CBCA Holds That GSA Is Financially Responsible for Certain "Real Estate" Taxes
- A number of developments in 2022 will impact federal leasing: The Civilian Board of Contract Appeals (CBCA) has issued a landmark decision on what constitutes a reimbursable real estate tax, the White House has issued guidance that will impact lessor obligations, and the U.S. General Services Administration (GSA) has issued a sweeping overhaul of its compliance clauses.
- This Holland & Knight alert provides an analysis of several developments and explains how each will impact landlords to federal government agencies.
A number of developments in 2022 will impact federal leasing: The Civilian Board of Contract Appeals (CBCA) has issued a landmark decision on what constitutes a reimbursable real estate tax, the White House has issued guidance that will impact lessor obligations, and the U.S. General Services Administration (GSA) has issued a sweeping overhaul of its compliance clauses.
This Holland & Knight alert provides an analysis of each of the following developments and explains how each will impact landlords to federal government agencies. The key takeaways are as follows:
- Allowable taxes for real estate tax adjustments. The CBCA has issued a ruling that clarifies the definition of "Real Estate Taxes" to include transportation and sanitation taxes, which will expand landlords' entitlement to tax adjustments under GSA leases.
- Changes to security requirements for GSA lease novation and for software. The GSA continues to increase its oversight on security for its landlords, and now requires an inquiry into security and personnel access to leased space in order to approve novation requests. Additionally, the GSA intends to implement a requirement of the new Office of Management and Budget (OMB) Memo 22-18, "Enhancing the Security of the Software Supply Chain," and may require GSA landlords to make attestations concerning building software when submitting proposals.
- New general clauses. The GSA implements most of its compliance obligations through the various iterations of its GSA Form 3517, the "General Clauses." This fall, the General Clauses underwent their most substantial revision in years, resulting in a number of new compliance obligations for GSA landlords.
Tax Adjustments: Real Estate Taxes and Special Assessments
GSA leases – and most other government leases as well – allow the landlord to recoup any real estate taxes levied against the leased property in excess of an established real estate tax base, which can be either negotiated or based upon a full assessment of the property. Each year, landlords can request an adjustment – or reimbursement – for any real estate taxes over and above this base. GSA leases typically define "real estate taxes" to exclude special assessments, but there has historically been some ambiguity as to whether taxes levied to support transportation and sanitation efforts constitute real estate taxes or special assessments.
On Nov. 10, 2022, the CBCA addressed the definition of real estate taxes in GSA leases, holding that transportation and sanitation taxes constituted real estate taxes for which lessors are entitled to reimbursement by the GSA under the terms of GSA leases.1 This ruling paves the way for nearly all federal landlords to file claims for reimbursement for the costs of similar transportation and sanitation taxes under leases with the GSA and nullifies a longstanding GSA policy to treat such taxes as special assessments.
In CESC Mall, LLC v. GSA,2 appellants were federal landlords who had six separate leases with the GSA for properties located in Arlington County, Virginia. Under the terms of all the leases' tax adjustment clauses, the GSA was "responsible for real estate taxes."
Each lease provided one of three similar definitions for real estate taxes:
- [T]axes which are assessed against the building and/or the land upon which the building is located, without regard to benefit to the property, for the purpose of funding general Government services.
- [T]axes that are assessed on an ad valorem basis against the Building and/or the landupon which the Building is located, without regard to any benefit to the property, for the purpose of funding general government services.
- [T]axes that are levied upon the owners of real property by a Taxing Authority (as hereinafter defined) of a state or local Government on an ad valorem basis to raise general revenue for funding the provision of government services.
Notably, special assessments were not included within the definition of real estate taxes.
Appellants filed claims for reimbursement of Arlington County's transportation tax and sanitary district tax pursuant to the tax adjustment clauses in their respective GSA leases. The transportation tax allowed Arlington County to "implement taxes to fund construction of roads and public transportation." The sanitary district tax was "for operating and capital expenses necessary to expand and upgrade the storm drainage (storm sewer) system." The GSA denied appellants' claims for reimbursement pursuant to an internal 2014 policy which directed that transportation and sanitary taxes be considered special assessments. The lessors then appealed to the CBCA, where all six appeals were consolidated.
A panel of three CBCA judges unanimously granted summary judgment in favor of the appellants on Nov. 10, 2022, finding that Arlington County's transportation tax and sanitary district tax were real estate taxes, not special assessments. Thus, the GSA was obligated to reimburse the appellants for payment of these taxes.
The GSA had argued that the taxes were not real estate taxes because both taxes funded specific, not general, purposes. The CBCA rejected this argument based on the language of the leases and prior case law, holding that "'[g]eneral' refers to government services, like stormwater and transportation services, that benefit the County in general, as opposed to benefitting any specific property owner." The CBCA reasoned that the taxes were not assessed against specific property owners to fund services or improvements specific to those properties but rather were used to fund general government services that benefit the county as a whole. Because the transportation tax and the sanitary district tax were "benefits of government that all citizens receive," they funded general government services.
