Protest challenging the terms of a request for lease proposals as unduly restrictive of competition and unrelated to the agency’s needs is denied, where the agency had a reasonable rationale for asking offerors to propose two fixed-price, assignable purchase options for the proposed properties. While the protesters found it less desirable to estimate a future purchase price to which they would be bound, this did not render the agency’s rationale unreasonable nor unduly restrict competition.
Second Street Holdings, LLC, 600 Second Street Holdings, LLC, Seven Hundred 2nd Street Holdings, LLC, and their managing agency Property Group Partners collectively protested the terms of a request for lease proposals issued by the General Services Administration’s Public Buildings Service, for the long-term lease of a property or properties to serve as the headquarters for the Securities and Exchange Commission. The protesters argued that the RLP is unreasonable, unduly restrictive of competition, unduly vague, and unfairly prejudicial to them because it requires an offeror to propose two fixed-price, assignable purchase options that the agency may choose to exercise 15 or 25 years in the future, respectively.
SEC currently leases headquarters space in three buildings owned by the protesters. The RFP in contention seeks to lease up to 1,274,000 square feet of office and related space for an initial term of 15 years, with a fixed-price option to renew the lease for 10 additional years for a total of 25 years. Additionally, the RLP required offerors to include two fixed-price, assignable purchase options for the leased property, one of which would be exercisable at the end of the initial 15-year lease term, and one of which would be exercisable at the end of the 10-year renewal term.
The RLP also included a draft lease specifying that any lease for a portion of the facilities to non-government parties should be cancellable as of the dates on which a transfer of ownership would occur, but that the government may negotiate a purchase price adjustment for any non-government leases with termination dates that extend beyond the transfer date.
The RLP provided that the net present value of the purchase options would be included in the evaluated price, and would be computed by taking 50 percent of the offered price, and then discounting that fraction at a 5 percent annual rate. The RLP also provided that if the facility were larger than the space required for the government’s use under the lease, the purchase option would only be included in the evaluated price pro rata based on the American National Standards Institute/Building Owners and Managers Association Office Area square footage occupied by the government.
The protesters did not challenge the inclusion of purchase options in the RLP, but objected to their fixed-price nature and assignability as inconsistent with industry practice and unrelated to a legitimate agency need. The protester argued that the requirement for offerors to propose fixed-price, assignable options that could be exercised 15 or 25 years in the future is inherently unreasonable because an offeror has no reliable way of determining the fair market value of its property in the distant future. The protesters also alleged that the nature of the options is not reasonably related to the government’s articulated need to potentially own the office space it plans to lease. As an alternative, the protesters suggested that a purchase option with a price to be negotiated at the time of exercise would be less burdensome and better aligned with the agency’s needs.
In response, the agency noted that the protesters did not object to the proposed methodology for estimating the fixed-price 10-year lease extension option, which could also be used for estimating a future purchase price. PBS noted that owning property is generally more cost-effective than leasing. Further, the agency concluded there is value in having a fixed-price purchase option so that the agency can plan and budget years in advance if it intends to exercise the option.
PBS also argued that the assignability of the options allows the agency to preserve the benefit of its bargain if circumstances should change. For example, if the leased property is no longer suitable as a headquarters for SEC at the time the option would be exercised, the agency could exchange the option to a third-party for reduced rent at a suitable facility. For these reasons, the agency has previously negotiated similar fixed-price purchase options in similar leases.
As a preliminary matter, GAO disagreed that the RLP compelled offerors to accurately predict the future fair market value of their property. Instead, GAO found that the RLP required offerors to set a price that they would willing to accept for the property 15 or 25 years in the future. GAO did not believe it was impossible for offerors to make such an estimate. The agency correctly noted that the same estimating tools that an offeror will use to compute the fixed-price rental option could be used to compute the purchase option price.
While the protesters identified multiple factors that go into calculating the value of a property, GAO noted those factors would equally apply to the value of the property as a rental. For example, a building’s amenities and access to public transportation also would be considered in computing a fair market value for rent. Accordingly, GAO was not persuaded by the protesters’ objection to the requirement to estimate a future purchase price.
GAO also found the purchase option related to the agency’s needs. The protesters did not object to the agency’s need to potentially own the leased real estate at the end of the lease term, but argued that the fixed-price and assignable nature of the options are not rationally related to that goal. However, the agency identified capital planning and budget constraints that make a fixed-price purchase option clearly more suited to its needs than a negotiable purchase option. If the agency opted not to exercise the options, the ability to assign the options would allow the agency to derive some value from them. Because the requirements were not objectionable and were reasonably related to the agency’s needs, GAO denied these aspects of the protest.
Next, the protesters argued that the fixed-price options are both unduly restrictive of competition and impermissibly vague. According to the protesters, because less burdensome purchase option terms are available, the agency’s selection of a fixed-price, assignable purchase option unduly restricts competition. Additionally, they alleged that the requirement to estimate a purchase price so far in the future introduces significant uncertainty and inappropriate risk, such that offerors are unable to intelligently prepare their proposals and compete on a common basis.
However, GAO disagreed. In this case, the requirement that the agency have the option to purchase a facility in the future restricts competition to offerors who own the proposed buildings or would have the ability to facilitate their purchase. GAO was not convinced that a fixed-price or assignable purchase option is any more restrictive of competition than another variety of purchase option, because an offeror capable of responding to an RLP containing any purchase option could also respond to this RLP.
While the protesters find it less desirable to compete for this lease, that did not make the requirements unduly restrictive of competition. In fact, GAO noted the protesters did submit an offer. The fact the protesters did not like some of the RLP terms was not enough to render them unreasonable. GAO found the protesters’ argument that the requirements were vague similarly unavailing. GAO noted the RLP terms were not open-ended, but merely imposed a readily identifiable risk on offerors. An offeror need not offer any price it could not afford to accept in the future, but would accept the risk that it might not consider the price acceptable in 15 or 25 years.
Finally, the protesters argued they would be unduly prejudiced by the RLP’s terms. Specifically, the protesters argued that the inclusion of the NPV of the purchase options in the agency’s price evaluation for determining which offeror is the LPTA offeror will prejudice owners of higher-value buildings, because buildings that have a higher purchase option price will have a higher evaluated price and therefore be disadvantaged in the competition. Further, they argued that the requirement to ensure that any leases to non-government parties be cancellable as of the dates on which a transfer of ownership would occur unfairly prejudices owners of large buildings with non-governmental tenants, such as the buildings owned by the protesters, because it would significantly impair the ability of such an offeror to retain other tenants.
GAO acknowledged that an LPTA source selection scheme may not work to the benefit of offerors proposing properties with a higher value, but explained that the nature of an LPTA procurement is not inherently unreasonable. Because the inclusion of the fixed-price purchase options was reasonable, GAO found it reasonable for the options to be included in the price evaluation. The fact that another offeror may be able to propose a building that better fits the agency’s needs does not mean that the protesters were unfairly prejudiced.
Finally, GAO noted that while the RLP contemplated that leases to non-government tenants be cancelable, it also contemplated that these leases could run beyond the date on which the purchase option was exercised. Further, GAO found the provision is clearly and reasonably related to the agency’s need to potentially exercise the option, explaining that it is not unreasonable for the agency to require that it be able to take possession of a building it has purchased without having to absorb additional costs related to existing leases.
Second Street Holdings LLC is represented by Seamus Curley and Samantha Rubin of Stroock & Stroock & Lavan LLP. The government is represented by Adetokunbo Falade and Elizabeth H. Johnson, General Services Administration. GAO attorneys Michael Willems and Edward Goldstein participated in the preparation of the decision.
