stand for the princi- including vacating the award, if we con- during this time period, there is less risk ple that GAO and the CFC generally clude that the Government committed to a lender that money lent will be spent will not read a termination for conven- reversible error in the procurement proc- —and financing institutions could ience clause into an executed lease that ess. themselves craft a clause in their lend- does not include such a clause and, be- Thus, the CFC in 210 Earll turned ing agreements requiring lessors to cause of the absence of such a clause, conventional wisdom on its head. honor any stay honored by GSA. More- will not disturb the award of a lease Rather than reading a termination for over, the larger concern that the Gov- even where the tribunal finds GSA (or convenience clause into the executed ernment could terminate for any reason, another agency) has acted improperly in lease (as would be the case in other at any time and risk the lender’s stream awarding the lease. However, while this types of procurement contracts), which of repayments midway through a 20- (Continued on page 38) - 31 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Challenges Facing the Government (cont’d) (Continued from page 4) management. We maintained that status dation and usage maximization within are therefore treated for budgetary scor- for the past three years. and across Departments. GSA is also ing purposes as capital leases, unless the As chair of the Federal Real Property working to implement the lease delega- lease term is extremely short term. Council’s asset management committee, tion program in a manner that maxi- Several years ago, PBS received re- we’ve been working hard to improve mizes the achievement of government- tention of proceeds authority as well as and standardize the way land-holding wide performance leasing goals and expanded options under Section 412 of agencies are managing their real estate targets. the 2005 Omnibus Appropriations Bill. portfolio. To date, the Council has fo- For new leases, the emphasis is being Since then, we have been working hard cused on developing the government- placed on agencies rigorous application with the Office of Management and wide inventory of federal real property of current OMB guidelines when deter- Budget and Congress on the applica- with specific emphasis placed on the mining whether to secure new space tions of Section 412 to our portfolio and disposing of unneeded assets and main- through a lease or capital acquisition. building modernization needs. It is ex- taining or improving the condition of These guidelines serve as important tremely important that PBS continues mission-critical assets. The FRPC in- budget controls that help federal agen- this effort as a priority, as well as seek tends to expand its focus to lease acqui- cies make smart business decisions increased direct appropriations to the sition, management and disposition. when entering into complex real estate Federal Buildings Fund to sustain the This effort is focusing on two areas: transaction. The FRPC intends to pro- viability of our 175 million square feet improved management and oversight of vide federal agencies with best practices of federal building inventory. existing leases and ensuring compliance and suggested approaches for identify- Continue to Implement the Presi- with current rules governing the acqui- ing real property needs that are best met dent’s Management Agenda sition of new leases. through a lease versus new construc- This priority is about good govern- For existing leases, the primary em- tion . ance and instituting good management phasis will be placed on maximizing the SUSTAINABILITY practices. PBS is the scorecard owner utilization of existing leased space and GSA is a leader in sustainability, but for the Real Property Asset Manage- terminating unneeded leases. Perform- is facing challenging goals mandated by ment initiative. In 2006 we were the ance goals and targets will be estab- the Energy Security and Independence first agency to achieve a “Green” status lished to facilitate lease space consoli- Act of 2007. The bill required GSA to on the scorecard for real property asset 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 We are a buyer of existing and major renovations. For new de- government-leased buildings signs, our target is to be 55% below comparable commercial buildings, • Single assets of $25 Million + which may be difficult to achieve using • Forward commitments today’s technology. Much more diffi- • Please submit to: cult is the goal of using 100 percent non-fossil fuel generated energy by sam.mitts@usrealco.com 2030 in new buildings. We are working or with a broad and diverse group of or- Call: Richard Mark 310-589-3344 ganizations both inside and outside the www.usrealco.com Federal community. This includes the Departments