In my last blog, The Benefits of a Government Tenant, I wrote about the upside of leasing commercial real estate to the public sector or government agencies and departments. As one who will tell you like it is, let’s address the things to think about before entering into a lease with the government:
1. Government lease deals add more layers to a process that’s already complex. They often include more hoops to jump, more requirements to check off, and a slower approval process. Patience and the right combination of owners and brokers are the ticket to make these deals happen. Once a deal is done, it’s important to properly administer the lease, so be sure to understand all of the terms. Partnering with a broker that knows and is experienced with the public sector side of commercial real estate saves time, money, and stress.
2. Local, state, or federal agencies/departments provide a gross lease to the property owner. This type of lease offers limited areas to negotiate, although the government will consider reasonable requests. Leases are full service, so owners are responsible for long-term operating costs and maintenance. Predicting a property’s net operating income and its actual monthly income can be difficult under the gross lease structure. Know that operating expenses will fluctuate, so plan accordingly. Again, working with an experienced brokerage and property management team can help ease uncertainty.
3. Termination clauses are built in many federal Government Service Agency (GSA) as well as state and local government leases. That means they give their notice (usually 30-60 days), and they’re done. The lease is over. Having an existing relationship with a broker and being prepared to list can help get the property back on the market more quickly.
4. Buildings need to be up to agency specs, which means they might have extensive security requirements or specific improvements needed. However, because the properties are customized, owners often receive higher than market value rent while the government lease is in place. Be aware that when they move out, the property most likely returns to market rate.
5. The renewal process is time consuming, as working with agencies can be slow with delays. In addition, government leases allow for rent to be paid one month in arrears. For example, if they move in on September 1, they pay that month’s rent in October. For both, planning ahead is key. An experienced broker can help a property owner prepare and sort out the terms of government leases.
Conclusion
Even with its obstacles (I love to figure those out), we work with government leasing at CEG. Partly because of my military background, but also because the positives outweigh the negatives for us. We prepare clients with what to know before leasing to the government and how the leasing process works. It’s important to have a broker with government lease expertise help navigate the challenges of termination clauses, specific property requirements, a slow renewal process, and lease terms.
If you’ve got questions, we’re here to help. Email or give us a call.
Jeff Salzbrun is the owner/broker of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in thousands of sale and lease transactions, ranging from single offices to 250,000+ square foot buildings. At CEG, we get your deal done. We know space, and we know the CRE business.