Obama Forces GSA to Renegotiate Leases with Landlords Nationwide

At the end of last week, President Obama signed a memo aimed at forcing GSA entities to reign in over $8 billion in building costs collectively by the end of 2012.  We all know the Washington D.C. office market is subject to, and at the mercy of, the whims of the government, but the entire country?  Republicans are likely to sit on both sides of the fence on this issue.  On one hand, Obama is cutting government spending and waste, be it through the consolidation of government office space, the sale of excess real estate holdings or the elimination of some agencies. On the other hand, this action could put a dent in local economies, and make the lenders who lent to property owners with GSA leases in place feel a whole lot more pain.  But more importantly as it pertains to commercial real estate, what does this swift action mean for the landlord-tenant dynamic?

Just so we are clear, by “building costs” Obama is referring to any and all expenses associated with occupying buildings.  Obviously, this measure wasn’t aimed to decreases agencies rampant spending on tenant improvement dollars, above and beyond what their respective landlords allotted them. More so, he is asking the agencies to cut their rents.  Believe it or not, this may not be such a daunting task for agencies, depending on their current lease terms.

First of all, there are over 14,000 government owned properties that are vacant.  Granted, vacant buildings in today’s commercial real estate climate may be difficult to offload, but there is intrinsic value in each. Furthermore, there are over 55,000 that the government has deemed underutilized that they can consolidate into.

As for properties where they are tenants, it is important to note some basic terms. The vast majority of GSA leases have early termination clauses on their generally long term leases.  Primarily, this is due to the fatc that those agencies understand that depending on whether donkeys or elephants control the executive and legislative branches of government, their agency and its functions may be scaled down, or in some cases, eliminated altogether. Like other private tenants, they can buck the trend of waiting till the last year of their lease to start regenotiating lease terms.  The government, obviously can be a powerful force.  But it begs the question: can landlords call their bluff?

Typically, tenants will try to renegotiate their leases because they literally cannot afford them due to economic hardship.  They have leverage in this situation, because they can effectively say, “either renegotiate my lease, or I may go under, and then you’ll get nothing.”  Not only is that a poignant argument, but landlords looking to stave off loss of occupancy and eventual foreclosure, will become more desperate to make sure they are able to pay their mortgage, any way they can, even if it means a reduction in income as opposed to a total loss of income.

Yet, one of the things that makes the government such an attractive tenant to a landlord is the fact that its not going to default.  The U.S. government’s credit is still a better bet than many well rated private companies.  So will landlords simply say no?  I don’t know the legal aspects of what the government can or cannot do in this type of situation, provided the current terms of a particular lease, but it could be an interest standoff.  If the specific agency is in absolutely no risk of being downsized (like, say the department of homeland security or the IRS), why would you let them out of their rental obligations early if you were a landlord?