Legacy Vision Presentation
The following is the text-only version of the presentation given by PBS Commissioner Moravec during the Advocacy Luncheon at the National Preservation Conference on October 2, 2003.
Integrating GSA's Portfolio and Stewardship Strategies
National Preservation Conference October 2003
GSA was created in 1949 to harness the government's economy of scale to procure federal office supplies, space, and communication systems more cost effectively. The mission of the Public Buildings Service is to provide superior workplace for the federal worker and superior value for the American taxpayer.
In response to the well-documented backlog of property maintenance and repair needs across government, GSA and other agencies have developed plans to pare the federal inventory of vacant and underutilized properties and to explore new ways to finance necessary capital investment to keep aging buildings viable.
- Let me share some of the critical realities we face:
- 241 of GSA's 1600+ buildings provide 95% of the portfolio income;
- Chronic underfunding has led to a backlog of $6 billion in portfolio repair and replacement needs;
- The Public Building Service has only what the federal buildings Fund will generate for capital reinvestment; and
- The Federal Buildings Fund is not sufficient to maintain the owned portfolio properly.
GSA's Portfolio Strategy calls for divesting of buildings that do not generate enough rental revenue to cover necessary repair and operating costs and reinvesting in strong financial performers so they can continue to meet federal workspace needs, by restructuring the owned inventory to consist of strong, income-producing properties, curing or disposing of non-performing assets, and concentrating resources on performing and under-performing assets.
Our restructuring goals are to:
Create a sustainable owned inventory in which income covers operating and capital needs
Improve the quality of space for our customers, in support of the mission of the government, and to
Maximize the financial performance of our retained assets.
These are all highly laudable business objectives. But, what about historic buildings and federal preservation laws and policies? Central to the National Historic Preservation Act are the mandates to use historic buildings first and to involve the public in decisions affecting them. The Act also provides special authority, under Section 111, to lease space in underutilized historic buildings to non-federal tenants. We realize that our strategy needs to consider more than quantitative values.
The financial health, physical condition, and future of our historic buildings is very important to us, and to the many communities where our historic buildings are located. About one fourth of the more than 1600 buildings GSA owns are historic. These 414 buildings include courthouses, custom houses, and office buildings in all 50 states and several territories. They were constructed to last and designed to reflect our ideals as a nation and our system of government. Together, they provide about 55 million square feet of workspace.
GSA's Center for Historic Buildings has worked closely with the agency's Office of Portfolio Management to fashion a vision of sound real estate management that also takes into account GSA's responsibility to maintain a quality inventory that positively represents the federal government's public building legacy, especially its monumental historic buildings and architectural icons. The goal of the Legacy Vision is to position the government's finest buildings to be strong financial performers. The strategy requires GSA to take a second look at historic buildings that are not performing well and to make every effort to make them financially viable.
To put the strategy into perspective, let's take a closer look at the entire GSA owned inventory. We have separated our buildings into 5 eras reflecting the changing mission and philosophy of the federal government toward design and construction.
Prior to World War II, the Dept of Treasury oversaw the design and construction of public buildings. They were designed by the Supervising Architect of the Treasury and other top architects of their day. These buildings were designed to create a strong and powerful image for the federal government.
In the 1940s, the federal government responded to very different needs. Buildings were quickly constructed for temporary, utilitarian purposes. Many of these industrial buildings were adapted to serve as government offices after the war.
The Great Society
In 1949, GSA was created to bring efficiency to government procurement, producing pens, pencils, and federal workspace for expanding government of the Great Society. Top construction priorities were efficiency and economy. GSA has over 600 buildings from this era-from 1950 to 1979--in the inventory. Although they offer some advantages such as large flexible floor plates, only a few are architecturally exceptional and many are not aging well.
In the 1980s, GSA followed the national trend toward a more sophisticated modern design. But for the most part, these buildings reflect the typical commercial architecture of their time.
In the early 1990s, GSA re-examined its mission and its affect on communities. With the creation of the Design Excellence Program, GSA elevated the profile of design and is making the federal government once again a leader in American architecture, by constructing exceptional buildings designed by the nation's top architects. We believe many of these buildings will be tomorrow's landmarks.
