January 31, 2019
Recent volatility in the federal government has been a hot topic of discussion, but it shouldn’t worry commercial landlords as much as you might think. The reality is that, while rent may not be processed and paid during a government shutdown, the General Services Administration (GSA) will settle all rent payments once the government is up and running.
Of course, a gap in a landlord’s rent flow is not ideal. That’s why it’s critical for Congress to pass a resolution that allows for government tenants to process rent payments in the event of another shutdown. For now, as long as landlords can float a month or two of unpaid rent, they can still reap the benefits of having a credit tenant.
Still, the potential for a government shutdown may seem like a risk that would prompt some landlords to turn away from GSA opportunities, right? Not necessarily; shutdowns don’t significantly impact real estate at which government agencies operate. Rather, landlords are more concerned with the lease terms the GSA is willing to sign. Here’s why:
At the end of any lease term, the GSA is required to conduct a competitive building analysis to determine whether the agency can remain at its current building or relocate. This procurement can delay lease negotiations, which prompted the GSA in 2015 to create some flexibility at the end of lease terms, called “soft term” or “non-firm term.”
Soft term allows the GSA to give a move-out notice at any point during the soft term, usually with 120 days’ notice. For example, the GSA could sign a 10-year lease with the first five years being firm term and the remaining six to 10 years as soft term. The GSA would then be fully committed to the space for the first five years like any other lease. However, the soft term allows the GSA to occupy the space for any amount of years six through 10, whereas a typical commercial tenant would have to either commit to the full remaining option term – or none at all – at the end of the initial five years.
When the GSA initially began using soft term, it was typically in a 10-year lease with five years of firm term. This structure did not provide landlords with the security and longevity they want in a tenant, resulting in less favorable pricing. To achieve better rates, the GSA evolved its structure and now typically executes 10-year leases with eight years of firm term or 15-year leases with 13 years of firm term. This approach has been appealing to landlords and still provides the GSA the flexibility it needs at the end of its lease term.
When working with GSA tenants, lease term and potential government shutdowns are only a few examples of the many nuances landlords and their real estate advisers must understand. There also are security requirements, policy shifts, and procedural and administrative issues that become paramount when leasing to government tenants. Despite these unique considerations, the GSA has the full faith and credit of the U.S. government, adding tremendous value to any commercial building it leases.
– By Matthew Lynch, Managing Director, Government. Washington, District of Columbia