Hearing of the Economic Development, Public Buildings and Emergency Management Subcommittee of the House Transportation Committee

Press Conference

HEARING OF THE ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS AND EMERGENCY MANAGEMENT SUBCOMMITTEE OF THE HOUSE TRANSPORTATION COMMITTEE
SUBJECT: THE SERIOUS COMMERCIAL REAL ESTATE CREDIT CRUNCH AND GSA: LEASING AND BUILDING DURING AN ECONOMIC CRISIS
CHAIRED BY: DELEGATE ELEANOR HOLMES NORTON (D-D.C.)
WITNESSES: SAMUEL MORRIS, ASSISTANT COMMISSIONER, OFFICE OF REAL ESTATE ACQUISITION PUBLIC BUILDING SERVICE, GENERAL SERVICES ADMINISTRATION; RICHARD PURTELL, CHAIR AND CHIEF ELECTED OFFICER, BUILDING OWNERS AND MANAGERS ASSOCIATION; MITCHELL SCHEAR, BOARD MEMBER, D.C. BUSINESS IMPROVEMENT DISTRICT; DEAN SCHWANKE, SENIOR VICE PRESIDENT, THE URBAN LAND INSTITUTE

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DEL. NORTON: (Sounds gavel.) This hearing will come to order.

The ranking member is on his way and has suggested we proceed. We will certainly ask him if he has an opening statement when he comes.

Before I begin, I do want to indicate that the staff director, whom many of you know, is not here today because her mother has passed last night and so she's on her way on a plane to a funeral. And I know all of us would want to offer our deepest condolences on the loss of her mother -- for our staff director, Susan Britter (sp).

I welcome today's witnesses to the subcommittee hearing on the tightening credit markets for leasing and construction. As we are all aware, the current credit market originated in the subprime mortgage crisis. And combined with exotic investment instruments and nonexistent or poor regulation, then conflated with a bevy of other factors to spread like a virus and bring down major aspects of our entire economic system.

What resulted was an all-consuming global economic crisis that has trapped even those like the commercial leasing and construction sectors, which had nothing to do with precipitating the crisis.

Today we will build on a hearing the subcommittee held in July 2008 that examined the economic factors affecting federal leasing and construction in the commercial marketplace. We examined the commercial sector market, because general service -- the General Services Administration is perhaps the largest customer for office space in the real estate market in the United States.

Moreover, the agency now has $1 billion to construct the first of three buildings in the Department of Homeland Security complex -- the largest development in GSA's entire history.

GSA's tied to the commercial market are clear from its role in leasing a loan. GSA leases slightly more space than it owns -- approximately 176 million square feet of leased space, housing over 700,000 federal workers, compared with 175.5 million square feet of owned space -- almost as much, but rapidly tilting toward leased space. The owned space provides office space for 640,000 federal workers.

The federal inventory is vast and ranges from 2,500 square foot border crossing stations to 1 millions square foot courthouse complexes in major metropolitan areas. GSA has a large stake in maintaining its strong real estate market position -- particularly in the leasing market -- in light of the continuing to federal agency leased space.

At this hearing, we seek to learn how the GSA building owners and developers, who are accustom to unimpeded access to credit, position themselves in today's (piddling ?) market.

Even though the competitive system for leasing and construction awards in the federal sector guarantees that only the most creditworthy need compete, we are concerned that the recent clamp down on credit has already affected even the most creditworthy competitors. Inevitably, GSA will be affected.

Last year, as the subprime mortgage crisis worsened, I began talking with experienced developers and business -- and building owners, and found that their strong credit standing with lenders and the lengthy time frames and lead-time for construction or leasing had left them pretty much untouched. That was at the beginning.

However, their reports to us had changed completely by last summer when we had our first hearing on credit in the commercial sector. Today, more than a year after the housing crisis because full blown, even the largest banks, whose customers significantly include the commercial real estate sector, are showing record profit losses.

Uncertainty and mounting losses have caused continuous shrinkage in all parts of the credit market. Federal leasing and construction contracts might have been said to be worth their weight in gold at one point -- and perhaps they still are -- but if credit becomes too difficult or too costly, private sector will pass the increased costs onto the federal government, raising costs to taxpayers.

GSA's reliance on the commercial office space market, and on the commercial construction sector to house federal agencies, ties the agency directly to commercial market conditions. As the federal government's major construction and leasing agency, GSA cannot escape the reality that it is in the same boat with the private real estate and construction sectors. The agency, therefore, must begin to use its prime position in the commercial marketplace to better leverage its buying power and to capture it outsize potential for reduced cost to taxpayers.

In today's atmosphere of soaring budget deficits and rising costs for all concerned, GSA must work collaboratively -- must work more collaboratively than in the past with the private sector to reduce the cost of acquiring commercial office space considering -- commercial office space.

Considering the present economic crisis, it is also possible that by working with our private-sector partners to achieve the vision and know-how necessary to reduce costs across the board, this subcommittee, the GSA and its corporate sector partners could help stimulate the local and national economies while addressing the needs of the federal government itself.

Today, we are interested to hear from GSA and financial and economic experts on the commercial markets and office development. We thank all of them for their testimony to be received today.

And we are very pleased -- and we knew you'd be here -- that the ranking member has arrived. And I'd like to ask if he has any opening remarks at this time?

REP. MARIO DIAZ-BALART (R-FL): Thank you, Madame Chairwoman.

I also -- before beginning, I also want to add to your words of condolences -- I can't say the word!

DEL. NORTON: Say it in Spanish.

REP. DIAZ-BALART: Right, right, right. (Speaking in Spanish.) There you go!

In all seriousness, Susan Britter (sp), who obviously is the very dedicated majority staff director of the subcommittee and she suffered a great loss in her family. I know that all of her prayers are with and her family. So we're thinking about you and your family, Susan.

Thank you, again, Madame Chairwoman.

The General Service Administration is the single largest building manager in the country. And GSA owns and leases over 340 million square feet of space which comprises nearly 9,000 buildings in more than 2,000 communities nationwide. So it's across the entire country -- obviously with a heavy involvement here in D.C.

In addition to office buildings, though, GSA properties include border stations, courthouses, research facilities, warehouses and obviously, post offices.

Now, because GSA leases more than half of its office space from private real estate owners, it's obviously reasonable to expect that the credit crunch in the real estate -- as you were saying, Madame Chairwoman -- and higher financing costs will impact the availability of space and the stability of lease prices, frankly, for the federal government. So even small rental changes could significantly impact the federal budget, given the huge amount of space that the federal government leases.

So as was mentioned before in several of our earliest hearings -- Madame Chairwoman, that you had -- part of the problem is the federal government's increased reliance on increased leasing to meet long-term space office needs. And it becomes a revolving circle -- that problem. Despite consistent reports by the GAO, another increase -- and others -- that increased reliance on cost of leasing for long-term space, obviously, is wasteful.

We need to continue to use scoring models, unfortunately, that promote leasing over construction or ownership, even though we know -- and that's something that you've been battling for a long time and I hope that this year we'll be able to make some headway -- but I know that you have been, frankly, a great leader in that area.

So you know, the very rules that are intended to guide the administration and Congress to make fiscally sound decisions result, frankly, in this leasing case, which means more spending of taxpayers' dollars in a less efficient manner. So again, I thank you Madame Chairwoman, for your leadership there in trying to change that.

Now, last month, the Recovery Act was signed into law. It included $5.5 billion for the Federal Building Fund. And as we know, that Recovery Act provided, frankly, little-to-no oversight provisions and said simply reporting -- it just requires reporting to the Congress and to the public how the money was spent after it was obligated. And we spoke about that in the subcommittee.

In response to this, I introduced a House resolution that simply provides some real basic guidance and guidelines with respect to these funds, so that we don't relive one more time the horrors that we are now experiencing with the TARP program. That resolution would make it clear that GSA should not proceed with projects that this committee rejected, and including this committee and reporting requirements contained in the Recovery Act.

We know that the potential for waste is huge when it comes to real estate -- frankly, when it comes to anything, but obviously, also with real estate. Federal real property has been on the GAO's high- risk list since 2003, obviously illustrating that problem.

And according the GAO, longstanding problems in the federal and real property area have multibillion dollar cost implications to the federal government -- i.e., in other words, to the taxpayers.

So the current credit crunch serves to emphasize the problem with the over reliance on costly leasing. Over 50 percent of federal space in leased facilities, which is wrong. Problems in the lending industry can have a tremendous effect on federal property management.

Now, in this economy, GSA should be investigating real opportunities, real serious opportunities that could be good investments for the taxpayer, that provide needed space and have also a real stimulus effect as well during the process. One option, for example, is using acquisition or lease purchase as a way of increasing ownership and stabilize development projects that frankly are either stalling or will be stalling due to the economy. There are many development projects that are either stalled or at risk of stalling. This potentially creates an opportunity for the taxpayers, the federal government, the taxpayers to acquire needed property at real significant savings to the taxpayer and also to help reduce our reliance on costly leasing and the uncertainty of the leasing market.

At the same time, such investments will help to stabilize economic development projects that local communities and economies are relying upon to help the neighborhood and to create sustainable jobs. The meeting space that the government needs must be done in a way that gives the taxpayer the best return on the investment. And obviously, the lease purchasing or purchasing outright would be a much better deal.

So the current credit crunch can provide a big impact on GSA leasing and building programs. I believe, however, that if managed right, if managed correctly, there's also an opportunity to make smarter decisions as to how the funds are used that, again, would bring long-term economic savings to the taxpayer. So I look forward to hearing from the witnesses on these and other issues.

And I want to thank you, Madame Chairman, again, and my statement once again, thinking of Susan.

DEL. NORTON: Thank you very much. Mr. Diaz-Balart.

We will ask our first witness to proceed, Mr. Samuel Morris, assistant commissioner, Office of Real Estate Acquisition at the General Services Administration, Public Building Service.

MR. MORRIS: Good morning, Madame Chairman, Ranking Member Diaz- Balart and members of the subcommittee. My name is Chip Morris, and I am the assistant commissioner for the Office of Real Estate Acquisition in the Public Building Service at GSA. Thank you for inviting me here today to discuss the impact of the serious commercial real estate credit crunch and GSA's leasing and building during an economic crisis. Bart Bush, the regional commissioner for the Public Building Service and the National Capital Region is here behind me today to answer any questions that you may have about NCR's recent real estate acquisition reorganization. We discussed that, Commissioner Winstead did, I believe, at some of the hearings last summer, our plans for that.

Since our new construction, modernization and repair and alteration programs are funded through appropriations, they're generally not directly affected by any decreases in the availability of credit. Because GSA pays contractors and subcontractors for these projects periodically for work completed, they typically do not need to obtain third-party financing to complete these projects.

The credit crunch has had mixed impacts on our leasing program. Financing for government leasing deals where the leases are backed by the full faith and credit of the United States has always been lower than that for more risky ventures. Therefore, when credit becomes more expensive or difficult to obtain, lessors of government-lease buildings have typically obtained financing more easily and on less costly terms than other borrowers.

However, GSA is noticing an adverse impact of the credit crunch on its leasing program in certain instances. We monitor the impact of the credit availability on lease projects on an ongoing basis. Most recently, in February of this year, we asked our regional offices to identify leasing projects where lessors were experiencing difficulty in obtaining financing. The regional responses identified 21 lease projects that they believe were impacted by a lessor's inability to secure funding that resulted in a delayed delivery of space or a need to re-compete the procurement.

The credit crunch is impacting some projects and some agencies to a greater degree than others. However, we have seen some impacts on small, short-term leases as well as large lease-construction projects. Several lessors have experienced difficulty obtaining financing for the build-out of tenant improvements. Others have had to withdraw from procurements due to their inability to obtain financing. In some cases, lease procurements have been terminated because of the lessor's inability to close on their planned financing. These delays can add costs to the overall project and impact our client agencies' ability to fulfill their mission.

