IG Slams SEC for Constitution Center Lease

WASHINGTON, DC-Last summer the Washington, DC area got a major boost with news that the Securities and Exchange Commission was leasing roughly 900,000-square feet of space at Constitution Center, a newly-renovated office building at 400 Seventh St. From there, however, behind the scenes the $556 million deal began to quickly unravel, when in October the SEC determined that it would not need 600,000-square feet after all--nor the 500,000 square feet that had been subject to the right of first refusal.

Now the building’s owner, David Nassif Associates, is asserting damages of $93.9 million. In a newly-released report by the agency’s inspector general, it appears that the company may well have a case. The report is unstinting in its criticism of the SEC and its decision-making leading up to this lease. What’s more, it concluded, it may well have violated federal law by moving forward without waiting for Congressional appropriations to fund the lease.

For a complete accounting of the debacle, the SEC’s 96-page report is a must read. Chapters are titillating, and include references to the SEC Office of Administration Services’ enhancement of its space needs. “OAS inflated its calculation of the need for additional space at SEC headquarters by unnecessarily including an estimate of contractors in its growth projections and then overestimating the number of those positions by 200 percent,” the report reads in part. And, in another section: “OAS inflated its calculation of the need for additional space at SEC Headquarters by unnecessarily including an estimate of interns and temporary staff in its growth projections and then overestimating the number of those positions by approximately 300 percent...”

The SEC declined to speak with GlobeSt.com but it did provide a statement by SEC spokesman John Nester. In it, he explains that in the summer of 2010, the agency realized it needed additional employees to carry out the new responsibilities assigned to it under the financial reform legislation--responsibilities that would include enhanced supervision of credit rating agencies, oversight of hedge fund advisers and the creation of an entirely new regulatory regime for derivatives, among others. 

“As an agency, we must continually assess our space requirements,” he said. “When it became apparent that the SEC would not be receiving funding for FY 2011 to support the necessary additional staff, the leasing office worked with the landlord to swiftly identify two self-funded agencies that were able to take the majority of the space allotted to the SEC. The SEC’s releases that enabled the landlord to lease space to the other federal tenants were conditioned upon the SEC being released from all obligations for the space. And, as noted in the Inspector General’s report, the agency does not believe any damages are owed.”

Nester says the agency's new COO is reviewing the IG’s findings and moving forward to implement its recommendations. “Even before receiving the report, the chairman had tasked the COO with overseeing the Office of Administrative Services. Additionally, the agency has been taking other steps to enhance the governance of leasing operations,” he said.

These include requiring future leasing decisions to be approved by the COO; reducing the square footage allotted to contractors who require office space; and acquiring a system that automates the layout and square footage needs of the agency, so that management is better able to calculate spacing. “Further, the COO is creating a senior executive level facilities management oversight committee which will review all major leasing decisions,” the statement read.

In the face of this budding scandal it is important to remember the federal government’s overall stabilizing influence in the District, Jones Lang LaSalle research director Scott Homa tells GlobeSt.com. “Without this catalyst the market would have faced several years worth of excess supply. We've already seen a noticeable slowdown in leasing activity during the first part of 2011 due to the federal government's push toward austerity.”

For the DC area, at least, there is a silver lining, he concludes: despite the leasing complications related to SEC at Constitution Center, the ability of that property to attract the OCC and FHFA and position itself as a new hub of financial regulation helped mitigate the oversupply problem in Southwest. For the SEC the fallout will be more significant, says Carl Schwartz, chair of the commercial real estate department at Herrick, Feinstein.

Schwartz's firm was the first in the nation to sue the SEC on behalf of Madoff victims, alleging that the agency--through its actions and inactions--was negligent. “In the big scheme of things, $556 million isn't transformational. But with all the image problems the SEC has had on the regulatory front, the last thing they needed was a black eye on how it procures its office space,” he tells GlobeSt.com.

“The most good that can come of this is if the SEC and other government agencies improve the process by which they decide how much space to lease, and in what kind of properties with what kind of amenities. Committing to a major lease and the expenditure attached to it, prior to the appropriation of money to cover the lease, smacks of really bad processes.”