How to bury
Negative Equity In A Lease
GSA Reverse Industry Day: Leasing Process- Private Sector versus Government Perspectives
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>> Well, good day, Mr. and Mrs. GSA, from border-to-border
and coast-to-coast, and all the ships at sea,
welcome to this GSA Reverse Industry Training, numero three.
We are so honored and pleased to have you here today joining us,
and not just those of you here in this fabulous auditorium
at the headquarters of the U.S. General Services Administration,
we are being broadcast worldwide
through the greater GSA broadcasting system.
Now, usually, too, I'm so very glad
that at this point I get to bury my shtick.
For the past couple Reverse Industry Training days we
started at 9:00 o'clock in the morning, so I make some crack
about the time zones and we end up in poor Hawaii.
If we started at 9:00 o'clock in the morning today,
it would have been 3:00 o'clock there.
At least by starting at 12:00 noon, it's 6:00 o'clock
in Hawaii, so it's a little more reasonable
that we have actual real-time viewers in Hawaii.
Aloha. So thank you for joining us, wherever you may be.
And now to continue with our program, please allow me
to introduce the intrepid producer of these proceedings,
GSA's procurement ombudsman, Ms. Millisa Gary.
[ Applause ]
>> Thank you, John.
Good morning everyone, or afternoon,
depending on where you are.
Thank you for joining us for round three.
Now, who would have thought last July, when we first rolled
out Reverse Industry Training, that within a year we'd be
at number three, but here we are, and I just want
to thank everyone who worked behind the scenes
to make this a possibility today.
My team, including Yvette, as a resource person and,
of course, the industry.
We could not have done this without you guys.
So thank you, thank you, thank you, and everyone else,
please enjoy the program today.
[ Applause ]
>> Millisa, thank you so very much.
Now, we are most pleased to welcome a very special guest
to really get things started.
This individual began GSA service in July 2017
as the associate administrator of GSA's Office
of Government-wide Policy.
She did so well there that she was punished, I mean promoted,
to being the deputy administrator.
Ladies and gentlemen, if you would,
please welcome the deputy administrator
for the U.S. General Services Administration,
the honorable Allison Brigati.
[ Applause ]
>> Thank you, John.
That's a tough act to follow.
Good morning, or afternoon, everyone.
I know we've had two very successful Reverse Industry
Training day events so far and I'm pleased
to see today's session focus on the public building service.
For those of you that don't know, I have a bit
of a passion for real estate.
I understand that we expect about 500 attendees today,
which is a terrific turnout.
I'd like to thank our wonderful industry partners
for their willingness to put the time and energy
into planning today's meeting.
As I'm sure many of you are aware,
this administration places a great deal of value
on our relationship with industry.
Both PBS Commissioner Dan Mathews and I think
that there are so many great things that can come
out of these efforts to increase communication.
Special thanks also to Millisa and her team
for putting today's event together.
I have a very fond place in my heart for the Office
of Government-wide Policy.
As you know, Administrator Murphy and I have set priorities
around four basic tenets; ethical leadership,
reducing duplication, generating more competition at the contract
and task order level, and increasing agency transparency.
Today's event certainly lines up with these goals,
especially those
around increasing competition and transparency.
We hope this will be a great forum where we can continue
to learn and understand the parameters and limitations
under which we operate as government
and industry partners.
Awareness and understanding of this dichotomy will result
in more effective engagement, stronger partnerships,
increased competition, a stronger supplier base,
better acquisition outcomes and greater value to our customers.
GSA attendees, you will hear from industry today on what it's
like to do business with us, including some
of the challenges that they face.
Whether you're a contracting officer, a program manager,
a COR, or a leasing contracting officer,
my hope is that these sessions will give you a broader
perspective and will help you increase your engagement
with our industry partners.
Thank you, and enjoy the remainder of the program.
[ Applause ]
>> And now we're off.
I believe we might all acknowledge that the bulk
of innovation in the U.S. comes from industry,
whatever it may be; real property, products or services,
the greatest advances have come in the private sector and we,
in the federal government, need that creativity.
If we want to acquire that kind of innovation and creativity
for GSA, we need to welcome, of course, our industry partners
with clarity and consistency, increasing understanding,
promoting collaboration and building trust
in our acquisition processes
for both our 1170 realty specialists responsible
for acquiring and disposing of real property,
and our 1102 contract specialists who acquire products
and services like furniture and design
and construction services.
So let's listen to our guests discuss their considerations
when doing business with the federal government.
Now, I say listen, but you're also welcome to interact.
In addition to the microphones that we have here
for our fabulous studio audience, we would also like you
to use your information, and if you're two fisting it,
communication and technology devices.
Turn the volume down, yes, but if you see or hear anything
that sparks a comment, a question in your mind,
e-mail it
to reverseindustrytraining @gsa.gov.
Our moderators will try to weave your questions
into their discussions.
And for those questions not answered during the live
discussions, we'll try to compile a question
and answer document and post it along
with the recordings of these proceedings.
Oh, yes, at the end of today's sessions you should receive
by e-mail a survey invitation about this event.
Please do respond, as it helps us ensure
that we are providing the kind of educational programs
that are useful to what it is that you do.
Again, now, on with the show.
The leasing process.
Private sector versus government perspectives.
I am totally dating myself, but let me ask you all,
do you recall that great parody of the 60 Minutes segment,
Point/Counterpoint that Saturday Night Live used to do?
The killer line was always when Dan Aykroyd would turn
to Jane Curtin and say, Jane, you ignorant --
I can't use the actual quotation or you might see a reduction
in force of one later on this afternoon, and I won't identify
which character is necessarily government or industry,
I'll leave that to your fertile imaginations,
but this recollection does lead well into this session
and its Point/Counterpoint.
So this session will contrast the different views
of leasing decisions between government and industry.
The federal government is understandably focused
on individual agency requirements,
yet industry is focusing
on project cash flow and residual value.
These lead to, I think, somewhat divergent value propositions
and impact pricing.
So please, let's join our panel
as its members discuss challenges
with leasing decisions.
To lead our panel, please welcome Joseph Brennan,
managing director at Jones Lang LaSalle.
[ Applause ]
>> Good afternoon.
We're all very honored to be here and look forward
to a productive day, and we're going to focus
on a tool that's really critical to us all, the GSA lease.
I'm Joe Brennan.
I'm the managing director
for the Government Investor Services practice at JLL,
but before I introduce our distinguished panel,
what I want to do is set the table for our discussions today
with a few broad questions and ideas.
First, the essence of a GSA lease.
Sure, in all of our worlds it's a bargain for important services
for a fixed period of time
between two very sophisticated parties,
but GSA has very precise needs,
the private sector has very precise needs,
and what we're going to do is we're going
to explore them both just a bit in this conversation today.
Number two, is there value in achieving a deep understanding
of the needs of both of the parties to the lease?
Do we really need to understand each other?
The answer is yes, and we're going to explore why,
we're going to offer some specific examples
from the good folks on the panel, and we're going
to take it a little bit deeper.
As a note, please appreciate that the ownership side
of this equation works very hard to understand the needs
of your system; your system, your approach,
your paying points, their goal is
to deliver exactly what you need out of a lease transaction
and what your customers require.
