Federal Leasing 2023: The Year in Review
- This year saw a number of developments in Federal Real Estate Leasing. The biggest news items of the year came in the form of policies directives from the General Services Administration (GSA), continued macroeconomic challenges and a number of court and board decisions, as well as Executive Orders impacting landlords for federal leases.
- This Holland & Knight alert provides a detailed look at some of the key topics and trends in federal leasing for 2023.
This is the first edition of Holland & Knight's Federal Real Estate Leasing Year in Review. For years, our GSA Leasing & Federal Real Estate Team has worked with LexisNexis to provide updated versions of the Federal Government Real Estate Leasing guide — now in its seventh and final edition — and beginning this year, we are partnering with LexisNexis to provide an analysis of news in this space. A version of this article will be available in Lexis Practical Guidance.
This year saw a number of developments in Federal Real Estate Leasing. The biggest news items of the year came in the form of policies directives from the General Services Administration (GSA), continued macroeconomic challenges and a number of court and board decisions, as well as Executive Orders impacting landlords for federal leases.
First, inflation has affected all aspects of the economy, but landlords to the federal government have been hit especially hard. The government has long held the position — and the courts have agreed — that market risks such as inflation fall on the contractor in firm fixed-price contracts, and federal government leases are primarily fixed-price contracts. Given these constraints, this Holland & Knight alert provides some insight into how and when landlords can recoup some of the costs associated with inflation and performance in federal leases.
Next is a discussion of three new lease alerts issued by the GSA that dramatically change compliance obligations for landlords with GSA leases. The first addresses holdovers in GSA leases. Holdovers have historically been problematic for a number of reasons, to include ambiguity as to the government's obligations on rent; this lease alert attempts to resolve some of this ambiguity. Also included is a report on lease alerts, discussing the rescission of COVID-19-era rules and the prohibition of ByteDance applications (such as TikTok) on government contractor systems.
The review continues with a discussion of some of the biggest and most newsworthy decisions from the Boards of Contract Appeals and the U.S. Government Accountability Office, including an analysis of these decisions and the impacts on government lessors.
Next is a brief look at the changes to the rule implementing the Davis-Bacon Act and its implications in government leasing. As discussed below, it may not have much of an impact, given the limited applicability of the Davis-Bacon Act to leasing.
Finally, the review concludes with a brief analysis of the new Executive Order mandating certain green leasing requirements.
New Year, Same Old Inflation
GSA Leasing and Lessors' Remedies for Increased Costs
2022 and 2023 have seen record-breaking inflation in the United States. For example, in June 2022, consumer prices were 9.1 percent higher compared to a year before, the highest 12-month increase in 40 years.1 With everything from eggs to oil2 reaching record high prices, consumers across the world felt inflation's pinch, and government lessors were no exception. And while inflation has slowed down a bit in 2023, it's still far above historical averages and is likely to remain so for some time.
Unfortunately for lessors to the General Services Administration (GSA) and other government agencies, agencies rarely adjust their rental pricing following lease award to address the impacts of inflation. Instead, the onus remains on lessors to consider inflation when submitting their proposals. There is some room, however, for lessors to negotiate and recoup some of their losses due to inflation through post-award pricing negotiations and delay claims against the government.
Below, we provide guidance on when and how lessors to the federal government can recover losses stemming from inflation.
- GSA and other government agencies will rarely compensate lessors for inflation that occurs post-award.
- Post-award pricing negotiations for Tenant Improvements and Building Specific Amortized Capital allow lessors to obtain some relief from inflation costs, current market trends and supply chain constraints.
- Delay claims are a possible pathway to also recoup inflation costs.
Rent Elements and Firm-Fixed-Price Government Contracts
In Government Contracts law,3 there are essentially two types of risk allocation: Firm-Fixed-Price contracts, which allocate risk to the contractor (or lessor), and Cost-Reimbursable contracts, which allocate risk to the government.
