Chapter VIII
Review of Sample Leases
The program review committee analyzed a randomly selected sample of 34 leases to calculate processing times and to examine the operation of controls over the process. Documents in the leasing unit's files were examined as well as the records of the State Properties Review Board and the Office of Policy and Management.
Processing times. The leasing process was divided into four phases to facilitate the analysis. The phases include: site search and selection; negotiations; approval of terms; and drafting and signing of lease. Elapsed times for the four phases are presented in Figure VIII-1.
As Figure VIII-1 shows, the largest amount of time (5.2 months) is spent in the last phase - the actual drafting and signing of the lease. The least amount of time is used at the beginning of the process when agents are searching for available sites. Negotiations and approval of terms appears to involve approximately the same amount of time.
Based on the sample, the median total processing time from the date on which a request for space was received by the leasing unit until the date on which the final lease was executed was 16 months. This average does not include seven cases where an option to renew the prior lease was exercised. These cases, which do not require negotiation of terms or drafting and signing of a new lease, had an average total processing time of 9 months.
A previous program review study of the state space acquisition function conducted in 1986 discovered similar processing times. The 1986 study found the average total processing time for leases was 15.5 months and the processing of options to renew was 5.4 months. Although staffing and some procedural steps have changed since that review, the committee believes many of the factors contributing to lengthy lease transactions remain the same. A discussion of these factors and issues raised by the case file review is provided below.
Leasing procedures. The procedural steps in a lease transaction are based on statutes, DPW leasing manual, and interviews with agency personnel. During its review the committee found:
Therefore, the committee recommends:
DPW update its leasing manual to accurately reflect the agency's current policies and procedures. DPW should develop specific time standards for the various procedural steps within each phase of the lease process and promulgate regulations accordingly.
Tracking system. An administrative assistant maintains an informal status log listing the physical location of lease proposal outlines (LPOs) or lease. However, formal analysis is not done to determine how long it has been at that location or phase. On occasion, the leasing supervisor will consult the log to check which proposals should be returning to the unit from other locations, but the supervisor indicated she is more likely to simply ask the leasing agent.
Each month leasing agents prepare an activity report to provide a chronological log of transaction progress. Originally, these reports were intended to help track processing time but the methodology did not work well and recording by agents was deemed to be burdensome. Currently, the report is used by the supervisor as a resource for when an agent is out of the office or on vacation. An examination of the reports indicated they were inconsistently maintained by agents and varied in quality. For example, some of the reports include much detailed discussion of the lease progress while others simply note "Negotiations in progress" without any substance to the progress made or anticipated.
Based on this review the committee finds:
Therefore, the program review committee makes the following recommendations:
Approval of terms. As shown in Figure VIII-1, one of the most time consuming portions of the lease process is the approval of the terms contained in the lease proposal outline (LPO). The LPO summarizes the principal terms of the agreement including rental rate, length of lease, square footage, purchase or renewal options, items included in facilities such as utilities or janitorial services, and the nature of any renovations.
The LPO, together with supporting documentation, provides the basis for State Properties Review Board decisions and the preliminary draft review for the attorney general's office. However, before the LPO is submitted to the board it must be approved by the client agency, the DPW commissioner, and the Office of Policy and Management.
Figure VIII-2 shows the LPO processing times by agency. As the figure illustrates, each agency takes about a month to approve the LPO.
Currently, OPM examines and signs off on all LPOs to ensure the cost or size does not exceed pre-authorized levels. This second approval is made after OPM has already authorized the request for space through the Statewide Facility Plan.
The program review committee finds:
Given OPM's proposed involvement in managing the request initially, the committee recommends OPM's approval at this stage should only be for proposals exceeding preauthorized levels.
It is the SPRB's responsibility to ensure the proposals contain terms and conditions favorable to the state and conform to state laws. The board, at its discretion, may make recommended changes to the proposal or ask for additional information. In the lease sample, the median processing time for proposals sent to the board was 28 days. The board requested additional information and made recommended changes to lease proposals before granting approval in 25 percent of the cases. Typically, DPW responded to the board request within two weeks. As such, the board's actual review time was 14 days.
The program review committee finds:
Scope of SPRB review. Although SPRB was not the focus of this study, the committee made several observations of their work through the case file review. The committee believes the board fulfills its function to ensure real estate transactions are properly developed and are sound from a business standpoint. Examples from the case files suggest SPRB frequently recommends changes to DPW proposals which result in better negotiations for the state. Memos and references in the SPRB files indicate it has even assisted DPW staff in some basic functions such as calculating rates. The committee acknowledges the benefit of SPRB involvement in transactions, however, it raises concerns whether SPRB is exceeding its scope of responsibilities by assisting in the performance of DPW functions.
The committee recommends:
DPW shall conduct a formal training needs assessment of all leasing and property agents including but not limited to their ability to conduct negotiations and evaluate alternatives. Training shall be provided as needed.
Drafting and signing of lease. Once the board has approved a proposal, it is returned to DPW where the leasing agent who prepared the proposal drafts the final lease for the assistant attorney general assigned to review DPW contracts and leases. A review of the lease sample data indicates the median amount of time from when the LPO was approved by the SPRB until the Attorney General gave final approval was approximately five months.
A review of the leasing sample found formal requests for clarification and additional information by the attorney general's office in 25 percent of the cases.8 Seven cases were sent back more than once. In some instances, the request for information or clarification was quite extensive. Among the reasons for return included technical error, incomplete documentation, or terms different than previously discussed.
