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An Interview With: David Baxa

Washington DC

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VISTA is a professional services firm, based in Herndon, Va., that works with federal agencies to identify and eliminate unnecessary real property costs. Baxa has been working on federal real property issues for 20 years. He is a Vietnam veteran and graduate of the Univ. of Virginia.

Editor’s note: Many of Washington’s commercial real estate firms devote much focus to needs of the federal government. We thought we’d experiment with an issue on that subject. If we find enough interest, we may create a separate interview series focusing on federal real property.
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Bisnow: People say the federal government doesn’t really know what property it owns. Can that be true?  That is certainly true.

How can that be?  It hasn’t been a priority. It’s often just been seen as a “bill to pay” in agencies’ annual budgets and not a priority to do something about. But the GAO turned things around in February 2003. They put federal real property assets on its high risk list, and prepared a report with a litany of ways that poor asset management is creating problems for the federal government. In many instances, inventory is just not being correlated with the missions federal agencies are supposed to fulfill. After GAO identified the problem, there were attempts to get legislation through Congress to change the way the feds handle their real property assets. When it became clear that legislation wouldn’t happen anytime soon, the President created an executive order in February of 2004, added real property asset management to his management agenda at OMB, and put OMB in charge of making agencies accountable. Everyone in the field now knows Executive Order 13327. It’s making big waves.

What does it do?  It basically forces executive departments to pay attention to what they’re spending on real property and why. Suddenly there’s a very high level of OMB emphasis. In fact, there’s a "federal real property council" that’s establishing process, procedures, and performance measures for property management. The goal of all this is to identify and get rid of unnecessary and wasteful spending.

How much money are you talking about that’s being wasted?
No one really knows, but some agencies are conjecturing they have up to 25% surplus space, and the current asset value of federal real property is conjectured to be at something like $350 billion. So it could be a quarter of that potentially. And to give you another statistic, the federal government owns or leases around 650 million acres and 3.3 billion square feet of building floor area. These are big numbers.

What does it mean to be "surplus" property?  We’re talking about empty buildings that aren’t being used, for example. Maybe there’s a function that it was used for that changed so the building has been abandoned or it’s just way too big, yet it’s still maintained and operated. For example, as income tax filers have moved dramatically toward electronic filing, the IRS has much less need for paper storage space. So if you’re sitting in several million square feet of buildings that were constructed for the purpose of managing paper, you don’t need them anymore. Or take a look at the military after the cold war. As we redeploy troops from Europe, there will be surplus space. Yet with the exception of the military, that is now in its fifth round of base realignment and closure, there has never been an emphasis in government on right-sizing inventory and identifying, tracking, and managing the cash flows associated with buildings.

So what specifically does the Executive Order do other than admonish agencies to get their act together?  It makes executive departments accountable to several different performance measures such as utilization and "mission criticality." It allows OMB to impose scrutiny and impose budget penalties against agencies that don’t appropriately managed their buildings. There’s actually several things that have come together. You'll also hear people talk about OMB's Circular A-123, and the General Accounting Service Board Statement 34, and of course Sarbanes Oxley. They are all creating an environment demanding that agencies closely scrutinize the inventory, condition, utilization, value, and cost to maintain of assets, including real property. Furthermore, there’s greater emphasis on what’s called "transparency" in the decision process. If something’s deemed surplus, agencies must create a timeline and cost estimate for disposal of the property. Proceeds from disposal will largely be returned to the general funds of the Treasury.

Is this having an impact, or is it just some more paperwork?
No, no. It’s like daddy has found out what the agencies are doing and has shown up with a shotgun. Clay Johnson, the deputy director at OMB, is heading this effort. They’re publishing a scorecard with a lot of red on it every quarter. They definitely have everyone’s attention. On the other hand, we recently worked together with the Federal Real Property Association to survey their members and found that 44 percent of respondents didn’t know their organization’s PMA scorecard ranking on 13327. A majority felt that OMB guidance is insufficient that and aggressive timelines for compliance might be unrealistic. Nonetheless, 42% believe they’ll achieve compliance in 2006. You can get a PDF of the survey findings on our website.

This is all a Presidential initiative?
Actually, this summer a bill was introduced, HR 3134, that should give 13327 more teeth. It also gives more incentive for compliance, because under it a percentage of proceeds from disposal of unneeded real property would go back to the agencies rather than just the general Treasury.

How does this affect Washington area commercial real estate community?
For one thing, 13327 recommends that agencies develop relationships with commercial real estate professionals, to develop accurate timelines and budgets for disposal of whatever excess real property there may be. And the work that will be accomplished because of this order will cause turbulence in the portfolio of the properties that the private sector leases to the feds. And that will very likely cause the federal government to need less property. In some areas it may not be leasing as much, that that represents opportunities to redirect the facilities to commercial use. The flip side is that in buildings the government owns, they could be in such disrepair that the cost to renovate them to meet current standards or missions is way more than what it would cost to lease new ones. So they could decide to dispose of what they own and go lease new facilities or build new ones.

We could see public private partnerships?  Absolutely, since there is so much less budget money today for federal construction. Agencies will go into partnership with private developers and have them build buildings for them in exchange for a cash flow stream represented by a lease commitment over a period of time. And here’s why. If the government builds a hundred million dollar building, it has to pay that bill at one time and capitalize that project. If it chooses to lease the building, it only has to secure funds for one year of the cost at a time. Sometimes that’s the only way the government can afford to budget it, even though that will cost more in the long run.

Related Topics: Executive Order, Clay Johnson