March 2006

Rent Questions Raised, Millions Credited

If you're a business with revenue problems and your landlord hikes the rent—again—you either find a less expensive location or re-negotiate the lease. But if you're a federal court with funding problems and the General Services Administration (GSA) increases your rent, you pay the increase. Chief Judge Frederick J. Scullin, Jr. in the Northern District of New York looked at his rent and asked why. Now, thanks to his efforts and those of his staff, their rent bill is reduced, the Judiciary is looking at considerable savings, and other courts are hoping to follow their lead. [See related cover story on rent relief legislation.]

Rent payments to GSA from the courts' operating account have grown from $133 million in 1986 to an estimated $965 million in FY 2006. By FY 2009, the rent bill to GSA will be about $1.1 billion, or nearly one-fifth of the courts' projected operating budget. Under current law, the Judiciary must pay rent to GSA in full as a mandatory charge against its budget. With increasingly tight budgets, that means less money for discretionary expenses, such as staff salaries.

"When a quarter of our budget is spent on rent and we're looking at cutting staff so we can pay the rent, then we have to ask, what are we paying for?" said Scullin. GSA sets the rent for court facilities, but Scullin and his staff were not quite sure how it arrived at the rates. He thought it was time to find out. Northern District of New York Clerk of Court Larry Baerman with Chief Deputy John Domurad were given the task.

"We had to ask why, for example, the Syracuse courthouse was paying $30.87 per usable square foot," said Baerman, "while the federal defender and probation offices were paying $16.07 per usable square foot—for better space, especially when other federal agencies in Syracuse in commercially-leased space were paying approximately $15.73 per usable square foot. We wanted to get to the bottom of such a disparity among rents."

By law, GSA is required to charge a rent rate that approximates commercial charges for comparable space and services.

"Our first thought," said Domurad, "was that the numbers were wrong because GSA had over-assessed the market rate. However, as we delved deeper into the issue, we realized that a critical component to our over-assessment was GSA's methodology for determining a tenant's pro rata share of the common area of a building. "

Baerman and Domurad began looking at courthouse floor plans and physically inspected areas within Northern District facilities they never knew existed. This investigation led to some startling discoveries. For example, in their Utica facility, a recent remeasurement of the building included over 15,000 square feet of "common space" that was actually an attic, which could only be accessed by a ladder through the ceiling.

"While the figures from the remeasurement survey had not yet been billed to the court, it is far from certain that this 'oversight' would have been corrected without the review," said Domurad.

They reviewed commercial leases from other federal agencies within the respective areas to determine how the commercially charged market rate differed from what was being assessed within the federally owned facilities. With the assistance of the Administrative Office, they hired an appraiser from a national company to provide them with a professional assessment of the market rates for areas in which their four facilities are located.

The Northern District of New York's efforts have paid off. Following an informal presentation by Baerman and Domurad to central GSA personnel, GSA reviewed the district's billing records and determined that an annualized rent reduction of nearly $1 million was in order.

"To reinforce the fact that the rent disparity we were seeing within the Northern District of New York wasn't an isolated event, our presentation briefly discussed GSA's billing rates for several facilities within the Southern District of New York," said Domurad. As a result of this inquiry, GSA re-evaluated the billing information for two facilities in the Southern District, which resulted in a savings or cost avoidance over three fiscal years totaling $30 million.

While the money is significant, Domurad is looking at larger consequences. "From the very inception of this project, our Chief Judge has been adamant that the goal of this project was not to simply establish fair and reasonable rent rates within the Northern District of New York. The true value of this success is that it validates a methodology that can be employed nationwide to analyze and identify potential areas where the courts may be charged rent above the commercially accepted rates."

Said Scullin, "I hope a similar review of court-occupied space is conducted on a national level to determine whether cost savings can be identified elsewhere."

Such a review is currently underway. "The Northern District of New York may be a worst-case scenario," said Debra Worley, Chief of Space and Facilities, Office of Facilities and Security at the Administrative Office, "and variations may well reflect differences between GSA regions and how standards are applied. But, we believe there may be problems with classifi cation of space at other courts as well, which is why all courts have received customized binders of their rent bills, and we've begun training in rent validation nationwide." (See Box on National Rent Validation Program.)

Worley believes there may be potential cost savings for the Judiciary as floor plans and classifications are reviewed, "but we won't know until we work with the courts on a case-by-case basis," she said.