When a landlord leases space to the federal government, it is most often a U.S. General Services Administration (GSA) contracting officer who signs the lease for the United States of America. In fact, the GSA leases well more than 190 million square feet in the United States and its territories. The GSA, in turn, executes an Occupancy Agreement (OA) with each federal agency that actually occupies this leased space. The OA is similar to a sublease between GSA and its tenant agency. The OA addresses both the financial specifics of the interagency agreement (reflecting the underlying lease contract) and the responsibilities of both GSA and the tenant agency.

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The OA is also meant to establish clearly the agency’s space needs, lease term, security charges, parking and so forth. In the event that multiple federal agencies occupy space under a single lease, each agency’s prorated and special charges are clearly articulated. On top of it all is GSA’s surcharge, which generally ranges from 5 to 7 percent of the agency’s annual rent.

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A critical feature of the OA, as outlined in the Code of Federal Regulations, is that it may not be construed as obligating future year tenant agency funds until they are legally available. This is important because it allows the individual agencies to comply with the Antideficiency Act. GSA funds the long-term lease contract through its Federal Buildings Fund, a multi-billion dollar revolving fund. However, the tenant agencies cannot make their rent payments until they receive annual budget appropriations sufficient to do so. If an agency, for whatever reason, determines that it can no longer pay the rent it may simply cancel its OA. That is the truly unique feature of the Occupancy Agreement: at any time, the tenant agency can cancel its “sublease” with just four months’ notice. The only penalty is that the tenant agency must pay the unpaid balance of the cost of tenant improvements as well as the remaining amount of any concession (free rent for example) applicable to the remaining lease term.

Landlords rarely see the Occupancy Agreement. So, this process is largely invisible to the private sector. However, the OA is influential in negotiations because GSA shares a draft OA with the tenant agency early in the process, and GSA updates the OA as negotiations progress. Behind the scenes, GSA must get the tenant agency “customer” to understand and accept the terms that flow through from the negotiated lease. Further, GSA may not execute a lease until the OA is first executed.

Kurt Stout is the national leader of Colliers International’s Government Solutions practice group, which provides government real estate services to private investors and federal agencies. He also writes about federal real estate on his Capitol Markets team blog. You can contact Kurt by email or on Twitter.