The standard GSA Global Lease Form L-100 breaks down the rent into four elements, and GSA treats all four rental elements as firm-fixed-price:4
- Shell Rent
- Operating Costs
- Tenant Improvements (TIs)5
- Security Improvements / Building Specific Amortized Capital (BSAC)
In addition to these four fixed-price elements, there is one entitlement in the standard GSA lease that is treated as cost-reimbursable: the annual real estate tax adjustment. GSA leases provide that once a real estate tax base has been established,6 the government agrees to reimburse the lessor annually for its pro rata share of any real estate tax increases over the tax base, while the lessor agrees to credit the government for its pro rata share of any real estate tax reduction.
Additionally, GSA leases often include a provision for overtime Heating, Ventilation and Air Conditioning (HVAC). This amount is considered fixed price, because there is a set rate for each hour of overtime use. So, while the lessor bills the government for each hour of overtime HVAC, the invoices reflect the agreed-upon price per hour, rather than the costs incurred by the Lessor.
The Bad News: Fixed-Price Contracts Allocate Risk of Market Changes to the Lessor, So Lessor's Will Be Unable to Obtain Relief for the Fixed-Price Elements of the Lease Due to Inflation
The bad news is pretty bad. GSA lease contracts, once fully negotiated, are fixed-price contracts, and so the landlord assumes the risk of any market changes that drive additional costs. This includes inflation.
Given the extraordinary market pressures over the past year and the accompanying inflation, both the U.S. Department of Defense and the GSA have issued guidance on how to address inflation in existing contracts and how to include economic price adjustment clauses when available.
GSA's guidance7 provides as follows with respect to existing contracts (to include leases):
In a fixed-price contract lacking an [Economic Price Adjustment] clause, the contractor is obligated to perform at the fixed-price, and can only recover for increases to the fixed price that are the result of changes or other actions/inactions by the Government. As a general rule, since inflation is not a government-directed change, it cannot form the basis for an equitable adjustment.
This language acknowledges what the U.S. Court of Federal Claims and the Boards of Contract Appeals have noted consistently for years: Contractors (and lessors) are not entitled to equitable adjustments based solely on inflation.
The Good News: There Are a Number of Opportunities for Lessors to Address Increased Costs Stemming from Inflation During the Design and Construction Phase of the Lease
Unlike most traditional government contracts, GSA leases are awarded with several undefined (or, at least, non-finalized) financial terms. After the lease is signed, the parties negotiate the final prices for its TIs and BSACs. While not cure-all, this does give lessors the chance to account for some of its additional costs stemming from inflation.
As explained below, this timeline offers lessors several opportunities to provide themselves with some relief from increased costs. Further, delay claims against the government also present opportunities for lessors to recover losses due to inflation.
- Tenant Improvement and Building Specific Amortized Capital Pricing is Negotiated Post-Award
While technically firm-fixed-price, TI and BSAC prices are negotiated after the government awards a lease, sometimes months (or even years) after award. This presents lessors with multiple opportunities to address inflation. First, negotiating TI and BSAC pricing post-award allows the lessor to account for inflation that has already happened. Second, it allows the lessor to account for current and projected market trends when negotiating prices, such as the Federal Reserve's intentions regarding interest rates. Finally, it also allows contractors to take advantage of any other current events and external factors that could affect prices, such as extreme weather, pandemics or supply chain constraints.
- Delays May Entitle Lessors to Equitable Adjustments with Respect to All Elements of Rent
Bringing a delay claim against the government could be a viable method to recouping losses due to inflation as well. The Court of Federal Claims and Boards of Contract Appeals have approved of such arguments before. For example, in George Sollitt Const. Co. v. United States, 64 Fed. Cl. 229 (2005), the court stated that labor escalation costs are a "type of additional expense [that] may sometimes be recovered as delay damages." To recover, "[t]he contractor must prove the extent of the delay and the amount of the harm caused by that delay." (internal citations omitted). Similarly, in Appeal of – ADT Constr. Grp., Inc. by Timothy S. Cory, Chapter 7 Trustee, 15-1 BCA ¶ 35893, ASBCA No. 57322 (Feb. 12, 2015), the Armed Services Board of Contract Appeals held that "[t]he lack of an economic price escalation clause in the contract does not preclude a contractor from recovering damages for cost escalation incurred due to government-caused delays."
