Two months ago, the Trump administration revealed its proposed 2019 budget and a companion proposal, the Legislative Outline for Rebuilding Infrastructure in America. Together, these proposals describe the president’s much-anticipated infrastructure plan. The centerpiece of the plan is a $200 billion request for funds “to stimulate at least $1.5 trillion in new investment over the next 10 years, shorten the process for approving projects to two years or less, address unmet rural infrastructure needs, empower state and local authorities and train the American workforce of the future.” Private capital investors are meant to take the lead in modernizing the Nation’s faltering infrastructure —building such things as roads, bridges, pipelines and broadband facilities. Half of the $200 billion budget request is slated to provide incentives in the form of grants for projects that would primarily be funded by the states. Another $50 billion would be directed to a proposed Rural Infrastructure Program to fund rural projects.
The infrastructure plan has proven itself controversial and congressional appropriators are likely to make substantive changes, assuming that they can agree on what those should be. Yet, we find the plan worth monitoring closely for two lesser provisions included within: Disposition of Federal Real Property and the Federal Capital Financing Fund.
Disposition of Federal Real Property
The “Disposition of Federal Real Property” section of the infrastructure plan builds upon the Federal Sales and Transfer Act (FASTA) legislation enacted a year ago. Trump’s plan would allow federal agencies to take properties to market faster, bypassing public conveyance requirements and provisions that provide state and local governments with preferential rights to acquire properties, sometimes at steep discounts. More significantly, the plan would allow agencies to retain their proceeds from sales and use them to reinvest in other owned assets, to improve space utilization and fund further disposal of unneeded assets. This feature is important because, heretofore, there has been little financial incentive to relieve agencies of their hoarding instincts.
The infrastructure plan also provides “authority to divest of Federal assets where the agencies can demonstrate an increase in value from the sale would optimize the taxpayer value.” Among the most visible targets for this divestiture are Reagan National and Dulles airports, two of the three major airports serving Washington, D.C., along with the Tennessee Valley Authority, the George Washington Memorial Parkway, the Bonneville Power Administration and other large federal infrastructure projects, many of them now badly aging and in need of substantial overhaul.
Critics of the program see the move simply as a way for the federal government to push that expensive maintenance off on the states, even as the overall infrastructure program is inadequate to fund the work that needs to be done. Proponents argue that a leaner and more efficient government will be the result, especially where assets can be privatized — and, more to the point, that funds from sales of such massive properties can in turn fund massive infrastructure projects that are critically needed.
Federal Capital Financing Fund
Perhaps the most important aspect of the infrastructure proposal to federally-leased property owners is the development of a “Federal Capital Financing Fund.” An earmark of $10 billion would create a revolving fund to finance large-dollar real property purchases. Purchasing agencies would then be required to repay the fund in 15 equal annual amounts using discretionary appropriations.
The intriguing part about this fund is that it isn’t designed to be used for new construction or major alterations of federal properties, only for purchases of leased buildings. This is probably in reaction to a GAO report published in 2016, which observed that “of the approximately 18,600 leases GSA [U.S. General Services Administration] entered into from 1992 to 2014, GAO identified 17 that included a purchase option… GSA has exercised purchase options on three of these leases [at the time the report was published].” The reason GSA doesn’t purchase properties more often is that the entirety of the outlay must be recorded in that budget year. So, while leases may be more expensive in the long run, year to year, they are far cheaper than the cost of buying property. The Trump plan could alter this dynamic and we may begin to see agencies start to buy assets. By our rough estimates, $10 billion — if applied solely against GSA-leased buildings — could purchase about one-fifth of all leased properties! This may come as good news for lessors seeking to divest themselves of property holdings, but it will also disrupt the leasing market.
The infrastructure plan offers new opportunities to buy properties from, and sell properties to, the federal government. That is going to excite some investors, but the typical federal property investor has reason to be concerned. The infrastructure plan is designed to remove some of the budgetary barriers that have limited investment in the federally owned property inventory, buttressing demand for leased space. If this new plan is successful in raising funds through dispositions, it will allow GSA to modernize its existing inventory, improving the workplace environment and space utilization, and ultimately, siphoning demand from the leased inventory. The Federal Capital Financing Fund could further grow the federally owned property inventory through acquisitions, and we would expect GSA to, more often, demand purchase rights in its leases for properties where long-term occupancy is likely.
In this era of hyper-partisan budget wrangling, the specific implementation of the president’s proposed infrastructure plan is difficult to predict. There is no doubt that the plan, as proposed, could have game-changing impacts.
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.