Government Leasing News Winter 2008

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.

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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.

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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 workers.
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)

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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

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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

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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.

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FALL 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.

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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-


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-


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 -


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,

- 11 -


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 -


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 -


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)

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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.

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Government Leasing News Winter 2008

Government Leasing News Winter 2008

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