Further, in the GSA Guidance discussed above, GSA stated that although inflation in general cannot form the basis of an equitable adjustment, "if the inflated costs are the direct result of Government action (for example, when Government delays the work into a period when higher costs are encountered), compensation is appropriate." While demonstrating that the government is responsible for a delay and that incurred costs are tied to inflation remains a tall order, a delay claim at least provides a chance at compensation for inflation.
Conclusion: Lessors Should Negotiate Financial Terms with the Understanding that Inflation Will Not Provide an Entitlement to an Equitable Adjustment
The rules governing fixed-price contracts and leases are not lessor-friendly when it comes to recouping costs from inflation. But as explained above, there are a number of ways that lessors can insulate themselves from the impacts of rising prices. First, understand that GSA leases are fixed-price, and negotiate rents accordingly. Second, take advantage of the post-award TI / BSAC price negotiations to obtain favorable pricing for improvements. And finally, understand your rights in the event of government delay.
New Lease Alerts from GSA
Changes to Holdover Rules, End of the COVID-19 Emergency, and a TikTok Ban
On June 14, 2023, GSA released three new lease alerts. These lease alerts address three new rule changes impacting GSA landlords and landlords to any other agencies relying upon GSA-delegated leasing authority. The first further clarifies 2019 updates to GSA's policies on holdover tenancies. The second cancels policies implemented in response to COVID-19 now that the White House declared an end to the emergency on May 11, 2023. The third applies the federal ban of TikTok on government devices to GSA leases.
Below, we provide a brief analysis of each of these alerts and how the new rules will impact landlords.
Holdovers in GSA Leases
Holdovers in government leases have always been problematic for a number of reasons, not the least of which is the fact that landlords can't evict a federal government tenant, which reduces the landlord's leverage to negotiate reasonable short-term holdover or extension terms.
The common law rule is that "there is an implied contractual obligation running against a lessee to vacate a leasehold upon the expiration or termination of a lease." Prudential Insurance Co. v. United States, 801 F.2d 1295 (Fed. Cir. 1986) (discussing federal government lease of office space). This rule has been further clarified by the Court of Federal Claims, which held that "[w]hen a lessee has a contractual duty to vacate the property at the end of the lease term, it necessarily follows that such a failure to vacate is a breach of that contractual duty, which will subject the breaching party to liability for holding over." Allenfield Associates v. United States, 40 Fed. Cl. 471, 486 (1998). However, this common law rule leaves a number of questions unanswered. Specifically, the common law rule does not address how parties to a government lease should address economic price adjustments (such as the operating cost adjustment) or cost-reimbursable line items (such as real estate tax adjustments) during the holdover period. In an acknowledgment to the ambiguities inherent in the common law, GSA implemented a policy in 2019 (now rescinded) to provide some clarity on how it would address some of these issues. That policy prohibited the escalation of operating costs or the payment of tax adjustments during a holdover period.
But now, the government has issued a new policy governing the treatment of holdover tenancies. While noting that "[h]oldover tenancies should be avoided whenever possible as holding over without the benefit of an agreement may lead to friction between the Lessor and the Government," the new policy also concedes that holdovers are sometimes unavoidable, and seeks to address some of the complaints with the 2019 policy. Specifically, the new policy provides as follows:
a. Operating Cost Adjustments: The Government shall continue to process operating cost adjustments for leases in holdover status.
b. Real Estate Tax Adjustments: The Government shall continue to process real estate tax adjustment requests for leases in holdover status.
c. Tenant Improvements (TI) and Building Specific Amortized Capital (BSAC) Rent Components: As stated under Leasing Desk Guide (LDG) Chapter 10, it is Public Building Services (PBS) Leasing policy, where the Government occupies space after expiration of a lease and before execution of a succeeding lease or replacement lease, to continue to make monthly rental payments at the then-current rental rate stated in the expired lease. As clarification, for leases in holdover where the rental at expiration includes TI and/or BSAC rent, the Leasing Contracting Officer (LCO) must carefully review the lease to confirm the details regarding the TI and/or BSAC rental payment. If the lease outlines the terms of the amortization and these improvements have been fully amortized at lease expiration, then the LCO should reduce the rent by the TI and/or BSAC rent during the holdover. However, if the amortization period stated in the lease extends beyond the lease expiration, or if the lease is not clear regarding the amortization terms, then the LCO may not reduce the rent without further consultation with regional counsel. In either instance, if reducing the rent, the LCO must send written notice to the lessor explaining the rental reduction, along with a unilateral lease amendment documenting the reduced rent. Since the purpose of this unilateral lease amendment is administrative, lessor signature is not required.
