Government, Too, Has Trouble Selling Buildings

For more than six years Akridge, a developer in Washington, had its eye on a 10-story office building in Bethesda, Md., which had been vacant since the National Institutes of Health moved out in 2002.

But the federal government did not put the building on the market until November 2009. By then, of course, the real estate market had slumped. Akridge and its partner, Rockwood Capital, a real estate investment fund in White Plains, finally bought the building last October, paying $12.5 million, less than the $14 million asking price.

In a report last October Republicans in Congress pounced on the long delay in selling the Bethesda building — and the discounted price — as an example of how the federal government has been mismanaging its real estate holdings.

The government owns or manages more than 900,000 buildings or other structures across the country — office buildings, courthouses, warehouses and other property types — making it the nation’s largest landlord. But like the former N.I.H. building, about 14,000 are no longer needed and are costly to maintain. An additional 55,000 are regarded as underutilized.

The report was also harshly critical of government spending to operate surplus and underused buildings, including $6.5 million for the Old Post Office Building at 12th Street and Pennsylvania Avenue in Washington. The administration’s own figures estimate the annual operating expenses for those buildings at more than $1.8 billion.

Last June President Obama ordered executive agencies to accelerate efforts to dispose of unneeded buildings, and set a goal of saving $3 billion by the end of 2012. Yet various obstacles make it difficult for the government to unload buildings it no longer wants.

For one thing they must first be offered to other federal, state and local agencies. Officials also have to ascertain if the building has a community use — say, for a homeless shelter.

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At times an agency may want to sell an obsolete building but cannot afford the moving costs, Jeffrey D. Zients, a deputy director of the Office of Management and Budget, said in a telephone interview. Then, too, political considerations may come into play. “Politicians love to come hold a ribbon-cutting for a new building,” Mr. Zients said. “Getting rid of a building is less rewarding.”

The Obama administration has determined that if the barriers to selling were removed, he said, the savings could be much higher — $15 billion over five years. The sum includes the dollars not spent on maintenance and energy costs as well as sale proceeds.

To speed up the disposal process the administration wants to create an independent commission modeled after the Base Realignment and Closure Commission, or BRAC, a process begun in 1988 to review Defense Department recommendations for closing military bases. The proposed commission, the Civilian Property Realignment Board, would be able to cut through much of the existing red tape, establish new procedures and come up with recommendations for selling property in bulk, Mr. Zients said.

The commission would also recommend ways the government could use its space more efficiently by, for example, consolidating space or getting agencies to move into one building.

In addition, the legislation is expected to provide incentives for federal agencies by allowing them to share in the proceeds from any sales. To reduce political influence, the commission’s recommendations would be submitted to Congress as a package and not subject to amendment — similar to the way the base closure recommendations were handled. Daniel Werfel, the controller for the Office of Management and Budget, said the commission would include people with experience in commercial real estate, government operations and community development.

The commission concept has bipartisan support, said Jeff Denham, Republican of California and the chairman of the House subcommittee on public buildings. “The goal in the short term is to sell as many buildings as possible to generate some immediate cash flow to help with the debt crisis,” said Mr. Denham, who backed a similar proposal when he was a state legislator. The longer-term goal is to improve the way the federal government handles its real estate needs, he said.

Some real estate experts wondered if a board was necessary. “Whenever government is faced with a problem, the first thing they do is appoint a commission,” said Nicholas R. Smith, an executive vice president at First Potomac Realty Trust, a publicly traded company that leases more than 700,000 square feet to the government. Mr. Smith said the process for selling federal property should simply be made less complex.

Jeffrey D. DeBoer, the chief executive of the Real Estate Roundtable, a Washington trade group that represents industry leaders, described the proposed board as a “positive idea.” But he urged the government to restrict its sales efforts for now to stronger markets with relatively low office vacancy rates, like Manhattan, the Back Bay area of Boston, Washington, San Francisco and the West Side of Los Angeles.

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“Our concerns are about the unnecessary dumping of assets in some markets that are oversupplied because of economic conditions,” Mr. DeBoer said. “We want to make sure we don’t make weak markets weaker.”

In their report last October criticizing the sale of the Bethesda office building, Republican members of the House Transportation Committee excoriated other government real estate practices. Titled “Sitting on Our Assets,” it said, for example, that the government spent about $12 million a year to operate the Old Post Office, which is near the White House, and collected only about $5.5 million in annual rent from the federal agencies and retailers that occupy about half the space. In 2008 Congress authorized the General Services Administration to solicit bids for redeveloping the building, but the requests for proposals went out only in March.

But Douglas M. Firstenberg, a principal of StonebridgeCarras, leading developer of government-leased buildings, said that despite its prime location the Old Post Office is a tough sell. Development options would be limited because the building is historic and has existing tenants. “If you could start with a clean slate,” Mr. Firstenberg said, “the line of people who would want to be involved would be endless.”

Darian A. LeBlanc, a senior managing director at Cassidy Turley, a Washington real estate company, said the National Institutes of Health building in Bethesda sold for a low price because of its poor condition.

The buyer, Akridge, plans to spend $33 million to upgrade the building to attract private tenants, said P. Brian Connolly, a senior vice president. Mr. Connolly said it would not have been appropriate for the government to invest that much. “Government entities are not in the risk-taking business,” he said. “We believe this is a wonderfully safe investment, but there’s always a risk.”

Some lawmakers have also criticized the federal government for renting when it could be owning. According to government figures, leasing costs increased to $8.1 billion in the 2009 fiscal year from $6.7 billion in 2008.

At a recent hearing Mr. Denham, the California congressman, said the Transportation Department was spending more than $1 billion to lease its headquarters at New Jersey Avenue and M Street Southeast. “Yet the government could have purchased several buildings for this amount,” he said.

Mr. Werfel of the Office of Management and Budget said he could not comment specifically on that lease. “But as a general rule,” he said, “if we know we’re going to have a long-term presence in a building — 15 to 30 years — we should be owning, not leasing space.”

Not surprisingly brokers who negotiate government leases say there are often substantial advantages to renting space. “Once you’ve owned a building for 30 years — then what?” said Joseph B. Brennan, a managing director at Jones Lang LaSalle. “When you lease the space, you get the prime value from the building, and then you’re able to move on.”