On larger, more complex projects, we do have available the use of our credit-tenant lease in order to attract more favorable financing. We're also working on our solicitations for offers to obtain more disclosures in our bids regarding the financing terms, both from the lenders and from the developers, in order to protect the government and assure ourselves of the financial viability of the perspective offers that we receive.

That concludes my testimony. I would be happy to try and answer any questions that you may have.

DEL. NORTON: Thank you very much, Mr. Morris.

Forgive me, I neglected to ask the members. And I'd like to ask them now before I begin my opening statement. The fact is that we're talking about a problem that obviously affects the nation's capital and the National Capital Region, but we're having this hearing because of the nationwide effect of the credit crunch. So before I begin my questions, may I ask if any members of the committee have any opening remarks they would like to make?

I thank you, with my apologies.

Mr. Morris, you mentioned what we suspected, and we wonder if it's going to spread. On page two in fact you said you have given us figures, 21 lease projects that were impacted by the lessor's inability to secure funding. That's regional response.

MR. MORRIS: Yes, ma'am.

DEL. NORTON: What about nationwide? Do we see that in other places as well?

MR. MORRIS: Those responses came from across the country, not just in the --

DEL. NORTON: Oh, these are regions across the country.

MR. MORRIS: Yes, ma'am, not just the National Capital Region.

DEL. NORTON: Could you identify those regions for us?

MR. MORRIS: They were all regions. There were regions -- let's see, we have region one, headquartered in Boston; region two and three in New York and Philadelphia; region four, headquartered in Atlanta; region five, headquartered in Chicago; and region nine out of San Francisco, California.

DEL. NORTON: So we do see a nationwide effect here.

MR. MORRIS: Yes, ma'am.

DEL. NORTON: Then you say some impact on small, short-term leases as well as large lease-construction projects. Now, that really would interest us as we're about to embark on some lease-construction projects. But you say that several SLs have experienced difficulty in financing for tenant improvements. And I'm wondering if this credit- tenant lease idea that you spoke of, would you explain that and how that might be helpful here to GSA? Because the tenant improvements would, of course, be very important to the agencies remaining in the building and renewing their leases and the like.

MR. MORRIS: I'll be happy to try and answer your question. Actually, the difficulty that we've seen in some of the developers obtaining financing for the financing of the tenant improvements have been in smaller, short-term leases dealing with the acquisitions we've been making on behalf of the Census Bureau in connection with the decennial Census that's going on. Acquiring those spaces has been difficult anyway because they're short-term leases, typically less than two years. And so in this kind of economic times, people are looking for us to go longer than a couple of years.

DEL. NORTON: But Mr. Morris, if we're finding trouble finding anybody that wants to lease, why don't we leverage the misery, forgive me, of the private sector here who would seem to want anything they could get at this point with somebody who's able to pay?

MR. MORRIS: Well, and that's a very good point. We've been pretty successful in obtaining the lease space that the Census needs. Out of those 21 projects that we got feedback on, eight of them had to do with Census Bureau leases that we're acquiring now, that we're trying to put in place by the end of August of this year. We haven't suffered too much as a result of that because the Census Bureau has been able to step up. Some of the developers had trouble getting financing to handle those tenant improvements. And the Census Bureau has stepped up and funded the cost of those improvements upfront, so they've taken that issue away from those developers who were trying to build out that space. So we've been able to solve that problem so far. But there were a couple of instances where in fact the developer I know in one case had trouble actually closing on his loan after the award and was not able to actually pay his contractor and his subs on a timely basis. That was eventually taken care of, and we're back on track.

But we're having -- because of the critical timing on delivering those census offices in order for them to get their mission started later this year, we're really following that very closely.

We've seen some impact but so we've been able to handle it. But we have also seen it -- and this is where your question about the credit tenant lease come into play -- we've also seen it on several large construction projects. We use our credit tenant lease on larger, more complex deals. Think of the Department of Transportation headquarters space in Southeast Washington. We used a credit tenant lease in that particular transaction. Most of the -- the GSA lease, if you think of it in commercial retail terms, we are tenant-oriented in the requirements, the contractual terms. It's more heavily weighted on what the government needs for its space, much like an anchor or a big box tenant would be in a shopping center or a mall where the developer or the owner of that mall is trying to win that anchor tenant to solidify his development for a shopping center.

So the government has very strong tenant requirements in its contracts -- in our regular forms, if you will. When we're dealing with large, complex transactions, we have been willing, when the circumstances are right, to compromise some of our requirements in order to facilitate better financial terms. For instance, once a facility has been developed, built to our specs and accepted by the government as meeting our requirements and we're entering into occupancy and we're starting to pay rent and we have contract administration going on, normally we still have very strong rights to either terminate that contract for a default by the landlord in failing to meet their obligations, or to take self-help actions, if you will, and offset our cost against the rent payments that we make.

Well, when you're really looking at large-scale financing for those kinds of projects, whether it be bond financing or traditional bank financing, we can pay a higher price for that because the lenders, the bond holders, want to make sure that they have an income stream over the life of that lease which will amortize their debt. So when we have completed the project and accepted the possession of the premises, we will compromise, if you will, our rights to terminate that lease and walk away from it, especially with regards to that portion of the rent that goes to amortize the debt that's on the project so that lender can be assured that at least so much of the debt that's needed to amortize their debt continues to be paid over the life of the lease.

And we seek recourse for if the landlord defaults on maintenance or operation of the facilities to a reserve account. Instead of paying all of our rent directly to the landlord, we may fund a reserve account that's held in escrow on the side, and if the landlord fails to live up to its obligations to maintain the premises, then we limit our recourse against that type of default to funds in that escrow account that can be used to cure that default and bring the maintenance and the operations up to par, up to the requirements in the lease.

So we found that in those kinds of cases, it facilitates obtaining financing for those larger deals and we can usually obtain better pricing. We think that may -- and we're looking at instead of just the large headquarter leases, that that credit tenant lease approach may help facilitate some of our other large lease construction projects.

DEL. NORTON: Well, Mr. Morris, I can't say enough about the need for GSA to act like it is in the real estate business and the need to do things right. I mean, we so seldom -- especially after we've essentially paid for the build-out because that passes on to us -- walk away from a lease, so the notion of leveraging this termination ability of the government that's in every lease with the kind of facts that you're talking about, that's the kind of thinking we need to have to save the government money.

MR. MORRIS: Right.

DEL. NORTON: That termination doesn't bring us anything. We have it in there because we are the federal government. In my judgment it needs to be leveraged more often, even in a situation that is not a credit crunch like this one.

I'm going to ask a statement that's not -- ask a question that's not unrelated to the statement of the ranking member. Then I'm going to go on to him and to others before I come back.

The ranking member did have a bill, and I'm in sympathy with what he was after. I didn't think that we could do it in legislation, but the committee intends, in any case, to work on the theory of his bill, which is, you know, after-the-fact monitoring won't do, especially for the stimulus project the GSA is in the midst of doing -- a specific number of jobs forecast. That's the whole point of the stimulus project. There's a certain number of days. We're going to require those days be met -- that a similar period be met by GSA.

The first thing that would aid and abet the theory of the ranking member's concern about before the fact rather than after the fact would be the requirement that the list of projects be published on the website. As of this moment, that list of projects is not on the website. How could that be? How long has it been since we passed the stimulus bill? Huh? At least three weeks? GSA was, long before passage, into -- correctly and justifiably into considering what those projects -- those projects are all over the country. Where are those projects? Why aren't they posted?

MR. MORRIS: I'm going to speculate on that, Madame Chairman. I have not actually been a part of the development of the project list and part --

DEL. NORTON: Is there anybody here from GSA who can come to the table and say anything about that to this committee?

MR. MORRIS: I can tell you that I think that GSA has come up with their project list and it's being vetted by the administration.

DEL. NORTON: Now, we are aware of that. We are aware of the project list. We are aware of it being vetted. Is it your testimony that the administration is holding it up?

MR. MORRIS: No, ma'am. I'm not exactly sure what the status of going public with a list is at this point in time. I'd hesitate to speculate on that.

DEL. NORTON: Would the committee --

MR. MORRIS: We can find out. I'd be happy to get back to you on that.

DEL. NORTON: The subcommittee should get -- the appropriate GSA official should be informed that by close of business Monday we either want the projects up, know the reason they're not up, or know when they will be up, particularly since GSA doesn't have the same requirements that the states and localities have, although we shortly will have, with respect to time and the like.

I'm going to ask the ranking member if he has any questions on this testimony.

REP. DIAZ-BALART: Yes. Thank you, Madame Chairwoman, and thank you for that statement. I mean, you've clearly been pushing for some of the same things that I've obviously been talking about. You've been doing it for longer than I have because you've been here leading on these efforts about accountability, right, and I know that you will do everything you can to try to get accountability. Obviously, as you well know, my problem has always been a lot of times we just don't put the stuff in the legislation and then later there's a lot of hoopla as to why things happen and I think the TARP example is the most dramatic but clearly not the last one. But I want to make sure that I mention that obviously you have been a leader in trying to get accountability, and thank you for that.

You know, we have -- we have about what, $5 billion, as I mentioned before, that you have now because of the stimulus bill and there's a great opportunity -- a great opportunity to purchase properties, either those that are already up or those that are coming up -- new facilities that may be coming up. So it's a great opportunity to acquire buildings. What I'd like as far as an explanation now is to specifically what are you looking at? I mean, are you looking at those because I would hate to lose -- this is a lifetime opportunity. And GSA did that a number of years ago and with very great -- with good results for the taxpayer. So are you looking at that?

And I'm going to ask you for a brief statement on that, but I would also like now, through this means, to ask you -- what I'd like to do is get together with you. Let's look at what you're looking at -- what you're looking at doing because I think we have an opportunity of a lifetime to save a ton of money for the taxpayer to help some of the issues that GSA has because of a scoring problem, and so -- and you have the money right now, you know, $5 billion -- a little bit over $5 billion.

MR. MORRIS: The concept of an opportunity to purchase I think, from my standpoint, is a good one. The money that's in the stimulus bill, to the best of my knowledge -- and I said earlier, I am not on top of that, but to the best of my knowledge the bulk of the funds are dedicated to repairs and alterations of existing federal buildings to improve them from an environmental standpoint, to make them more energy efficient. There's also some money in there for swing space for leasing that I'm aware of because we've been strategically trying to plan for the needs of that swing space to coincide with when the repair and alternations of federal buildings are coming online.

I am, quite honestly, not aware of money that's being devoted for those types of opportunity purchases that you're mentioning that's available in the stimulus bill. I'm not aware of that.

REP. DIAZ-BALART: Well, again, because the language specifically says that it's authorized for GSA to "initiate design, construction, repair, alteration and other projects to existing authorities of the administrator" -- "and other projects through existing authorities of the administrator." So it does have an open-ended part there. And, again, I just think it would be such a shame, particularly with all the issues that we have and the fact that we have this issue of this vicious cycle of you all not getting the funds because we're leasing.

So we have a great opportunity, there is the money available, and I'm pretty sure that -- I mean, the language, again, says that. You're right; what does that mean? But there is clearly a caveat that -- an out. It says, "and other projects through existing authorities." You clearly have some existing authority to do so because you've done it in the past, which is why I would like to sit down and figure out what you're doing because I think -- my fear is exactly that, that maybe you're not really looking at this. We have an opportunity and this -- you know, we should be doing business as usual when you have this opportunity. The market is where it's at. You have the cash on hand. You have properties that are probably either available now or will be available shortly because of the circumstances. It's a no-brainer, and it's a no-brainer in particular because one of the things that we should always be emphasizing as first and foremost is make sure that the taxpayers' money is well- spent and is done efficiently, and I know you agree with that.

So this is the opportunity, folks. So, anyways, with all due respect, what I'd like to do is sit down with you and look at that.

MR. MORRIS: I'd be happy to do that, Congressman.

REP. DIAZ-BALART: Thank you, sir. I appreciate that. Thank you.

DEL. NORTON: Thank you, Mr. Diaz-Balart.

REP. DIAZ-BALART: Thank you.

