US Administration Terminates Federal Office Leases Through General Services Administration

The widely reported directive tasking the US Department of Government Efficiency and the General Services Administration (GSA) with the termination of roughly 7,500 federal office leases nationwide will have far-reaching consequences on institutional landlords, investors, and lenders. To better understand the ramifications of this executive order, it is important to know how GSA leases work and how they are financed.

The standard form L201C GSA lease contains provisions allowing the government to exercise an early termination right upon a certain amount of advance notice to the landlord. This right typically vests after what is known as the “Firm Term” of the GSA lease. From and after the date that the early termination takes effect, the government is no longer liable for rent or other payments under the GSA lease (typically payments will stop in 90 or 120 days). It is possible that the Department of Government Efficiency and GSA will seek early terminations of leases even during the Firm Term, which will result in negotiations with landlords for early termination and surrender agreements and whether the resulting negotiations result in any payment from the GSA to a lessor will be determined.

Despite the tenant-favorable early termination provision, GSA leases are considered “credit tenant leases” in financings, and lenders have come to rely on the stability of GSA leases at the properties securing their financings. Credit tenant leases are typically longer-term commercial leases with a tenant that has a strong credit rating. This strong credit rating provides additional security to lenders beyond the other real estate collateral when financing a project.

The termination of such credit leases, including a GSA lease, however, will likely trigger unwanted events, for both the borrower and lender under financing arrangements. Early GSA lease terminations may result in any one or more of the following under financing documents: (1) implementation of cash sweeps, (2) inability to satisfy property-level financial covenants, (3) inability of a borrower to pay debt service as a result of diminished rental income, and (4) an event of default that would allow a lender to enforce rights and remedies. 

In addition, additional considerations will need to be addressed if the financing in question is part of a securitization. Accordingly, it is important for both owners/borrowers and lenders to understand their financing arrangements to determine the implications of a GSA lease termination as well as their respective rights and remedies. This novel situation may see the rise in preventative agreements between borrowers and lenders so that entire financings do not fall apart as a result of the GSA lease termination.

Additionally, the impeding lease terminations will create system-wide challenges. The eventual surrender of so much office space will impact ancillary office support services such as restaurants and other shops, parking lots, and other tenants in the buildings where the GSA leases once occupied office space. The extent of such ramifications is yet to be seen.

Morgan Lewis will continue to track the developments of this directive and its impact on the commercial real estate industry as a whole as well as on state and local governments through impact on their respective tax bases.

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