The program review committee finds:
This issue has already been acknowledged by the agencies. DPW, in conjunction with the attorney general's office and the SPRB, have been working on the implementation of a process checklist and the development of a new standardized lease contract. The new language is expected to be used for the majority of leases thereby expediting the process. A final draft of the standardized lease is anticipated by the end of this calendar year. In addition, DPW has recently placed a paralegal in its leasing unit to assist in the drafting and executing of leases.
The program review committee supports these initiatives and encourages DPW to continue to strengthen its quality control functions. However, to provide a goal for the agencies the program review committee recommends:
Quality control and supervision. As mentioned earlier, DPW's leasing manual refers to staff functions for positions no longer filled. Among these vacant staff positions is the loss of a lease director and a quality control officer. These positions have been vacant since the mid-90s. Several of the responsibilities associated with these positions have been assumed by existing staff while others are not performed9.
Recently, the DPW commissioner transferred responsibility of the leasing unit to the director of DPW's Facilities Management. However, as evidenced by program review's DPW study last year, facilities management responsibilities and operations are already quite extensive. The committee believes the state's $30 million space acquisition function warrants a separate unit director. Therefore, the program review committee recommends:
DPW hire a director for its space acquisition function who will assume a quality control position. A formal quality control system shall be established to provide a review of all real estate transactions before they are sent outside the unit.
Lease Management. Once a lease has been signed and the client agency occupies the space, agencies are generally responsible for ensuring the lessor complies with lease terms regarding repairs and maintenance of the leased space. However, recurrent and unresolved problems are brought to the attention of the leasing unit, which until the late eighties included a lease compliance officer. As discussed earlier, leasing staff absorbed responsibilities previously conducted by functionally dedicated staff. Through its review of the leasing sample, interviews, and observations, the committee found:
The committee believes the diffusion of responsibilities distracts from the agents' and supervisor's primary responsibility to locate and deliver leased space. In addition, the lease management function requires continued contact between leasing agents and lessors which does not promote the arms length distance which should be maintained for negotiation of future leases.
To ensure lessor compliance with lease terms and increase the amount of time available to leasing agents, the committee makes the following recommendations:
The lease management function shall be strengthened and removed from current leasing agents and instead a position be created to deal with these issues. The lease compliance officer will have primary responsibility for:
Holdovers. Another issue evident in the case files is the number of holdover leases. At the time of the committee's review, 60 (29%) of the 204 active leases had terminated, leaving the occupying agency on holdover status. According to leasing staff, the standard holdover provision is if a lease expires without a renewal, the tenancy becomes month to month at the same terms or rates as the original lease. However, a few leases allow for a higher holdover rate. The committee was not able to determine how many of the total holdover leases include a higher holdover rate provision. In the leasing sample, five of the 34 leases were on holdover. However, an additional 10 leases in the sample had previously involved holdovers. None of the leases reviewed by the committee allowed higher holdover rates.
The committee's examination of the files found the median amount of time a lease carried holdover status was 1.4 years. However, one case in the committee's sample had a holdover in effect for almost four years10.
Whether the number and amount of time a lease is on holdover is a concern is debatable. Given that the standard provision for holdovers is to remain at the existing rate, it may be argued that the state benefits from not having to pay a higher new rate. However, being placed on a month to month tenancy does expose the state to being evicted at any time. Among the reasons leasing staff contends holdovers occur are client agency indecision or delays regarding relocation and late or delayed processing of request for space. (This issue was discussed in Chapter VII.)
In addition to indecision and delays, the committee believes insufficient tracking, workload variations, and diffusion of primary responsibilities may also contribute to the high number of holdovers. The committee believes holdovers should be significantly reduced and recommends:
DPW develop tools to flag potential lease renewals and establish a system to monitor the number of month to month leases that includes the length of time and reason a lease has been in holdover status.
Competitive bids. Competitive bids are a critical aspect of real estate transactions that can serve as the state's price control. Limited competition provides potential bidders and existing landlords a better bargaining position to negotiate for terms and conditions in their best interest.
Committee review of the case files found DPW invitations to bid do not generate many proposals. DPW had only one or two responsive offers to consider in the majority of leases examined by the committee. At the same time, the program review committee also noted instances where the client agency refused to consider site alternatives and where the client agency's desire to remain in the location was well known hindering negotiations by giving the existing landlord a stronger bargaining stance.
The committee recommends:
Another recent DPW initiative has been to allow private real estate representatives the opportunity to conduct presentations to the leasing unit. The purpose of the presentations is to increase staff awareness of overall market conditions, vacancy rates, and upcoming construction developments. The program review committee recommends:
DPW formalize this initiative and offer additional real estate industry representatives similar opportunities.
8 This does not include communications made by telephone or in person.
9 This finding was also noted in a recent report by the state auditors. The auditor's report noted three instances where an LPO approved by the SPRB was materially changed and resulted in the execution of a lease that contained terms that conflicted with the terms approved by the SPRB. The auditor's listed lack of quality control and outdated procedures manual as a contributing cause. Auditors' Report Department of Public Works for the Fiscal Years Ended June 30, 1997 and 1998
10 Discussion with the leasing staff suggests the lease involved an uncooperative owner and lack of alternative sites. The committee found little documentation regarding these issues in the file.