DEL. NORTON: Mr. Perriello, have you a question for --

REP. THOMAS PERRIELLO (D-VA): Sure, I'd just like to follow up on your point and the ranking member's point and ask you, would you agree with the basic premise that there are long-term cost savings to be made if we looked at some of these procurement strategies, if you had that flexibility and took it?

MR. MORRIS: Yes.

REP. PERRIELLO: And can you give a sense of what kind of gains we could see, say over the next 10 fiscal years?

MR. MORRIS: You mean quantify that for you?

REP. PERRIELLO: Sure.

MR. MORRIS: That's hard to do right now. One of the things about an opportunity purchase is trying to marry up the requirements of particular government agencies with the location of where those buildings might be. So I'm trying to find the buildings in different markets, determine -- we're actually getting a lot of calls. I fielded a call yesterday from a citizen saying, we're looking for opportunity purchases for distressed buildings; do you know where there are any? And it's like, we're not really in privity of contract with landlords and their lenders, so what we hear or what we know about is really second and third hand. But when you have an opportunity in a metropolitan area where you see buildings that are stalled in their development, stalled in construction, and we know that we've got, for instance, an expiring lease load in that community that we need to transition federal workers in, that's when you can try and marry those things up. I don't think that we have done the kind of research that you guys are looking for to try and take advantage of that yet.

REP. PERRIELLO: But you would agree both on the issue of renegotiating or looking at some of these leases and procurements there are cost savings there.

MR. MORRIS: Yes.

REP. PERRIELLO: And then on the issues related to implementation of recovery, can you give us a sense of whether you have the capacity you need to be implementing right now the various things that have come through as part of that.

MR. MORRIS: That is a strategic part of our planning efforts to handle the recovery. I mean, we are looking not only at the work plans but what it's going to take to mobilize our workforce and our efforts, and I think we feel pretty confident about that.

REP. PERRIELLO: All right. I yield back.

DEL. NORTON: Thank you very much. Ms. Edwards, do you have an opening statement or anything you'd like to say at this point before I --

REP. DONNA EDWARDS (D-MD): Mr. Morris, we had a hearing on the credit crunch last summer when it became clear that it had moved big time to the commercial real estate sector. What has GSA done to evaluate the impact of the credit crunch on its portfolio since that hearing?

MR. MORRIS: Well, we've continued to monitor the situation. As I mentioned before in my testimony, we've gone out to the regions to try and find out if they can identify, and they have, projects where they have experienced difficulties that they believe were attributed to financing.

In addition to that, we've actually tried to look at our own processes and procedures, the form of our solicitations of offers, to see what we can do to protect the government and moving forward with procurements for lease acquisitions to make sure that we've got financially viable developers who are bidding on our projects. We've continued the work of a lease construction group in my office that have drawn on people from across the country to look at how we can better structure our solicitation to make them more user-friendly. Secondly, we're looking at, as I mentioned earlier, the use of our credit tenant lease and more projects, and not just the great big headquarter leases, but other lease construction projects like the FBI, like -- you know, we have a lot of Social Security Administration field offices that are lease construction projects, and they're in every congressional district around the country and making sure that we're getting the best deal on those and we are having developers that are able to secure financing. They --

REP. EDWARDS: Well, let me take up precisely an example like that.

MR. MORRIS: Okay.

REP. EDWARDS: The committee has expressed concern about quite a significant number of leases we've been asked to authorize for the FBI. Now, that means the FBI needs space here and nationwide. It's a perfect leveraging opportunity, one would think, of the kind you're talking about for Social Security space. Are there any plans to exercise purchase options on any of these new leases? After all, if the FBI is there and you do go to all the work for build-out and the rest that a very special security agency needs, and you have a number of them coming up at the same time, isn't that an example of how you could leverage your position in the real estate market?

MR. MORRIS: We do have purchase option language in the leases that we're doing -- these lease construct leases that we're doing for the FBI. They're not as tight as they probably should be. We inserted those, quite frankly, Madame Chairman, at the suggestion of the committee that we ought to be able to have those purchase options available to us when down the road we have funds available to actually exercise those.

What we've been doing with the FBI is for those projects that have been approved by the administration and by Congress and are under construction, we're monitoring those pretty closely to see if they're coming online according to plan. We've had a couple of instances where we've had financial problems with projects underway. We mentioned one at the hearing last summer where we had an FBI project in Detroit that was cancelled, in part because of financial difficulties of the developer. We had another one in Charlotte, North Carolina where we had to cancel the contract after award because the developer couldn't perform. But we've been going back on other projects that have been --

DEL. NORTON: Could I ask a question? Are these FBI buildings more or less alike in these areas, the locations?

MR. MORRIS: The program of requirements are similar but they may vary dramatically in size from one project to another. They're going to be -- there may be very large ones, several hundred thousand square feet, to smaller ones. Even the small ones, though, are large by normal standards. They could be 75 (thousand) or 80,000 square feet.

DEL. NORTON: And do we have, you know, different developers all over the country -- different developers based on their location doing the work?

MR. MORRIS: Yes. Yes. We have some repeat competitors that are -- I'll call them chasing those projects. Some of them are bidding on more than one, but --

DEL. NORTON: Well, I would hope so.

MR. MORRIS: Yes.

REP. EDWARDS: The reason I asked is it occurs to me that, especially in this market, if you're able to bid on one, you know how to do it, you know the requirements. The requirements are rather special. To have to go from one end of the country to the other and start all over again does not seem to me to be looking at one's portfolio as to how to leverage a need which looks pretty similar across the country and get the best deal for the government or the best deal for the developers.

MR. MORRIS: Right.

DEL. NORTON: For example, if one had to do more than one of these and really knew how to do them and do them well, conceivably, that could cost the government less.

MR. MORRIS: That's true. Part of the problem --

DEL. NORTON: And one would be able, indeed, to make a deal for more than one at one time, if one had such a reliable builder to do it, given the specialized nature of the -- and the quantity of leases we're talking about -- of the space we're talking about.

MR. MORRIS: Part of the problem that we've had with some of the FBI projects is actually just making sure -- and that's one of the things that we're having to do now, is really take a gut check on some of the projects that have been approved, to make sure that they're -- that the terms and the prospectus that Congress has approved, are still viable numbers. So that in --

DEL. NORTON: In terms of what?

MR. MORRIS: -- in terms of being able to bring those projects in --

DEL. NORTON: At the cost?

MR. MORRIS: Yes, ma'am. So we're going back to those projects now and working with the FBI to do a gut check to see if the requirements and the rent caps and the limitations in those approved projects are really viable in this market, to go out there. And we want to make sure that we feel comfortable that we can bring those in. In addition, we're hiring a contractor to go back and look at the program requirements and take a look to see where we might be able to value engineer some of their requirements to try and save the government money and bring them in within the existing limitations of the prospectus. We're also spending some time with the FBI to see if we can't --

DEL. NORTON: I would think the costs have gone down --

MR. MORRIS: Well, the costs of credit haven't gone down, but costs of materials have --

DEL. NORTON: Are these people still trying to get the credit? These people are just now trying to get the credit?

MR. MORRIS: Well, in some of the projects that we haven't gone forward with yet, yes, they're not out on the street yet. So those are the ones that we're looking at --

DEL. NORTON: How many of these FBI projects are out on the street at this time?

MR. MORRIS: I need to provide you that information.

DEL. NORTON: Would you please provide us that information within 30 days?

MR. MORRIS: Yeah.

DEL. NORTON: We'd like to know -- we'd like a status report on the state of the FBI projects. In particular, where we are, whether it's procurement stage, at some later stage --

MR. MORRIS: We can get that for you, ma'am.

DEL. NORTON: You mentioned in some of your remarks, in answer to a prior question, making the process user friendly, as well. That's going to be particularly important if you want to have anybody bidding on these projects.

Projects have been worth so much that the private sector has absorbed, really, quite outrageous costs from GSA, large amounts of it from delay, an absolutely frustrating bureaucracy. People can't afford it anymore, particularly with the cost of credit. And I would hope that we would use this opportunity to make the entire process more user friendly and save the government money because when you say the -- these developers find a way to get their money back, after you have, in fact, raked them over the coals. Those who don't get the contracts, of course, are just left out in the cold, and that's a terrible thing to do, too. But it may be very much to the disadvantage of the government to leave so many out in the cold today, when credit is so hard to come by in the first place.

What comes to mind is the so-called occupancy agreement, where -- there have been times when the way GSA does the timing on the signing of an occupancy agreement that there have been occasions where occupants have been allowed to opt out of an occupancy agreement after we're very deep into the process. Now you would think that the occupancy agreement would be signed before the procurement.

Now, what possible advantage is it to the government to allow agencies to act as if they're just free agents with somebody else's money -- I'm just going to ask GSA if I can opt out and GSA almost always bends. That's why we're going to re-authorize the statutes to give the agency stronger authority so that that bending will go. But what seems particularly wasteful, are allowing agencies to opt out of an occupancy agreement. Under what conditions would an agency be allowed to opt out of an agreement following a procurement and all that the agency's gone through?

MR. MORRIS: Let me explain a little bit about that process for you, and lead up to answering your question. The occupancy agreement, as you understand, is the agreement between GSA and its customer agency, as to the terms and conditions of their space requirements. In a leasing -- we have occupancy agreements not only in lease scenarios, but also for our federal buildings. In our leasing program, if an agency is moving into leased space, the occupancy agreement basically is a pass through for the terms and conditions of that underlying lease. When we get ready to start the procurement --

DEL. NORTON: A pass through for the terms and conditions?

MR. MORRIS: Basically for the square footage, and the rent that they're going to be paying. They pay us what we're paying that landlord.

DEL. NORTON: But they're talking to you now, because you're already on a limb for this space?

MR. MORRIS: Well, at the very beginning we go to the agencies, before we start the procurement, and get that commitment from them, and have them sign a preliminary occupancy agreement, that is essentially their commitment to us that they want the space that they say they do, and that they're willing to pay the estimated rent that we're telling them it's going to cost. So we don't start the process until we get --

DEL. NORTON: Yeah. And if you're in the private sector, and you do that, you're going to be held to it. Why isn't the agency held to it?

MR. MORRIS: At the end of the day, when that lease is procured, we go back to that agency, when we have the final numbers, after award, when we know exactly what the rent's going to be, and they sign up again, a final occupancy agreement, which basically is that billing document from which they agree to pay us the rent that's set forth in the lease that we've procured for them.

Now, we don't have many agencies opting out of those occupancy agreements at that point in time. The opt-out scenario really comes during the term of the lease. And we don't see that too much, but there is a regulatory provision that agencies can, if they have a change in mission, give us 120 days --

DEL. NORTON: Well, Mr. Morris, you can rest assured I'm not talking about that.

MR. MORRIS: Oh. Well, in terms of --

DEL. NORTON: I'm talking about -- that's what I want to know. If that's the condition for opting out, somehow the federal government or the Congress has changed your mission in some significant way, and your testimony is that that's the condition for opting out, then I'll be perfectly satisfied. I want to know if there are any other conditions for opting out.

MR. MORRIS: I think what we get feedback on, and what you may be really driving at are the delays that it takes for us to get that final occupancy agreement finalized and signed with that agency.

DEL. NORTON: And what is it that they are negotiating during that time with you?

MR. MORRIS: Well, it's not just the occupancy agreement itself. They should be -- it's just getting them to sign it, to make sure that they've got their requirements met --

DEL. NORTON: And what would delay them in signing? Here's some people who've asked GSA to go out and find them some space. Now -- so tell me why they tell you they have not signed the agreement. We're going to deal with that in the statue, so I need to know, candidly, what is the reason that an agency would give you --

MR. MORRIS: Not valid reasons, I can tell you that.

DEL. NORTON: Well, thank you.

