FY2018_FAR_CONTRACTOR_INSTRUCTIONS_-_Final.pdf

2018 Fiscal Year Fair Annual Rent Contractor Instructions

Issued May 5, 2015 Page 1

Appraisal of Fair Annual Rent

Contractor Instructions

FY 2018

Asset Management and Valuations Division Office of Real Property Asset Management

Public Buildings Service General Services Administration

May 5, 2015

Issued May 5, 2015 Page 2

Table of Contents

Contractor Instructions

Summary of Recent Changes and Clarifications

Section 1: Introduction What is the Fair Annual Rent (FAR) Program?

What is Fair Annual Rent (FAR)?

How does GSA establish Rents?

How does GSA use FAR Appraisal Reports?

How can I be considered as a contractor for FAR Appraisals?

What is the overall process for the appraisal component of the FAR Appraisal Program?

Is the program the same every year?

Section 2: The Appraisal Process

Scope of Work for FAR Assignments What is the subject property or subject space I am appraising?

How does GSA suggest I begin the appraisal process?

How is the value conclusion reported?

How does GSA define building areas?

How do private sector R/U ratios relate to GSA R/U ratios?

I understand the process requires forecasting rents. What are the requirements for prospective rents?

I’ve analyzed market rents before. How is this different?

The Rent Comparison Process Selection of Properties for Comparison

What if I’m appraising a single-tenanted or Special Purpose building?

Rent Comparison Grid Spreadsheets Warehouse and Parking Rent Comparison Grids

Section 3: Report Submission and Review

Section 4: Tools What are the Tools and why does GSA provide them?

Do I have to use these Tools?

What if I have technical problems with the Tools?

Tool #1: The FAR Contractor Tools Workbook Are there any technical issues I should be familiar with?

Contractor’s Summary Page (Page 1 of the Workbook) General/Office Space Rent Comparison Grid Warehouse Space Rent Comparison Grid Parking Rent Comparison Grid

Tool #2: The FAR Appraisal Report 2017 Template I have the Template File. How and where do I save it to my computer?

After I have saved the file, how do I open it?

What is the Bookmark page and how do I use it?

How do I paste information from the Contractor Tools workbook into the Template?

What additional information do I import into the Report?

What photos do I need to include?

A Parking or Warehouse analysis was not necessary. Do I include all these empty pages?

Tool #3: The Regional Review Checklist (in PDF Format)

Issued May 5, 2015 Page 3

Section 5: Summary and Comments

Section 6: Addenda

Rent Comparable Data Sheet (Minimum Requirements)

GSA Building Shell

GSA Space Assignment Guide (excerpts)

Primary Regional Contacts

Services

Determination of Market Typical Leased Space

R/U Ratios and Load Factor Discussion

Tenant Improvements (Discussion)

Shell Appraisal Considerations

Issued May 5, 2015 Page 4

Contractor Instructions

(FY 2018)

These Contractor Instructions (“instructions”) provide guidance for contractors completing Fair Annual Rent (FAR) Appraisals for the General Services Administration (GSA). Presented in a simple question and answer and bulleted format, they will guide the contract appraiser through the appraisal process.

Because of the lead time needed for Federal agency budgeting, we project FAR rent cycles two plus years into the future. Instructions are issued annually 2-3 years in advance of the targeted fiscal rent cycle.

Calendar Year Published Fiscal Rent Cycle Document Name

2010 FY 2013 Contractor Instructions

FY 2013

2011 FY 2014 Contractor Instructions

FY 2013 - 2014

2012 FY 2015 Contractor Instructions

FY 2014 - 2015

2013 FY 2016 Contractor Instructions

FY 2016

2014 FY 2017 Contractor Instructions

FY 2017

2015 FY 2018 Contractor Instructions

FY2018

Issued May 5, 2015 Page 5

Summary of Recent Changes and Clarifications

● Training Requirements: Contractors are required to attend this year’s on-line seminar

“Understanding Fair Annual Rent Appraisal ” prior to submitting FAR rent appraisals for