This Lease Alert is effective as of June 14, 2023, and serves to cancel the previous Lease Alert No. LA-19-02.
End of the COVID-19 Emergency
The Biden Administration announced an end to the COVID National Emergency and Public Health Emergency Declarations, effective May 11, 2023. The COVID-19 public health emergency has affected all levels of government. Holland & Knight analyzed the need for a GSA's response to COVID-19, and the GSA has issued many policies in response. The GSA incorporated the COVID-19 safety policies into government leases. Now, federal agencies have been charged with creating a plan to transition out of policies set during the emergency.
The GSA's Senior Procurement Executive Office of Acquisition Policy issued a memorandum on April 27, 2023, addressing the GSA's policies canceled at the end of the public health emergency. This memo states that the GSA will issue supplements to continue some policies on Federal Acquisition Regulation (FAR) Class Deviation that were focused on COVID-19, but the GSA has been found valuable for small businesses during federal acquisition regardless of the COVID-19 declarations.
The Lease Alert, in supplement of that memorandum, explains the impact of the end of the emergency declarations on GSA leasing. Landlords can relax the safety protocols implemented during the pandemic. LA-22-02 – Temporary Guidance on Renewal Options Added Post Award, also in response to COVID-19, is set to expire on March 20, 2024. Second, the following safety policies are canceled, effective May 11, 2023:
- LA-21-01 – Considerations and Options for Non-Traditional Lease Physical On-Site Tours & Inspections (implementing remote acquisition strategies, such as virtual inspections when on-site, pre-award building tours were impractical)
- LA-21-09 – Rescinding Routine Disinfectant Requirement (require additional janitorial services to include permanent routine cleaning and disinfecting services in consideration of rental decreases)
- LA-21-15 – Implementation of Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (implement FAR 52.223-99 requiring vaccination, masking, and physical distances in the workplace; Holland & Knight has discussed the impact of this clause on GSA leases)
On Feb. 28, 2023, the Office of Management and Budget (OMB) issued a memorandum requiring the removal of TikTok (or other ByteDance applications) from federal information technology.
This prohibition covered not only information technology (IT) owned or operated by federal agencies, but also to IT "used by a contractor under a contract with the executive agency that requires the use" of that IT, whether expressly or "to a significant extent in the performance of a service or the furnishing of a product."
On June 2, 2023, the Federal Acquisition Regulatory Council (FAR Council) published an interim rule, FAR 52.204-27, to implement the OMB directive. FAR 52.204-27's prohibition on TikTok was more broad, covering not just contractor IT used to a significant extent in contract performance, but also "equipment provided by the Contractor's employees."
The Federal Register notice echoes this, noting that "[t]his prohibition applies to devices regardless of whether the device is owned by the Government, the contractor, or the contractor's employees (e.g., employee-owned devices that are used as part of an employer bring your own device (BYOD) program)." Holland & Knight has previously provided a detailed discussion of the new FAR clause as applied to traditional government contractors.
Now, GSA is mandating the inclusion of FAR 52.204-27 into federal leases8 through Lease Alert No. LA-23-04 – Prohibition on a ByteDance Covered Application. This rule is mandatory and effective as of June 14, 2023, for all new, succeeding, superseding, extension and renewal leasing actions conducted by GSA or through delegated GSA leasing authority. The new lease alert require inclusion of FAR 52.204-27 in Requests for Lease Proposals where an award has not yet been made. Additionally, FAR 52.204-27 is included in all lease extensions and exercise of option years for existing leases.
Landmark Decisions in 2022/2023
Tax Adjustments and Procurement Disputes Continue to Drive Litigation
The past year has seen a number of notable decisions from the Boards of Contract Appeals and the Government Accountability Office regarding leasing property to the federal government. Below, we provide a summary, their effects and what lessors to the government need to know.
