In April 1995, the Office of the Inspector General initiated a review of the process by which the Commonwealth leases private office space for use by state agencies. Leasing of private space is the responsibility of the state Division of Capital Planning and Operations (DCPO), an agency created in 1981 within the Executive Office of Administration and Finance on the recommendation of the Special Commission Concerning State and County Buildings, often called the Ward Commission after its chairman, John William Ward. The Ward Commission, which uncovered widespread public corruption and waste, recommended centralizing within DCPO the responsibility for ensuring that the state's real property needs -- including construction, repairs, renovations, leases, and operations -- are met efficiently and effectively.
DCPO's role and responsibilities for acquiring and disposing of state real property are set forth in Massachusetts General Laws c.7, §§40E-40L. DCPO is required by statute to facilitate the leasing process for state agencies; at the same time, DCPO is charged with ensuring that the leasing process is fair and accountable. DCPO's dual roles of service provider and watchdog sometimes generate competing pressures that DCPO must balance in carrying out its statutory responsibilities.
As of April 1996, DCPO was responsible for 498 leases totaling more than seven million square feet and costing more than $97 million per year. This Office's review focused on office leases, which accounted for 73 percent of the state's lease transactions, 61 percent of the state's annual lease payments, and 56 percent of the amount of space rented. The components of the Commonwealth's leasing function, impediments to timely and cost-effective leasing transactions, and the likely impact of recent measures to decentralize the state's leasing function are examined in this report.
During the course of this Office's review, the Secretary of Administration and Finance convened a "Property Work Group" representing state agencies, the Trial Court, and the Governor's Office. The objective of the Property Work Group was to review and recommend improvements in the Commonwealth's real property management policies, procedures, and practices. The major focus of the Property Work Group's proposals was a new system for delegating leasing authority to state agencies. Under the new system, implemented in May 1996, user agencies with sufficient staff capability were authorized to procure leases of less than 15,000 square feet outside downtown Boston.
Significant Leasing Issues
This Office's statistical analysis of DCPO leasing data and interviews with user agency and DCPO officials yielded a mixed assessment of the Commonwealth's leasing process. The following is a summary of the significant leasing issues identified during this Office's review:
- DCPO's professional management and oversight have protected the Commonwealth from excessive leasing costs and added value to the leasing function.
- Protracted leasing schedules encourage short-term lease amendments, which cause further schedule delays.
- DCPO, user agencies, and landlords all share responsibility for protracted leasing schedules.
- Some time savings projections for the user agency delegation process appear unrealistically high.
- Major exceptions to the lease size threshold established for agency delegation have already been authorized.
- The delegation process, as currently designed, poses new risks to the Commonwealth.
- Systemwide cost control and accountability require effective DCPO oversight of the agency delegation process.
- Statewide facility planning needs improvement.
- DCPO's post-delegation leasing, oversight, and planning responsibilities may warrant additional resources.
- Statutory restrictions reportedly impede cost-effective leasing.
Conclusion and Recommendations
The recently instituted agency delegation process is intended to streamline leasing transactions. In principle, this Office does not oppose decentralization of state leasing if accompanied by sufficient and effective monitoring and enforcement. In practice, however, this Office has serious concerns about the risks posed by the agency delegation process as currently designed. Although the agency delegation process is intended to promote economical leasing, this Office's analysis suggests that it may have the opposite effect: leasing costs may escalate in the absence of the downward pressure DCPO has historically exerted on the size and cost of space leased by user agencies.
The agency delegation process also fragments responsibility for long-range facility planning. Given that the Commonwealth leases almost four million square feet of office space at an annual cost to state taxpayers of $60 million, planning and coordination of the leasing function are prerequisites to an efficient, cost-effective leasing function. Yet user agencies are required to prepare their own facilities plans, conduct their own searches for suitable state-owned space, and evaluate the costs and benefits of whatever options they are able to generate. From a systemic perspective, this disjointed and unsystematic approach is unlikely to result in sound, cost-effective leasing decisions.
Real estate transactions are more complex and require more specialized expertise than most other public procurements, yet user agencies with delegated leasing authority are not required to assign experienced real estate attorneys to represent the Commonwealth in negotiations with private attorneys representing landlords. Insufficient experience or diligence on the part of user agency attorneys could expose the Commonwealth to legal problems as well as favoritism or abuse in leasing transactions. To the extent that user agencies are subjected to inappropriate political pressures from landlords and other interested parties, these risks will be magnified.
The Ward Commission centralized leasing authority within DCPO to promote professionalism and accountability in the state's leasing transactions. Even if all eligible leases were delegated to user agencies, DCPO would continue to manage at least three-quarters of the Commonwealth's $97.7 million annual investment in private leased space (including non-office space). Moreover, as responsibility for leasing is shifted to user agencies, DCPO will need to assume important planning, monitoring, and enforcement responsibilities. Current DCPO resources devoted to leasing may well be insufficient to fulfill DCPO's essential responsibilities. The recommendations offered below are intended to ensure that the Commonwealth's investment in leased space is sufficiently protected from waste, fraud, and abuse.
Several statutory changes also appear warranted. While five-year leases make sense in some cases, they may be too short in cases where the state requires the landlord to finance substantial buildout. In addition, the statutory prohibition on renewing leases more than six months before they expire also appears unnecessarily restrictive. Permitting lease renewals to be exercised up to one year before the expiration date of the lease could increase the Commonwealth's leverage in negotiating lease amendments, improve the Commonwealth's relationships with private landlords and reduce the number of short-term lease amendments initiated in response to incomplete lease renewal transactions.
To protect the Commonwealth's interest in maintaining the cost-effectiveness and integrity of state leasing, the Inspector General offers the following recommendations to the Legislature:
- The Legislature should direct DCPO to prepare and periodically update a statewide master facility plan.
- The Legislature should direct DCPO to prepare a detailed delegation oversight and evaluation plan.
- The Legislature should direct DCPO to prepare a staffing plan and appropriate resources for its implementation.
- The Legislature should mandate and fund a consultant study, commissioned by DCPO, to design a reliable system within DCPO for collecting and tracking information on usage of state-owned space.
- The Legislature should amend M.G.L. c.7 to require all state agencies to provide information to DCPO on their usage of state-owned space.
- The Legislature should amend M.G.L. c.7, §40G to allow the DCPO Commissioner to lease private space for a term not exceeding 10 years, provided that any lease exceeding the standard five-year term be ineligible for delegation.
- The Legislature should amend M.G.L. c.7, §40G to permit lease renewals to be exercised within the 12 months prior to the lease expiration date.
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