MR. MORRIS: They're not valid reasons. What happens is --

DEL. NORTON: And the agency needs to be protected here. And here, I don't want to blame GSA. I want to tell you what I think the problem is. Here is GSA charged with a government-wide mission. Not very many agencies have a government-wide mission. You deal with the public, or you deal with a particular sector. And here, GSA not only deals with the market, the credits, the leasing and construction sectors, GSA has clients that are peer agencies.

So essentially if you are a peer agency, you know, you're just like me, of course you have a mandate, a very strong statutory mandate, it occurs to us it's not strong enough, because those delays cost the government. When we get down to it, those delays cost the government, as if somehow these people were on their own dime -- well in a sense they are, but their own dime turns out to be the taxpayer's dime.

And it has gotten to the point where the delays of that time, which means being deferential to the agency, becomes so costly so that, particularly, as we look at the state of the markets today, and what's it's going to take for it really to right itself up, I don't see how you're going to keep the gold standard set of businesses, let's call them, because thet are across the board, you deal with, unless we can make the agency far more user friendly, and use this opportunity to do so.

I would appreciate, Mr. Morris, if you would undertake to look at ways that you think the agency could be helped in serving its clients while making the process more user friendly to those who've invested money. When I say, "How could we be helpful?", I mean there are things we could do statutorily. There may be other suggestions, but we do need your suggestions. If we don't get them we're just going to do what the private sector tells us they need. If they're willing to come forward, I want to hear from the agency's point of view.

Since you've got an agency responsibility to the federal government, I want to hear from you and we'll be having hearings over the next couple of years in any case. But I would very much appreciate your doing so and making sure those under you begin to help us think through and reauthorize a public building service statute, in effect.

MR. MORRIS: We'd be happy to do that. I would like to point out there are certain instances -- not just to bash our customer agencies -- there are times -- I don't think they happen frequently -- but there are times when an agency may resist moving into new space if they're not satisfied with the quality of the construction. Maybe the HVAC system is not operating properly; maybe there are some issues with adjustments in that. Maybe there are some other quality of constructions that aren't being met to the government requirements and they will be loud and vocal about those types of issues -- and we've run across those from time to time. But I don't think that's --

DEL. NORTON: Look, that's legitimate obviously. In fact, to give you a perfect example, one where the agency has moved in and we brought considerable pressure on agencies to, in fact, move to space which cost the government less and is well within the delineated area and so we have them moving to NoMa, which is within a stone's throw of the Senate.

And one of those agencies was the Equal Employment Opportunity Commission. They complained to us about the size of the spaces for lunches and heat and a number of things. And to the credit of the GSA I said, my goodness, how could we have made sure these agencies would not continue to insist upon renting or leasing only in the highest cost parts of the District for us now to get back complaints that basic in nature -- heat, not enough space for employees to eat? That doesn't speak well of the Congress or of the agency and we have been informed that GSA has been out there and that there's a build-out going on. And that's the kind of taking care of the customer that we think is absolutely called for; were that all that we knew in our long experience about occupancy agreements we would be very pleased. We do know that's something we're going to be looking at in this kind of climate -- anybody dare to say to somebody, oh no, I don't think I want to go there after all.

MR. MORRIS: Right, that's unacceptable.

DEL. NORTON: It just isn't. Let me ask you about these -- in that line, this holdover status. A witness is going to testify here that 60 percent of government leases enter into holdover status upon expiration. We believe this is a government-wide figure. We want to know how many leases are, indeed, in holdover status and where they are located. We want to know about leases in this region since so much of the federal sector is in this immediate region but we also want to know leases government-wide. And we want to know how many leases are expiring within the next six to 12 months and do you have any of that information to give us today?

MR. MORRIS: Yes ma'am. I'll start out by saying that holdover leases arise when we're not able to provide a replacement space solution for an expiring lease in a timely manner and we're unable to negotiate an extension with an incumbent or an existing landlord.

DEL. NORTON: Now what are the difficulties in negotiating? You're trying to get a better rent for the lease for the government perhaps?

MR. MORRIS: I think oftentimes it has to do with pinning down the requirements for that agency that's in that space. Believe me, a holdover is the worst case scenario and should be avoided if at all possible.

DEL. NORTON: Do most of these agencies want to remain in that space?

MR. MORRIS: Well it really depends; a lot of them do and that's one of the things that we're really working on because when we're going out for a new requirement we typically go out and hold an open competition -- that's our modus operandi if you will -- but there are plenty of situations and, quite frankly, you touched on it in one of the hearings that we had last summer where the tenant agencies requirements haven't changed. They are happy where they are and in those cases the federal regulations allow for a concept of entering into negotiations for a succeeding lease with that incumbent landlord.

We have to do a market analysis to see what the rents are like in that area, in that market; see what we're paying under the current lease; we have to factor in things like moving cost; and we actually have to go to the public and advertise that we do have a continuing need for space in that market and request expressions of interest from the market. If we get expressions of interest from other providers of space, then we have to make a decision based upon the numbers of whether or not it's worthwhile to go into a full and open competition.

If there are no bona fide expressions of interest, then we're free at that time to go ahead and negotiate another deal with that landlord. There are plenty of those situations around the country in every region. One of the things that my office has been doing to try and address the problem of the number of expiring leases that we continue to face each year and our inability to replace those leases in a timely fashion, is to use that as an important tool -- to say, look, if you know that the agency requirements aren't changing; if you go through this regulatory process; you factor in the market analysis; you look at the moving cost; you seek expressions of interest -- and the results of those efforts say take a look at negotiating with that current landlord; then right now, especially in these times when rent rates are not rising -- they're flattening -- we need to go along. We need to negotiate the best deal we can and lock in not on a year extension but go long and at least go out there five to seven years where we can take advantage of the market rates and we can stabilize that landlord's building.

DEL. NORTON: Is that happening? You know, that's like ABCs of how to operate in this kind of market if you have leverage GSA has. Is anything written to regions to tell them to proceed in that way?

MR. MORRIS: We issued a realty services letter just this past year on that very subject, reminding them of this regulatory authority and encouraging the regions to use this whenever they have the opportunity -- when the situation meets. And when you've got a brand new requirement coming in, we're typically going to be going to the market and doing a full and open competition but that's not the case in every situation.

DEL. NORTON: And that's going into this market and doing much of a -- you know that looks like another bureaucratic turn of events.

MR. MORRIS: One of the other things that we're trying to do now is actually get information out to the regions on a quarterly basis about what the market rates are, what the market conditions are in major metropolitan areas around the country.

DEL. NORTON: Because then all you have to do is, it seems to me, is to factor in the moving costs.

MR. MORRIS: Well that's true. What we're doing is getting them information in all the major metropolitan areas on a quarterly basis to say: here's what rent rates are for general purpose office space in these markets and, by the way, here are our current leases that are expiring over the next 12 months, 24 months, 36 months and beyond; so you've got leases that are expiring in these markets and what we need to be doing is planning now, as soon as possible, to take advantage of the current market conditions and go long where you can. We've seen trends over the last year and a half -- because we do this on a quarterly basis -- where rents have continued to flatten and in many markets have started to fall somewhat and this is an excellent opportunity for us to --

DEL. NORTON: Mr. Morris, the subcommittee will hold the agency very responsible if you do not take advantage of this market to renegotiate these rents or to extend these rents or to move because this is the time to do it if you have -- if you at the GSA, if you're an individual you're stuck, there's not much you can do. And that's why I want you to get to us the list of the holdover leases, their status, and also leases that will be expiring in six to 12 months, and what you say you're doing I'm sure has something to do with the fact that the subcommittee requires you to do some centralizing once again of leasing.

MR. MORRIS: And let me say that the holdover rate is really rather small as a snapshot of our whole portfolio. What we end up seeing is --

DEL. NORTON: Sixty percent enter into, according to an upcoming -- wouldn't this enter into holdover status upon expiration? I don't know who --

MR. MORRIS: That's not correct; it represents about 4 percent of our overall portfolio. We have 8,600 leases in our portfolio; we have about 300 leases that are in holdover at this point in time -- it represents about 4 percent of our total inventory.

DEL. NORTON: You would have to say percentage of those that are expiring.

MR. MORRIS: It's about 13 percent of our total leases expiring in 2008. Now where the problem is, we're not replacing all of those leases. We're doing -- and this is where I think we're getting some push-back from the private sector.

They're not all going into holdover status. There are a number of leases, and there are about 40 percent of our leases that are expiring that are being extended on a short-term basis. To me, a holdover lease is when you don't even have lawful possession of the premises. You're squatting, in effect.

DEL. NORTON: You have to extend it on a short-term basis because they're holding over.

MR. MORRIS: Well, the holdover scenario --

DEL. NORTON: You know, what is it? You know, this is not some apartment we're on a month to month. Or maybe that's what you're talking about.

MR. MORRIS: No. Well, the holdover is the situation where the landlord has said, I'm not going to give you an extension, we want you out of here. And we're trying to negotiate a short-term extension for a year or a two-year extension while we get the agency requirements finalized so that we can effect a final solution.

DEL. NORTON: Do you have the staff and the talent to do that quickly?

MR. MORRIS: We have laid out this past year a plan nationwide, and we'll be happy to share that with you, to try and reduce the extension problem that we have with our expiring lease load. We actually are increasing the staff above what it has been nationwide. We've been somewhat successful in that endeavor, not as much as we'd like. We need more people not only to do work in house but actually to manage our broker program as well. So as you are well aware of, we talked about it, I know, last summer, just staffing needs and our leasing specialists, I will say we've made some progress.

Just this last week, we kicked off a week of what we call our boot camp in the Public Building Service where we bring brand-new people that have joined the organization in for week's worth of training in Washington. And I had the pleasure of meeting 15 new leasing specialists from regions around the country, who just started with the agency, many of whom had come from the private sector, and others we had actually recruited from other federal agencies where they had been doing realty work. And so we had it was like a freshman class of brand-new realty specialists from around the country. They were in Washington for a week of training. And I got to meet with them and talk to them. And we had a reception after. But they were more than enthusiastic. They were really quite excited about joining our organization and trying to make a difference.

And we talked about this is a time where the country is having economic difficulties. And I hate to say it, but it's an opportunity. I hate to say it in the sense that we don't want to have bad economic times, but it is an opportunity for the government to try and make the most of it.

DEL. NORTON: Thank you, Mr. Morris. Mr. Morris, I'm just about finished here. I'll ask Ms. Edwards if she has any questions.

REP. EDWARDS: Thank you, Madame Chairwoman.

And thank you, Mr. Morris, for your testimony. I want to go back to this question of the lease expirations because my reading of the upcoming testimony is that of the leases, that there are 60 percent of your leases that are expiring that are extended.

MR. MORRIS: That's true.

REP. EDWARDS: Thank you.

MR. MORRIS: That's true, not holdover but extended.

REP. EDWARDS: Extended. And so but even still, 60 percent extended, it seems to me not only does that represent kind of an unfairness to the government and to the taxpayer, but it perhaps represents an unfairness also to the landlords in terms of their ability to project what their business opportunity is going to be. I mean, 60 percent seems rather extraordinary.

MR. MORRIS: I think that's a valid point. There are bona fide cases where extensions will occur. If we are moving customer agencies into a federal building or new lease space and there have been delays in the completion of that new space for whatever reason, we may have to extend the lease for a short period of time until we can actually accomplish the completion of their new facilities and move them in.

REP. EDWARDS: I think all of us understand that.

MR. MORRIS: But on a portfolio basis, it is my belief that it is entirely incumbent when the government enters the marketplace to contract for lease space that they have an obligation to respond on a commercially reasonable fashion. And it doesn't do the government any good to do what I call serial extensions of leases one year after another where we are not able to lock into a long-term lease to house the government. And I believe you're right. We are getting pushback from our private sector landlords who are saying, we need stability in our portfolio, in our building, and we need to know what you folks are going to do. And we have an obligation to be able to deal with that.

REP. EDWARDS: Well, I appreciate that. And I look forward to hearing from you and from the agency in the near future about the progress on that because I shared with you (and ?) the chairwoman that we are actually, you know, in a great position, you know, for the government, for the taxpayer to get a really good deal on a long-term lease opportunity in this current market. And we should take full advantage of that. And so we shouldn't come back here in another several months still discussing 60 percent extension rates for expired leases.