In the spirit of sort of this reverse industry day,
we believe it's critical you appreciate what the owners
require to best deliver the services you need.
Three, where do private sector or owners find or lose value
in lease negotiations, prospectus development,
program of requirements, extensions and change orders?
And more importantly, why should you care?
Why does it matter to you
and why does it matter to the U.S. taxpayer?
Because it has direct impact on the rent and you need
to understand -- together we need to understand sort
of how we can sort of create deals
that are better value for the taxpayer.
And then four, how can we both drive for the highest value
for our clients' needs?
You've got clients, we've got clients.
How can we both do a better job?
We're going to endeavor
to answer all those questions this afternoon,
and we believe events like this are a great start, and thank you
for the ombudsman for putting this together.
So let's begin first with you, the GSA.
The government's half of the leasing equation, the buyer.
A few high-level points relating to the most powerful buyer
of real estate in the entire world.
GSA houses roughly 500,000 employees in leased space only.
The GSA has more than 8,000 leases around the country.
Your total annual leasing expense is roughly $5.5 billion,
and an annual operating budget, salaries, benefits,
roughly $10.5 billion.
Your customers need offices, lab space, operations facilities,
warehouses in order to run their operations.
The government literally couldn't function
without what you provide.
What you do is a very big deal.
Let's briefly look at the other half.
The other half of the equation are the investors
and the service providers of the private sector.
This side of the equation can literally provide the government
anything, any service, any facility, any operation
with one basic need; it needs to be financeable.
If it's financeable, it works, if it doesn't,
it's very, very complicated.
U.S.-based federal real estate leases represent $50 billion
in value, a meaningful target for investors.
Private sector owners simply need
to comfortably predict the returns that they can make
for their real estate investments.
The classic example, a developer delivers a building
to the government for a 15-year lease.
Seems pretty simple.
It's not. Cancellation options, soft term, holdover,
vague rents, commencement dates, unclear parking income,
establishing a tax base, they're all elements
that make GSA leases less predictable, less value
and more expensive for the taxpayers.
The GSA contract memorializes the bargain
between the government and the lessor,
and that contract can be priced by the capital markets.
The more predictable, the more valuable.
Also a direct impact on price.
For the investor the value
of the lease contract is directly related to certainty;
the certainty in receiving the rent they bargained
for over the period of time that they bargained for it.
A decrease in certainty is directly related to a decrease
in value and results in an increase in cost
to the taxpayer, more rent.
So a big part of what we're going
to discuss today is the impact of certainty
for the private sector and for the value it can create
for the U.S. taxpayer.
We've assembled a very unique panel today.
All are federal real estate experts,
all have worked inside the federal government,
and all currently work for private sector owners who seek
to create value by procuring federal leases.
Truly a reverse industry day.
I'm going to allow them to briefly introduce themselves
and then we'll dive into some questions we've developed
with our GSA partners, and once we've warmed up the room,
we'll open it up to some questions for folks in the room
and folks around the country.
Leroy, please go first.
Thanks.
>> Are we on?
I presume we're on, but it doesn't sound like it.
>> You're not on, but you have to just be strong.
>> Okay. Got to be strong.
>> Here, you want to swap mics?
>> Testing, testing.
>> We need some help from the AV squad.
>> Yeah, this one says this is on.
Maybe it will activate.
I'll just begin.
Good morning everyone.
Leroy Battle, principal with Urban Development Ventures.
I started my career in commercial leasing with GSA
when the advanced acquisition program,
before it was automated, and subsequently left that post
and went to work for, at the time which is one
of the region's largest developers,
they call themselves Kettler now,
it was KSI when I worked there.
We basically did large land acquisition projects
and my role was one of land acquisition and to help get us
through the zoning entitlement process.
And subsequent to that post I joined a team that managed
about four million square feet of lease space
for the National Institutes of Health, and a couple
of gentlemen from that particular team left.
We went to Cassidy and Pinkard
and started the government service practice
with Cassidy and Pinkard.
I later started Urban Development Ventures
and became a small business partner
with the CBRE leasing team,
servicing the national broker contracts.
It's a pleasure to be before you this morning.
>> I'm Joe Delogu.
Thirty years ago next month I accepted my job at the GSA
and was a career management intern here for a number
of years and eventually a realty specialist
and a contracting official, and left though to follow my dreams
in the private sector.
Initially I was at a small consulting firm,
but met the firm in that capacity.
It became the Spot Right.
Spent the next decade and a half of my life,
which was a firm called Spaulding & Slye,
where I opened the government services division at Spaulding.
We grew that division up to 50 people over time.
We had the first generation of NBC contracts,
where we helped GSA out in 33 states doing tenant rep work.
While there I started three investment funds with CalSTRS,
and obviously my other partners, and we bought
and operated GSA-occupied product around the country.
We developed ground up, we did project management
and construction work, and property managed
about five million feet of space
that was occupied by the government.
I left Spaulding & Slye after we sold it to JLL.
I stayed at JLL for a few years, but realized my destiny was not
to work for a company that was bigger than the town I grew
up in, so I started a small business, FD Stonewater,
where I'm one of a handful of partners.
We have just under 30 people, and one of our centers
of expertise is GSA brokerage and ground-up development,
which we continue to do today.
>> Thank you.
>> Well, good afternoon, and thank you for including me
in today's presentation.
Like my fellow panelists, Joe and Leroy,
I too started my career in the federal government.
Unlike my two fellow panelists, I stuck around.
I made a full career of the federal government,
first with Navy and finished up in national capital region,
working with some of you side-by-side
who are now sitting in the audience.
Once I retired from the federal government I went to work
for a local regional developer, the JBG Companies,
and then later left and started my own company,
where JBG Companies was my largest client.
Turn it back to you?
>> Excellent.
Thank you.
All right.
So these are the folks you're going to be able to sort
of ask all these great questions of in a few minutes,
but I'm going to throw a few soft ones up first
and we'll see how we do.
Joe Delogu's going to start, I think, with the first question.
Joe, talk a little bit about, please, the impacts of holdovers
and short-term leases,
on how the private sector thinks about those issues.
>> Sure.
>> Please.
>> Sure. Happy to do that.
Fundamentally, and then Joe alluded to this
in his opening remarks, one of the most key things
that the two parties need out of each other, lessor on one side
and government on the other, is predictable behavior,
and predictable behavior runs
through the entire initial development of the space.
The government is certainly expecting predictable behavior
in performance of the landlord during the initial stand
up of the facility.
Each party is expecting predictable behavior during
the term.
The landlord is expecting to be paid rent
and is expecting operating and tax passthroughs
and the economics of the agreement to be lived up to.
Likewise, the government is expecting that space
to be heated, cooled, operated, cleaned and taken care
of every single day during that lease term.
But the critical thing is at the end of that term,
the landlord really needs predictable end-of-term behavior
out of the government and the reason
that the landlord needs that,
I'm going to isolate three key -- there are many others,
and maybe some of my colleagues can kick some more
in after this, but that landlord has promised a lender
when the end of the term is, and in all likelihood,
loan documents have been set up and agreed to and there's a term
on those documents, and that end-of-term moment is probably
linked to the landlord's debt agreements,
and tremendous penalties come from not living
up to your debt agreements, just like they do
for all of us personally.
