Space and Rent Reduction in Federally Owned Facilities
In an earlier blog, we discussed reporting metrics that convey overall space reduction progress. One such metric is a comparison of space and saving rent.
Generally speaking, a smaller space footprint should yield less rent. For example, if a family downsized their home, moving from a 4,000 square foot single-family home into a 1,500 square foot condo, it is logical to expect the monthly mortgage payments to decrease. This principle is an appealing part of space reduction.
However, it’s not quite that simple. If GSA is your landlord, you may actually find that, despite a decrease in space, your rent costs stay the same or even go up instead of saving rent. This blog examines three reasons for why the rent may not decrease along with a reduction in square footage.
Less Space Does Not Equal Saving Rent
Moving to a More Expensive Building. No two buildings are the same. This is especially true when comparing rental rates. GSA rental rates are set by appraisal; much like your home is appraised by analyzing recent sales of similar properties. While this means that landlords of Class A commercial real estate in the same vicinity should charge a similar rental rate, it is not uncommon to see a higher rent per square foot cost in federally owned buildings when compared to nearby leased facilities, which can keep an agency from saving rent.
Another hidden cost of moving into a federal building is in security. All federal tenants pay a basic security fee to the Department of Homeland Security (DHS) - currently $0.74 per rentable square foot. However, DHS collects a building-specific fee in many federally owned facilities that can range from $0.02 to more than $5.00 per rentable square foot.
Consider this example: your agency moves from a 20,000 square foot leased facility paying $12 per square foot and the basic security fee of $0.74, into a smaller footprint of 14,000 square feet. Except this new location is in a federal building where the rental rate is $14 per square foot and the security fee is $4.74 (a basic fee of $0.74 plus a $4 building-specific fee). That 6,000 square foot decrease in space that appeared to be saving rent, just cost an additional $7,500 in rent!
Appraisals and Other Adjustments. Much like an adjustable-rate mortgage, which fluctuates every few years due to market conditions, GSA re-appraises its properties every five years. Therefore, even if your office stays the same size, the rent can increase after an appraisal when your occupancy agreement comes due.
The same logic holds true for operating costs. Many organizations don’t realize that utility costs are not based on the actual amount of utilities used by an agency. Instead, GSA sets the utility costs by appraisal. Based on the appraisal, GSA charges the same amount for utilities on a square foot basis to all tenants in a building. Thus, while turning off the lights as you leave the office may be good for the environment, it’s not immediately lowering your agency’s energy bill. Appraisals and operating cost rate changes can increase rent significantly even if an agency hasn’t increased its space footprint.
Exclusions. When developing a space reduction strategy, many agencies excluded space changes due to projects that were already in the pipeline. Even though these projects are excluded from being counted in the space footprint, they still cost money and can increase the overall rent. Also, don’t forget that GSA charges rent on a rentable per square foot basis. If GSA changes the building’s R/U factor or performs a space re-measurement, you would have likely excluded that space change from your space reduction strategy because your organization did not actually increase or decrease its footprint. However, all of those seemingly small GSA adjustments can affect the bottom line. While your agency might not have actually increased its footprint, your rental payments could experience an increase.
Tracking and reporting the decrease in rent from your space reduction program is not as simple as it seems. These issues that we have described are easily managed with knowledge of the rental process and careful tracking of both space and rent.