Tax Adjustment Dispute
Disputes over tax adjustments in government leases remain one of the most common points of disagreement between lessors and their government tenants. This year, there were a number of tax adjustment disputes at both the Boards of Contract Appeals and the Court of Federal Claims, with most being settled prior to the issuance of a decision. However, the Board did issue one consequential decision: Rooker Coweta, LLC v. U.S. Department of Agriculture.
In Rooker, the Appellant claimed that the lease had initially used the incorrect tax base, and it was owed $159,382.96. The dispute centered around language from the lease and language from the solicitation. The lease stated, "The base for calculating real estate tax adjustments for the leased premises shall be the first fully assessed year. If the Government occupies the premises in 2009, and the first fully assessed year is 2010." The solicitation, which was incorporated into the lease, stated, "Base year taxes . . . are 1) the real estate taxes for the first 12-month period coincident with full assessment (the taxing jurisdiction has considered all contemplated improvements to the assessed property in the valuation of the same) or 2) may be an amount negotiated by the parties that reflects an agreed upon base for a fully assessed value of the property."
The government claimed that the tax base was $169,628.20, as that is what the Appellant included in its proposal (Form 1364), meaning that the parties negotiated the tax base. The Appellant, however, argued that the tax base was $111,695.49, as that was the tax amount for the first fully assessed year.
The Board agreed with the Appellant.
We agree with Rooker that the lease "expressly requires that the parties calculate the Real Estate Tax Base through the full assessment method" rather than by using a negotiated tax base. The fact that the amount projected "for base year taxes" in the 2007 proposal differed from the amount of taxes for the "first fully assessed year," 2010, does not create an ambiguity in the lease. The parties correctly anticipated that occupancy would occur in 2009. The tax amount per square foot shown on form 1364 was an estimate for the "base year" of the lease—2009 to 2010. The "base" for tax adjustments is a different year, calendar 2010. The rent breakdown on form 1364 and the Real Estate Tax Adjustment clause are separate parts of the lease and use the word "base" in different ways. Accordingly, the "base" amount under the adjustment clause is clearly $111,695.49, the taxes for 2010, not the amount derived from form 1364 for the "base year" of the lease. We see no ambiguity at all.
This decision is important because it further clarifies that mere inclusion of the GSA Form 1364 (or Form 1217) does not demonstrate that the Parties intended to set a base year for tax adjustments.
Protest of Price Evaluation
GSA price evaluations have for some time been problematic in the eyes of the Court of Federal Claims and U.S. Government Accountability Office (GAO), with a number of decisions sustaining challenges to them.
In RTD Middleburg, LLC, the Protester challenged GSA's price evaluation of an awardee's lease proposal on multiple bases. The Request for Lease Proposals (RLP) required that, when evaluating offers, GSA would consider "[t]he cost of relocation of furniture, telecommunications, replications costs, and other move-related costs, if applicable." The awardee proposed "new construction on land next to the incumbent protester's property," but GSA did not consider replication and relocation costs in its evaluation of awardee's offer. The Protester argued that replication and relocation costs were necessary because the awardee's offer entailed constructing an entirely new building and moving the government into it. GSA, however, claimed that replication and relocation costs were "not applicable" to the awardee's offer.
GAO sustained the protest:
As stated above, Michael Downing's proposal was for new construction on land next to the incumbent protester's property. Therefore replication and moving costs would necessarily be incurred by the agency in the event of an award to Michael Downing. Here, however, the contemporaneous record is devoid of a meaningful explanation for the agency's position that relocation and replication costs were "not applicable" and therefore need not have been included in the present value analysis. In addition, the agency failed to provide a post-protest explanation supporting its position. In light of this lack of explanation, we cannot find the agency's interpretation of the RLP to be reasonable. As noted above, the solicitation expressly called for such costs to be included in the present value analysis, if applicable.
