Time For a New Lease on Government Facilities

July 28th, 2008 by Leave a Comment

By Steve Stancil

Since its creation in 2003, the Commission for a New Georgia has brought fresh eyes and ideas to ways government can manage assets and operations to increase efficiency, reduce and avoid costs and improve service. Its recommendations have saved millions of dollars on a wide range of government functions, including facility, real estate and construction management.

The Commission, an independent council of top-level executives from all parts of Georgia, which acts as a “real-world consultant” to state government on management and performance, launched 22 fast-track task forces. The implemented recommendations started with the establishment of a State Property Officer to manage the state’s real estate assets and to coordinate and identify efficiencies within the operations of the Georgia State Financing and Investment Commission, the Georgia Building Authority and State Properties Commission.

A State Construction Manual was developed and implemented to ensure $1 billion in construction projects remain on time, on budget and within quality standards. The first comprehensive inventory of all buildings, land and leases is completed; divestiture of surplus properties has generated $36 million in proceeds and the consolidation and renegotiation of leases have reduced future state expenditures by an estimated $10 million.

Currently, all leases are for a single year. But the State Properties Commission is positioned to take the next step in lease renegotiations and, following a market-oriented approach to real estate transactions, enter into long-term lease agreements for select properties.

State Properties Commission inventories include approximately 1,850 leases totaling $254 million annually. Ten percent of these leases, or 170, account for 65 percent of the rent monies expended annually ($155,677,196 in fiscal 2007) and 82 percent of the space (11.5 million square feet). These large leases are where the greatest cost reduction will be found.

A shift to multi-year fixed term leases to leverage the state’s real estate spending is good public policy for several reasons. A multi-year term gives the landlord an incentive to provide cost-effective lease rates and favorable terms by amortizing initial build-out costs over a longer period of time. These leases are the industry standard in the commercial real estate market; if state government can to enter into similar agreements, cost comparisons will be more transparent with other market transactions, allowing the State Properties Commission to competitively negotiate leases on the taxpayer’s behalf.

In a 19-state survey for the State Properties Commission on best leasing practices by state government, 18 states have addressed the legitimate need to balance annual appropriation requirements with more economically favorable multi-year contractual agreements. But Georgia still takes a literal interpretation of its “full faith and credit” clause and adheres to a firm policy of one-year leases.

Best practices among the states indicate that multi-year leases are the new standard. State leases should not be handled as short-term space solutions because they are not. State agencies are looking for long-term occupancy, which benefits the stability of the agency and the community it serves. Long-term occupancy, with the leverage to enter into long-term leases, benefits the financial well-being of the state – therefore, the taxpayers – and is aligned with the state’s mission to become the “best managed state in the nation.”

The Commission for a New Georgia recommends leasing, wherever possible, instead of construction and ownership of non-special purpose facilities (specifically, administrative or office space). This sound guiding principle is greatly strengthened when long-term leases allow more competitive lease arrangements.

Deploying, managing and maintaining the state’s $240 million leased portfolio is costly and time-consuming. As the transformation to a portfolio management culture matures, long-term leases instead of annual leases will improve flexibility, reduce rental rates, favor tenant improvements and provide real transparency and accountability into the service delivery process.

Steve Stancil, Georgia’s State Property Officer, leads the Georgia Building Authority and State Properties Commission and wrote this commentary for the Georgia Public Policy Foundation. The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (July 18, 2008). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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