Defense and Energy, the (Continued on page 38) - 32 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Seminar on Alternative Lease Construction Methods On 4 December, 2008, the Naval standards. Add to that the destabilized Shaw Pittman LLP. Also on the panel Heritage Center on Pennsylvania Ave- credit markets and it’s the perfect storm. were Tom Zarrilli and Paul Penney of nue was the scene of an active engage- And all that combined with the intrinsic the New York City–based investment ment. This one did not involve the navy, difficulties of the procurement system banking firm of CTL Capital, LLC. however; it was all about ideas. Govern- currently employed by GSA has re- Panelists recommended to the govern- ment Leasing News, together with ment attendees that the current package AMV, LLC, sponsored a seminar on system of procurement be replaced with Alternative Lease Construction Meth- a process for disaggregating the compo- ods. AMV assembled a team of invest- nents of a major development project. ment bankers, lawyers, developers and At a minimum, they advocated the dis- public procurement experts and pre- aggregation of the financing which sented a variety of new methods for comprises the single largest component doing lease construction projects to a of project cost. Tom Zarrilli said that wide range of Federal agency real estate requiring the developer to provide the professionals. A preview of the seminar financing saddled the contractor with a has appeared in a series of articles ap- cost that was mostly under the control pearing in GLN throughout 2008. of the government tenant. Zarrilli fur- In recent years, Federal agencies have ther indicated that existing lease con- had to rely increasingly on lease con- struction solicitations could easily be struction methods to meet their space amended to provide the government requirements. “Lease construction” is a with the right to arrange separate fi- Pat Keogh of AMV, LLC term somewhat unique to government nancing. that means a privately financed leased sulted in the government’s lease con- Tom Zarrilli’s presentation was par- struction efforts having ground to a halt. ticularly interesting to seminar atten- 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- Tom Regan of Regan Associates, LLC ess. Tom Regan of the Herndon Vir- Tom Zarrilli of CTL Capital, LLC ginia development firm, Regan Associ- build-to-suit project. The cost of the ates LLC, said offerors on GSA’s lease dees in light of the significant market ongoing war on terrorism has dimin- construction projects routinely expend changes experienced in recent months. ished the funds available for the capital between $500,000 to $1 million or more He demonstrated graphically the inter- building assets required by Federal in their attempt to win a deal. relationship of financing rates, develop- agencies. This comes at a time when the Keogh and Regan were joined in the ment costs, and real property market cost of public buildings is otherwise day-long series of presentations and valuations in explaining the recent rash increasing as a result of the added em- panel discussions by David Miller of of failed procurements. Zarrilli made phasis on security and green building the law offices of Pillsbury Winthrop (Continued on page 34) - 33 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Seminar on Alternative Lease Construction Methods (cont’d) (Continued from page 33) and editor of Government Leasing Regan, the former head of the Pennsyl- some particularly interesting points on News announced the establishment of vania Avenue Development Corpora- the budgetary scoring rules and how the Virgil W. Ostrander Award for in- tion. Rear Admiral Richard A. Bu- they are influenced by other market novation in lease procurement. The in- chanan, USN (ret.), who serves as Presi- factors such as capitalization rates. dent and CEO of the Navy Memorial David Miller of Pillsbury Winthrop delighted the crowd with a talk on the gave a fascinating presentation of the importance of our Navy in America’s role of public-private partnerships in defense and global business activities. federal contracting, emphasizing the The Admiral shared many of the tradi- cooperative nature of the PPP approach tions and Navy values incorporated into vs. the often adversarial nature of con- the Navy Memorial. ventional contracting. In concluding the panel’s presenta- The panel’s key recommendation was tions, Keogh mentioned that AMV has a that GSA employ a more total disaggre- GSA multiple award schedule contract gation approach to its lease construction which covers all the professional ser- procurements. This approach would be vices provided by panel member firms patterned on the procurement structure in representing government agencies on employed by the $300 million Archives build-to-suit deals. A GSA schedule II project in College