Not living up to your commercial loan agreement is
really problematic.
In a similar vein, that landlord has investors
and all those investors are expecting to know when the end
of the term is succinctly.
And it gets to also what happens next, which is what happens next
at the end of the term needs to be one of two things;
either the lease needs to be renewed for a proper duration
of time so that the landlord has the capability
of restructuring his debt and equity arrangements in carrying
that lease agreement forward into its next cycle,
or that landlord needs to be allowed
to market the space to somebody else.
What can't happen is neither of those things.
That will send the landlord into, you know, fits of anxiety
because now we've lost predictable behavior
and we have neither a space that can be marketed,
nor financial arrangements with outside debt providers
and equity providers that can be lived up to,
and that's extremely problematic.
And it comes in two forms; holdovers, which Joe alluded to,
you know, where literally nothing is occurring,
we've all just sort of agreed, you know, presumably not to deal
with the end-of-term moment for a period of time,
or a short-term extension comes up.
And I think in our business there's a lot of --
I believe, the presumption
that when a short-term extension is put in place that, well,
we're all good, right.
We're really not all good
because the short-term extension is probably not fulfilling the
lender and equity providers' expectation
of what economically is supposed to happen at the end of term.
It is, at best, a stopgap and it is, at worse,
a moment of -- sorry -- oh, okay.
It's, at best, a stopgap, and at worst, it's a moment of breach
of the agreement between the landlord
and the landlord's outside debt and equity providers.
>> The theme that I want to try to stay with as we go
through all of this is why does this matter to both sides.
>> You articulated beautifully why that matters
to the owner's side, but just, I want to keep coming back to this
with everybody, you know, why this matters
because this bargain that we're putting together is important.
So, I mean, if you want to talk a little bit more about that.
>> Well, I was going to offer, too.
I've talked for a fair bit --
>> Sure.
>> do you guys want to throw anything
in from your personal experiences
on the end-of-term moment, as it relates to either holdovers
or short-term extensions?
>> You were fairly comprehensive at delivering --
>> The only part you left out --
>> that delicate end-of-term moment.
>> The only part you left out is I usually go
in a room and start crying.
>> All right.
Well, we'll keep going.
Joe, other sort of half of your question was talk
about lease term.
>> Yeah.
>> Ten-year deal versus -- you know, talk a little bit more
about why a longer term deal matters to everyone.
>> So as many in the room know, we've been involved
in realty contracting for a long time.
This notion of soft term,
which is what I think Joe is getting at,
has been a very not well understood concept.
So let's just start with the high-level lease term.
So if you are us, what you want to be able to bring
to the lenders and outside equity providers is the longest,
firm lease term possible.
That's really it.
Short of bringing the longest possible lease term possible is
you have to have predictable terms, at least.
So predictability would look like a contract
for ten years firm and, say, two five-year options.
Okay. So we're going to have a predictable decade of income,
followed by a fixed moment
of whether there will be a binary yes or no on an option,
followed by a second binary moment
where there will be a yes or no on an option.
Okay. That's pretty predictable and it contains little moments
of uncertainty where you're going to pass through the gate
of the yes or the no on the option.
There's been this lease term that's been used though inside
GSA, which we all call on our side the soft term,
which is this incidence where the government wants to contract
for ten years, but say only five of it will be firm
and the following five are going to be what we call soft,
and I don't know quite how it's referred to inside,
maybe the same term of art,
but it basically is a rolling opportunity
to exit at any point in time.
Now, this goes back to predictable behavior.
Now the government has asked for and wants an unpredictable,
and on our side, impossible to quantify opportunity to leave,
in whole or in part, really at any moment in time
between the sixty-first month of the lease and the hundred
and twentieth month of the lease.
So okay. So what goes on in our world
when that request comes in.
We can't get lenders to underwrite that.
They'll underwrite that five-year term
and they may include a residual value portion, but it's going
to be tremendously discounted by the fact
that the soft term is essentially an unknown.
You have no way to know or promise
or literally bank upon the government's continued tenancy.
So with that reality -- I would say equity providers are the
same way, by the way.
So everyone in the capital stack is going to look at that
as essentially a five-year commitment, and they're going
to force the payback window into a five-year payback window.
So I'm sure everyone in the room understands that.
When you take a capital expenditure like the standing
up of a new lease and you force it
into a five-year payback window,
you force the rent out of ballooning up.
So in effect, GSA has to pay that rent for that ballooned
up privilege of having the ability to exit
at any point during the latter five years.
Conversely, go back to the very first thing I said,
what we on our side want is the longest, firm,
firm lease term possible.
So when we capitalize that -- so let's take a real long one,
right, GSA's maximum leasing authority, 20 years.
So when we go to capitalize that, we're now going
to get lenders and equity providers to all underwrite
on a 20-year payback window and it's the opposite
of the five-year payback window, right.
We take that rent, we stretch it out over 20 years,
we take maximum beneficial use of that payback window,
that rent now can slide down.
Now, the win/win here is truly a win/win.
In that situation the landlord has predictable term life
without the uncertainty of a rolling exit, right,
that could occur at any point in time, and it has a long window.
So predictability and long window is the most efficient
rent execution we can give you.
And, of course, all of us want to give you that.
No one on our side wants to give you an inefficient
rental proposal.
We all want to give you the most efficient one possible,
and you should want that, too.
And so on your all's side of the table,
really pressing your customers
on lease term is incredibly important
to everyone in this arrangement.
>> That's great, Joe.
Thank you.
And you're going to feel those kind of consistent themes
as we go through all of these questions.
Leroy, if you could, talk a little bit
about some examples when, gosh, we get changes in lease terms
or requirements during critical moments of these events and what
that does to this side's of the table ability
to kind of deliver, please.
>> Certainly.
Joe's done a good job of, I think, sharing with us sort
of the rational relationship between risk and profile
and rental rate and lease term and rental rate,
so that critical nexus between those.
And just to draw from a recent -- not so recent deal,
but it's not very old, actually.
I was involved in a transaction for a Homeland Security group
that had an expiring lease.
They were in about a little over 85,000 square feet of flex space
in Alexandria, Virginia, and the space was very unique
in that it was comprised of about a third office space,
about 20,000 square feet of warehouse space, and a little
over another 20,000 square feet of special space,
consisting of a gun range, classrooms
and workout facilities.
So a very unique space.
And the only other comparable facility
for this particular group was to travel down to Quantico
to the FBI training facility.
And so recognizing that most of the folks were sort
of in the metro area, a trip down to Quantico would be sort
of a day's exercise, which they could accomplish
in Alexandria in half a day.
So more efficiency.
And so as we entered into conversations
about that particular deal, it originally came
out as a ten-year lease term with five years firm
and the other five years soft, in Joe's parlance.
And so for the landlord, you know, that created somewhat
of an issue with them, given the uniqueness of this facility.
The offered rate from the government's perspective was not
very advantageous.