I want to go to another set of questions, and it really has to do with this region, with the metropolitan region. In addition, in some upcoming testimony, we see a chart that shows the amount of GSA owned and leased space in the metropolitan region. I represent a significant portion of Prince Georges County and some of Montgomery County. And there has been a longstanding complaint, particularly in Prince Georges County, that Prince Georges County has not enjoyed in this region a fair share of GSA lease opportunities for full-service lease space, not just for warehouse space. And so I'd be interested, and it doesn't have to be here, that I see some kind of and this committee sees some kind of breakdown of how those leases breakdown across the region by county.

Because you know, when I look at 18 percent in this region of GSA space going into suburban Maryland compared with 25 percent in northern Virginia and 57 percent in D.C., I certainly understand the District of Columbia numbers, I'm not quite sure I understand the great discrepancy from suburban Maryland to northern Virginia. And I dare say that when we look at suburban Maryland and break that down by county that we will see that indeed it's not the imagination of developers in Prince Georges County that the county is then shortchanged. And you know, there is a fairness in this region.

And I think that the concern isn't just about this metropolitan region, that it's replicated other metropolitan regions, too, where there needs to be sort of a fair, you know, shared opportunity for GSA leasing in our metropolitan region. And I know that in my work on this subcommittee, it will not be the last time we'll hear this question until there's, you know, an answer that is much more satisfactory to the people of the 4th Congressional District.

I would also like to ask you about, if you would, please describe the process by which and the transparency provisions by which you analyze where GSA lease opportunities will take place. And I am particularly interested in the way that you both value the lease and how you assess things like transportation because Prince Georges County has, I believe, the greatest number of Metro station stops in the suburban metropolitan area. And those are all stations that could be fully developed out. And so I'm curious to know how you analyze transportation as a core factor and, frankly, as a green factor in determining where to locate GSA leases.

MR. MORRIS: It is a big consideration. I'd like to start out by saying that we had the pleasure in meeting this week. Bart Bush, my colleague from the National Capital Region, behind me and I, along with the acting commissioner for the Public Buildings had a very frank meeting with the director of Economic Development for Prince Georges County along with several of the senior businessmen of the county to have a frank discussion about some of the issues that you just brought up. And quite frankly, for me, it was enlightening because I am not only focused on NCR but also the country at large. And some of the issues that they brought to our attention I frankly wasn't aware of.

But in determining -- to try and answer your question to begin with -- where we go, transportation patterns play an important role. The agencies themselves that we are trying to find space for tell us, where they come up under our regulatory scheme with delineated area, that they're looking for in terms of locating. And they factor in a number of factors that are mission related. This very topic has been a huge point of discussion with the chairman of the committee, subcommittee and other members of the committee. In fact, we are now following guidelines in our larger deals where the prospectuses themselves contain an explanation of what that delineated area is going to be. And once that's determine and put into the prospectus, we're bound by that unless there's some kind of significant change, in which case we have to come back and notify the committee.

So to try and answer your question to begin with, transportation is a huge factor. Establishing the delineated area is the first job of the agencies that we're trying to locate. And then we take a look at what they tell us and try and consult with them and advise them on what kind of competition opportunities are there there. And are they too small? And is there a need to actually enlarge that area to achieve better competition and the opportunity for better pricing?

REP. EDWARDS: Thank you, Mr. Morris.

I mean, you can just bet that there will be ongoing questions at least from this Congresswoman about these issues because they're profound and they deeply impact the ability for the district that I represent to enjoy the kind of economic development and prosperity that the rest of our region enjoys. And I can assure as well that, you know, with 16 available Metro stop opportunities for transportation-oriented development that GSA can participate in, some of us will be very, very hard pressed to believe that you can't find some on that class A space that is located in Prince George's County. And not to take away from any other parts of the region but as you begin to look at these leases that are expiring -- and I'd be curious to know the numbers of the leases and the square footages in the Metropolitan region as these are expiring -- so that you can take a new look, a fresh look at available opportunities throughout the Metropolitan region. Thank you very much.

MR. MORRIS: Let me just follow up because I would like to share with you one important factor that they actually brought to light in our meeting was what they perceived as a disadvantage -- the Prince George's County officials -- in terms of the availability of existing space.

Obviously in Washington, D.C. it's much more built out. Northern Virginia has a larger stock of existing buildings than Prince George's County and so that oftentimes in these procurements competitors from Prince George's County, their space solution in that kind of procurement is going to be new construction and that it was important to understand that if you're dealing with new construction -- and that is going to be a possibility -- that the pricing on existing space is not really going to carry over to pricing for new construction because the costs are going to be approximately the same across the region.

The point was made the cost of concrete in Prince George's County is going to be the same that it is in the District --

DEL. NORTON: Mr. Morris, the gentlelady has made a point that goes well beyond when new construction -- and I'm going to put it on the record now, given your explanation to her -- in the leases that are expiring within six to 12 months we want the exact location --

MR. MORRIS: We can give you that.

DEL. NORTON: By county and by place in the county. And the reason that the gentlelady's questions are so apropos has to do with many instances in the District of Columbia I could cite -- but a particularly shocking one from Prince George's County.

Now the reason that I want to put this on the record is because I believe that the developers in Prince George's County are sophisticated enough to have written to the chair of the committee and therefore inform me. I must conclude that throughout the United States this same -- and I'm going to call a spade a spade -- redlining is occurring. This is what we found. We got this long, almost scholarly, letter from a developer in which he laid out how the procurement that you actually cited -- you cited the prospectus -- how the agency had, in fact, violated the prospectus through the amendment process -- you're right.

We said that these complaints about proceeding after the delineated area to have agencies do whatever they wanted have become so systematic that you can't change a prospectus without coming back and reporting. And this is what the agency did in Prince George's and Montgomery County -- two very middle-class counties -- some of the highest income counties in the United States; this is not like, you know, they're buying in the Southeast and Northwest.

This is how the agency handled that, seeing that they had to come back and say we're going to change the prospectus. They read into it that, well, we're not going to change the prospectus; we'll show Norton and the committee. We're going to amend the prospectus. And they trusted us enough so that they didn't get a lawyer to come down and get to every jot and fiddle to (catch us ?). So we're going to amend it. And what did they do to Prince George's County? Here was an HHS, a new facility, not entirely new but they needed more space.

And this is what the Public Building Service did. In absolute unadulterated collusion with the agency, it came forward with a set of conditions that only the present Montgomery County location could possibly have met; these included places of worship -- if I may say so, that one really got to me as a strong believer in the separation of church and state -- that we could actually have a federal government document that said that places of worship was a factor in location. And then they went down a trivial list that included hardware stores, beauty salons -- we're trying to remember them all. It was as if someone went out and said what is it around the agency today that we have? And then they said, fine, make a catalogue of that; put that on GSA's desk and say: get us a place where you can get that.

Here was somebody trying to compete for the process and he has the -- oh, the one that really got us was distance from the Metro. Now the Prince George's location was closer to the Metro. Here where everybody is trying to change the world green before it completely boils over, they simply extended the distance of the Metro -- they said, we'll fix that. It says whatever, well under certain conditions we can't extend it so we'll just do that and it will all come together and they'll never catch us.

That's why you don't see me having confidence in the agency. So here's a very, very sophisticated developer, who didn't just write me a complaint, he did jot and fiddle. I couldn't believe it that under my very nose that the agency with whom I had worked so closely would do something that was abusive, deceptive -- a lie is the only way to -- so we call him in and they had no -- they tried to indicate as best they can why these unheard of conditions were put and doing it by amendment. And the staff and I sat and said, what can we do about this? And to make it worse, the RFP was already out. One of the things we don't do in the federal government -- we do abide by the right rules. We couldn't then say, hey, well, look, just throw it back and throw it all out.

Never -- and I have worked with this agency ever since I came to the Congress in 1991 -- I can only think that under our very noses this was happening day and night and we never would have learned about it. Well that one instance has only been a part of a catalogue now of growing instances where the agency has essentially lied to and violated the expressed written requirements of the subcommittee.

When that happens enough -- and you have the nerve to sit here and tell her about the prospectus and to give her a lesson in how you go about it when I have this outrageous example sitting before us -- I want you to know that it angered me to no end; it reduced to the level of minus-zero my confidence in the agency; they double-crossed the chairman who they knew had had this problem with redlining in the District and they were doing the same thing to one of the counties. As a result, it was one of the circumstances that has led me to engage in the present process of reauthorizing the entire agency and holding the agency much stronger to account on its reporting requirements to us. It was a total betrayal of trust -- and the gentlelady wants to say something on this regard.

REP. EDWARDS: Thank you Madam Chairwoman. What I do want to say is that I'm from Maryland and I represent both Prince George's and Montgomery County and the last thing that I want to do is to set up a competition between the counties. And that's why the imperative of fairness and parity in the GSA process is so important; because I know that for, Madam Chairwoman, the developers that you represent here in the District of Columbia and I in Prince George's and Montgomery County and my colleagues, we just want a level playing field and we want to know what the rules are and we want to know that when the rules are placed in order that the developers in the interest in our district understand what they are and that people are playing by the rules.

And what the chairwoman has described is a circumstance where there were no rules. And in fact, to the extent there were, they were changed in the middle of the game, and that's not fair to anybody, not to any of our jurisdictions, and nor is it fair to those who want to compete for GSA leases.

And so you can be assured that I, and I know that the chairwoman on this subcommittee, are going to be looking at these issues in great detail, because looking at our region, and one only has to look -- I think the Brookings Institute did a study several years ago called "A region divided". And when you look at the dots on the map, you can see the disinvestment. And that disinvestment is happening in the county that I represent. And so there will be additional questions. And I hope that the agency is both held to account, and then displays the kind of parity, fairness, and transparency that the taxpayer deserves, and certainly that the people of the 4th Congressional District deserve.

Thank you, Madam Chairwoman.

DEL. NORTON: I thank you, Ms. Edwards.

I do want to say that the gentlelady makes a point. She represents both counties and she's not trying to put one county against the other. But I need to tell the gentlelady that I am. I'm trying to put all the counties in play. I have put all parts of the District of Columbia in play. I mean if K Street comes up with a lower figure and better space, too bad, NoMa, too bad, the other areas that we've encouraged to develop down by M Street. Sorry, that's exactly what we want. We want the best deal for the government.

I want Prince George's annexed. I to see some explored -- unexplored opportunity for price reduction, for encouraging -- there was going to be new space here. This land was going to have to build, so your notion about "Hey, if Virginia had the smarts to build, and Prince George's did not". On the contrary, Virginia got the contract to build, and they built.

That's the only way Virginia has gotten it. So that has -- that's an opportunity. We see what happens when there's an opportunity. Let me tell you about opportunity. During the fiscal crisis in the District of Columbia, real estate collapsed in one of the wards across the Anacostia, Ward 8. And so people abandoned their property and moved out, and sold it for nothing. And look what we got happening in Ward 8 now. Smart folks, like the federal government has not been, swooped into Ward 8, saw that land prices were lower than they were in other parts of the district. We have whole new development of middle class housing all through Ward 8. Now, we're asking for GSA to play that role.

As it turns out, Prince George's county ain't Ward 8. Prince George's county, and I repeat, is one of the most prosperous counties in the United States of America. And it got that way the same way that Fairfax got that way. All of them got that way because the federal presence moved out into the area. When the federal presence moves out all kinds of other businesses move out, and that's the way it happens.

The same thing has happened in the District of Columbia. If the federal presence moves into an area of the district, that's the good housekeeping government seal of approval, and others come. So where you already are set up for success, because you have one of the most highly educated work forces in one of your counties, then I say she can't understand it -- And I'm not trying to put her in competition with one part of her constituency or the other -- but I can say, Let's get it on. Let's get it on between all the counties that are likely places for new construction to be built, where we're building new construction, and it happens all the time, so that we have a fair to the government.