Park, MD. Most contract is a master contract that can be recently, this approach was employed used by any Federal agency and some for the $250 million National Institutes Rear Admiral Richard Buchanan, local governments as well to procure of Health Research Center on the east USN (ret.), President and CEO services at prearranged rates and terms. of the Navy Memorial The AMV schedule contract was the Baltimore Bayview campus of Johns Hopkins. Members of the AMV team spiration for the “Virgil” award comes vehicle used by NIH to access the vari- advised NIH on the Bayview deal. Tom from Section 1.102(d) of the Federal ous firms’ services in completing the 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- David Miller of Pillsbury Winthrop fice of Public Utilities. Eisen quoted Shaw Pittman LLP Paul Penney of CTL Capital, LLC Ostrander, who attended the seminar, as Regan’s presentation presented data to being remembered for saying that Bayview transaction. show that the disaggregated procure- “’deal’ should not be a four letter word For those of you who were not able to ment structure most closely parallels the in government procurement.” attend the seminar, do not despair. You best practices currently in use among Seminar attendees were given a pres- can order a copy of the slides and plan major corporate credit tenants. entation at lunch on the redevelopment to attend the next session in the series. Dr. Dennis Eisen the founder, owner of Pennsylvania Avenue by Tom See the next page for details. - 34 -
  • WINTER 2008 GOVERNMENT LEASING NEWS To Order the Slides 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. Preliminary Announcement of the Next Seminar 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. 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 DennisE@aol.com - 35 -
  • WINTER 2008 GOVERNMENT LEASING NEWS 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 Government Leasing News: I understand Newmark Larry Bank is a managing principal of Newmark Knight Knight Frank has ramped up its federal and GSA leasing and Frank’s Washington D.C. office. He founded The Bank facility service capabilities. Can you explain this new initia- Companies/Oncor International in tive? 1993 and molded it into one of the most prominent representatives of Bank: We have been one of the largest independent real tenants in the Washington metro- estate service firms in the world. However, until recently, we politan region. In June 2000, The have not operated with a specific concentration of providing Bank Companies merged with services to the federal government and its various agencies. Newmark Knight Frank. Mr. Bank Realizing the importance of servicing this sector effectively, is responsible in part for managing we have brought on a number of GSA leasing specialists with the day-to-day activities of the vast experience in dealing with government agencies and now office, as well as focusing on the have a strong focus on providing a wide array of commercial entire scope of consulting, broker- real estate services to GSA and other federal agencies. age and investment sales activi- ties. GLN: Besides its Washington D.C. office, what markets does Newmark Knight Frank have offices in? Bell: With these full capabilities in house, Newmark Knight Frank’s Integrated Management Services platform Bell: We are headquartered in New York, and operate from offers clients seamless, beginning-to-end solutions for every over 195 offices in key markets on six different continents. phase of occupying a property, from strategic planning, de- Last year, our transactions were valued at more than $47 bil- sign, construction and initial occupancy to ongoing cost- lion. Our current staff is more than 6,900, which is significant effective management. When employed in complement to our because we have the resources to be a major force in real real estate advisory services, our consulting and management estate while meeting the local and global needs of owners, capabilities allow us to serve our clients as a full service real tenants, investors and developers worldwide. estate department, offering optimal value and efficiency. GLN: What are some of the key facets of your practice that GLN: So this new platform offers a lot more than just pro- make you unique in terms of tenant representation? viding short-term leasing services, am I right? Bank: We have consistently focused on developing and Bank: Absolutely. Looking beyond real estate, Newmark expanding our service lines in order to optimally meet the Knight Frank’s strategy-to-implementation model offers a changing needs of our clients. We have been successful over single source solution for every step in the process. This inte- the last five years in building an integrated real estate prac- grated methodology takes a holistic view of each client’s tice. We realized the need for this by listening