Our Legacy Vision acknowledges that making value distinctions between buildings is appropriate and in the interest of American taxpayers and communities. Few would argue that a contemporary masterpiece designed by one of the nation's top architects and a least cost 1960s building should be given equal priority for use as federal workspace. Preservation groups also support making value distinctions between historic buildings as part of a comprehensive strategy. Few would argue that a utilitarian warehouse built to meet immediate production needs during World War II or even a 1930s community post office typical of its day should be given the same priority for retention and reinvestment as a one of a kind, 1870's Second Empire custom house designed as the focal point of a historic coastal city.
The Legacy Vision gives priority to those buildings that best represent the federal government's public building legacy by making every effort to keep these Legacy buildings occupied and viable. Let me tell you now what we are doing specifically - some illustrative examples to accomplish that vision.
Specific financial turn around measures include undertaking necessary repairs and improvements to eliminate vacant space, relocating tenants from leased space or non-historic federal buildings to historic federal buildings, increasing rent rates to better reflect operating and repair costs, and supplementing federal tenancies with non-federal (outlease) tenants.
Our first step is to make sure we are accounting for and receiving all possible revenue from our buildings. It is important that we have accurate building square-footage and assigned square-footage by tenant to ensure proper billing. We can also increase our revenue by raising rents to be more in-line with market rent for comparable space. At a number of special use facilities such as courthouse and border stations we can use return on investment rent pricing for rehabilitation projects. The courts have welcomed this approach when it allows them to remain in the historic courthouses.
At the national historic landmark, U.S. Custom House in Savannah, our Customer Satisfaction rating is 100% and the building is fully occupied. Market rent in the Savannah Central Business District is $20/sf, but the building rent was lagging at $8.41. Recent rent adjustments are expected to turn the under-performing 1852 building into a strong performer. An ROI rate of $17.33/sf. now supports the cost of investment in the aging infrastructure and other repairs to keep the building functional in its originally intended use. Remeasuring the building significantly increased billable square footage.
Attracting tenants to vacant space in historic buildings can require imaginative marketing. Space that was insensitively remodeled in the 1970s, like the postal work area in our Minneapolis federal building, can be a hard sell. By using graphic simulation to show what the space will look like after the suspended ceilings are removed to expose the original arched windows and vaulted ceilings, our regional realty staff were able to secure a new federal tenant.
Section 111 of the National Historic Preservation Act allows us to lease space not currently needed by the government to non-federal tenants. Outleasing, as we call it, can be used in several ways to keep our historic buildings occupied and viable. Section 111 is primarily used by GSA to supplement a predominant federal occupancy. We also use it to keep a building occupied during interim periods between federal tenants. Long-term, whole-building outleases are rare and are generally reserved for buildings of exceptional significance in markets where the government has a long term interest. We require all outleases to make good business sense. Leases are for limited terms, generally based on the reinvestment payback period, and the terms must be advantageous to GSA.
The tenant of the 1906 San Francisco Custom House, for example, only needs 4 of the building's 5 floors. A credit union on the ground floor and some other retail services fill the remaining vacant space.
During a vacancy between federal tenants, a five-year lease to the Massachusetts State Courts is keeping the 1933 McCormack Post Office and Courthouse in Boston building occupied. The rental revenue is underwriting recurring repairs and maintenance.
Outleasing also enables the government to capture its investment in high value assets for future federal use. The 1842 Tariff Building in Washington is an exceptionally significant building in a central urban location and rising market where long-term retention is warranted. GSA's 60-year lease of the national historic landmark to the Kimpton Hotel Group will cover operating expenses and fund a major makeover that could not have been accomplished through the Federal Buildings Fund.
Another part of our strategy is to use Section 111 outlease revenue to turn around financially troubled historic buildings whose performance can be substantially improved by specific investment actions. First we reinvest Section 111 revenue to meet the needs our Section 111 income producing buildings. Then we look for opportunities to fix problems that are preventing a historic building from performing.