We had them to really to sort of open the kimono
and show the different structure of the rate,
office versus warehouse, so we could sort of try
to pound the number down to something a bit more reasonable.
And, of course, from the landlord's perspective,
they were saying, well, maybe
if you can get me a little bit more term.
And during the course
of the negotiations the requirements changed just a bit.
You know, the interest
of expanding the gun range became one of paramount interest
to the end users so that they can accommodate
and have a more robust training facility.
And so the conversation ultimately was a matter
of if we're going to invest all this additional dollars
in this facility, and given the importance of the facility,
does it make sense to just renew the deal for just five years.
And as a result of that, I think the government made the decision
to execute a ten-year lease term, which, of course,
drove down the rental rate.
And in addition, there was sort of one other sticking point,
the uniqueness of the facility.
The government had a requirement to have the landlord
to clean the gun range.
And I think most of the landlords, particularly
in the region that do GSA deals, and even perhaps national,
they are much used to the special unique requirements.
You know, everyone sort of waits with bated breath
to see what the specials are, as sort of an exercise
of trying to knock those down.
But in this particular case, cleaning the range became one
of additional risk factor that the landlord would
like to have had removed.
And so ultimately, the end user, who apparently, obviously,
being Homeland Security, they're probably a little bit more
knowledgeable about gun ranges than Jones Lang LaSalle,
and so ultimately they took that responsibility inhouse
and removed it from the special requirements be,
and ultimately the deal, probably from the initial offer
to the deal at the end of the day, probably went
down probably almost seven to eight bucks per square foot.
So it turned out to be very much worthwhile and certainly
in the best interest, I think, of the taxpayer
and the government, at the end of the day.
>> Leroy, I'd like to add another case study where --
in a recent procurement where I was proposing
to build a facility for government use.
The way we structured our offer created a lot
of angst for ourselves.
The change that occurred during the procurement was defining
what part of the security requirement was
in the builder's shell, versus in the tenant improvement side.
For those of you that may not be familiar
with how a rent number comes together,
there are certain requirements that the developer,
the landlord, a lessor, is responsible for providing
in building a base building, up to a certain condition,
described as one wood shell [phonetic].
We are then responsible
for offering a tenant improvement allowance to pay
for interior buildout.
And several years ago, maybe a decade ago,
we batted a security allowance for the agency
to then customize the building to add in whatever level
of security they required.
In this particular instance there were decisions made during
the procurement to take some of the security items
that otherwise would have been paid for out of the allowance
and put it into the building shell,
making it the landlord's responsibility.
During the procurement there were many questions asked,
many clarifications provided, but at the end
of the day there was doubt in our minds
as to did we cover the security requirement they wanted
in the shell adequately enough, did we --
well, the allowance we provided was specified,
but it wasn't clear to us totally
that we had covered everything in our number.
As a consequence, we put a contingency or increased number
in there, which translated into a higher rent.
And so the motto to this story is keep it simple.
When you start doing things that are a little more complicated,
it starts creating risk that we see and we price
that risk into the deal.
And so to the degree that things are simple,
we can give you the best pricing for it.
>> Yeah. I was going to add these are great points.
In general, we as landlords are -- you probably shouldn't ask us
to do things that don't really have a normal market context.
Like cleaning a gun range is a very unique skill.
There's an environmental component to it.
We can figure it out, but at the same time,
there's probably going to be a contingency associated
with that.
So as you put an RLP together, reflect upon am I asking
for things that are kind of market normal,
and if it's not market normal, is it a good idea
to ask the landlord to do a market not normal thing.
And it's really possible that there's no one else will
out there in the market that can provide it,
and maybe the answer to that's yes.
Maybe, you know, you should ask the landlord.
But maybe the answer to that's no,
and that's a possibility, too.
But just in these generalisms, we're definitely --
we can't tell the future any better than you can.
You probably only want to ask us to do market normal things,
and we're way better at certainty than we are
at uncertainty, like John's example on scope of work.
>> Absolutely.
One of the things that the ombudsman had suggested
that we try to walk away from as we go
through these are ah-ha moments.
We hate short-term deals.
We hate soft term.
So should you.
And this costs you more, you're paying for --
you're getting flexibility
that, frankly, and very often that you don't need,
and you're paying for it, the taxpayers are paying for it.
And back to the gun range, which is a really interesting example.
We're great at paying for it.
We can figure out how to pay for that function and go
out and hire that person.
We just figure it in the deal.
But again, on short-term leases, on other things,
you know, we can't do that.
But if we know ahead of time, if we know that's a function
that you need, those are the kinds of things we can do.
Again, back to that, we can do almost anything
if it's financeable.
John, a couple things we had talked about earlier.
Schedules, delay impacts and some other things that kind
of go into, you know, how we sort of --
what impacts our leases and the certainty that goes into them.
And then I think you may also want to talk a little bit
about sort of the wonderful things and the things
that aren't so wonderful
at a full-service lease structure, please.
>> Delay. You guys hate delay.
You have delay clauses in your leases.
Factor that by a times ten.
That's how much we hate delay.
Every decision -- if I back up a minute.
When the private sector makes a decision to propose
on a lease procurement, we're underwriting a building
and the costs engendered in bringing that building forward,
and we're spending a lot of time analyzing what it will cost us,
how we're going to finance it,
how much equity are we putting out, and what are the returns.
We do what we refer to as a pro forma analysis that looks
at the revenues minus expenses,
calculating that operating income and looking
at the debt capacity on a particular project.
All that's done over a time period.
Anytime that time period changes,
and usually it's not shorter, it's longer, it wreaks havoc
on our estimates and changes the profitability of the deal.
And so when we enter into setting rate structures,
it's all based on assumptions we make on financing
and there's a lot of risk on interest rate.
Delay only causes problems when we start paying debt service
and how much capitalized interest is then put
into the project.
And so delays for us really erodes the profitability
of buildings and it makes it difficult for some companies
to actually go after GSA leases if they fear there will be delay
in the process getting to the end result.
And we don't look at delay as --
at least I've never looked at delay as government delay
versus private sector delay.
Delay is delay.
Delay changes the nature of the deal,
and one of the things I've always worked hard on,
on the deals I've touched, is to make sure they're delivered
on schedule so everybody's happy.
I've talked about the pro forma and how we look at revenue
and expenses, so let me dwell a little bit on the expense side.
Typical rents are made up of three kinds of expenses,
as we look at them; taxes, utility and operating expenses.
Those are very important aspects of the expense profile
of any project because what's left over is defined
as net operating income, and that's what we
in the financial industry uses to size debt on a project.
So how we judge and estimate future expenses are very
important in our process.
So let me talk about utilities because that's one
of my buttons, if you will.
Utilities in a full-service lease are paid
for under the lease rental rate.
However, when we're setting up that rental rate,
we really don't know what the actual consumption
of the user will be.
All we can go by is historical data or average usage
in an environment or geographic location.
And so there is some risk as to consumption, and that's a risk
that we cover by putting a buffer in.
In other words, we charge you a little more every month
because we don't know exactly what you're going to use.