to our clients overall objectives and business practices, and implements and realizing that there was a gap in the communication be- strategies that provide exponential value by reducing costs tween their strategic planners and the final executers of the and thereby increasing profitability. Our approach is founded transactions. The fact that the consulting and execution in the belief that real estate decisions should be made with groups were separate often led to plans that were unable to be consideration of long-term goals, and not just as reactive implemented effectively. Recognizing this, we have devel- measures driven by lease expirations and other immediate oped a practice that includes specialists in the full range of needs. By looking past near-term solutions, we provide crea- workplace solutions: logistics experts, strategic planners, tive, analytically derived platforms for long-term strategy project and construction managers, and real estate specialists, development. Some companies believe that you have to sepa- all under one roof. Combining these services within a cus- rate the leasing from the strategic consulting and execution tomized and streamlined process ensures significant savings phases; we specifically do not. in time and money for our clients. (Continued on page 37) - 36 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Spotlight: Newmark Knight Frank (cont’d) (Continued from page 36) Theo Bell joined Newmark Knight Frank in 2008 as senior GLN: What are some of the specific areas that this plat- managing director at the firm’s Washington, D.C. office, form can provide tangible benefits to clients? with 18 years experience in com- mercial market presence expan- Bell: Our clients benefit through reduced operation costs sion and government contracts such as: direct and indirect labor, transportation, energy, oc- management. Prior to joining cupancy, supply-chain and distribution costs. We approach Newmark Knight Frank, Mr. every assignment as a trusted advisor and partner, and we Bell held senior-level executive supplement and leverage each client’s internal capabilities in positions with corporate and a consensus-building environment. commercial real estate service firms, including most recently as Bank: If I may add to that, the basis of our services comes senior vice president to the Gov- from recognizing what is needed to provide our clients with ernment Services Group at UGL the information to make confident decisions about their facil- Equis, where he managed key ity needs. For example, we have developed several types of account relationships with agen- proprietary software that help define the criteria which the cies such as DOD, GSA, FBI, IRS, IMF, the Census Bu- facility solution will be measured against. We are now able to reau, Department of Homeland Security and the Depart- provide analytic tools to our clients that allow them to ana- ment of State. lyze and weigh different locations and solutions. As their project manager, Newmark Knight Frank can utilize its vast instead of expanding into that space to relocate to 101 Consti- transactional experience to implement what we recommend, tution Avenue, thus leaving behind a significant amount of which ultimately leads to reduced risk and accelerated sav- gutted space that had less then two years remaining on the ings that are all ensured by a single point of accountability. term. It seemed a nearly impossible task to find someone who would be interested in subleasing short-term, gutted GLN: How will this platform specifically benefit GSA and space—considering that at that time landlords were only of- other federal agencies? fering about $35 per square foot for improvements—and Goldman had been planning on sacrificing the rent. But I Bell: Our integrated platform optimally positions Newmark then ran into someone from the FBI at a seminar who men- Knight Frank to meet the specific requirements that this sec- tioned they were looking for space in that area. The agency tor demands. During my tenure as a board member of the was interested in what we had available with Goldman, and I Federal Real Property Association (FRPA), I have witnessed was able to arrange a long-term lease for them with the prime an impressive trend in federal real estate: departments and landlord. As you are well aware, the FBI has some interesting agencies are now more focused on optimizing their business safety issues and requirements that needed to be worked out. operations, and integrating the workplace with both process We were able to accomplish all of the security measures, and and workflow for their diverse workforce. Increasingly, there through the use of very aggressive economics, arrange for a is a demand within the government sector for higher quality buyout of the Goldman lease, which was utilized to lower the portfolio advisory services for their tenant agencies. 