Superseding lease negotiation saves taxpayers big

March 06, 2019

By Gretchen Jabben

It’s not often when a chance to save taxpayers over a half million dollars drops into a GSA employee’s lap, but it happened to Public Buildings Service Leasing Specialist Dennis Clemons. He pursued the money-saving opportunity and on Feb. 14, he successfully awarded a superseding lease agreement on behalf of the Railroad Retirement Board for space in Omaha, Nebraska.

“It’s exciting to have the opportunity to save taxpayer money. I wish we could do this more frequently. I wish it was 300,000 square feet, instead of about 3,000 square feet, but we will take our victories where we can get them,” Clemons said. 

What is a superseding lease?

A superseding lease [PDF - 1 MB] replaces an existing lease before its expiration. This approach establishes new term and lease conditions at an existing location but does not involve competition, because it meets particular requirements that make it advantageous to the government. In this particular scenario, the new lease brings considerable financial savings to the government.

From ‘hot dog’ to ‘no deal’ to ‘now we’re talking’

With seven years left on a federal agency lease, the building landlord approached Clemons with a request to move the federal tenants from the 2nd floor to the 12th floor of the building. The landlord was financially motivated, as the proposed change in accommodations would benefit the lessor by enabling a redesign of the first four floors, incorporating a flagship hotel and upscale bars. 

Clemons, a seasoned negotiator for GSA, recognized the scenario as an opportunity for a superseding lease agreement and tax dollar savings. In his 26 plus years with GSA as a leasing specialist, he said he had not witnessed or been part of a superseding lease in Region 6. He said he remembered thinking, “Hot dog! This is a chance to save some money!” 

The lessor arranged a building plan presentation in December 2017 and Clemons remembered being presented with plenty of “bells and whistles.” But several months later when the first proposal arrived, it did not include enough incentive for GSA to disrupt the federal tenant with a move to a higher floor. 

No deal.

Two more proposals followed, and Clemons rejected each. He patiently waited for the right offer. 

The right offer finally presented itself after a phone conversation with the landlord in September 2018. The proposal included a 15-year lease and dropped the rent from nearly $20.00 to under $7.00 a square foot. The landlord had Clemons’ attention. Usually a large drop in rent would trigger skepticism in a lease contract officer, but in this situation: high-rise building, many tenants, financial motivation, Clemons was not worried. 

Superseding with super savings

Negotiations commenced and the final terms included:

• A 15-year lease to replace the existing lease, which had seven years remaining.
• Rent per square foot was adjusted from the current $19.98 to $6.62 in Years 1-2, $7.50 in Years 3-7, $12.00 in Years 8-12, and $21.00 in Years 13-15. 
• Lessor-provided build-out and space upgrades, including a new RRB vestibule with security window.
• Tenant relocation expenses reimbursed by the lessor.
• No cost of services or tax escalations for the term of the lease. 

Based on the extensive design plan, Clemons predicts an occupancy date in May of this year. It is a month later than the lessor estimated, but “I was happy to give them that space for the right dollars,” he said. 

The current market rate for commercial space in the building’s area is in the low $20s per square foot. With predictable cost of living increases, the market rate will be higher than the new lease’s $21 by Years 13-15, according to Clemons. Based on the tenant space of 3,565 rentable square feet and the current lease rate, over the next seven years, the lease cost savings add up to about $370,000. 

Market rent rates in this zone are predicted to continue to increase incrementally, but even if the numbers are crunched with the 2019 rate of $19.98 per square foot for eight years following the current lease expiration, the cost savings to taxpayers over the next 15 years would exceed $600,000. 

With the additional agreement to remove the CPI and tax escalation paragraphs in the new lease, costs related to the administrative time required to adjust the lease annually will be avoided, saving even more taxpayer dollars. “The RRB and GSA finance folks will be doing a happy dance,” Clemons predicted.

While this negotiation represented a single opportunity to save big money, Clemons stressed that there are many folks in the agency who are also working hard and looking for every opportunity to save American taxpayer money and said he “was just fortunate to be the guy there when the circumstances presented themselves.”