And so on the deals that I've done in this region,
the last three large deals,
and they were all single tenant deals,
my first amendment is to go net utilities.
It allows the government to then pay direct.
A little side note to that is you have a bulk utility rate
that is far less than anything I would pay,
so it is a true win/win because I'd rather not cover
that contingency and you get to pay much less.
Taxes is another one.
The tax clauses change through the years.
Every improvement makes it more complex
and a little more difficult to administer,
and setting the right tax base
in your rent is a true guessing game for us.
So again, setting a tax base during a procurement,
we're going to guess a little on the high side
because we don't want a tax base in the lease
that is underestimating what we are responsible
to pay during the term of the lease.
So these are two aspects of the rental rate that we include
in a full-service rent that actually, if you could figure
out a more streamlined way of setting the tax base or paying
for taxes directly and paying utilities directly,
you would get a savings.
>> Before we go to the color aspect of this, two things.
One, for our listeners and viewers around the country,
we're going to go to you all for some questions
when this is done, so please send them in.
I've got an iPad here ready to respond.
I think the website has been passed out to everybody,
so please shoot us a question and as soon as we're finished
with this, we'll be ready to talk about it.
And I --
>> And, Joe, you should invite the audience,
for those who haven't fallen asleep,
to ask questions as well.
>> Absolutely as well.
And we'll also saying we're glad Commissioner Mathews is here,
so we're holding our crowd together, too, which is good.
And the other thing is we're hearing from the broadcast.
Apparently my voice is okay, but if you guys could speak
up a little bit more as we go
through this, that would be great.
All right.
So, John, on schedule impact and full-service lease,
do you guys have any other thoughts on the advances
and pitfalls associated with both of those?
>> Yeah, I'll layer on top of --
>> Please do.
>> John's response.
The schedule management aspect of, for instance,
with our build-to-suit lease program, everyone who works
at our company is schooled that the schedule is the schedule,
and first here is delay is delay and we just need to fix it
because it really doesn't benefit anybody to quibble
over how we got to a delay situation.
That's kind of lose/lose.
And we understand that at some, you know,
extenuating situation we have to go there, but the first tier
that our team is trying to do is to work out let's just fix it
and let's try to save some time elsewhere in the schedule
so we can get back consistent with the delivery promise
that we've made to everybody because I can't say enough,
John's comment about how corrosive delay is
to a deal's economics cannot be understated.
It's Armageddon at some level,
where extensive delays can ruin deals,
and not just ruin the setup of deals, they ruin the entire term
of the deal because the delay and the economic impact
of it has obliterated all the upside to the owner by virtue
of that loss and delay.
>> Go deeper in that, interest rates and, you know,
bid prices move and --
>> Sure.
>> Please.
>> If you can't deliver the building when promised
to the lender and the equity providers, at best,
you have a long workout on your hands, an equity workout.
At worst, you're in default and you are now
in a serious predicament with lenders.
Now, no lender really wants to get the building back,
but that workout can be extremely costly
and the workout, you know, in effect,
can suck all the upside out of the deal.
>> Well, Joe, simply put, when you structure a deal,
debt service starts on a date certain.
>> Absolutely.
>> Not on when the rental rate goes into effect,
not on lease commencement.
So if a deal lags by any period of time,
you have to start performing
on the debt service before you have any revenue.
>> Got to pay the band, and the building's not delivered
and that's a problem and the rent's not in
and it's rent start date.
It's all of those kinds of things that go in.
And so back to this sort of symbiotic relationship.
We can deliver anything, but we got to be able to --
>> So, Joe, that might be --
I mean, if I were to leave people with kind of like --
>> Sure.
>> a case, what could we all do with that,
maybe I would suggest my first response, the way I opened up,
would be this is what you can do,
which is the first-tier management of delays is
to not get into finger pointing initially.
Let's get into fixing it because fixing it's actually good
for everybody
and then we don't have to get to finger pointing.
So fixing it may mean accelerating a design review.
It may mean accelerating things
that your client is doing on the process.
But the first tier addressing
of a delay should be let's just all fix it.
And it's not really good for anyone if folks the
in the process stand back and kind of wait
for the other guy to fix it.
>> Right.
>> Or the other guy to just sort of soak it up.
It's everybody's problem initially before we get to kind
of whose problem it is and it's better just to fix it.
>> Yep.
>> I just wanted to -- John, you mentioned something that sort
of struck a chord with me.
You mentioned that we're aware that there had been several --
not a ton, but several tweaks, changes to the GSA tax language
over the years, and there was maybe 15 years ago language
added where if the landlord went and got a tax appeal,
that the GSA could sort of participate or be knowledgeable,
sort of, in that process.
And you mentioned, you know,
establishing the tax base becomes somewhat
of a guessing game, but a bit downstream,
as the landlord's maybe going forward with an appeal,
have there been opportunities, in your experience,
where there may be something, lease workouts done
that might make adjustments to the base,
or is it just hasn't been impactful at all?
>> Well, first of all, am I allowed to take questions
from the other panelists?
>> Absolutely.
>> We appeal many of our leases almost on a regular basis.
However, in my mind is a distinction
between an appeal amount and the base.
The appeals don't impact the base.
All they do is return money to the government
because if we get a downward adjustment,
that basically goes back to the government, minus the costs
of pursuing the appeal.
>> That's why I sort of proposed that question, just to --
so there's no net benefit
for the landlord based upon the new operating language
in those documents?
>> No. The documents, in my mind, are pretty clear
that the responsibility rests on the landlord
to basically appeal unfair taxes on behalf of the government.
When we send in a bill, we're the first scrubber.
If we think the tax bill's too high,
we go after the jurisdiction and go right -- the correct tax.
>> He asked me to carry this maybe
in a slightly different direction,
but hopefully it's helping.
The tax clauses are a really good example of one
of many numerous ways in which GSA puts forth kind
of one size fits all criteria, and sometimes that's okay
because sometimes one size actually does come pretty close
to fitting all, but the tax clause is definitely not one
of them, and a good example of maybe taking two sides.
In instance number one you're going to go
in a multi-tenanted office building
and your competing lease requirement made you get
in an urban area, and maybe it is healthy just
to allow the taxes to be wrapped right in there and to be part
of the full-service evaluation
so that you can be measuring the differences in taxation levels
between the different buildings you might be looking at
and embed it right into the financial analysis.
I can see how that works.
On the other side though might be your build-to-suit program,
where you're going to do a build-to-suit in the market
for the X, Y, Z agency, and everyone building is proposing
to bid you a brand-new build-to-suit.
Well, then you're just making all those guys guess.
And back to my remark where, you know,
we don't really tell the future any better than you guys do,
but if you make us tell the future, we're all going
to put a contingency on it
because we don't want to be wrong.
It actually might be more financially efficient just
to go net of electricity, like John says in that case,
because we can't tell the future
on the power bill any better than you can either.
And it might be more efficient to just pay the actual expense
when those bills come in by going net,
or to agree upon a base like with taxes
in the build-to-suit program,
because in that program there's really no demonstrable benefit
to you by going full serve.
Odds are we're all looking at the same mill rate
from the locality, we're all going
to calculate the thing the same way.