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- GLN: Can you describe one of your more interesting or fully complete the transaction in less then 60 days; and, by unusual leasing situations where you provided services on the way, the FBI still resides in that space. behalf of a federal agency? GLN: Thank you, gentlemen. See you at the next FRPA Bank: Yes, one interesting case arose when I was fortu- meeting. nate enough to be doing a transaction for the investment banking firm of Goldman Sachs at 1101 Pennsylvania Ave- For further information about Newmark Knight Frank’s nue. We had leased some additional space for them and had Washington D.C. office, call Mr. Bank at (202) 292-0100 or gutted it for them, their intention being to expand operations via Email to LBank@newmarkkf.com, or call Mr. Bell at and extend in the space. Goldman ultimately decided that (202) 292-0123 or via Email to TBell@newmarkkf.com. - 37 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Challenges Facing the Government (cont’d) Advertiser Index (Continued from page 32) Lease Policy, the lease requirements of Environmental Protection Agency, the Energy Independence and Security Financing ASHRAE, the American Institute of Act of 2007 will be addressed which CTL CAPITAL, LLC Architects, the Alliance to Save Energy, include a mandate for all new leases, Tom Zarrilli 212-792-7861 the Commercial Buildings Initiative, with few exceptions, to be obtained in Paul Penny 212-792-7863 Congress, and others—to explore both Energy Star-rated buildings by the year Investors technology and techniques for achiev- 2010. HPI CAPITAL INC. ing the goals in a cost effective way. Stacy Zaeh 704-343-9334 In December 2007, PBS issued Green Our work at GSA is important, espe- Lease Policies and Procedures for Lease cially in these challenging economic SALUS PROPERTY INVESTMENTS, LLC Acquisition. This document is applica- times. It is also innovative and exciting. James M. Jacobson 704-333-4340 ble to all types of lease procurements We are a leader in the real estate indus- USAA REAL ESTATE COMPANY and requires LEED Silver—the US try in general and certainly in the Na- Richard Mark 310-589-3344 Green Building Council’s rating sys- tional Capital Region. We have a tal- tem—for new lease construction over ented, hard-working and dedicated staff Property & Casualty Insurance 10,000 square feet (where the federal and I am honored to have had the privi- AUSPL INSURANCE PROGRAM government is the sole occupant). It also lege of serving as Commissioner for the Jeanne Arand 800-726-0366 added additional energy efficiency and past three years. As the landlord to the environmentally sustainable require- civilian federal government, PBS con- Radon Testing ments for leased space and updated tinues to play a critical role in support- TRS DESIGN & CONSULTING Tom Rochford 925-299-2380 many existing sustainability require- ing agencies with their space needs so ments in place since 2000. In an upcom- that they can concentrate on their core Technical Advisors ing amendment to the December Green missions for the American people. FEDERAL LEASE CONSULTANTS Dave Cunningham 303-903-9570 JONES LANG LASALLE Termination for Convenience Clause (cont’d) Kim Burke 202-719-5613 (Continued from page 31) of significant breach damages, and firm’s Government Contracts & Dis- year lease would be checked to just this would not adversely affect a lessor’s putes team, representing clients in a one limited and mostly predictable cir- ability to obtain financing. wide variety of government contract cumstance at the beginning of perform- matters including GSA leasing matters. ance. Ultimately, including a limited Alex Tomaszczuk is a partner and T h e y c a n b e c o n t a c t e d v i a termination provision pending the out- Daniel Herzfeld a senior associate in the alex.tomaszczuk@pillsburylaw.com and come of any protests would allow GSA law firm of Pillsbury Winthrop Shaw daniel.herzfeld@pillsburylaw.com, re- to obtain best value, reduce GSA’s risk Pittman LLC. They are members of the 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 JamesJacobson@salusprop.com - 38 -