Yeah, we want to be fair to Prince George's, but guess what? I want to be fair first and foremost to the government, and wearing her federal hat, that's exactly what the representative from Prince George's wants. So you've had to take this tongue-lashing because you're here before us. (Chuckles.) But we wanted to put it on the record so it can be clear that we're not going to take the assurances from the agency any longer. We're going to put it into law. We're going to hold the government -- if this agency ever does to us what it did to Prince George's, because when they did it to Prince George's they did it to us, we're going to hold you in contempt because it was a contemptible act.

In any case, sir, you can take that tongue lashing and give it to the rest of the folks back there

MR. MORRIS: I hear you Madam Chairwoman. Loud and clear.

DEL. NORTON: We called them all before us right in my office and told them what we thought of the violation of trust between us. And they needn't violate trust with me, because I have been the prime defender of this agency. I've respected its expertise. And so when the agency double crosses me, believe me, it ain't got no friends up here now. And I expect to be treated with the kind of respect that the Prince George's county episode tells me I was not treated with, that the subcommittee was not treated with, and frankly, Prince George's was treated with contempt, and I believe it was red lined -- and I will not go any further than to say red lined. You know what that means. I think that's what happened.

Thank you very much for your testimony, and I want to go on to the next, or the last panel of witnesses, very important to us. Richard Purtell, chair and chief officer, CEO of BOMA; Mitchell Schear, D.C. Downtown Business Development District. Also is a president -- of what? (Off mike consultation). Prenotto (ph) Development, and Dean Schwanke, senior vice president, Urban Land Institute. We are pleased to receive your testimony.

As to who should proceed first, I'm not sure we have any chosen order, so shall I just go from my left, my own left, to my right, or would any of you like to proceed first? Mr. Schwanke? Am I saying your name right, sir? Schwanke?

MR. SCHWANKE: Thank you, Madam Chair, and Ranking Member Diaz Balart, and the rest of the subcommittee members. My name is Dean Schwanke. I'm the senior vice president for publication and awards at the Urban Land Institute, here in Washington D.C., in Georgetown. We're a not-for-profit association with 38,000 members around the country and the world, primarily involved in development and investment in the real estate industry. Our mission is to provide leadership and the responsible use of land and in creating and sustaining thriving communities worldwide.

Pertaining to the current real estate environment, we've been over a lot of this already, but I'll go over some of the things that we see. The current financial crisis and the economic recession are pulling the real estate sector into a very difficult business environment characterized by numerous negative trends including the following -- increasing vacancy rates, falling rents, dwindling development prospects, lack of available capital for lending, stricter underwriting, falling property values, sluggish investment in transaction markets, increasing loan delinquencies and foreclosures, and growing distress for property owners.

While these trends are bad for commercial real estate industry, they present somewhat more favorable environments for tenants, as the availability of space is increasing while rents are declining. Of particular interest to the GSA is the office sector. A couple of facts here, office vacancy rates in the U.S. have risen from 12.8 percent in the fourth quarter of 2007, to 14.7 percent in the fourth quarter of 2008, according to one estimate.

And others are even higher. And some estimates suggests that vacancy rates will go to 18 (percent) to 20 percent by the end of 2010, which creates quite a favorable environment for tenants. Office rent growth has turned negative in the latter part of 2008, and negative rent growth is expected to continue well into 2010, and probably longer, depending on how the economy performs. Increasing vacancy and falling rents will translate directly into reduced income for commercial properties, which will put strains on operating budgets, reduce values and create distress for owners. So commercial real estate developers are facing dismal period.

Financing is evaporating for new construction, demand is falling, and projects coming online will struggle to lease up, falling short of forecasts. By one estimate, office completions in 2010, will total only about one third of the completions in 2008, and completions are expected to remain at low levels unto 2012. So we'll have a real shortage of new space coming online over that period of time.

Turning to the capital markets, the lack of liquidity in the financial sector has been well documented, and this problem is particularly severe for the commercial real estate sector, as it is a capital intensive business. Perhaps most important for real estate capital markets are the problems in the commercial mortgage backed securities market. CMBS issuance grew dramatically over the past ten years, and as of early 2008 had come to be a huge source of debt capital to commercial real estate, with over $230 billion dollars of CMBS issuance in 2007 alone. However, there has been no new issuance of CMBS since the second quarter of 2008. Zero. And it is unlikely this critical source of commercial real estate debt capital will be revived any time soon.

In addition to the lack of capital availability, underwriting standards have shifted drastically, and the cost of debt capital has gone up. Commercial mortgage interest rates spreads over Treasury's have increased substantially. Bank underwriting standards and equity requirements are now much more demanding and conservative. More of our property values have declined, not only because of the declining fundamentals, but also due to the rising capitalization rates, and a lack of investor confidence. Further declines are likely for several more quarters, if not years. As a result of all these trends, refinancing of any commercial mortgage coming due will be extremely difficult for most property owners in 2009 and 2010.

Many borrowers with loans coming through will find themselves unable to obtain suitable financing, as any new financing sources will require more equity and charge higher interest rates than many buyers can manage -- especially if the property's value has declined, which will occur in some cases.

As a result, many owners will find themselves in distressed situations and will either lose the property to the lender or will sell the property at a distressed price level. This can and will happen even to owners with properties that are performing well and the problem will severely impact a large number of commercial real estate owners and investors -- lenders that have used leverage to finance properties.

So what does this mean for GSA? The current environment presents both opportunities and problems. On the negative side, because of the lack of financing, it will be more difficult for developers to develop new buildings to meet specific GSA standards and requirements -- as you've already talked about. Although, GSA is certainly a strong credit tenant for any proposed development deal and will make any such deal look much better than most others.

Moreover, the lack of new speculative buildings in the market, which tend to be more green and energy efficient, will inhibit GSA's ability to find the most technically advanced green and energy efficient space through the leasing process.

However, the retrofitting of existing buildings to be more green and energy efficient will proceed, we think, as owners seek to upgrade their buildings to compete in a difficult market that is increasingly demanding such space. GSA can certainly be a leader in hastening this trend as it has been in the past.

On the positive side, availability in choice in office space markets is improving while costs are decreasing -- as we've discussed. And the 2009-'10 period will certainly be a tenant's market -- if not into '11 and '12. Rents and occupancy costs will decline and stabilize at attractive levels for several years; thus, the next two years should provide an excellent environment for leasing new space or renewing or renegotiating leases at attractive terms.

Moreover, attractive acquisition opportunities will present themselves in a transaction market where there will be distressed sellers and few buyers. GSA could find attractive buying opportunities and could potentially acquire quality well-located office buildings for its own use at greatly reduced price.

That's my testimony and thank you, Madame Chair, and subcommittee members. I appreciate being here.

DEL. NORTON: Thank you, Mr. Schwanke.

Mr. Schear -- am I pronouncing your name, correctly?

MR. SCHEAR: Schear -- thank you.

DEL. NORTON: Mr. Schear.

MR. SCHEAR: Thank you, Madame Chair for the opportunity to be part of today's session.

My name is Mitchell Schear and I've been active in the Downtown BID since 1997. The Downtown BID is a nonprofit corporation that works to improve one-square mile of downtown Washington, D.C. It includes 62 million square feet of office space. Within that area, GSA owns 17 million square feet -- in leases an additional 7 million square feet.

I'm also president of Vornado/Charles E. Smith, which is the Washington division of Vornado Realty Trust. We are the largest lessor of office space to the federal government in the Washington, D.C. area. Vornado is one of the largest owners, developers and managers of real estate in the United States with a portfolio of over 100 million square feet.

Your decision to hold this hearing today is timely, because these discussions are taking place all across the specter and people are focused on these issues. What I'd like to do is just recognize Representative Norton and this committee and GSA for their work on behalf of D.C. and the region.

And on the lighter note, Representative Norton, I'd like to congratulate you on your performance as "Glenda" in the Arena Stage Benefit.

So having said that, I'd like to skip over my formal testimony and having listened to the exchange back and forth, I'd just like to make several observations.

I'd like to reiterate that this is really an extraordinary time for GSA to be leasing space in the marketplace. There are great opportunities for the government to take advantage of. And basically, as you were saying before, you know, come at us! You know, we've got space. We're going to compete against one another and demand is what we're looking for.

It's also a great time for GSA to buy. And I think what I would say -- it's not only good for the government to buy, it's also good from the owner's standpoint for GSA to buy, because what the government will be doing is putting liquidity into the market, putting cash into the market. And if you look at companies and the amount of capital that then comes back out, then they can use that money for other purposes as well. So we think that there is a win-win situation out there.

I would also just like to add, as you talk about these new projects -- because, you know, we think you will see very little construction taking place -- that really new projects are not really economic in the marketplace today. And I think the reason we would say that is threefold: One is due to the rent that would be required to be paid by the government in particular; due to construction financing and permanent financing and you need both pieces of that puzzle.

Do you --

DEL. NORTON: Did you say "due to the rents that the government would be required to pay?"

MR. SCHEAR: Yes. In other words -- let me finish. So what happens is because of the availability of debt and the costs of the debt and the rent that would then be paid, there's basically -- it would be a current disconnect so that the developer would not go forward with the project generally speaking.

And then finally, the third reason new projects would not go forward is, I think, there's really going to be an abundance of space that's existing or under construction already. So I think that's just not an avenue that will necessarily be pursued by the private sector in the near term.

Happy to answer any questions.

DEL. NORTON: Thank you very much, Mr. Schear.

Mr. Purtell.

MR. PURTELL: Thank you.

Good morning. I'm Dick Purtell, portfolio manager for Grubb and Ellis Management Services and I'm here today in my role as chair and chief elected officer of the Building Owners and Managers Association International and our local association here in Washington, the Apartment and Office Building Association of Metropolitan Washington, D.C.

As the District's congresswoman, you may be interested to know that AOBA's members own or manage 75 percent of the city's private office space and that one-third of the city's privately-owned space is leased by GSA.

When I appeared before you last summer at a hearing on the credit crunch, it was already clear that our nation was in a downward spiral and the commercial real estate industry was beginning to feel the pinch. Unfortunately, there's no good news.

Today, the roughly $6.5 trillion income-producing U.S. property market faces its worst liquidity challenge since the Great Depression. With virtually no liquidity, commercial borrowers face a growing challenge of refinancing maturing debt and the threat of rising foreclosures and delinquencies.

Through the end of 2009, an estimated $200 to $500 billion in commercial and multifamily real estate loans will mature from a variety of sources. Over the next few years, these maturities increase to well over $1 trillion. We are faced with the dual challenge of developing strategies to stop the downward spiral and restoring confidence in the markets.

While the incremental measures taken to date to address the crisis may have fortified the balance sheets in certain financial institutions, they have failed to address the root cause of the problem. It is imperative to enact measures that will enable financial institutions to effectively restructure their balance sheets to take toxic assets off banks' books and to start lending again on solidly underwritten transactions.

By stabilizing financial institutions and restoring confidence to the credit market, commerce will once again move forward, but the time to act is now. We're encouraged by the creation of the TALF and the Public-Private Investment Fund. If engineered properly, these programs could provide credit markets with the economic confidence they need to reconnect in the wake of a broad dislocation and help restart the stalled economy.

The cost of not taking immediate action goes higher with each passing day. Real estate directly and indirectly generates economic activity equivalent to nearly 20 percent of the nation's gross domestic product. Nearly 9 million jobs are created from real estate activities, which annually generate millions of dollars in federal, regional and local tax revenues.

Local governments especially depend on this revenue, which amounts to approximately 70 cents on every local budget dollar to pay for public services such as education, road construction, law enforcement and emergency planning and response.

Beyond these industry-wide credit issues, there are some specific areas where the private sector and the public building sector could effectively work together for our mutual benefit.

First, we congratulate Congress for allocating funds to the General Service Administration to implement energy efficiency retrofits in federal buildings. We would like to suggest that these retrofits not be limited to federally owned buildings, but also be allocated to make needed retrofits of space that government leases from the private sector.