FY2018

● Ten year level unserviced rent: The appraisal provides a current rental rate and subsequently a levelized unserviced rental rate based on a 10-year term. The FAR

Contractor Tools workbook provides a tab to calculate the levelized rent, allowing you to input your projected unserviced rent escalations for the subsequent nine years. Based on your selected method of escalation ($ or % escalations) the worksheet will calculate a level unserviced rent for the entire ten-year term. The escalation factor(s) should be fully supported by the data from the comparables, market surveys, and surveys of local market participants. The levelization is limited to the unserviced rent, since GSA escalates the operating expense or services annually on a separate schedule.

● Size Adjustment (Subject Property): Appraise the property based on the largest tenant size in the building. This information will be provided by the Regional Appraisers.

● Tenanted Floor R/U Ratio: This ratio recognizes rentable and usable space throughout the tenanted floors. This is the ratio to use when adjusting comparables to the subject. The Tenanted Floor R/U ratio correlates closely to how the private sector market would determine the load factor in our buildings.

● GSA Billing R/U Ratio: This ratio recognizes rentable and usable space throughout the entire building and an allocation of facility common area measured by GSA, but often not recognized in the private sector. To accommodate GSA’s billing systems, this is used to convert the concluded rates in the report to GSA Billing Rates. GSA Billing R/U was previously known as Facility R/U for buildings within a facility.

● Building Space Classification Reports and floor plans: Contract Appraisers will be provided Building Space Classification Reports and floor plans from the Region for each building they are appraising (if they are available.) These documents help the appraiser visualize the various categories of space within the subject property. If Building Space

Classification Reports and floor plans are not available for a property, the GSA Billing

R/U will be the basis for the subject, instead of the Tenanted Floor R/U.

● Billing R/U Conversion: The market rent concluded for the tenanted floors will be converted to a GSA Billing Rate (by embedded formula) on the Contractor’s Data

Issued May 5, 2015 Page 6

Summary and Conclusions Form.

● Operating expenses: Provide adequate support for your estimates of market operating expenses. Acceptable sources include lease comparables, BOMA, IREM, etc. To the extent possible, recognize significant characteristics of the subject, including energy improvements.

● Parking – separate or included in rent: Analyze and state clearly whether parking is included in rent, or offered (and charged) separately. If parking is included in base rent, make appropriate adjustments for differing parking characteristics in the adjustment grid.

● Parking rate analysis: Since the majority of GSA’s tenants are bulk users of our parking spaces, the Parking Rent valuation is oriented to the rates paid by users leasing multiple spaces, rather than toward retail single space daily, weekly or monthly rates. Rates should reflect the per-space market rate for the number of spaces generally required by users of space the size of your subject.

Issued May 5, 2015 Page 7

Section 1: Introduction

What is the Fair Annual Rent (FAR) Program?

GSA is, in effect, the landlord to tenant agencies who occupy federal buildings nationwide. By law, GSA must charge its Federal tenants a commercially equivalent market rent. The Fair Annual Rent (FAR) Appraisal Program is part of the process by which we determine and apply rents. In this program, we update rents for approximately 350 to 500 buildings annually, nationwide. FAR rates for all of our owned buildings are updated on a cyclical basis, at least once every 5 years, in most cases.

What is Fair Annual Rent (FAR)?

Fair Annual Rent (FAR) is the annual amount that may reasonably be expected for the right to the agreed use of real property, as established by competition in the open market. FAR is a fully serviced rental rate; the annual rate includes the cost of all services except Security1.

For practical purposes, FAR is the equivalent of the market rent that 10-year tenants would pay for our properties, determined within the guidelines of the FAR Appraisal Program.

How does GSA establish Rents?

We engage independent third-party appraisers with local market expertise to appraise the appropriate fair annual rental rate (Fair Annual Rent or FAR) that we should charge our Federal tenants.

How does GSA use FAR Appraisal Reports?