* * *
Here, we have found that the record is inadequate for us to conclude that the agency's evaluation of the awardee's present value price was reasonable because it did not account for relocation and replication costs as required by the RLP. We also find that the agency's cost benefit analysis of the protester's proposal was not reasonable because the agency used the protester's current lease rates instead of the proposed rates Middleburg offered in response to the RLP. Given the nature of the errors in the agency's price evaluation described above, we have no basis to conclude with certainty that the awardee's proposal was the lowest-priced. A reasonable possibility of prejudice is a sufficient basis for sustaining a protest.
The main takeaway from GAO's decision is that GSA must explain its reasoning behind why costs do or do not factor into price evaluations of proposals when required by the solicitation. Otherwise, GSA subjects itself to potentially adverse protest decisions.
Protest of Proximity to Public Transit
In 2015, GSA issued a lease alert mandating that all lease solicitations include a requirement that the offered property is within a certain proximity to commuter transit. The lease alert then went on to provide definitions for multiple types of transit. Importantly, the lease alert defined "Bus Rapid Transit (BRT)" as "operat[ing] similar to a rail system but without the tracks. Bus rapid transit systems feature separated right-of way or exclusive lanes, signal priority, off line fare collection, and express service between stops."
In BOF GA Lenox Park, LLC, GSA issued an RLP seeking office space in the Atlanta area. The RLP required that offerors' proposed space be located within a certain proximity to "[a] subway, light rail, or bus rapid transit stop." The awardee's offered space, however, was not within the required distance of a subway, light rail or bus rapid transit stop. It was within the required proximity of a bus stop, which, as GSA argued, was enough to meet the RLP's requirements. Protester, though, contended that a bus stop is not the same as a bus rapid transit stop under any relevant definition.
GAO agreed with the Protester:
[W]e disagree that the [Metro Atlanta Rapid Transit Authority] MARTA bus stop servicing the awardee's property satisfied the solicitation requirement. In this regard, the MARTA bus stop at issue does not have the characteristics of a bus rapid transit stop, as defined by either the FTA, MARTA, or GSA itself, in its internal agency guidelines.
* * *
The solicitation here includes a specific term, provided at the direction of the lease alert discussed above and regularly used in all GSA leases, intended to require proximity to a particular type of transit service.… In this context, we disagree with the agency's representation that "[n]othing on the face of the RLP suggests that 'Bus Rapid Transit' refers to a specific type of bus transit system." Accordingly, we cannot conclude on this record that the agency reasonably concluded that MARTA route 126 is a bus rapid transit line, or that this route's connection to a rail line otherwise satisfies the RLP's requirement. We find, therefore, that GSA improperly evaluated FDS Vegas's proposal with regard to the proximity of the proposed property to rapid transit.
Importantly, lessors not only need to ensure that property offered to the government is located within the required proximity to commuter transit, but also that the type of commuter transit meets the RLP's requirements, which, as shown by Lenox Park, is very specific.
Changes to Davis-Bacon Act Requirements
New Executive Branch Rules, but Uncertain Applicability to Government Leasing
The U.S. Department of Labor (DOL) on Aug. 23, 2023, finalized its new rule relating to the Davis-Bacon Act (DBA). This rule went into effect 60 days after it is officially published in the Federal Register, on Oct. 23, 2023. The final rule will have far-reaching consequences, including its potential impact on those seeking a "bonus credit" under the Inflation Reduction Act (IRA). Holland & Knight has provided an in-depth analysis of the changes to these rules and their implications for government contractors.
However, with respect to government leasing, it is unclear whether or not this new rule will have any substantial impact. GSA implements DBA and related labor laws through its "Labor Standards" provision, which states as follows in its most current iteration:
If the Lessor proposes to satisfy the requirements of this Lease through the construction of a new Building or the complete rehabilitation or reconstruction of an existing Building, and the Government will be the sole or predominant tenant such that any other use of the Building will be functionally or quantitatively incidental to the Government's use and occupancy, the following FAR clauses shall apply to all work (including shell and TIs) performed prior to the Government's acceptance of space as substantially complete.
This approach to the DBA and the related labor-focused statutes is consistent with a 1994 U.S. Department of Justice memorandum from the Office of Legal Counsel, which limits applicability of these acts to new construction or complete rehabilitation of existing buildings in which the government is the sole tenant. GSA has acknowledged this rule multiple times over the years, most recently in a 2003 memorandum setting policy for GSA that limits applicability of the DBA to new construction or substantial renovation of a building in which the government is the sole tenant.
