The General Services Administration (GSA) leases more than 150 million sq. ft. of space from private owners in over 2,000 communities, making it one of the most ubiquitous entities in the real estate community. Due to the unique terms and conditions contained in government leases, buyers of office buildings where the government is already a tenant often face a steep learning curve.
The number of potential conflicts between a building owner and the government increases as the square footage under lease increases. Some investors mistakenly assume that entering into a lease agreement with the government is equivalent to a standard commercial lease. Here are just a few examples of some of the many unique terms and conditions in GSA leases that can have a significant financial impact:
GSA's standard tax escalation clause states that the amount of any increase in taxes above the first fully assessed year will be paid by a lump-sum payment. Depending on the size of the leased building, the amount can result in hundreds of thousands of dollars. But buried in the 150-page contract is a clause that requires that the lessor submit the tax escalation claim within 60 days of the tax payment date. If the deadline is missed, the lessor forfeits the entire escalation. This is more than just a hypothetical example, as I've seen it happen numerous times.
When GSA wants to make alterations to space it leases, it may ask owners to sign a “waiver of restoration” clause, stating that when the lease expires it won't be required to restore the space to its original condition. If owners don't want the alterations GSA proposes, they may conclude that by refusing to sign the waiver, they've effectively stopped GSA from doing the alterations. But there's a clause in the lease that allows GSA to make any alterations it wants. Owners' protection lies in the fact that by refusing to sign the waiver, they may be able to force GSA to restore everything to its original condition when GSA eventually moves out — if there is no other clause waiving restoration rights. But it could be 10 or 20 years before that occurs. Will the records be accurate and readily accessible at that time? Good recordkeeping and a corporate memory are critical.
Conflicts do occur, and when they do there's another unique clause that comes into play. The Contract Disputes Act clause outlines the procedures to follow if owners have a disagreement with the government that they can't resolve in negotiations. It allows the building owner to submit a claim against the government by simply writing a letter to the government contracting officer outlining the basis for the claim, and the amount. The government's contracting officer can then negotiate, or pay the claim, or issue a denial of the claim. The denial of the claim is in the form of a “final decision,” which is a misleading description, because this decision can be anything but final. If an owner doesn't agree with what the contracting officer decides, he can appeal to GSA's Board of Contract Appeals, which renders an unbiased decision. How much will it cost owners to appeal to the Board of Contract Appeals? A letter and a stamp.
How do these issues play out in the business world? Suppose a government-occupied building is purchased in the 15th year of a government lease. Upon conducting an in-depth review of the past lease history, the owner discovers that GSA has been one-half of a percentage point short in the required rental payments every year starting in year two of the lease. In short, GSA is on the hook for 14 years of insufficient rent payments.
The good news is that a so-called “novation agreement” signed at the time of purchase enables the building owner to collect the entire amount due, even if it didn't own the property at the time of the error. Additionally, interest will be due on the 14 years of insufficient payments under the Prompt Payment Act, another little clause peculiar to government leases.
Ultimately, there are traps and treasures in GSA leases. To avoid any unpleasant surprises, owners should do their homework and understand their options in the event of a conflict.
David Cunningham served 25 years as a government leasing contracting officer, and now conducts in-depth reviews of GSA leases for building owners. He can be reached via e-mail at fedlease@msn.com