Priority is given to investment that will enable GSA to attract or keep a tenant.
The 1868 U.S. Custom House in Portland, Minnesota is one of the most architecturally significant buildings in the region. It will be partially vacant when a secondary tenant leaves. Outlease revenue will fund the necessary HVAC and ADA upgrades to attract back-fill tenants to keep the building for continued federal use.
At the 1929 U.S. Courthouse in Tucson, Arizona outlease revenue is funding immediate repairs needed to secure the Bankruptcy Courts as tenants for the vacant building.
Another critical strategy is ensuring that historic buildings are given priority in federal housing decisions and that we set priorities among historic buildings. In cities with multiple GSA properties, we focus federal housing plans on increasing historic building occupancy and eliminating vacant space. For example, the federal office space inventory in Portland, Oregon includes four architecturally and historically significant buildings. None of these buildings are meeting the financial performance benchmarks set by the portfolio strategy. The regional portfolio team is looking at Portland's historic inventory as a whole to ensure that helping one building does not jeopardize the others.
The Pioneer Courthouse, a national historic landmark built 1869, is the oldest and most significant federal building in the region. It is fully occupied and continues to serve its original use as a federal courthouse. It is currently undergoing modernization and seismic upgrade. A Return on Investment rent rate will be charged on completion of the project, repositioning the building as a stable and healthy financial performer.
The 1933 Solomon Courthouse, prominently situated in downtown Portland, has high customer satisfaction and a 12% vacancy. The region is working to backfill the building with both federal and non-federal outlease tenants to generate revenue required to rehabilitate the building within the next 10 years. If the project is completed, the bankruptcy courts will backfill the building. In the meantime, the building is serving as swing space while the Pioneer Courthouse is under renovation. The outcome for the 1898 U.S. Custom House is not yet resolved. It is an architecturally exceptional building in a prime location where land values can be expected to rise because of tight controls on development to limit sprawl. The current federal tenant will vacate the building soon and a backfill tenant is not available. A long-term outlease is being considered to secure private investment funds for the necessary seismic, systems and code upgrades and enable the government to maintain ownership of the high quality asset for future federal use.
Sometimes the best option is a public benefit transfer. The 1918 Post Office is the located in the Pearl Historic District, an area experiencing rapid redevelopment. The building will be vacant within two years. Given limited prospects for future federal tenancy and the high cost to renovate and seismically retrofit the building, reinvestment for long-term retention of this asset is not practical. As part of the local redevelopment Master Plan, the City would like to use the first floor of the building and the surrounding site for a public market and convert floors 2-6 to loft housing. We will ensure that, as the successor owner of the property, the City will be held to the same high standards of stewardship as we are.
Some buildings require a blend of strategies to remain viable, such as the 1848 New Orleans Custom House. Strategies being used to turn around this under-performing national historic landmark asset include:
Auditing to ensure that all occupied space earns rent,
Increasing rental rates,
Outleasing of vacant ground floor space to a non-federal tenant for use as an Insectarium, and
Undertaking fire safety improvements that will make the building's top floor occupiable.
The building is already generating substantially higher revenue and is projected to have a positive FFO (Fund from Operations) and NOI (Net Operating Income) in the next fiscal year.
The Legacy Vision is already making a difference in GSA's ability to keep important historic buildings occupied and viable. The number of historic buildings on our troubled building watchlist is shrinking.
But in some communities, we no longer have a sufficient federal presence to justify the turnaround effort. Vacancy at our 1935 courthouse in Vicksburg, Mississippi, increased over the years as the court presence shrank. This building will soon be transferred to the State of Mississippi for use as offices. In this case, as we seek new space for federal tenants, there is an opportunity to use another historic building. The courts in Vicksburg will soon relocate to this 1853 Greek Revival auditorium in Natchez, Mississippi a smaller building that is the right size and offers a dignified presence for the courts.
In demonstrating that sound business practices and good stewardship can go hand in hand, GSA is proud of the part we play in the continued vitality of cherished community landmarks and the economic health of America's historic town and city centers.