So the benefit is elusive.
So two examples.
One, there's a benefit.
The other, clearly no benefit.
>> Caution on the net utilities are really net electric.
That's certainly not one size fits all.
When you're in a multi-tenanted building,
it's very difficult to go net electric.
If you're in a single user building, it is the way to go.
And for me the tripping wire is can I get a meter direct
from the utility company and put that meter
in the government's name so they can take advantage
of their bulk buy program and get a reduced rate.
If you can do that, I would be advocating for you to do
that because it saves you money.
>> Well, this is at the risk of being sort of, you know,
the least boring -- I mean, the least exciting folks
at the lunch hour to go deep on taxes, for God's sake,
but that's a challenge.
I guess to summarize just a bit, the tax piece,
the operating piece is a huge risk for developers.
The government's intent is to pay the taxes.
The government's intent is
to pay the passthroughs on the electric.
It's costing you more.
It's costing the government more because we're trying
to cover it on the back end.
>> Hey, Joe, context for everyone in the room.
The way that you all handle operating expenses,
I'm sure everyone knows this, but I'm just going to say it,
is really nonmarket, right, because the market
out there is calculating what's called an expense stop,
and I won't take the time to sort
of explain how an expense stop works,
but when you do it the way that it's done in the GSA lease,
if someone's wrong -- pardon me, if one of us landlords are wrong
on our calculation of what we project the base to be,
we're wrong for the entire lease term.
>> We've guessed wrong.
>> Yeah, right.
Whereas, in an expense stop situation,
if a landlord is wrong and you're [inaudible], well,
the expense stop will just fix itself the following year, yeah,
because you're going to go over to paying based on actuals.
And so in instances where you don't want us really forecasting
the future, kind of better not to ask us to.
>> All right.
We've gotten our first question from around the country,
from Ms. Hernandez, and this is a good one, actually.
Think about build-to-suits.
Do we think about build-to-suits differently than we sort
of a normal lease, a normal multi-tenant lease,
and what how do we think differently,
how do we approach a build-to-suit differently
than we would sort of a regular lease?
>> I'll go ahead and start that.
>> Go ahead.
Sure.
>> We have a big business
of brokering deals inside multi-tenant office buildings,
as well as a build-to-suit program, so I've got a lot
of thinking on these two things.
The build-to-suit program,
the biggest differences were custom crafting every aspect
of that execution to meet the government's needs,
every aspect.
So it's completely financially engineered to be responsive
to your RLP, it's completely built in a, you know,
totally customized fashion.
There's a direct one-to-one relationship between any change
and your ask and our response.
In an existing office building your needs are being diluted
over this bigger base of everything else that is going
on in that building, and that might affect kind
of how operating expenses -- well, it affects, really,
how everything is looked at.
The building isn't being capitalized,
customized with your need.
It was capitalized already when you showed up.
There was already a loan in place, an owner in place,
investors in place, and you're just kind of tucking in there.
Yeah, so those are probably the biggest differences.
>> If I could add on.
I think also the leasing
in a multi-tenant situation is more market based
because it's really what is the competition for that space.
>> That's a great point.
>> It's not based on the cost of the space.
It's based on what will Leroy pay versus Joe.
>> Yeah, alternatives.
>> Yep. Whereas, the build-to-suits,
which is what I've focused on,
is we spend every dollar of the rent.
I mean, the rent is engineered based on the demands of the user
and we design a building for the user.
>> So we could also take Leroy's firing range.
It comes up again and again, right, but asking for a kind
of dramatically nonmarket things inside
of a multi-tenanted office building,
you've got to appreciate, is a fairly provocative thing.
So you aren't going to bring the firing range into the building
on Fifth Avenue, probably.
And there are lots of examples like that that kind of crop
up where we get these sort of kind
of dramatic nonmarket asks inside
of regular office buildings.
And, you know, some are really dramatic and some are kind
of closer to the edge, you know, bringing prisoners
into the market office building, you know,
probably not a good idea.
But, you know, there's certainly plenty of landlords
who understand that the government's money is green
and that it's a really great deal and they're willing
to do those deals if it kind of works out inside the building.
>> And also, again, back to the kind of symbiotic piece,
you know, why should you all care that that matters
to this side of the table.
It impacts the deal.
It could impact our insurance, for example.
I mean, whether you're bringing prisoners in
or you've got a firing range or --
you know, I was involved in one where it was sort
of a very critical facility and they were, you know,
worried if somebody from the cleaning staff damaged the
computer and it had impact on sort of, you know, satellites
and airplanes in the sky.
I mean, what does that have to do with anything?
Well, those were discussions,
and so there was a big insurance discussion there.
Firing range.
For God's sake, the last place --
>> Joe, there's an assignment risk in there, too.
>> Sure.
>> So after the initial deal's set up, you know,
folks need to appreciate that we're concerned about the fact
that you have assignment subletting rights inside your
standard lease, and so if we believe we've contracted
for the Department of Justice and they're going to be coming
with a bunch of, you know, clean-cut lawyers
and everything's going to look real executive, and then all
of a sudden that group leaves and the next group is going
to be, you know, a function that has a high visitor component
or introduces weapons into the building or has, you know,
just a completely different use, if we come to you
and we're wanting to sort of talk
about the assignment subletting clause,
it's because we're afraid of that stuff,
because that stuff actually happens frequently.
>> Exactly right.
And it's also the -- another risk is involving other
government agencies.
We have a firing range, all of a sudden here comes the EPA
and we've got to deal with our building.
How do we think about that and what's happening with lead
and arsenic, asbestos, all those kinds of things that happen.
I mean, those are all elements that we're pricing
into some of these deals.
Anyway, just wearing the other guy's sort of shoes
for a moment, those are the things that we think
about as we get into these.
Oh, this is an interesting one.
Okay. So this is from -- and I think Ms. Hernandez again.
How significant are rental escalations?
What does that do to our value creation and how does the sort
of GSA's sort of practice of having flat rents and how does
that sort of work as the private sector likes escalating rents?
Go ahead guys.
>> Flat rents are nonmarket.
I mean, we can just start there.
In the vast lion's share of the markets out there
in the United States, an escalating rent is market only.
So right at the gateway you're asking the landlord to agree
to something that's just a little different
than what they've usually done.
Usually not a problem.
It's just a different financial engineering exercise to go ahead
and take the rent and flatten it out.
>> So along those lines, why --
>> Let me just ask one second.
I think there's a microphone somewhere.
We would love to make sure that you make the broadcast
because it's important.
>> If not, Joe, why don't you just repeat the question?
>> Thank you very much.
>> So along those lines --
>> There we go.
That's all right.
Just talk.
>> So along those lines, so often we get offered
in with free rent at the beginning.
So whether there's a rent set or say ten years,
what difference does it make if you just --
you know, if you're careful with how you flatten it out,
it all is the same money at the end?
So why is it that we're seeing so many free rents
at the beginning and then -- as opposed to flat when we know
that that might be what we like?
>> But the free rent is even a whole different animal.
And that's a great question.
I think we can talk a lot about both, so.