FAR Appraisal reports are used for various purposes. They are used by GSA’s regions to set rates for our Federal tenants. They are read and used by asset managers, realty specialists, and other professionals throughout GSA in planning strategies for our assets and in helping GSA satisfy our tenants’ space requirements. After they are approved, FAR Appraisal reports are stored electronically in GSA’s Appraisal Data System (ADS) database. You, as the contract appraiser, should be aware that your appraisal will be reviewed at several levels before approval.

Additionally, your reports will be available to customer agencies, and will be used by real estate professionals throughout the organization.

How can I be considered as a contractor for FAR Appraisals?

Most FAR Appraisal contracts are issued locally by GSA’s 11 regions, who engage well-qualified appraisers with expertise in our markets. You must meet the following basic qualifications to be engaged for FAR Appraisal work:

● You must be a certified general appraiser in good standing in the state in which the subject property is located. Temporary licensure is acceptable.

● Your report must meet the guidelines outlined in these instructions and must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) in effect at the time of the appraisal.

● You must have competency in the subject’s market and expertise in analysis of

1 Security is managed and billed separately by the Department of Homeland Security; therefore it is not generally included in FAR analyses or in FAR rates.

Issued May 5, 2015 Page 8 market-oriented lease data (market rents, tenant improvements (TI), Rentable/Usable (R/U) ratios, etc.).

● You must be currently registered on the System for Award Management (SAM) www.sam.gov.

● You must meet any additional requirements of the individual solicitation for services (Request for Proposal or RFP) issued by the region.

We use a variety of competitive contracting vehicles to hire qualified appraisers. You can learn of contracting opportunities by:

● Contact the regional appraisal staff in your area to express your interest in participating. A list of the regional appraisers is included in the addenda.

● Registering and looking at contracting opportunities posted on FedBizOpps at http://www.fedbizopps.gov.

What is the overall process for the appraisal component of the FAR Appraisal Program?

The process provides independent, professional, and credible rent estimates for each fiscal year (FY). We require estimates of rent to be projected for future fiscal years. The overall process includes the following major steps:

● GSA determines the need for appraisals and engages independent contract appraisers to complete one or more FAR Appraisals.

● Upon award and prior to report submission, the independent contract appraiser must attend the current version of the online training seminar – “Understanding Fair Annual Rent Appraisal.”

● Contract appraisers perform the appraisal and develop the appraisal report, using templates provided by GSA.

● Appraisers submit final appraisal reports to GSA as specified in their contract.

o The FAR Appraisal requires in-depth analysis of the local market and a comparison of at least three2 executed and confirmed leases for properties competing directly with the subject, resulting in an indication of market rent for the subject space as measured in the subject’s market.

o Additional analyses examine parking rates, rates for services, occupancy trends, service expense trends, and rental rate trends.

● The appraisal is reviewed, analyzing the criteria outlined in (but not limited to) the Regional Review Checklist, which is included in the Contractor Tools.

● The reviewer contacts the contractor for discussion/correction of any concerns revealed in the review process. After all concerns are addressed and corrections are made, the contractor submits final versions of the report, including electronic copies in PDF format.

● The reviewer checks the final version for corrections and generates a final Regional Review Report. (The reviewer cannot make any edits or changes to your final report.)

● Upon approval, the contractor submits an invoice consistent with the instructions

2 You may be asked for additional comparables to adequately support your conclusions. You must provide a sufficient number of comparables to accurately reflect the market and analyze the subject.

Issued May 5, 2015 Page 9 in the contract, and the reviewer approves the invoice for payment.

● The reviewer consults with the regional portfolio director for rates concurrence.

The contractor’s appraisal, the regional review, and the regional portfolio director’s concurrence are sent to Central Office for final review and consensus.

Any additional concerns that arise as a result of the Central Office review will be directed to you through the regional appraiser who engaged your work. In some cases, your regional appraiser may ask for additional clarification or support as a result of concerns raised during the Central Office review.

● Upon Central Office approval, GSA enters the rates into our Appraisal Data System (ADS) for use in generating future occupancy agreements (OA)3.

Is the program the same every year?

