Sale of federal buildings could be difficult

By Jonathan O'Connell
Monday, February 21, 2011

President Obama could not have been more clear, when outlining his budget proposal in Baltimore last week.

"Now, some of the savings will come through less waste and more efficiency," he said. "To take just one example, by getting rid of 14,000 office buildings, lots and government-owned properties we no longer need, we can save taxpayers billions of dollars."

Implementing that vision, however, has not been easy. More than two years after the government tallied 14,000 vacant buildings under President George W. Bush and eight months after Obama issued a presidential memo asking that $3 billion in savings be found from shedding excess real estate, the public still knows little about the value, location, condition or size of those properties -- much less how they might be purchased or leased. Doubts are being raised by the Government Accountability Office and private sector analysts about whether the president can meet his savings goal by his stated deadline, the end of 2012.

The federal government uses such cumbersome means to sell property, according to the GAO, that "The lengthy review process may inhibit GSA's ability to achieve cost savings under the Presidential Memorandum by 2012."

The watchdog cited a slew of properties in Alameda, Calif., and Kansas City that the government had declared surplus in 2002 but had still not disposed of by 2009. Members of Congress have raised similar concerns locally over the Old Post Office Pavilion.

Commercial real estate and government leasing experts said little is known about the 14,000 vacant properties but that they aren't likely to be valuable enough to hit the $3 billion mark. "I would venture to say that the overwhelming majority of them are poorly located, surplus, in the hands of the military, old warehouses, World Ward II facilities, that type of thing," said Darian LeBlanc, senior managing director of the government services group for the brokerage firm Cassidy Turley. Any sales the government does make, he said, "will not anywhere near yield to the Treasury what the government expects it to."

Locally, the conversation about properties the government has sold often begins and ends with one building, a 47-year-old office tower on Wisconsin Avenue in Bethesda. The administration has repeatedly pointed to its sale as the successful disposition of an unneeded building, one that brought taxpayers millions of dollars when it was sold to Akridge in August.

But a closer look at 7550 Wisconsin Ave. shows just how far the government has to go before it can earn billions of dollars in additional savings. Formerly home to the National Institutes of Health, the building was vacant for the better part of a decade while the General Services Administration wound through the legislatively mandated requirements for property disposal. Before a property can be sold it must be offered first to other federal agencies, then to homeless providers and other public entities, including state and local governments. Only after all of those entities weigh the pros and cons of taking on a property -- and then decline -- can it finally be offered for sale.

Robert A. Peck, who oversees many of these properties as commissioner of the Public Building Service under the GSA, has offered the Bethesda sale as an example of the agency's success but he has his own concerns about the sales process.

At a subcommittee hearing earlier this month, at which both Democrats and Republicans seethed at the government's management of the Old Post Office Pavilion -- which is partially vacant and results in more than $6 million in losses annually -- Peck cited the many stakeholders required to review and approve a disposition. The GAO had similar concerns, writing in its February report that it had recommended to the Office of Management and Budget in 2007 that it work with agencies to "reduce the effect of stakeholder interests in real property decisions." OMB officials agreed with the recommendation, according to the GAO, but have yet to implement it.

"The process is fairly proscribed," said Joe Brennan, managing director at the brokerage firm Jones Lang LaSalle. Brennan wondered if the federal officials were simply trying to rid themselves of extra buildings or actually wanted to raise billions of dollars. "Are you trying to just get rid of excess properties, just kind of take out the trash, or are you really trying to raise real money?" he said.

If it's the latter, Brennan said, the estimated 45,000 underutilized properties would need to include some updated buildings in attractive locations. "The market will pay low prices for low-value opportunities," he said.

Even when the government completes the disposal process, it has not always utilized the market well. Once the GSA had the necessary approvals to sell 7550 Wisconsin, for instance, it began an online auction for the property and asked for an opening bid of $14 million. The first bid came in at only $100 and the final selling price was only $12.5 million (the GSA cited an outdated assessment). If the government wanted to make more money, Brennan said, it would have moved one of its agencies into the building before the sale -- assuring the buyer it would have a reliable rent-paying tenant and steady revenue stream.

"If you're trading an empty office building in downtown Bethesda and you're trying to get that off your books as excess because that's what the law prescribes, then that's one thing," he said. "If you're trying to raise money, why not put a federal lease in that building and then sell it?"

There is money on the sidelines in commercial real estate that may well be eager to purchase even completely empty buildings. Akridge not only bought 7550 Wisconsin from the GSA, but also the development rights over the tracks behind Union Station. But so long as the value, location and condition of the 14,000 vacant properties that President Obama says the government is getting rid of are unknown, potential buyers are not sure what to look for.

"From where we sit," said Akridge President Matt Klein, "we're not aware of very much if any Washington metro-based real estate that GSA owns or controls that's vacant."

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