The GSA also argued that the taxes did not raise general revenue because they raised funds for "specific purposes … and 'general revenue' must be used to fund any government services." The CBCA rejected this argument as well, determining that the taxes at issue raised general revenue, as "'[g]eneral revenue' refers not to an uncommitted pool of money to fund government services but rather to revenue collected to fund government services that benefit the whole county, which these taxes do." In other words, the fact that the taxes were earmarked in the budgeting process for a specific use was irrelevant.
The CBCA found that both taxes are assessed against the building and/or land and are based on the assessed value of the property (an ad valorem tax). As such, the CBCA held that the GSA was responsible to pay both the transportation and sanitary district taxes as real estate taxes.
The CBCA's decision presents an opportunity for numerous GSA lessors to recoup significant amounts of money. Those companies who currently have leases with the GSA should immediately begin to submit their transportation and sanitation tax bills to GSA and request reimbursement. Lessors should do this not just for future tax bills, but for prior tax payments as well. Even those companies whose GSA leases have now ended can still go back and seek re-payment of prior transportation and sanitation tax bills. Under a lease with the federal government, a landlord's exclusive remedy is under the Contract Disputes Act. Generally, a lessor has six years from the time that a claim accrues to submit a formal claim to the lease contracting officer. If that claim is denied, the lessor can then "appeal" the contracting officer's decision to the CBCA or the U.S. Court of Federal Claims.
If you have any questions or need more information, contact the authors or another member of the GSA Leasing & Federal Real Estate Team.
GSA Security Requirements
For landlords or investors seeking to buy or sell properties leased to GSA, the government has instituted a new policy for properties leased at or above Facility Security Level III.3 Specifically, the GSA will now conduct an inquiry into both the buyer to ensure compliance with Homeland Security Presidential Directive-12 (HSPD-12),4 which mandates as follows:
[I]t is the policy of the United States to enhance security, increase Government efficiency, reduce identity fraud, and protect personal privacy by establishing a mandatory, Government-wide standard for secure and reliable forms of identification issued by the Federal Government to its employees and contractors (including [landlord] employees).
Not later than 4 months following promulgation of the Standard, the heads of executive departments and agencies shall have a program in place to ensure that identification issued by their departments and agencies to Federal employees and contractors meets the Standard [for secure and reliable forms of identification].
In practice, this means that the GSA will review the buyer's personnel vetting and documentation of personnel identification to ensure that security requirements are met before approving any novation of a lease Facility Security Level III or higher.
GSA's focus on security concerns will continue into the new year with new oversight of landlord software. In conversations with GSA officials, the GSA intends to implement new requirements to comply with OMB Memo 22-18, "Enhancing the Security of the Software Supply Chain."5 This memorandum "requires each Federal agency to comply with the NIST Guidance when using third-party software on the agency's information systems or otherwise affecting the agency's information."
New General Clauses
On Sept. 26, 2022, the GSA issued Lease Alert No. LA-22-07 Revision to General Clauses.6 This revision to the General Clauses represented the most substantial change to government leasing compliance obligations in several years. These changes were driven by the new requirement for Cyber-Supply Chain Risk Management (C-SCRM) clauses, as outlined under Acquisition Letter MV-22-06, issued by GSA's Senior Procurement Executive, Office of Government-Wide Policy, on Sept. 16, 2022 (included with the Lease Alert as Attachment 3), as well as updated General Services Acquisition Regulation (GSAR) and Federal Acquisition Regulation (FAR) clauses.
The notable changes include the following:
- Added FAR clause 52.204-21, Basic Safeguarding of Covered Contractor Information Systems (November 2021). This clause places requirements on landlords for computer system security.
- Added FAR clause 52.204-2, Security Requirements (March 2021). This clause, which is incorporated by reference, only applies when the contract may require access to classified information.
- Added FAR clause 52.204-9, Personal Identity Verification Of Contractor Personnel (January 2011)
- Added GSAR clause 552.204-9, Personal Identity Verification Requirements (July 2021)
The new clauses are largely – although not exclusively – focused on landlord security requirements. These new clauses became effective on October 1, 2022, and are likely to be present in all new leases.
1 CESC Mall, LLC v. GSA, Civilian Board of Contract Appeals (CBCA) Nos. 7359, et. al., Nov. 10, 2022, 2022 CIVBCA LEXIS 226.
3 The details and requirements for this security level are available on the U.S. General Services Administration (GSA) website.
4 The full text of this directive is available on the U.S. Department of Homeland Security (DHS) website.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.