The building owner will benefit from capital improvements made to the building. The federal government will benefit from improved high- performance space while demonstrating leadership and new technologies and taxpayers will benefit from job creation and improving our environment.

We would also like to call attention of the growing problem of the government's use of short-term lease extensions. Increasingly frequency, the U.S. government is asking its commercial landlords to enter into short-term extensions at the end of the lease term, instead of renegotiating the lease or giving notice to vacate the space according to the termination terms of the lease.

It is standard market practice to give anywhere from six months to four years advance notice of the intention to vacate or renew a lease prior to the lease expiration. Some of our members have estimated that currently 60 percent of the government leases enter into these makeshift holdover arrangements upon lease expiration.

This practice happens for a variety of reasons. In some cases, the future space needs have not been addressed by GSA's client agencies, which can be due to budget uncertainty or the agency's growing pains.

Also, the lengthy process for securing congressional authorization for GSA's large deals goes through the prospectus process and this can cause delays or get bogged down in bureaucracy.

While the causes may be understandable, the results can be costly for both the federal government and for the landlord. Leasebacks carry a large penalty, typically 50 percent above the rent they were paying before lease expiration. The government deprives itself of the ability to obtain the best financial terms and a full range of options in the marketplace. This practice is also problematic for the landlord. If the building is trying to secure financing, potential lenders will treat the space as vacant in the absence of a lease. A vacant or underutilized building will have a low income stream and therefore impact the creditworthiness of the building, which in turn leads to onerous loan terms.

In addition, the landlord cannot market the space to potential clients without the knowledge of the tenant's intention to vacate the space. It can also affect other tenants in the building who may have expansion rights in their leases. The government has always been a valued tenant and customer of the private sector real estate community. Due to their creditworthiness and the guarantee of payment, many landlords are willing to make significant accommodations for government lease tenants; however, in the present economy, the increasing practice of lease holdovers is creating additional distress. We encourage the subcommittee to consider ways to help streamline GSA's leasing practices and eliminate unnecessary bureaucracy. We support full and open competition but with sufficient time remaining on the lease to eliminate the uncertainty and upheaval to the landlord.

Thank you very much for the opportunity to be here today.

DEL. NORTON: Thank you, Mr. Purtell. I'm going to say all three of you have given a virtual catalogue in synopsis form of not only the market today but of the areas where we should be particularly conscious to look. The testimony is therefore particularly helpful to us, and I'd like to begin with some questions.

Mr. Purtell, in your testimony, page four, I mean, you take the question I was putting to our GSA witness right through the scenario that makes us see both sides of the issue and come to grips with what's at play here. Indeed, if BOMA has within its BOMA portfolio, so to speak, 90 percent of the lease space in this region, a third of it leased by GSA, that says everything about why we've got to look at this credit market just as you look at it, perhaps even more so given the ways we are affected across the board.

Just let me begin with the lessee process because, with my government hat on, GSA knows I'm going to insist that it go through, as you yourself mentioned, the competitive process. That gets us the best deal for sure. But we are particularly interested in really outside the box thinking about how to do things that meet the government's competition requirements and other regulatory requirements while at the same time doing so speedily.

My great interest in government -- in coming to the federal government was precisely -- I came as a lawyer to a very troubled agency, the Equal Employment Agency, and started a practice which my kind of allies in the various movements shrunk at. I looked at it; I saw the cases -- the large cases where the payback was, where you would to bring a systemic charge. Then I saw where the agency was putting its time, into cases of individuals that deserved full attention from the government but, for lack of a better term, I would call nickel and dime cases. And because they were nickel and dime cases and because they had a very open process, there were almost no remedies because people could file very easily.

And so I started a settlement process where, by very early, you brought both sides together when both sides are in doubt and put the investigators to work calling out to each side what the areas of doubt were and we ended up with a larger -- much larger remedy rate for those who brought grievances, who, if they'd gone through some of them in fact would have gotten something, but more of the agency's resources going into where the biggest payoff was. So my major interest is in the jigsaw puzzle of making government regulation meet the standards of keeping the ball moving.

Now, when you heard our first witness describe what he went through -- and then of course you have to advertise because there may be somebody who comes forward that even when you factor in all your moving costs and so forth, it makes sense to move out. And just knowing nothing about the process, I said, well, you know, the market conditions, why do you have to do that every time? You know what those are. They don't change. In fact, you don't want to change on a day to day basis; you want those market conditions in -- and hopefully not even the quarter but in some larger timeframe, and so you don't really have that many expenses to look at to make a judgment.

I don't know if any of you have suggestions you'd like to offer at this time, but I'd like to know any suggestions you have for streamlining that process where we've had so much concern, what we're calling the holdover process, what amounts to leases for short term, which also are not in the interest of anyone concerned -- whether you can offer any suggestions for streamlining that particular process.

MR. PURTELL: I would just start to say that I think, you know, back in -- I'm from Cincinnati, Ohio and I've worked with GSA leases in a number of cases. I think in the previous testimony there was comments about, I think, looking at leases expiring in six to 12 months. I think the process needs to start a lot sooner than that.

DEL. NORTON: So one of the most obvious things you could do is to start earlier than when the thing is about to expire in the first place.

MR. PURTELL: Absolutely.

DEL. NORTON: So how much earlier?

MR. PURTELL: Well, right now I'm working with tenants in the properties I'm responsible for about two years in advance of that process, and it just -- it takes a while. Even, you know, GSA has its own issues to deal with but even the private sector, the companies I'm working with, it takes a while to get through a significant lease renewal. So I would highly recommend you start that process sooner.

MR. SCHEAR: Madame Chair, I think it's really not for me to necessarily suggest how, for the General Services Administration or for the Congress, to attack this, but you asked for outside the box ideas so I'm going to throw one out there for you.

DEL. NORTON: I'm serious.

MR. SCHEAR: Okay. The situation I think is such that if -- you asked GSA if they had enough resources to take care of everything and I think the answer was not a resounding yes in terms of that. So if you take a look at today's marketplace and you look at all the real estate professionals who are unemployed because of what has happened and, you know, you have them right here in this region -- you have them in every region because there's been -- you know, they're very qualified, capable people, so I guess the question would be, might there be some resources available perhaps on a short-term basis where the government would either hire or contract some additional resources so that instead of -- and what they could perhaps do is catch up once, if you will. So if they're working right now on leases that are already in holdover, then they can't quite get ahead, as we suggested, on the deals that are two and three years out, so it's possible that there could be a one-time sort of cleanup, if you will, and then begin to try and get further and further.

DEL. NORTON: Yeah. And, Mr. Schear, just as Mr. Purtell suggested a commonsense notion, hey, start a little earlier and a large part of the problem will take care of itself, your notion is about backlog. That, by the way, is exactly what I meant at the EEOC, a hundred-thousand-case backlog. So no matter how much I streamline this process in the front end, I'm still going to end up with a backlog. So we just separated out the backlog cases and said, we will proceed on a backlog strategy that is different from the other strategies and takes into account other factors.

Now, you were right about their own personnel -- they have been bled dry -- and it may be that for on a short-term basis something like that could be done. But that's the kind of thing we're looking for. So if you're serious about it, you don't keep filling the backlog and then congratulating them for getting rid of the new cases. You try to find a way to clear the deck so that the new procedures can in fact click in.

Mr. Schwanke, I'm nervous about exactly what you indicated in your testimony. You say on page five that "financing of any commercial mortgages coming due will be extremely difficult for most property owners in 2009 and 2010. Many commercial real estate loans are structured as five-year loans and thus, for these types of loans, roughly 40 percent of the loans will be coming due in the next two years." I mean, that reminds me of the subprime mortgage crisis, although these are not necessarily -- some of these, by the way, are securitized loans but they certainly are not the same kinds of things.

What is going to happen? What do any of you think is going to happen? Do you think that those who hold these loans will see that they're all in the same boat and will negotiate their way out of this problem that apparently you see as large-scale?

MR. SCHWANKE: Yes, I think it is large scale and on one really knows how we're going to get through it, especially the securitized loans, which are set up with servicers that have certain requirements they have to follow and may not be able to renegotiate that loan as a bank might be able to.

DEL. NORTON: May not be able to do so because of what, did you say?

MR. SCHWANKE: Because they have certain rules they have to abide by because these securities are held by a whole set of owners in the securitized mortgage market and they have rules they have to follow, and they don't have a lot of leeway like the banks might have.

DEL. NORTON: If I could stop you there. You know, the government has had to help with this in the private sector. Do you believe the government may have some role to play here for -- I mean, if we see 40 percent of these loans then take down office space in large cities across the United States, somebody will wish they had come up with some way to do something here, and I'm not sure that anybody is paying much attention at those levels because we're so preoccupied here with what's on the plate now.

MR. SCHWANKE: If something's not done, I mean, this could be the next wave of problems. It's a mortgage-backed security. It's a commercial mortgage-backed security just like the other mortgage- backed securities that are causing all the problem with the subprime. It's a much healthier market. It didn't have the same kind of problems that the subprime -- these were all generally good loans when they were made but they're going to go into a distressed situation simply because of the economics of the marketplace now where property values --

DEL. NORTON: These are people who could pay. These are not people who are in distress.

MR. SCHWANKE: Generally. Well, they're going to be in distress because property values are going down, interest rates are going up, and what they're asked to put back into the next refinancing deal is going to be way more than what they had to to start --

DEL. NORTON: Whereas if this were a bank they could of course have negotiated keeping with the state of the market.

MR. SCHWANKE: Yes, and even some banks won't negotiate these. Some of my colleagues here can probably talk to this better than I.

DEL. NORTON: Mr. Schear, Mr. Purtell?

MR. PURTELL: Well, I would just comment that that is correct. Many of these loans that we're dealing with that are going to be refinanced are interest-only loans, so the impact of the value when those come due is going to -- that's going to play out.

Just an example of statistics here in the Metropolitan D.C. area, in the next five years there's $21 billion of these loans alone in this area.

DEL. NORTON: How much?

MR. PURTELL: Twenty-one billion.

DEL. NORTON: Of these securitized loans?

MR. PURTELL: Yes, in this market alone, by 2013. So this is going to obviously play out --

DEL. NORTON: In this regional market alone.

MR. PURTELL: Yes.

DEL. NORTON: And do you have any idea of how much of that space would be government-occupied?

MR. PURTELL: I don't have those statistics.

DEL. NORTON: We will ask --

MR. PURTELL: I'll look into that.

DEL. NORTON: -- GSA to look into that.

MR. PURTELL: We'd be glad to help them do that.

DEL. NORTON: Mr. Schear, did you have anything to say on that score?

MR. SCHEAR: Nothing additional.

DEL. NORTON: Let me ask you, Mr. Schear, how do you believe that even with a GSA lease or -- whether you believe or, for that matter, whether any of you believe that if you have a lease or a federal tenant, they're still going to have trouble getting financing?

MR. SCHEAR: I think --

DEL. NORTON: A federal government lease with the good faith of the federal government behind it. And will that have an effect on the cost of credit itself? Would it have an effect on credit availability?

MR. SCHEAR: Are you thinking in terms of new construction or refinancing an existing, or both?

DEL. NORTON: First new construction, then refinancing.

MR. SCHEAR: Okay, I think that in terms of new construction, I think clearly if anything is going to get financed, it's going to be a federal government lease. But I think in today's market, in this month of this year, it is nearly impossible to get financing for a new project, even with a government lease.

DEL. NORTON: Now, a new project with a government lease, with the government behind the project, what makes it difficult to get a loan in that case?

MR. SCHEAR: Just simply the scarcity of lending capital available, the number of lenders who are willing to lend, and --

DEL. NORTON: Even to the government, which is financing so many of them?

MR. SCHEAR: That's what I would say. I'm not sure if either of my panelists would suggest otherwise.

