Real Property Disposal
WILLIAM H. MATTHEWS
OFFICE OF REAL PROPERTY ASSET MANAGEMENT
PUBLIC BUILDINGS SERVICE
U.S. GENERAL SERVICES ADMINISTRATION
COMMITTEE ON HOMELAND SECURITY
AND GOVERNMENTAL AFFAIRS
SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY
UNITED STATES SENATE
FEBRUARY 6, 2006
Chairman Coburn and Members of the Committee:
I am William Matthews, Assistant Commissioner of the General Services Administration’s (GSA’s) Office of Real Property Asset Management. I am pleased to appear before you to discuss GSA’s real property portfolio and our management of these real property assets.
GSA is one of the largest public real estate organizations in the world, with an inventory consisting of 8,920 assets with over 342 million square feet of rentable space across all 50 states, 6 U.S. Territories, and the District of Columbia. We serve approximately 1 million Federal employees at 59 different agencies. Our portfolio consists primarily of office buildings, courthouses, laboratories, border stations, and warehouses.
While the composition of our portfolio is driven by customer needs, its performance is the result of our strategic approach to asset management which balances customer demand with market dynamics and the condition and performance of our assets.
Consistent with our core mission, GSA has been an active member of the Federal Real Property Council created in 2004 under Executive Order 13327, and has played a leadership role in establishing templates for Real Property Asset Management plans and identifying key elements appropriate for national-level inventory systems.
GSA has a robust inventory system that is capable of accurately and consistently reporting real property data and that meets the Federal Real Property Council’s (FRPC’s) inventory reporting requirements for twenty-three mandatory data elements.
Using the FRPC’s government-wide standards, GSA’s current inventory consists of 8,932 assets totaling 387,841,174 gross square feet (gsf) nationwide. When these assets are separated between leased and owned, the portfolio consists of 1,884 owned assets totaling 218,983,699 gsf and 7,048 leased assets representing 168,857,475 gsf. The annual operating costs for FY2005 were $1.5 billion, $800 million for government owned and $650 million for leased locations. The replacement value of the owned inventory is $37.2 billion.
GSA captures its inventory of real property assets in the System for Tracking and Administering Real Property (STAR). STAR is the primary tool GSA uses to track and manage our real property assets and to store inventory data, building data, customer assignment data and lease information for over 20,000 assignments. GSA purchased the STAR software program from a private sector application in the late 1990’s, and specifically adapted it for GSA’s business processes.
STAR provides Asset Business Team members, including GSA realty specialists, property managers, asset managers and portfolio managers, access to business data, thus supporting responsible asset management and the following functions:
- Business Management
- Space Management
- Occupancy Management
- Lease Management
- Security Management
Over four years ago GSA implemented a PBS portfolio strategy to restructure our portfolio of owned assets to consist of financially performing assets for which there is a long-term Federal need and to reinvest in these assets to optimize and preserve their value for customer agencies and taxpayers. We made progress across the country; and thus far we have:
• Reduced the percentage of underutilized and non-performing assets from 42 percent to 26 percent;
• Reduced vacant space from 9.2 percent to 6.8 percent, significantly below the 2005 industry average rate of 12.5 percent; and,
• Reported excess 204 assets and demolished 50 buildings and, as a result, eliminated 3.1 million rentable square feet of vacant space and achieved a cost avoidance of $400 million in capital reinvestment needs.
Based on our asset management practices and implementation of our portfolio strategy, we achieved a “fully effective” score from OMB’s Program Assessment Rating Tool (PART) evaluation of GSA’s real property asset management program.
Applying the Federal Real Property Council’s definition of asset utilization, 96 percent of GSA’s leased and owned assets are utilized. GSA has only 376 assets that are considered underutilized or not utilized. The majority of these properties fall into segmented categories as can be seen in the following chart.
As a result of GSA’s efforts to restructure its portfolio, we have developed strategies to work out solutions for non-performing assets. These strategies range from cost containment, outleasing, exchanging assets, conveying assets to tenant agencies, to disposing of the asset. One-third or 125 of GSA’s underutilized and unutilized assets have been reported excess and accepted for disposal. These assets account for almost 9 million gsf and $10.9 million in operating expenses that will be eliminated upon completion of the disposal action. Another 18 underutilized assets with approximately 1 million gsf and $1.5 million in operating costs are projected for disposal in the next five years pending customer relocation.
There were 89 leased facilities that were determined to be underutilized with operating costs totaling $6.2 million in FY2005. GSA eliminates vacant leased space by backfilling space with other customers, terminating the lease or vacant portion thereof or buying out the remaining lease term whenever possible. At the end of FY2005, GSA’s leased vacancy rate was at a record low level (below 1.5%).
