GSA has said it agrees with the recommendations

WASHINGTON, DC–The Government Accountability Office released a report last month [PDF]
with recommendations for the General Services Administration that could conceivably have a chilling effect on foreign investment in office buildings that are leased by government agencies.

The report, “GSA Should Inform Tenant Agencies When Leasing High-Security Space from Foreign Owners” is a follow up to a finding last year that some US agencies and departments that deal with sensitive security matters — think Drug Enforcement Administration, Federal Bureau of Investigation — are leasing space in buildings owned by foreign entities. All told, GSA found there were 20 such leases.

But perhaps the real eyebrow-raising finding was that GAO couldn't definitively say what the number actually was as it was unable to identify the building owners for about one-third of the 1,406 high-security leases it oversees.

Ergo its recommendation to GSA: if the lease in question is for an agency with a high-security mission, first make sure who owns the building. If the ownership has a foreign-based component, then share that information with the tenant agencies so they can assess and mitigate any security risks.

GSA says it agrees with this recommendation.

The Practical Effects of the Recommendation

A building's ownership is not always clear-cut and in some cases GSA will have to expand its lease procurement documentation to ask for more disclosure about the ownership structure and individual owners' interests, writes Colliers International's Kurt Stout.

This won't be well-received by property investors, who are already uncomfortable with the government's broad rights to review documents relating to “evidence of ownership” and “signatory authority” prior to lease award. At minimum, expect additional disclosures to add more friction to an already cumbersome leasing process.

There are other related costs or consequences to this, Stout continues.

The recommendations also will bog down any subsequent sale of leased properties, which is important because as of now property sales move a lot faster than lease transactions.

Furthermore, if it chooses, GSA could outright kill a property sale invoking a standard clause that the new lessor will be in the government's interest, Stout also wrote.

Some Agencies Want The Notification

While the recommendations are likely being met with displeasure and dismay from commercial property owners and investors, at least some agencies say there is a need for the greater disclosure and notification that GAO recommends.

For example, 9 of the 14 tenant agencies GAO contacted were unaware that the space they occupy is in a building that GAO identified as foreign owned. The other five agencies that knew they were occupying foreign-owned space had either taken actions to mitigate the risk or were not concerned.

The Secret Service told GAO that its counterintelligence branch determined that foreign ownership of a building it occupies could raise counterintelligence and security concerns. The space could be compromised through any unannounced inspections, emergency repairs to the building or unescorted access throughout the space by the facility owner or representatives

DEA had similar concerns, at least about the unauthorized access, and said it would be “useful” for GSA to inform the agency about changes in ownership because this information would help its security assessment.

Rebuttals are Given Equal Time

GAO dutifully reported the rebuttal arguments to these concerns. Many of these foreign owners are passive investors. Many of the ownership funds are co-mingled with other sources. The buildings are almost always managed by US companies. There are strict controls in place for the high-security operations. Finally, my personal favorite: “There are cheaper ways to conduct nefarious actions than buying a building.”

The Trump Administration Weighs In

GAO's recommendations are just that — recommendations. So it is possible that GSA may not implement them in full or at all, especially as a new administration takes over operations.

But probably not, at least according to a blog post written by four attorneys at the international law firm Dentons.

Emilia (Jinjuan) Shi, Kenneth J. Nunnenkamp, Sandy Walker and Michael E. Zolandz are predicting that foreign direct investment will likely see policy changes under the Trump Administration, especially given that the role of the Committee on Foreign Investment in the United States (CFIUS) arose during confirmation hearings. They write:

A consensus is building in both houses that CFIUS must be strengthened, both as a direct national security measure and as a quid pro quo to China's restrictions on US investment.

Instant Insights /

Foreign Investors May Hesitate To Buy Gov't Leased Buildings After GAO Recommendations

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