MR. SCHWANKE: Certainly you could find yourself in a situation where the cost of construction is going to be higher than what the rents are going to support, basically. In a leasing situation you can see a situation develop where if the loan is coming due and a lease is coming due at the same time, and in the market it's a situation where the rents go down and the owner still has to cover the cost of his debt and he has to put more equity into it, he's got less income. You can see he's in a distressed situation.

DEL. NORTON: And that's the problem we were describing before --

MR. SCHWANKE: Right.

DEL. NORTON: -- how this is all circular and you've got to have somebody who can pay and yet with the costs going down, the market going down, that controls the square footage, the cost per square foot, which isn't enough to take care of the higher cost of credit and debt.

MR. SCHWANKE: It does present an opportunity I think where if the GSA is in a building that becomes in a distressed situation and they have to sell, GSA could be a buyer and get a very good price on that and not have to move and find themselves in an attractive market situation.

DEL. NORTON: Now, the GSA testified that, well, yes, but that might depend upon the location and the rest. Should it really? I mean, if you've got a rock-bottom price in an area where you usually need some space, should you be that picky about, well, we can't meet the -- you know, that's not exactly what the agencies are looking for at this time. I mean, how would a private party look at that market when he leases all over a defined region? He may need more, for the moment, in Fairfax than in Prince George's but there are some properties in Prince George's that are particularly favorably priced. How would somebody -- leave aside GSA for a moment -- look at that as an opportunity or a risk?

MR. SCHWANKE: Well, it depends on what kind of leasing is in place. If it's an empty building it would be a huge risk because you'd have the risk of leasing it up and in this market that would be very difficult. But if --

DEL. NORTON: No, we're assuming that we're talking about the government --

MR. SCHWANKE: Right. Okay, so --

DEL. NORTON: -- and that the government needs spaces all the time because, as you've heard, some of these leases expire, people would like to move somewhere else, and the question of getting new space, you've just testified, is not going to be easy. So here comes a building -- maybe it's one of these buildings you just testified about -- the ARM, as it were, became due and so they just can't meet it. So there that building springs up in D.C., Prince George's, Montgomery County. What if you had the money -- (chuckles) -- like the government does and were weighing the risks and opportunities? Would you regard -- what would you regard as the risk and what would be the opportunity, if any?

MR. SCHWANKE: Well, if you have an empty office building that the GSA can fill, that's a golden opportunity -- and it meets your specifications. Now, a lot of these buildings won't necessarily do that. They're not going to be transit-oriented. They're going to be out on a highway somewhere. They're going to be empty. They're going to be --

DEL. NORTON: Yeah, so I'm assuming those would be off.

MR. SCHWANKE: Yeah.

DEL. NORTON: You have to be -- our own procurement rules say --

MR. SCHWANKE: Right.

DEL. NORTON: -- you have to be -- Ms. Edwards will tell you, you have to be near a subway, and we tell you the exact number of feet. So I'm assuming all of that is in order.

MR. SCHWANKE: Okay.

DEL. NORTON: And, in fact, we know where people build. They build because they want us to come in the first place, so I do understand that. The first and foremost kind of tenant they want is the federal government. So assume all of that's in place but you don't have a tenant at the moment. You may not even have the money at the moment. You may have to come and say to Norton, can you help us because this would save the government a bazillion dollars -- whatever it is. If you could get hold of the money, my question is, even though there may not be somebody right now who wants that space in that place, is this, for a big-time lessor or developer a risk or is it an opportunity?

MR. SCHEAR: If I can -- I think I understand the question. If capital were available and the government were available to lease, that's a win-win-win for -- you know, for everybody. So I think that regardless -- as long as it meets the requirements, then I think that that would absolutely be a good thing.

DEL. NORTON: We're trying to orient the GSA to think, in a down market, what the advantages -- there are obvious disadvantages that have come out in this very hearing, but the terrible disadvantage of having someone who is prepared to pay -- continue to pay on his mortgage but the short-term mortgage has become due is hard for me to see as a benefit to somebody in the market there. I don't see the benefit to the lender. I don't see the benefit of course to the builder who's put in that position but, heaven help us, it may be a benefit to the GSA if it positions itself to take advantage of it instead of having to come up with a procurement for a building it doesn't own every time and then lease it and still it doesn't own it, and then, by the way, keeps on leasing it until it buys it several times over. Those are the kinds of practices we're trying to get rid of.

Should the government, in short, have an investment strategy of its own? If you were, just off the top of your head -- you haven't had time to think through this question -- but if you were to advise the government today on an investment strategy -- and one of you, I think it was Mr. Schwanke, testified of a reasonable financing strategy for the federal government -- bearing in mind that we lease and sometimes we have to construct entirely new space for an agency -- what would be your investment strategy, given where the federal government and the market are at this point in time?

MR. SCHEAR: Well, I would suggest it's a great time to buy. Over the next year will be a great time to buy commercial real estate, if you're going to use that real estate. It's a win/win. You don't have to take a risk if you can occupy the space. And it will not only serve the government well by allowing them to acquire space at very greatly reduced prices, but it will also help the overall commercial real estate market by putting a floor under prices of buildings. If there's a buyer in the marketplace willing to buy at a certain level, that floor that is there right now -- no one quite knows where the floor is going to be.

And that's bad for the commercial real estate market. It's bad for the banks and all the lenders that are lending into that market. So you can serve two purposes with one by buying low and being a market maker essentially.

MR. PURTELL: I think simply stated, if you are a user of space in today's marketplace, investment strategy would be to be opportunistic and take advantage of today's current situation.

DEL. NORTON: Ms. Edwards, can I ask if you have any questions?

REP. EDWARDS: Thank you, Madam Chairwoman. And thank you to our panelists today. It's been a very illuminating conversation.

And I think one of the points of illumination, and I hope that our colleagues have heard that, is a very similar warning that we received from the FDIC three or four years ago about the sub prime market and the securitization that was taking place in that market, and the impending disaster. And what we've heard right now is that we have a lot of commercial-backed securities that are maturing and need refinancing over the next five years. And it's a boatload. And the credit markets are closed in, and so the capacity to refinance in this situation is dire.

And we're talking about loans that are good. I think when we looked at the housing market we saw a housing market where at first we started with a sub prime problem and we have quickly deteriorated into a prime problem and with, again, a shrinkage of credit. And this is really scary. And so thank you for that because it's a bit of an illumination for me.

My questions actually have to do with looking at the GSA, to the lease plan and the lease- versus-buy options. I'm reminded that a few years ago I actually, for a nonprofit that had cash, was looking at leasing space and then decided --

Because in 2000 it was a horrible commercial market. There was space available all over this city. Got a great deal on a building over on Dupont Circle; you know; retrofitted the building. And it's a good deal right now.

And it seems to me GSA is in exactly that kind of position, whether it's in a position to take advantage of that or has the capacity and the analysis to do that or not. So again, I appreciate your pointing out those options.

I wonder if, when you look at what the possibilities are for GSA, if you have some recommendations. You made a couple about how to proceed from here, because I think we're in a little bit of a quandary. We know that it's a buyer's market. We know that it's in some ways a landlord's market. But we don't seem to be able to take advantage of it. How do we do it?

MR. PURTELL: I think the first way, and I would suggest Mr. Schear made a great suggestion on the out-of-the-box thinking was to assist the GSA in some of that backlog by getting the expertise that maybe it's not there right now so you can deal with that, because obviously the opportunity won't last forever. And so I think the next 12 months are critical to take some steps to deal with that.

REP. EDWARDS: And do you have some sense though of what --

I mean I don't even, and I wasn't quite sure GSA knows, has a handle on the numbers of leases that are coming to term, because I don't know how you -- as the Chairwoman has pointed out -- deal with what's ahead when you haven't dealt with what's behind. And it wasn't clear to me, whether it's using technology or something else, that GSA fully has a grasp on the magnitude so that they can deal with issues of capacity.

MR. SCHEAR: I think that the -- clearly, I'm certain GSA prior to today has been thinking about these matters. You all have made it very clear to them, the industry is available to work with them.

It's easy for us all to sit here and say there are great big opportunities out there, but to then match a specific situation to a specific requirement really is a challenge, whether you're in the private sector or in the public sector. So I think that will be seen as time goes on we should make sure whatever resources are available and see if in fact those kinds of situations will emerge. If they emerge in 2 of 15 situations and something is able to be done on an opportunistic basis, that may be a great standard as opposed to not being able to take advantage of any.

So I think that we'll have to see how it plays out really in the trenches because it's really not that -- we can't sort of look on it from on high and say 'hey, just go do it.'

REP. EDWARDS: Um-hum. I can appreciate that. Just one last question. It's about retrofitting for energy savings versus new construction. And I'm just really unclear about how you assess the costs, because we hear all the time, and some of you said it, you said in your testimony that retrofitting buildings might be a more effective strategy than new constructions just because of the gaps in the rents that would be available and the new construction financing. But if you factor over a period of time -- and I don't know what that period of time is -- how much energy savings that you might get by building new and green, is there some parity in the retrofitting versus new construction?

MR. PURTELL: Well, I think, you know, retrofitting, clearly you have an asset in place; so it's greener to use an asset in place than it is to build something new. And strictly from an energy efficiency point of view, the pay-off should be pretty good over a short period of time. If you start going into other greener things that are more costly and don't get into cost savings, operating savings, that's another question.

But clearly, from an energy efficiency point of view, I think it's something we'll see a lot more of because building operators are going to want to reduce their cost. And they can then position their buildings as being more green. Clearly the Obama administration is positioning the whole federal government to attack that issue and become more green. So I think it's a win/win.

And a lot of building owners are seeing that as something they have to do, whether they are building newer or retrofitting an older building. And especially if you find situations where a building becomes largely empty or it has enough flex in it so that they can start retrofitting the space within the empty space, then that gives an opportunity to become more green.

I know our offices we turned into a green office several years ago just because we wanted to. But some others might have something to say.

MR. SCHEAR: I think you're right on sort of the forefront, and it's a really interesting and important question that's not yet answered because I think we've all figured out how to build new green buildings, and I think the industry has advanced very rapidly in a very short period of time. So from ground up I think we can deliver a really good quality sustainable product.

In terms of the existing inventory which is mostly what we're focused on -- we're not going to be in a period of huge buildings. Much more complicated to figure out within the existing inventory how to build efficiencies. So I think that is a question that the industry is focused on right now looking at the cost-effectiveness, looking at a whole variety of issues, and I think more to come in the coming months on that front.

REP. EDWARDS: Mr. Purtell, you actually specifically mentioned a desire to retrofit leased buildings, which I think is a little bit more complicated. So I wonder if you could elaborate on that?

MR. PURTELL: Well, I guess the comment, and I would just confirm what's been said before me, is that the existing building stock is, you know, the biggest part of this discussion. And the opportunities are probably the biggest there as well. And that we have, it's aging. We have a lot of equipment that needs to be replaced, and I think this is another opportunity to potentially incentivize those owners to do that and be more energy-efficient at the same time. So.

REP. EDWARDS: But the government would only get, and the taxpayer, real benefit from that if there were really a long-term lease so that we actually get sort of our bang for our buck as opposed to what could amount to essentially a windfall for a leaseholder who then when the lease terminates gets to lease out this great green building.

MR. PURTELL: Right. I can give you -- that may be a simplified example, but the energy of buildings in my market, the energy cost is near $2.00 a foot. So regardless if there's energy efficiency and we can save, you know, 10 percent by being more energy efficient -- do the math on all the numbers and how that works. So there is an opportunity immediately and for as long as they are there to save money for the taxpayer and the GSA.

DEL. NORTON: I want to thank the gentlelady very much. And I want to say to all three of you that, first, I appreciate your waiting us out as we went through the issues with GSA representatives. But that -- I want to say as well that as we try to think of what to do going forward, your testimony in particular has been of immeasurable value to us. And we thank you very much for it.

MR. PURTELL: You're welcome.

MR. SCHEAR: Thank you.

MR. SCHWANKE: Thank you.

DEL. NORTON: (Sounds gavel.) The hearing is adjourned.

END.

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