No. Various influences cause the program to evolve over time, therefore your contract and your appraisal report will include the current FAR Contractor Instructions by reference. Your contract with GSA governs your obligations and specifies the version of these instructions applicable to your assignment.

The Fair Annual Rent Appraisal Program is an ongoing program. We update the requirements as necessary, but the underlying requirements are the same from year to year. We need reliable up-to-date indicators of market rent for all of our properties on a regular basis. Your role is to provide consistently well-reasoned values, on a timely basis, in reports that effectively lead users of the report to your conclusions.

3 OAs provides our tenants with a level, base rent for 10 years. Expenses for services are adjusted during the term of the OA. Security is not included because it is managed and billed separately by the Department of Homeland Security.

Issued May 5, 2015 Page 10

Section 2: The Appraisal Process

These Instructions are not intended to teach you how to appraise or analyze rental data, but are intended to highlight some unique situations and to explain our needs and requirements, to the extent that they may affect your appraisal process. You have been hired because of your expertise, and we rely on your analysis when we set rents for our Federal tenants. It is your responsibility to convey your expertise and your reasoning to the reader throughout the report.

FAR Appraisals are subject to scrutiny at every level of the process. While GSA has a mandate and requirement to charge our tenants a market-equivalent rent, the rent paid to GSA is a significant expense for the agencies/tenants and can affect their ability to serve their core missions.

In this appraisal process, details are critical. The smallest adjustments can impact millions of dollars of revenue over the term of our 10-year occupancy agreements (OA). Your appraisal is part of the process we use to establish market-equivalent rents for billions of dollars in annual rent payments for Federal tenants in GSA’s owned inventory. Accuracy and credibility are critical to the program and support GSA’s mission:

"The mission of GSA is to deliver the best value in real estate, acquisition, and technology services to government and the American people."

We recognize that our properties exist in diverse markets with varying market practices. We rely on your expertise to analyze the local market and determine the market-equivalent rent for our property. We need you to explain local market practices as they relate to measurement and description of leased space. Present your final conclusions in terms of a full service rate on an annual basis, per rentable square foot. If a comparable states the rate in terms of Usable area, convert this rate to a rent per rentable square foot on the Rent Comparable Data Sheet. Also if the stated rate is not on a full service basis (NNN or others) convert the expenses to the full service basis on the Comparable Data Sheet. These conversions are necessary as the Space Rent Comparison Grid (adjustment grid) only accepts rental rates per rentable SF and on a full service basis.

Scope of Work for FAR Assignments

We provide a description of the minimum scope of work (scope for the appraisal assignment) in the FAR Appraisal Report 2018 Template (“Report Template”). Further, we provide a Consolidated Statement of Work that highlights some of the appraisal-specific conditions, as well as contractual obligations.

It is your responsibility to recognize and incorporate all efforts necessary to produce a credible analysis and report. You can expand the scope of work, but you cannot reduce the scope of this assignment. It is our expectation that you will use your knowledge of the local market to analyze the market sufficiently, and that your report will convey sufficient detail that readers will understand the market and your conclusions. At a minimum:

This assignment involves analysis of pertinent market factors to determine the Fair Annual Rent (FAR) for the subject property (and for the subject parking, if included in the assignment). The appraiser has researched the competitive market to the extent necessary to understand the subject’s position in the market and has identified properties that allow for realistic comparison

Issued May 5, 2015 Page 11 with the subject. The subject building data for this analysis were obtained from sources such as GSA, public records, and the appraiser’s actual inspection of the building, relying on measurements provided by GSA, unless indicated otherwise. Market, lease, and expense data were obtained from public records, multiple listing services and commercial data sources, brokers, owners, tenants, and participants in the market. Data was verified by parties to the transactions or by those having direct knowledge of the transactions, as indicated in the Rent Comparable Data Sheet for each property.

The appraiser has inspected the subject property to the extent necessary to understand the property but has relied on GSA for certain building information, tenancy information, expenses, if available and other information pertinent to the occupancy, construction, and condition of the building. Assumptions regarding Federal tenancy and market-based rents are described in the section labeled Hypothetical Conditions, Extraordinary Assumptions and Limiting Conditions.

