State space management policies

Follow-Up Review Report No. 14-11

September 2014

Georgia Department of Audits and Accounts
Performance Audit Division
Greg S. Griffin, State Auditor Leslie McGuire, Director

Why we did this review
This follow-up review was conducted to determine the extent to which recommendations in our January 2012 Special Examination (11-33) have been addressed.
The purpose of the original examination was to answer Senate Appropriations Committee questions regarding state policies for state owned and leased space. The Committee asked about the balance and cost of space for state owned and state occupied, state owned and unoccupied, state owned and nonstate occupied, and non-state owned and state occupied properties. The Committee also requested information on policies for determining location and spaces and the management of tenant improvements.
About the State Properties
Commission
The State Properties Commission (SPC) is the state's real estate portfolio manager. SPC is responsible for acquiring and disposing of real property, managing administrative space, and establishing/managing lease agreements for (non-exempt) state entities. In 2006, SPC (in conjunction with the Carl Vinson Institute of Government) developed the Building, Land, and Lease Inventory of Property (BLLIP) as the state's first single source inventory of state owned and leased real property.

Follow-Up Review
State Space Management Policies
Action has been taken to improve
property data and procedures impacting
leasing costs
What we found The State Properties Commission (SPC) has taken steps to address the majority of issues identified in the January 2012 Special Examination. SPC has added data quality controls and implemented new procedures to better manage leasing costs. However, there are several recommendations that have not been implemented.
SPC has implemented additional controls to improve the quality of the data in the Building, Land, and Lease Inventory of Property (BLLIP). Our 2012 report found missing and incorrect values for key fields in BLLIP. As a result, SPC could not determine the primary use of many properties, whether the property was occupied, the percentage of usable space that was/was not utilized or occupied, or the cost of the space. Since then, SPC has developed guidelines for conducting periodic quality control reviews of the data. SPC has also identified mandatory fields, modified the primary use categories, and added a field to indicate usage for properties other than administrative office spaces. In addition, SPC indicated that it is working with the agencies that have the most missing data. However, the database still lacks sufficient information to calculate the cost of state owned space. SPC noted that a Total Cost of Occupancy analysis would require changes in the state's accounting system and better data collection of utility payments.
SPC has also developed stronger policies and procedures related to two primary factors that impact the state's lease costs the amount of space leased by an entity and the property's cost per

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square foot. SPC implemented a policy that outlines the acceptable variance between SPC's square footage space standards and the actual square footage of the space rented. To help control the cost per square foot, SPC collects market rate data and compares those figures to the cost per square foot figures for existing leases. When lease rates are higher than market rates, SPC policy requires a document detailing whether the lease will be renegotiated or explaining the variance.
SPC is taking other steps to reduce costs through the use of metro-plans and multi-year leases. Currently, SPC is conducting metro-plans in Waycross and Columbus to identify opportunities for consolidating space, renegotiating lease rates, and relocating state entities to more cost-effective locations. In addition, the Georgia Constitution and state law were amended to allow SPC to execute multi-year leases. SPC estimated that multi-year leases could save $37 million over a 10 year period. The statutory change also authorized SPC to manage multi-year leases for all state entities, including exempt agencies. In the original review, we found that exempt entities had a greater proportion of high-cost leases.
While SPC has made improvements, there are several recommendations that have not been fully implemented. For example, SPC still lacks criteria for evaluating the merits of a requesting entity's geographic location requirements. Instead, SPC relies on the agency to determine the best location. In addition, SPC has not established written policies restricting state agencies' location in premium space, and BLLIP records do not indicate the relative quality or class of space leased by state agencies.
We also found that SPC has not made any changes to how it manages tenant improvements (TIs). In the original audit we discovered that SPC's lease files did not always contain documentation of multiple bids and that SPC lacked policies for handling above-standard TI costs. We recommended that SPC better track TI costs so it could identify if cost-savings would result from the ability to use multi-year leases or from self-funding TIs. SPC responded that the uniqueness of TIs makes them difficult to separate from lease rates and that self-funded tenant improvements are not an industry best practice.