>> I was going to go back and remark
that in the escalating rent situation,
if it's a build-to-suit, it probably doesn't matter
because you're going to custom engineer the capitalization
of that building and it can be flat
if that's what you want it to be.
If you're going into a multi-tenant building,
odds are that owner has pro forma'd those rents to be going
up and he's not living up to the pro forma.
Those pro formas are promulgated to his lenders
and outside investors and everybody else.
And so you're definitely presenting a landlord with a bit
of a square peg round hole situation in that case.
He'll probably figure it out, but it's going
to be a little uncomfortable.
>> Also, in escalating rents, which are commercial market,
it provides you ways to fix mistakes
because there's more income over time.
So if your operating expenses are going up faster
than you had predicted and you're in a full-service lease,
you have some additional cash flow to deal with that.
But you asked a specific question just a moment ago,
and I'm not sure Joe answered it.
>> So it was more along the lines of the --
>> I was going to come back to that.
>> the free rent.
>> Yeah.
>> The free rent.
>> I mean, I'm just curious, since --
for instance, somewhere back in the discussion you had pointed
out that if there's a delay,
and let's say occasionally there are delays, and then you're hit
with a free rent period as well, then --
>> There we go.
>> I mean, I can't figure out why you would do
that because then you're not coming --
>> So why do we do free rent?
>> Yeah, as opposed to just making it a flat rent
over the ten-year period.
>> Well, I can answer for myself.
>> Great question.
>> We score better in your evaluation of net present value.
>> But can't you adjust it such that --
you could adjust it such that that would be in place.
>> Well, maintaining a coupon, too, is --
>> You do a discounting over net present value,
and you don't discount year one.
And so providing you free rent gets maximum return,
in your evaluation model.
>> I understand that.
But, I mean, you could adjust the rents to make up for that.
So I was just curious for you, who say you'd like to get rents
because you're afraid that with the delay then you're not
getting income in, then that's another, you know, two years
or a year, or however many months you have worth.
I mean, I'm just curious.
It doesn't really matter because we do the NPV either way.
>> There's one more point that I think [inaudible].
>> I have a slightly different answer,
which is that we're living at the moment in a bit of a market
where free rent is good, and I'm going to explain why.
At the moment, and I'm going to use the build-to-suit
as an example, it is cost efficient for us
to capitalize the temporary loss of income associated
with free rent in exchange for a higher coupon
after that free rent period is burned off,
because at the moment cap rates will --
cap rates are the rates upon sale, just in case -- okay.
At the moment cap rates are favorable and we will come
out better than a flat rent execution.
So with the capital markets being what they are today,
our firm would generally do a free rent deal or a deal
where there's a large cash concession up front
because we want that higher coupon
for the rent paying period, and it is likely driven by an intent
to sell because the sale price would be calculated
on that coupon upon exit.
>> And panelists, just remember to speak up if you can, please.
We're getting [inaudible].
>> Is this the last question?
>> No, no.
They would like for you all to be stronger --
>> Louder.
>> Keep your voices louder, yes.
Taller.
>> I want to follow up on the free rent question just
very quickly.
John already mentioned that I think the GSA scoring
or analysis model, and it's something that the market sort
of understands, and given --
I think if we go back maybe to even the mid-2000s,
there's been very much precedent set for if you do a year free
or three years free, I've seen those deals,
that sort of puts you in the renters' circle.
And then in this climate where, you know,
sometimes we've termed the large deals sort of like elephants,
you know, the 500,000 square foot deals, you know,
the elephants, they don't run very often,
but when you see one running,
you should best position yourself to be successful.
And so in those scenarios, I think most
of the marketplace is very much keen to offering
as much free rent as possible, given the competitive set,
those competitor's buildings
that they may be competing against.
And also, you know, there was a window --
I think 2007 going forward would probably be okay,
but if we turn the clock back just a few years prior to that,
where there may have been a bit more of a cessation
in deals being transactions, many landlords were sort
of throwing out their pro forma
because if you got a new building, it's sitting vacant,
you tell the broker this is the number I want, and the guy next
to you, who just recently delivered,
he's kind of gotten deals that you may have been
in waiting for, and so there may be instances where you just have
to sort of throw the pro forma out, and as Joe stated,
you get your return on the back end.
You're basically selling yourself for sale
to some institutional player that's more interested in sort
of a long-term return on investment.
>> All right.
I'm going to --
>> Joe, I think you have one --
>> One more.
Oh, excuse me.
>> I just wanted to piggyback a little bit
on the lady's comment.
We were actually discussing an actual offer this morning
where we had a significant amount of free rent,
let's call it two years, for the sake of discussion,
and when you do the present value, you're essentially --
we have another issue -- we have two issues with it,
from the government side.
The actual net present value is, let's say,
20 percent below the program rate that was allowable
in that jurisdiction, which is a problem --
you know, that part isn't a problem,
but when the rent actually kicks in two years later,
it's 25 percent higher than our program rate,
which does create a large headache for us.
It also creates a large headache for the agencies because we pass
through the rent in a sublease kind of arrangement, you know,
operating agreement we call them,
and so the agency itself would, let's say, would --
we would pass through that rent for two --
or no rent for two years.
That affects their budgeting capability and, you know,
it's a problem for a government tenant to say I've got no rent
for two years and all of a sudden now I've got, you know,
a huge spike in rent in year three.
So I think there needs to be -- I was wondering this morning
if there needs to be something in our RLP that states if it's
that kind of free rent, it needs to be somehow leveled
because I don't think it really works for our ultimate client.
>> So there are --
>> Or the lessor for that --
I mean, I understand how you would capitalize it
and it creates more value ultimately
that you can capitalize, but it's sort of a disconnect,
I think, in this kind of market situation where there is --
you know, it's a tenant market, I think,
in a lot of jurisdictions.
>> Sure. And I'm going to -- just a little piece of this,
and I'm sure we'll all dive into this a lot.
This is, I think, one of those instances
where it's worth the conversation,
and I appreciate sort of your mission is to get those folks
in space, meet the precise things that they need
when they pay their rent.
The other side of the table is trying to deliver the facility
that you've asked for within the guidelines,
and one of the challenges is changing the rules in the middle
of the game really is a devastating problem
for this side of the table.
Now, can we do it; sure, but the thing I guess
that I would consider there is the ability on sort
of the financial markets to look at the deal in one way
and the other is simple policy.
I mean, you know, but maybe policy's never simple,
so we understand that, too.
So go ahead.
>> So a common fact, and this is --
if I'm allowed to ask a question of the audience to that point.
Is there any prohibition between your agreement with the tenant,
your occupancy agreement, versus your agreement with the landlord
in your lease, such that you could charge the tenant the
levelized version, so from a budgeting standpoint they pay
you the lower fee, if you will, the lower
rent, but then the federal building fund washes it through
and pays the landlord the rent that was in the lease?
You could do it such that you're budget neutral,
not on a year-to-year, but over the term of the lease
and use the federal building fund to create a steady budget
for the agency, which is, I think, your point.
>> I mean, I think that's really a great idea.