Given that the new rule implementing the DBA did not alter the statutory framework, and given that Office of Legal Counsel opinions are binding upon the executive branch (see 28 U.S.C. §§ 510-513), it is unclear if the threshold for applicability will change given that the Office of Legal Counsel has clearly stated that the DBA only applies to government leasing in very limited circumstances. If the threshold for applicability remains unchanged, then most GSA leases will be unaffected by these changes. This remains an area to monitor in the coming year.
Green Leasing at GSA
GSA and the rest of the federal government continue to develop and revise sustainability and "Green Leasing" standards for landlords of U.S. government tenants. On Dec. 13, 2021, the White House issued Executive Order 14057, Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability,9 and the following August it issued implementing instructions for the same.
Now, pursuant to the Executive Order, GSA and other leasing agencies are meeting the first tranche of obligations, which were effective Oct. 1, 2023. As of that date, for all new lease solicitations for 25,000 rentable square feet or more in which the government occupies at least 75 percent of the building, the following "Green Lease" standards and guidelines are mandatory:10
- Lessor Reporting: Energy, GHGs, Water: Leases will require lessors to report monthly usage of water and energy, as well as greenhouse gas emissions.
- HVAC Refrigerants: For all qualifying leases, the lessor will have to comply with the S. Environmental Protection Agency's (EPA) Significant New Alternatives Policy (SNAP) Program to use acceptable refrigerant substitutes when equipment is replaced, retrofitted or when newly purchased, and track the type and quantity of refrigerant used in each chiller, air conditioning and refrigeration system containing 50 pounds or more of refrigerant.
- Systems Commissioning: Lessors shall be required to incorporate commissioning requirements to verify that the installation and performance of energy consuming systems meet the government's project requirements.
- Composting Added to Recycling: As part of the required recycling plan, lessors are "encouraged" to establish a composting program for food waste and organics where local markets for commercial organic materials exist.
GSA's Office of Leasing Sustainability maintains the most current versions of the GSA standard Request for Lease Proposals (RLP) and Lease Templates, all of which are current as of October 2023. In these versions of the standard RLP and Lease, all of the sustainability requirements are highlighted, and a review of earlier versions of the RLP and Lease reveals a number of new requirements.
This is an area of increased scrutiny and attention, and additional requirements are certain to follow in the coming years.
1 U.S. inflation reached a new 40-year high in June of 9.1 percent, Politico, July 13, 2022.
2 School lunch, eggs and airfare: Why inflation soared for 10 items in 2022, CNBC, January 13, 2023.
3 And GSA leases are Government Contracts. See Forman v. United States 767 F.2d 875 (Fed. Cir. 1985).
4 See Second St. Holdings LLC v. United States, 162 Fed. Cl. 306, 325 (2022) (noting that in a GSA lease procurement dispute, "the procurement at issue is a fixed-price contract"). The Operating Costs line item in GSA rent calculations can best be described as fixed price with economic price adjustment, as it escalates each year automatically based upon the U.S. Department of Labor's Consumer Price Index (CPI).
5 GSA publishes a "Pricing Desk Guide," which provides guidance on the distinction between the Building Shell and Tenant Improvements. The Pricing Desk Guide defines the "Building Shell" as "the complete enveloping structure, the base building systems and the finished common areas (building common and floor common) of a building that adjoin the occupant areas," and the "Tenant Improvements" as "the finishes and fixtures that typically take space from the shell condition to a finished, usable condition."
6 The Real Estate Tax Base can be established by one of two methods: It can be negotiated or the Parties can agree to use the first year of "full assessment" following completion of the tenant improvements to establish the base amount.
8 Unlike most federal acquisitions, the GSA alone decides what FAR provisions apply to government leases. The General Services Acquisition Manual (GSAM) 570.101(d) provides, "The FAR does not apply to leasehold acquisitions of real property." Here, FAR 52.204-27 applies because the GSA has mandated its inclusion in federal leases in order to comply with the OMB rule.
9 Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability, 86 Fed. Reg. 70,935; Dec. 13, 2021.
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.