SPC Response: SPC does not agree with the format and reading of the report and believes the report misrepresents the months of work and responsive action taken by SPC. SPC noted that there were a total of 21 sub-findings within the four broad findings. SPC further noted that of those 21 sub-findings, 16 were fully addressed, three were partially addressed, and two were not applicable.
DOAA Response: DOAA agrees that SPC made significant improvements to address 3 of the 4 findings in our 2012 special examination. Our reports are organized by finding and each finding may include a number of recommendations for addressing the finding or issue noted. These recommendations are focused on dealing with aspects of the problem identified. As such, when all aspects of the finding have been addressed, we deem the finding "fully addressed." When some but not all aspects of the finding have been addressed by the agency, we deem the finding "partially addressed." A description of action the agency has taken on each recommendation is provided in the report so that the reader can quickly discern what has and has not been done since our original review.
The following table summarizes the findings and recommendations in our 2012 report and actions taken to address them. A copy of the 2012 performance audit report 11-33 may be accessed at http://www.audits.ga.gov/rsaAudits.

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FINDING

State Space Management Policies
Follow-Up Review, September 2014
SPC should provide more comprehensive management oversight and control of BLLIP data to improve its usefulness for portfolio management.
Fully Addressed In the original audit, we found that missing and incorrect values for key fields in BLLIP limited SPC's ability to effectively manage the state's real estate portfolio. Following the audit, SPC took action to improve the quality of the data. As a result, SPC is better able to determine the primary use of the properties, whether or not the property is occupied, and the percentage of usable space that is/is not utilized. SPC still lacks information on the cost of state owned buildings; however, SPC indicated that accurate cost data would require other agencies to change or improve data collection processes.

Original Recommendations
Establish quality control guidelines and review procedures for BLLIP data entry to reduce varying procedures and field interpretations among the various users and entities with permission to edit BLLIP records.

Current Status
To better identify the properties' primary uses, SPC removed "other" and "vacant" from the use type selection and consolidated some use types. SPC also defines the data fields in its application to reduce varying interpretations among users and continues to offer training to agencies.

Strengthen information system controls for critical fields in BLLIP to prevent entry of erroneous values and make certain fields mandatory for record submission, particularly those related to use, occupancy, cost, and square footage.

SPC identified mandatory fields for record submissions for the lease, building and other asset databases. Required fields for building and leases include primary use, square footage, facility type (for buildings), and rent (for leases). In addition, SPC indicated that it added information system controls (e.g., dropdown lists) in order to reduce data entry errors.

Conduct periodic data quality reviews to detect obvious errors and blank values in the data.

SPC established guidelines for conducting periodic data quality reviews, with a focus on buildings used for office space. The procedures include identifying key fields and performing monthly reviews of those fields to determine agency compliance. Any deficiencies in the key fields should be reported to the agency for correction. In addition, the asset manager is responsible for identifying two properties to directly verify the data by physical inspection.

Work directly with the state entities that represent the majority of missing and inaccurate data to improve data completeness and accuracy.

SPC indicated that it added information on primary use for the leases that it manages. In addition, SPC indicated that it identified eight agencies that have the most missing BLLIP data and is working with those agencies. The Office of Planning and Budget is also identifying entities that did not populate BLLIP data when submitting strategic plans and requesting that the agencies enter the data.

RECOMMENDATIONS

Add a field to identify unused (vacant) versus used space and limit the use of occupancy rate fields to the primary use categories for which occupancy rate calculations are relevant (i.e. offices and not radio towers, storage buildings, etc.) .

SPC added a field to indicate usage for properties other than administrative office spaces. SPC calculates occupancy rates for administrative office spaces based on the total capacity and total occupancy.

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FINDING

State Space Management Policies Follow-Up Review, September 2014

Determine the most efficient and effective way to collect and maintain data necessary to calculate costs associated with state owned buildings.

SPC reported additional agency investments in sub-metering projects. In addition, SPC contacted the Georgia Environmental Finance Authority (GEFA) to discuss a centralized processing center of state utility payments. However, SPC indicated that GEFA is not having success in collecting this data. SPC noted that a Total Cost of Occupancy analysis would be extremely difficult without being able to obtain data from GEFA and changing the State Accounting Office's chart of accounts.

