Leasing to Government Agencies
Q A government agency has approached me about leasing space in my office building. I am considering the idea, but I've heard that government agency tenants have more specific requirements than typical commercial property tenants. What criteria and costs might be involved?
A While leasing space to government agencies can be a great opportunity because they have more accountability and will, therefore, pay the rent and uphold the lease terms, that may not matter if expensive and inconvenient buildouts and strained tenant relations outweigh the peace of mind that a well-behaved, stable tenant brings.
Most of the issues with leasing to a government agency stem from buildout requirements. Government agencies usually want specific, costly items installed that will be useless to future tenants or could permanently change or damage the space in such a way that it would severely limit the types of future tenants an owner could rent to.
For example, government agencies almost always require some security buildouts. But extensive buildouts like bulletproof glass and soundproof walls are time-consuming to install and can be very costly. When the lease ends, the space will be useless to you unless all of those items are removed and the space is brought back to its original condition, and many government agency tenants often make the owner responsible for restoration costs in the lease. In fact, the U.S. General Services Administration (GSA), which is responsible for finding and leasing appropriate space on behalf of government agencies, uses form leases that leave little room to negotiate.
Before you agree to have a government agency as a tenant, consider how its presence will affect other tenants. For example, law enforcement officers or other government officials coming in and out of your building with guns may not provide a comfortable environment for other tenants.
Many owners have specifically avoided leasing to government agencies. The GSA spent several years scouting and signing leases for the 500 locations that an estimated 1.2 million temporary employees of the U.S. government will work out of to conduct the 2010 Census. Canvassing workers in 435 Congressional districts will be supported by a Census coordinating organization working out of the carefully selected and newly built-out offices across the country, which were selected by the GSA and national real estate advisory firm UGL Equis.
The criteria that were established by the Census Bureau and the GSA for each facility are precise and eliminated many buildings from consideration. The GSA established three basic space models for the Census offices, ranging from 5,098 square feet to 6,479 square feet. Each location must meet numerous construction criteria, be accessible 24 hours a day, seven days a week, and have maneuverability for a 40-foot delivery truck as well as a loading dock and freight elevator for deliveries.
The 50-member UGL Equis team had to find owners that were willing to install a security system that will be centrally monitored by the government. Spaces also must have vestibules outfitted with security glass monitoring windows, and be compliant with the Americans with Disabilities Act (ADA), among other requirements. UGL Equis said that some urban neighborhood owners were reluctant to enter a short-term lease that required numerous property improvements.
“We were asking owners to lease for a very short period, 16 months to two years, while the norm for a commercial lease is five to 10 years,” explained Paul Michaelree, who supervised the UGL Equis effort in the Dallas Region. The short-term leases required by the Census, coupled with the need for substantial and disruptive tenant improvements, did not make financial sense for many smaller real estate owners, he said.
To encourage owners to enter into short-term agreements, UGL Equis and GSA engineered an accelerated tenant improvement (TI) amortization option to owners, through which they would be reimbursed for the cost of the tenant buildout within the first three months of the lease, allowing them to secure more favorable borrowing terms from their banks and mitigate their risk.
It's important that you factor in any and all costs that you think that you might incur when negotiating the rent with the GSA. If you decide that you want to rent to a government agency but are not sure that you can afford to, ask whether options such as an accelerated TI amortization plan are available for you, especially if you are a small owner.