With an aging inventory it is imperative that we reinvest in our facilities to maintain a quality workplace for our client agencies. At any given time a significant portion of our vacant space is under renovation for our tenants. As of September 30, 2005, GSA had 21 assets vacated for major renovations accounting for almost 9 million gross square feet and $39.6 million in operating expenses. As the current projects are completed, the space will be backfilled and these assets will once again become utilized. At the same time, new projects will begin in different assets keeping the amount of assets that are underutilized due to major renovations fairly constant.
The remaining 123 underutilized assets have space that is vacant and available for assignment to tenants and do not yet have a backfill or disposal plan in place. However, this group accounts for less than 1.5 percent of GSA’s assets. This category includes 76 buildings that are part of other facilities and cannot be easily separated and disposed of, 18 buildings that are active courthouses, and 16 buildings that were vacated because of hurricane Katrina and will be reoccupied. GSA is currently strategizing ways to eliminate the vacancy either through backfill or disposal for the remaining 13 underutilized assets.
DISPOSAL METHODS AND CHALLENGES:
GSA is a recognized industry leader in its disposal of underutilized assets and uses a four-step process: (1) Screening other Federal agencies for possible continued Federal need by another Federal agency, (2) screening for specific Public Benefit Conveyance opportunities for the property’s reuse, (3) negotiating with the local community to promote the highest and best future reuse of the real property in question, and (4) taking the real property to the market to sell by sealed bid, public outcry auction, or Internet sale. We have had great success in Internet sales. An excellent example of this internet-based method is the on-line live auction of the Yeon Warehouse, a 75 year old industrial facility with 55,000 square feet of space in Portland, Oregon. This was an underutilized asset that we sold in 2005 for $1.75 million, 17 percent over fair market value and costing just 0.5 percent of the sales price. The $1.75 million will be deposited into the Federal Buildings Fund and thus be available for Congress to authorize and appropriate for reinvestment in other mission critical assets.
One of the significant challenges confronting GSA’s efforts to dispose of underutilized assets is the funding required by our customers who must incur move and related costs. Often, many of the smaller tenants housed in an underutilized asset do not have sufficient resources to cover their physical or telecommunications move costs, or the additional rent they may incur should alternate housing be found in neighboring leased space.
We also are challenged to balance funding of projects for assets that we need to retain, such as those that will recapture vacant space, versus funding demolition of underutilized properties that remain vacant until they can be torn down or funding assets where environmental remediation is necessary prior to disposal.
GSA’s Portfolio strategy calls for retention of assets for which there is a continuing federal need and that generate sufficient rental income to keep retained assets in good repair. Conversely, our strategy calls for divesting of buildings that do not generate enough rental revenue to cover necessary repair and operating costs, with some exceptions made for legacy assets. A divestiture of these public buildings has resulted in cost savings and has reduced the amount of vacant space in our inventory. This is prudent asset management and provides incentives to Asset Business Teams to make the right decision for each asset. GSA uses performance measures and benchmarks to monitor performance, shape direction and allow for midcourse corrections for both programs and projects. Locally and nationally, GSA uses performance information to influence asset strategies and make informed investment decisions. Operating costs, vacant space, and disposal cycle time are among the metrics that GSA routinely monitors.
Unless one of the special retention of proceeds authority apply, the net proceeds generated from the sale of GSA properties are directed for deposit into the Department of Interior's Land and Water Conservation Fund rather than the Federal Buildings Fund. Retention of proceeds is one of the most powerful incentives available for vigorous asset management. A specific example of this financial incentive is GSA's pending sale of its 2 million square foot facility known as the Middle River Depot in Baltimore County, Maryland. In fiscal year 2005, Congress specifically granted GSA the authority to dispose of the Middle River property and permitted GSA to deposit the proceeds of sale into the Federal Building Fund. This one-time retention of proceeds authority allows GSA to return funds to the Federal Buildings Fund that GSA can then use for its real property capital needs.
GSA is in a unique position with customer agency needs driving the composition of our real property inventory; housing our own internal functions is a secondary driver. Because we operate in a dynamic real estate environment with ever changing customer agency needs and missions, our portfolio must be able to adjust to changes in customer agencies' size, reductions of space and budgets, relocations, consolidations and changing agency missions. The challenge to effective portfolio management is to strike the proper balance between prudent investment and the ability to meet changing customer-agency needs. We will continue to employ national strategies of investing in performing assets, divesting under performing assets, and building flexibility into our portfolio to address changing priorities within the federal community. Despite these many challenges, and the fact that the amount of space needed by some agencies may grow, while others decline, on the whole, GSA’s portfolio has been relatively stable, with modest growth in square footage.
Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or the other members of the committee may wish to ask.