It's way above my pay grade, but it's something
that I think we ought to consider
because I think ultimately we're trying to deliver space
for that client agency and they don't have
that budgeting flexibility with --
you know, because it's annual appropriations
and we've seen what we went through just recently.
>> And that is, as Joe pointed out,
a clash between an agency budgeting issue
and a procurement practice.
>> I was going to add to John's point
that there are private corporations
who do exactly what he is advocating, where --
you know, back in the day from my Spaulding Slye/JLL days,
who is a large corporate services business
and I was very aware because a friend of mine ran one
of the accounts, that they would take concessions
and effectively levelize them out, and the users,
it's a large military contractor,
so often under one roof there would be numerous kind
of customers, if you will,
that they would pay the levelized number
so that the real estate branch of the organization,
they were getting that concession
and effectively washing it
through the economics of the deal.
The thing you wouldn't want to miss out on is
if a landlord has this tool that they can offer you
as a concession, it's a great tool, you should take it.
You know, and it's frequently in multi-tenant office buildings,
you know, that landlord's got a net pro forma setup costs.
They're part of the pro forma budget
and oftentimes setup costs not used can be given as cash
and free rent that's been factored
into an owner's pro forma is there for you to take.
That's what it's intended for in their pro forma.
And so you wouldn't want to turn your back on a great, you know,
benefit just because of, you know,
hopefully a solvable budget, you know, matter.
>> Anybody else?
All right.
We've got one more over the internet we can sort of look to.
This is from John, and it sounds like we're --
there's some contact being made.
From a lending and leasing and financing perspective,
what's the best, most viable, ideal lease term?
Is that ten?
>> What's the best what?
>> What's the best firm term,
and the question is in two parts.
What is it, and is there a difference
between a private sector user and a federal user
between that lease term?
Would you look at the different --
>> That's a really great question.
Do you want to lead or --
>> It doesn't matter.
>> Yeah, okay.
It's all case dependent, but here's what's going on for us.
So if you come at us and you've got a --
let's say you build-to-suit just because it's easy,
and you're custom crafting the capitalization.
If you come and you're asking for a ten-year term,
there's a community of ten-year lenders and ten-year kind
of equity sources out there, and it's kind of one answer.
Anything less than ten
on a build-to-suit would be borderline not financeable,
so why don't we not deal with that just for a second.
But there's kind of community A for shorter firm term deals,
and then there's actually community B for long-term,
and this would be kind of anchored
by the syndicated bond financing crowd,
of which there are numerous providers
who will effectively take your --
let's use a 20-year just as a for example.
You have 240 promised rent payments at a specific period
of time, and these syndicated bond financiers will sell every
single one of those rent payment strips to investors,
sometimes in bulk, sometimes in segments, but you can go
to the syndicated bond finance crowd for the longer term leases
and it's a different capitalization.
Now, is one better than another?
That, a little bit, deals with what are the government's needs.
If they truly only have a ten-year need,
then I guess they should really only go
and contract for ten years.
If they really actually do have a 15- or a 20-year need, well,
they should go with the longest term possible because some
of our lending community's tool kit is way more efficient
for those long terms and that efficiency can translate
into lower rent, which goes right back to the government.
>> So my answer is a little different, though analogous.
You have 20-year statutory authority, so I'm not going
to recommend going more than 20 years because you can't.
If you have need for 15, you start at 15.
So the question really becomes between 15
and 20 is there an ideal term,
and the answer truly is longer is better.
However, under the current scoring rules,
you have to ensure you're an operating lease.
Most of the math that I've done makes it very difficult,
in my eyes, to get an operating lease determination once you get
past 18 years.
Nothing magic about that number, it could be 17, it could be 19,
you could even do a 20.
For the most part, once you start getting 17, 18 years,
you're nearing the 90 percent of net present value calculation
that trips you into a capital lease.
So for the most part, doing 15-year terms,
they're financeable and they're operating leases.
Now, my answer's only good for today [laughter],
as scoring rules will change
in the next couple years, is my prediction.
You'll get a different answer because the future, I believe,
holds a change in scoring,
such that there will be no more operating leases.
Everything will be considered a capital lease.
It's being done on the private side.
The government financial board is looking to do the same
for the government side, and then all of this will go
out the window, you'll put everything on your books,
and quite frankly, at that point,
you'll be doing 30-year deals.
>> John's comment that all capital markets answers are good
for the duration of this presentation only --
that's really real.
I mean, the capital markets change and, therefore,
the answer sometimes changes.
>> Absolutely.
Leroy, you good with all this?
>> Yep.
>> Okay.
>> It works.
>> Great. And I'm also going to keep bringing this back
to sort of our own context.
What we are talking about on a lot of these is market.
A market gets made at ten-year deals, a market gets made
in the credit tenant lease market, a market gets made --
and when it fits in that sort of box that's our market,
it makes it sort of more simple and easy to do.
We can do it, but, you know, these deals are hard enough.
I would almost put it back to you all and the same thing,
if we come to you and say, my, gosh, there's a fire
and life safety issue, your response is, oh,
that's a problem for us.
That's your market.
You know, sometimes we can revert to local code,
sometimes we can figure out ways to fix it.
But again, these things are hard enough.
So when we're living in our market box and you are living
in your market box, these are the kinds of things that we need
to try to really work together on.
We have about three minutes.
Gentlemen, do you all have any other sort
of thoughts before I wrap this up?
No.
>> I would just say that I think over the years, you know,
I've certainly seen, from my vantage point, GSA as a leader
in this space, not just here, but certainly nationally.
And provided that, you know, there is continued sort
of open conversation, the small deal that I mentioned
as an example, I think we had some very open-minded people,
the user sort of had access to dollars,
they could make decisions in terms
of the lease term very quickly, and the CO was quite flexible
and a good listener and a good executioner and so, you know,
and those are, I think, the good sort of building blocks
to have good transactions.
>> Excellent.
>> Actually, there is one thing I'd like to say.
Gee, I surprised everybody.
>> Having been on both sides
of the transaction, my hat's off to you.
What you do is so much harder
than what I do now on the private side.
Your job, in dealing with all of the rules and dealing
with your client base and trying to be good stewards
for the federal government,
is one of the most difficult jobs in the government.
So congratulations on a job well done, and my hat's off to you.
>> In conclusion, I just want to thank you all for allowing us
to come to a reverse industry day.
Kind of a big deal.
I think this is great for us to be able to share
with you all how we look at the world, and we really work hard
to try to understand how you all look at the world,
and this is very, very valuable.
Thank you to the office of the ombudsman
for putting this whole thing together and allowing us
to come sit with you on this beautiful facility.
And thanks everybody from around the country
who is listening out there.
The real sort of key is, and I think we've tried to be precise,
is if we can predict it, we can price it,
and if we can price it, we can pass it along to you.
If we can't predict it and we're guessing, we're bad,
just like you guys are bad -- you know, when guys are bad.
So that's our half of the equation and we hope
to make it fit into your half of the equation as we press
on with these critical deals
for the federal government and the taxpayer.
Thank you very much.
[ Applause ]
>> So folks, I have about 30 minutes after the hour.
Let's take a ten-minute break
and join up, well, in ten minutes.
We'll see you back here soon.
