I fully realize that the title of this blog post is the written word equivalent to chamomile and a comfortable blanket on a rainy day. I’m a real estate guy, not a marketing guru so catchy headlines aren’t my thing.
Despite the apparent dullness of this topic (I hope I’m not overselling how amazing this is), there truly is an important topic at its core. Is the humble GSA Form 1217 (GSA’s Lessor’s Annual Cost Statement) actually unintentionally misleading for offerors who don’t eat, sleep, and breathe GSA leasing (AKA, the vast majority of owners in this niche sector of commercial real estate)?
What is the role of the GSA Form 1217?
Before I dive into the meat of the discussion, it is important to quickly describe the role the GSA Form 1217 plays in the GSA leasing process. The Form 1217 is separated into two sections:
- Section 1: Estimated Annual Cost Of Services And Utilities Furnished By Lessor As Part Of Rental Consideration.
- Section 2: Estimated Annual Cost of Ownership Exclusive of Capital Charges
In practice, the information entered into Section 1 of the GSA Form 1217 ultimately becomes the Operating Cost Base (Operating Rent) for the lease.
The information entered into Section 2 is meant to be contemplated in the offered Shell Rent.
It is also worth noting that the Form 1217 presupposes that an offeror has read and understands the requirements of the proposed lease prior to completing this form. This is not an unreasonable assumption in my opinion.
What is the Issue with the GSA Form 1217?
Ok, so far I am assuming that there is nothing controversial in the preceding statements. So why do I believe that there is an issue with the GSA Form 1217 as currently presented? The issue I see is this, the document provides very specific line items where the owner is to contemplate their costs to provide lease required services. As an example of the documents specificity, there is a line item reminding the offeror to account for the “Replacement of Bulbs, Tubes, Starters”. That’s pretty specific.
Despite this level of specificity, however, there is not a single line item that states “Maintenance of Tenant Improvements”. The Form 1217 practically goes out of its way to cite some of the more obvious maintenance costs that would be associated with a market based full service lease, but is silent when it comes to capturing the costs related to requirements that are completely unique to a GSA full service lease.
Lease paragraph 5.01 in the current GSA Global Lease Template, and previous lease templates for that matter, contains a very simple statement in the opening sentence. “The TIs shall be designed, constructed, and maintained in accordance with the standards set forth in this Lease.” This is the only place in the lease, outside of the FSL document which we will discuss later, where you will find language stating that the lessor may be responsible for maintaining the tenant improvements. And to further muddy the waters, I will point out that this sentence does not say “The Lessor shall maintain and replace the TIs” though that is sometimes the interpretation.
It cannot be stressed enough how unusual this requirement to maintain a tenant’s TIs is. You will not find this in a “market” lease. And yes, it is very clearly stated in Section 5.01 (except where interpreted differently by some Lease Contracting Officers), so why is it not clear in Section 1 of the GSA Form 1217? It is an omitted cost line item in the very document that is intended to assist offerors in preparing their Operating Rent offer. There appears to be a disconnect here.
What does the FSL Document say about Maintenance?
Another fairly obvious example for anyone familiar with this space are the maintenance, repair, and replacement requirements in the Facility Security Level (FSL) document. These requirements can be a bit trickier in practice. First, they are found in an exhibit to the lease which is less likely to receive the same amount of attention as the primary lease form. Also, the specific section with the operating rent implications contains terms that are not immediately familiar to the majority of market participants.
Why Is The Maintaining TI Line Item in the GSA 1217 Form Important?
Returning to the primary premise of this post, if the GSA lease contains a requirement that would absolutely drive a premium in operating rent when compared to any and all definitions of “market”, why is this line item not specified on the GSA Form 1217?
While I could cite other examples, the two requirements cited here seem to represent the largest departures from a “market” lease transaction and would therefore be the best candidates for inclusion on the GSA Form 1217.
So why is this a “soapbox” issue for me? That’s an easy one. Brian and I receive an unacceptably large amount of phone calls every year from owners who never contemplated the fact that these requirements would exist in a lease and they are sometimes desperate to try and obtain relief from GSA… which typically falls on deaf ears because “it was in the lease”.
Another reason this issue is important to me is that we will occasionally see good landlords lose a GSA lease procurement because another offeror has the most powerful competitive advantage anyone can have. The Ignorance Advantage. This is the offeror who wins the deal via highly competitive rates, only to realize later that they didn’t really understand what they were signing up for. As Brian likes to put it, “Congratulations, you won the deal… but you are going to lose your shirt.”
Modifying the GSA Form 1217 to account for and draw attention to some of the lease requirements that represent the largest deviations from a typical “market” lease will not resolve the reality of The Ignorance Advantage, but it is certainly a step in the right direction.
How Do We Fix Form 1217
Unfortunately, we cannot fix it, but if you are reading this from your desk at GSA, I encourage you to consider these suggestions with an open mind. If you are a broker or owner who deals with this on a daily basis, I would welcome your feedback. And if you agree, I would welcome your support in sharing this message. And finally, if you are a first-time offeror on a GSA lease procurement, please do everything you can to fully understand what you are offering on. Might I humbly suggest that hiring a broker that specializes in leases with the Federal Government would be a good decision? Seems reasonable. Just don’t be the party that wins the deal, and loses their shirt…
If you have questions or would like us to review your lease, please don’t hesitate to contact us today.
Chad worked in federal real estate at the GSA and the U.S. Navy for over 15 years. As Principal of Arco Real Estate Solutions, he now assists building owners and brokers obtain and maintain leases with GSA and other Federal Agencies. When he is not using his expertise in this niche industry to assist his clients, he serves as an instructor for the very classes GSA requires for its leasing employees.