SPC should establish stronger policies and procedures necessary to provide more transparency of space and lease management decisions.
Partially Addressed In the original audit, we found that SPC had not established sufficient procedures related to facility location, facility quality, space standards, and methods for lease cost data review. Following the audit, SPC implemented policies for enforcing space standards and reviewing lease cost data. In addition, SPC implemented other changes that impact costs, such as conducting metro-plans, executing multi-year leases, and managing multi-year leases for exempt entities. However, SPC has not made any changes to its process for evaluating geographic location requirements or the need for premium space.

Original Recommendations
Consider requesting more statutory authority over leases negotiated by exempt entities. For example, SPC could provide independent oversight over highcost leases that exceed defined limits and could work with agencies to establish parameters for reviewing costs.

Current Status
SPC is now authorized to manage multi-year leases for exempt entities. In addition, the Georgia Department of Labor is no longer an exempt entity.

Improve its analysis of backfill opportunities in state owned space before leasing private space. SPC should (a) establish policies and procedures to define staff requirements for assessing state owned property inventory and (b) require documentation of the analysis to be maintained as part of the lease file.

SPC modified its internal tracking system to include check boxes and date fields documenting staff consideration of vacancies in state owned space and other back-fill opportunities. However, SPC has not established procedures detailing the methods staff should use when conducting the review of state owned properties.

Write procedures explaining the goals and standards related to leasing. Specifically, SPC should establish procedures detailing the data collection and analysis techniques that staff should execute to identify private property for state entities to lease.

SPC developed standard operating procedures explaining the goals and standards related to leasing as well as data collection and analysis techniques. According to the procedures, the purpose of the leasing process is to ensure "the location and selection of cost effective, modern, safe, production-oriented work environments to meet the current and future needs of the State and its agencies." The procedures also explain that the leasing specialist may post notices, use online services, and/or communicate with brokers or landlords.

Adopt criteria to evaluate the merits of a requesting entity's state geographic location requirements and adopt procedures to formally document SPC staff considerations of general geographic area (and the associated cost implications) as part of the lease file.

SPC has not adopted criteria for evaluating the merits of a requesting entity's geographic location requirements or procedures for documenting staff considerations of the geographic area. SPC relies on the requesting agency to determine the best location that will serve its program requirements.

RECOMMENDATIONS

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RECOMMENDATIONS

State Space Management Policies Follow-Up Review, September 2014

Obtain information on market lease rates for geographic areas throughout the state and establish procedures for evaluating market rates and including market rate evaluations in lease files.

SPC implemented standard operating procedures requiring annual review and market rate comparison of rental agreements. SPC obtains information on market lease rates for geographic areas throughout the state and compares this information with the State's average lease rates in those areas using data from BLLIP. SPC also calculates the variance between lease rates and the market rate to highlight leases for potential renegotiation.

Establish working definitions to classify the quality of space occupied by state entities. SPC should also require that state entities provide written justification for leases of "premium" class space and consider requiring formal SPC approval for leases of premium space.

SPC has not established formal policies restricting state agencies' location in premium space or outlining the steps necessary to justify exceptions to this policy. Also, SPC does not routinely classify the quality of space in the BLLIP records. According to SPC, an indication of premium class space may be provided in the comments section at the discretion of the leasing specialist.

Require that lease files include justification when space standards are exceeded by 10% or more.

SPC implemented a policy that includes acceptable variance between the established space standards and the actual square footage. The acceptable variances range from 10% to 30%, depending on the square footage of the space. Exceptions require written documentation signed by the approving authority of the state entity.

Develop a strategy for performing metroplans in the future. The strategy should prioritize locations with the greatest potential for cost savings.

SPC indicated that it is currently working with a contract broker to conduct metro-plans in Columbus and Waycross. SPC expects the metro-plans to be completed in October.

Establish policies and procedures for conducting periodic, systematic analysis of BLLIP data records to identify areas for potential cost savings.

SPC developed a policy for identifying leases that are above market rates. The asset manager annually reviews office property rental rates and compares the rates to a formulated average rate for each city. Rental rates are also compared to the SPC average rental rate and to market rates provided by several recognized market sources.

Develop a strategy for reevaluating lease costs when leases come up for renewal. The strategy should prioritize leases with the greatest potential for cost savings.

SPC policy requires the asset manager to provide the Leasing Division with a list of leases with higher than average lease rates as compared to the average city rate and the average SPC rate. For the above market rate leases, the policy also requires a document to be placed in each lease file detailing whether the lease will be renegotiated or what explains the variance. The asset manager is also required to provide market data from CoStar or other recognized market sources, an estimate for moving and other relocation expenses, and a target rental rate for renegotiations.

