GSA’s buildings exchange projects need more risk planning, revised reports, funding requirements

The FBI headquarters and Labor Department headquarters are just two exchange projects recently derailed. Auditors at the General Services Administration say the...

The General Services Administration recently cancelled its request for exchange proposals related to the Department of Labor headquarters, and a new report out from GSA’s Office of Inspector General points to a longer history of problems with GSA’s Public Buildings Service exchange projects.

In their review of PBS’s planning and funding for exchange projects, auditors recommended the service do a better job incorporating risk into their planning and decision-making processes.

“PBS’s planning and reporting for exchange projects has not been comprehensive,” the audit report stated. “We found that, while certain PBS exchange guidance mentions potential risks, PBS did not adequately factor risk into its financial analyses, causing it to overvalue its properties.”

GSA agreed with the recommendations, saying it would establish a corrective action plan to address the issues.

Quantifying risk

GSA, considered the landlord of the federal government, owns or leases more than 354 million square feet of office space within 9,600 buildings in 2,200 communities across the country.

PBS reported its 2016 owned inventory was an average of 49-years-old, and needed $1.2 billion in maintenance and repairs, according to auditors.

“In recent years, PBS has faced funding constraints as congressional appropriations for new construction and repairs and alterations have varied,” the report stated.

Congressional appropriations (Source: GSA Office of Inspector General)

Because of the reduced appropriations, GSA has looked for other ways of meeting real property needs, auditors said, including real property exchanges. GSA is required to submit quarterly reports to the Congress detailing the exchanges. Auditors said those reports needed increased transparency.

PBS set initial guidance for real property exchanges in 1997, and following a 2013 audit on Section 412 Authorities [which allows GSA to accept “in-kind” or non-cash payments], GSA released additional guidance.

PBS has completed eight exchanges to date, auditors said, with the highest exchange worth $10.8 million.

“Five of these completed exchanges were under $3 million,” auditors said. “All of these completed exchanges were negotiated with a single party, generally a state or local public agency. None used the Section 412 authority. In recent years PBS has begun pursuing competitive exchanges, in which PBS issues a solicitation to the private sector to obtain competitive proposals for the property.”

The audit report is based on eight ongoing exchange projects as of November 2015.

Auditors pointed out in their report that the 1997 Exchange guidance and Section 412 guidance does not require PBS to “quantify risk” nor to factor in “discounting property values to account for the time the developer will have to wait to realize a return on its investment in exchanges.”

Those lower price tags can prompt exchange cancellations, despite PBS spending money in the early stages of the project.

“We conclude that a decision to pursue an exchange project should be based on a comprehensive financial analysis or business case that includes an evaluation of how risk might affect the values that developers are willing to propose for GSA’s properties,” auditors said. “This analysis should be conducted before GSA expends significant resources on the project.”

The OIG warned that the Public Buildings Service needs to do a better job on its exchange project funding reports.

“We found that the business case or other planning documents for six of the eight exchanges we reviewed did not include planning phase or project cost estimates, and none estimated the direct and indirect costs of GSA and contractor personnel assigned to the project,” the report stated. “Developing project cost estimates would also help PBS ensure that it funds the costs properly. Because exchange projects are not authorized through the budget process, they do not typically receive line item funding for planning and oversight costs. GSA must therefore identify funding sources for such costs.

The OIG pointed out that PBS also uses Building Operations funds for construction management services, which according to guidance, might not fall under their proper use.

“In addition to not identifying costs in the planning process, PBS did not report these costs to congressional appropriations committees as requested,” the report stated.

GSA did respond to two of the auditor’s observations, including about the Building Operations account.

While the guidance doesn’t have specific instructions on the Building Operations funds use, based on GSA counsel, the account “is being used properly in the context represented within the draft report,” GSA said in its response.

“Construction management services are an incidental and necessary part of the due diligence associated with an exchange transaction, and to not obtain such services using funds from the Building Operations account, in the absence of a line-item appropriation for the transaction, would frustrate the purpose of GSA’s statutory authority to convey real property by exchange,” GSA said.

Plans on hold

The Labor Department project is not the only major exchange cancelled by — or caused problems for — GSA, particularly in Washington, D.C.

GSA in early March announced a postponement related to the FBI headquarters consolidation project. GSA said it needed congressional funding before it could announce where it’s chosen to build the new $1 billion headquarters.

GSA also cancelled the Federal Triangle exchange in February 2016, after spending three years and $336,000 for an environmental assessment.

“Developers’ proposals responding to the Federal Triangle exchange Requests for Proposals did not meet the value PBS assigned to the Regional Office building and Cotton Annex building,” the IG report stated. “As a result, PBS cancelled the exchange project and is now pursuing a disposal of the Cotton Annex building and its site. While the sale under the disposal process is not final, PBS accepted a bid on the Cotton Annex in February 2017.”

GSA addressed the environmental assessment in its report response, saying the assessment was a requirement for the Annex’s disposal.

“PBS acknowledges … that the cost of the environmental assessment would have been less in the case of an outright sale of only the Cotton Annex, since a portion of the $336,000 was used to evaluate the Regional Office building,” GSA said.

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