GSA to Landlords: You'll Get Paid …Eventually

WASHINGTON, DC-The CEO of an industrial REIT was interviewed on CBS at the beginning of last week, during which he was asked about the impact the shutdown would have on his company's operations.  While he view of the long term was precise, he couldn't quantify the short-term. Why? He wasn't quite sure about whether rents would be paid. The CEO can be forgiven for the missing information. The General Services Administration has been slow to clarify how rents would be handled in the shutdown.

"There have been some emails coming out of GSA and while they have been hedging a bit we are getting a clearer picture," Jones Lang LaSalle's Joe Brennan tells GlobeSt.com. In a nutshell, he says, landlords will be paid – eventually. That is, when the shutdown is over. He adds one gloomy caveat: if there is a US debt default, the GSA may fall back on a deficiency of funds clause.

Kurt Stout of Colliers International goes into a deep dive of what the shutdown could mean to private sector landlords with federal government tenants in this post.

October rent will be due until November 1st, he writes. "If the shutdown persists through October, it is unlikely rent will be paid on time. In that event, expect payment to be made shortly after the shutdown is lifted." The good news, he adds, is that the Prompt Payment Act may require the federal government to include interest with the rent.

Stout also examines other issues in his post such as whether the government will pay tax reimbursements during the shutdown (answer: no, nor will it pay CPI adjustments or other amounts owed); can landlords recover costs from delayed tenant improvement construction projects currently underway (answer: unclear but lessors should document the costs and establish the appropriate rent commencement date); the offer process (answer: again unclear but assume GSA will suspend the offer process while the shutdown is in effect. "We can only hope GSA will act rationally on this issue.")

While such details are greatly welcomed by federal government landlords they do not address the big picture of the shutdown--the uncertainty it is creating for the economy, to say nothing of the question of whether the debt ceiling will be raised. Clearly uncertainty is now rife throughout the markets, but by how much—and how it will impact the commercial real estate sector.

Here we turn to Auction.com senior principal and economist Peter Muoio, who notes that throughout this year there has been a decline in uncertainty--dropping below what was seen in 2008. Unfortunately, Muoio says in a prepared statement, there has been a sharp jump in uncertainty as quantified by the daily uncertainty index--back to a level we have not seen since the start of the year. "The longer the shutdown and fight over the budget and debt ceiling drag on, the higher uncertainty is likely to go and the more damage to spending and investing plans," he says.

Muoio's final, dismal observation: "The stage is being set for another potential late year economic stall that could be worse than econometric models are currently projecting."