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State Space Management Policies Follow-Up Review, September 2014

Determine costs savings that might result from executing multi-year lease agreements, including the tenant improvement costs that will be amortized over the term of a multi-year agreement.

SPC estimated that the State could save $37 million over a 10year period if SPC had the authority to enter into multi-year lease agreements. In November 2012, the state Constitution was amended to allow for multi-year leases. Effective January 2013, O.C.G.A. 50-16-41 authorized SPC to enter into leases up to a term of 20 years.
Following these amendments, SPC implemented standard operating procedures for multi-year leases. According to the procedures, SPC should take into consideration the history, future existence, and size of the State entity when deciding to enter into a multi-year lease. In fiscal years 2013 and 2014, SPC executed 48 multi-year leases, including 20 year leases (4), 10 year leases (8), 7 year leases (10), and 5 year leases (26).

FINDING

SPC should conduct additional research related to leases that exceed average market rates to identify opportunities for cost savings.
Partially Addressed In the original audit, we identified SPC leases that were high-cost and leases that were above market rates. Since then, SPC has developed a policy for identifying and evaluating existing leases that are above market rates. However, SPC still lacks formal procedures for permitting and documenting the decision to execute a new lease at above market rates.

Original Recommendations

Current Status

To ensure that the state is not paying higher than necessary lease rates for properties, SPC should periodically collect market rate data for cities and compare those figures to the cost per square foot figures for existing leases.

SPC developed a policy for identifying leases that are above market rates and determining if the lease should be renegotiated or if the agency should relocate to another property. According to the policy, the asset manager annually reviews the office property rental rates and compares those rates to a formulated average rate for each city. In addition, the asset manager compares those rental rates to the SPC average rental rate and to market rates provided by several recognized market sources. A list of leases with higher than average lease rates is provided to the Leasing Division. If the lease rate is higher than the SPC average rate, then the policy requires comments to be provided. If the lease rate is higher than the market rate, then the policy requires a document detailing whether the lease will be renegotiated or explaining the variance.

To ensure that higher than average lease costs are reviewed and justified, SPC should establish a policy and procedure for permitting and documenting the decision to execute a lease at rates that are higher than the established market norm.

SPC does not have policies and procedures that specifically address permitting and documenting the decision to execute new leases at above market rates. SPC does have a policy that requires the agency to provide written justification if it disagrees with SPC's recommendation. According to SPC, market rate is inherent in their decision-making when making recommendations.
As discussed above, SPC has implemented a policy for identifying existing leases that are above market rates and determining if the lease should be renegotiated or if the agency should relocate to another property.

RECOMMENDATIONS

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FINDING

State Space Management Policies Follow-Up Review, September 2014
SPC should improve how it manages tenant improvements for the spaces it leases.
Not Addressed In the original audit, we found that lease files did not contain records of multiple bids and SPC lacked sufficient policies and procedures regarding high-cost tenant improvements. By tracking TI costs, SPC could determine if the ability to use multi-year leases or self-funding TIs would result in a cost-savings. SPC has not made any changes to how it manages TIs.

Original Recommendations
SPC should ensure that it uses (and documents) multiple bids to constrain TI costs.

Current Status
SPC has not made any procedural changes regarding using or documenting multiple bids. SPC indicated that it accepts multiple bids, but in some cases, there may only be one or two available options.

SPC should develop specific policies for handling and documenting abovestandard TI costs.

SPC has not implemented any new policies for handling and documenting above-standard TI costs. SPC indicated in its response to the original report that the uniqueness of TIs makes them difficult to separate from lease rates but that the cost of some non-standard TI's are maintained in the lease files.

RECOMMENDATIONS

4 Findings

1 Fully Addressed 2 Partially Addressed 1 Not Addressed

The Performance Audit Division was established in 1971 to conduct in-depth reviews of state-funded programs. Our reviews determine if programs are meeting goals and objectives; measure program results and effectiveness; identify alternate methods to meet goals; evaluate efficiency of resource allocation; assess compliance with laws and regulations; and provide credible management information to decision-makers. For more information, contact
us at (404)657-5220 or visit our website at www.audits.ga.gov.