  • WINTER 2008 GOVERNMENT LEASING NEWS Cumulative Index of Articles Vol. 1 No. 1 (Spring 2005) Vol. 3 No. 2 (Summer 2007) Executive Order 13327: Federal Real Property Asset Management GSA’s Securitized Credit Lease Classification of Federal Leases Sustainability Practices for Federal Real Property Enhanced Use Leasing on Military Bases Ask the Expert: Building Transfer and Novation Agreements Data Integration in Real Property Asset Management Vol. 3 No. 3 (Fall 2007) Leased Area by Agency in the United States Book Review: The Site Security Design Guide Better, Faster Ways to do Build-to-Suits Insights into GSA Form 1217 GSA Leases after 9/11 Challenges in Public Housing IV Leased Area by State in the United States Section 412 Sale-Leasebacks for GSA? GSA’s National Brokers Contract Economic Parameters for Federal R. E. Analysis FY’06 to FY’09 Vol. 1 No. 2 (Summer 2005) GSA Lease Distribution by Procurement Action Claims of Waste or Restoration in Government Leases Largest GSA Leases over 250,000 Rentable Square Feet New Opportunities in Property Management Vol. 3 No. 4 (Winter 2007) Economic Parameters for Federal R.E. Analysis for FY‘06 and FY‘07 Insights into GSA Form 1364A Innovative Financing of Government-Leased Real Estate Spotlight: UGL Equis Vol. 1 No. 3 (Fall 2005) Telecommunication Rings in Government Buildings Recent Changes to the Scoring Rules for Federal Leases GSA’s Inventory of Owned and Leased Property GSA Lease Action Glossary Vol. 4 No. 1 (Spring 2008) Federal RPM–An IT Solution for the Federal Enterprise The Government’s Novation Agreement—What Does it Really Mean? An Insurance Claim Checklist for Hurricane Katrina Victims Implications of the Recent GSA Directive on Delegated Leasing Authority New Opportunities in Property Management – Part 2 Challenges in Public Housing V Vol. 1 No. 4 (Winter 2005) The GSA Cost Per Person Model Financing Reconstruction of Government-Leased Buildings Recovery of DOI’s Gulf of Mexico Regional Office Managing Your GSA Rent Bill Vol. 4 No. 2 (Summer 2008) Don’t Leave Money on the Table! The NIH Bayview Research Center -- A New Model for Lease-Construction New Opportunities in Property Management – Part 3 Partnering with the Market to Meet Federal Real Estate Needs Letter to the Editor on Reimbursement Clauses Better Asset Management: How to Do it and How it Helps The New Automated Advanced Acquisition Program GSA Real Property Disposal Process Chart Katrina: The Math and Aftermath The Korpacz Real Estate Investor Survey Vol. 2 No. 1 (Spring 2006) The Transparency Act of 2006: www.USASpending.gov Reading Between the Lines: Interpreting GSA’s Space Advertisements Vol. 4 No. 3 (Fall 2008) New GSA Portal and Web Site Greening of the Duncan Federal Building Energy Management: A Key Component of Asset Management The Past is Prologue for GSA’s Lease Construction Program Public-Private Partnerships in USPS-Owned Buildings Recent Innovation in Security Blinds Interagency Security Committee Standards for Leased Space DoD Real Property – An Overlooked Opportunity Vol. 2 No. 2 (Summer 2006) On Liquidated Damages FAA’s Construction-Leaseback Program Challenges in Public Housing VI Meeting Summary on Financial Performance Vol. 4 No. 4 (Winter 2008) Letter to the Editor on Foreign Leases Book Review: Sustainability Matters Vol. 2 No. 3 (Fall 2006) Challenges Facing the Government’s Federal Civilian Landlord Planning for Emergencies – Can You Afford Not To? Real Property Tax Management for Government-Leased Buildings GSA’s Present Value Analysis Model Succeeding Lease Cost-Benefit Analysis Needs Only Be Reasonable Don’t Leave Money on the Table – Part II Ask the Expert on GSA Lease Renewals and Extensions Vol. 2 No. 4 (Winter 2006) Enormous Success of the RTC Negotiating Space Alterations with GSA The Resolution Trust Corporation 1989–1995 New Directions in Building Telecom Design Lease Construction: It’s Either New Tools or New Money Establishment of the Virgil W. Ostrander Award for Innovative Procurement Vol. 3 No. 1 (Spring 2007) Should GSA Add a Limited Termination for Convenience Clause? Ask the Expert: Multiple IRR’s Summary of the Seminar on Alternative Lease Construction Methods Keeping your Government Tenant when the Lease Expires Spotlight: Newmark Knight Frank New Accessibility Standards for GSA-Leased Facilities Consolidation of the Civilian Boards of Contract Appeals - 39 -
  • FALL 2007 GOVERNMENT LEASING NEWS WINTER 2008 GOVERNMENT LEASING NEWS F Federal Lease L Maximizing Profits C Consultants, Inc 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. 3877 W Kenyon Ave Dave Cunningham, President Denver, CO 80236 Federal Lease Consultants, Inc. Fax 303-806-0740 Email: fedlease@msn.com (Clip here) 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. NAME: _______________________________________________ Check One: COMPANY/AGENCY: __________________________________ o One-year Subscription (4 issues): $225 ADDRESS: ___________________________________________ o Two-year Subscription (8 issues): $395 _____________________________________________________ o Three-year Subscription (12 issues): $560 CITY: ____________________ STATE: ______ ZIP: _________ o YES, please send me a copy of the wall chart at no additional cost. TEL.: _________________________ FAX: _________________________ E-MAIL ADDRESS: ____________________________________________ o ENCLOSED IS MY CHECK FOR $ _________ (Payable to: GOVERNMENT LEASING NEWS) Send checks to: GOVERNMENT LEASING NEWS § 13408 Glen Lea Way § Rockville, MD 20850-3638 Or call 301-762-1441 to pay by MasterCard, VISA or Discover - 40 -