By Sunny Sajnani, Senior Director
The General Services Administration (GSA) is probably the largest tenant in the United States, providing space for more than 400 federal government agencies, bureaus, and commissions with more than 1 million employees and contractors. As of April 2014, the GSA’s leased inventory totaled 198 million square feet held through more than 8,600 GSA leases. Its annual rent payment obligations represented more than $5.6 billion.
Metropolitan Capital Advisors (“MCA”) has recently completed several debt placements for GSA-accepted properties. Assignments have ranged from refinancing construction loans into permanent mortgages to acquisition Guidance Lines of Credit (GLOC). These properties are occupied by a wide array of GSA tenants within various sectors of both state and federal government. Financing GSA-leased buildings is not an easy task because the government agencies play by a different set of rules.
Leases with government entities are very different from typical commercial leases. Government lease contracts must adhere to a complex set of policies, standards, and regulations set by federal statutes, executive orders, and laws. The landlord must make various certifications that are not typically required for commercial leases, and meeting the lengthy list of mandates required during the leasing process can impact both cost and the overall transaction time.
For example, the GSA controls the leased space and can bring tenants in and out of the space during the lease term, which allows the GSA to manage leased space. The GSA must comply with the Federal Acquisition Regulations, which means that rental payments for government leases are made in arrears instead of in advance like typical commercial lease payments. Also, security deposits are not applicable to federal leases.
Another major obstacle to overcome by both landlords and lenders is that many GSA leases have annual appropriations clauses. Basically, if the government was to cut funding for any particular section of the federal or state budgets, the GSA has the right to cancel its lease on an annual basis if there are no longer funds available to service the lease! So, why would any landlord accept this? Because GSA tenants rarely move! GSA data indicates that for every year between 2001 and 2013, an average of 95% of GSA leases remained in place or were renewed. That being said, landlords (and lenders) still need to be comfortable that the purpose of the tenant and the sector of government it serves will be necessary for the foreseeable future.
Based on these nuances (and others) related to GSA leases, purchasing and financing GSA buildings also has a different playbook versus financing regular commercial single-tenant leases. Cap rates can vary greatly depending on the lease term remaining, GSA use, and location. Although perceived as risky, experienced real estate professionals who understand the GSA space can underwrite and take advantage of market opportunities for new GSA needs and rolling leases.
MCA Senior Directors have deep experience financing all types of leases, including GSA leases. Depending on the lease terms and property characteristics, the cast of lenders that play in the GSA space can vary greatly. Terms can vary as well with a wide array of options in leverage, recourse, rate structures, maturities, required reserves, etc. For advice on how to refinance or acquire your next GSA property, contact a MCA Senior Director or visit our website at www.metcapital.com.