In this analysis, the appraiser has analyzed properties that compete with the subject property and has used lease and expense data from those buildings to arrive at an informed estimate of the subject’s Fair Annual Rent (FAR) expressed as a rate. The appraiser has analyzed market data related to services provided in the subject building and has provided a justified market-based estimate of expenses for the subject. The appraiser has analyzed the competitive market conditions and understands local market practices (such as measurement parameters, lease size, tenant improvements). The appraiser must provide informed estimates of anticipated market trends applicable to the leased space market and to the costs of services provided in the subject property.

Because the objective of this assignment is lease analysis, pertinent lease data has been analyzed. The development of the Sales Comparison, Replacement Cost, and other sections of the Income Capitalization Approaches to value is not pertinent. While a formal Highest & Best Use Analysis is not necessary (in most cases we assume “as is” condition and use), we do expect the appraiser to consider how the market would utilize space in the building. For purposes of this assignment governmental use is considered with its own distinct characteristics.

Features such as wide corridors and ornate lobbies may be necessary, depending upon the specific use. A thorough analysis of GSA’s building classification and an understanding of how your estimated rent will be used to determine the gross building income is critical to your analysis.

The results of the appraiser’s analyses are provided in this appraisal report, which summarizes the data and analysis in a format and to an extent specific to GSA’s needs.

Additional supporting data and analysis are in the appraiser’s work files. The appraisal, the analysis, and the report are intended to comply with the provisions of the Uniform Standards of Professional Appraisal Practice (USPAP) in force as of the appraisal date, applicable to the development and reporting of this rental analysis. The report provides sufficient data to support the analysis and lead readers to the appraiser’s conclusions. The report is intended to comply with the requirements of USPAP Standards Rule 2-2 for an appraisal report, as well as any supplemental standards imposed by the GSA.

What is the subject property or subject space I am appraising?

The determination of the subject property is a critical point in any appraisal analysis, and identifying the subject is a USPAP requirement. In this case, you are seeking a single market rate applicable to the amount of space occupied by the largest tenant in the building, based on the typical or average quality of the tenanted floor areas throughout the entire building, at a specific point in time, assuming the building were available for use in the private sector. Comparable leases selected should be suitable for realistic comparison to the largest tenant size in the building.

Issued May 5, 2015 Page 12

Although your conclusion must be stated as a single rate for the entire building (unless otherwise requested), the rate you select must recognize significant differences within the building that might offer either greater or lesser appeal. In developing that average rate, recognize the full range of floor levels, views, etc., and be aware of high profile, premium areas or inordinate amounts of less desirable space that may be included in our tenanted Rentable area. In rare cases, the regional appraiser may request separate, supported rates for distinct areas in the building.

In your analysis:

● Consider existing TIs that are average for, or typical of, the building (unless you are appraising warm-lit-shell space or as-renovated space, per instructions). The rate should be based on the “as is” condition at a single point in time during a 10-year rent cycle. Consider condition and quality that reasonably reflects existing tenant finish and common area finish throughout the building.

● Rents are fully serviced rental rates, but do not include Security which is managed and billed separately by the Department of Homeland Security.

● Consider analyzing the subject’s efficiency relative to the locally recognized economic R/U level rather than the R/U level in each individual lease comparable.

Understand that load factors stated in leases are often based on market norms, and are often not based on precise measurements (as in GSA’s calculated R/U).

Keep in mind that your subject benefits from the building amenities present and is subject to all positive and negative characteristics affecting the building’s ability to generate rent. Your research and analysis should consider all factors affecting rent in the subject building.

How does GSA suggest I begin the appraisal process?

Appraisers have their own preferences as to the manner in which they conduct any assignment.

We are not dictating how you do your work. However, the following suggestions might make your appraisal and analysis more efficient.

● Do your mandatory training (Understanding Fair Annual Rent Appraisal) and building inspection early in the process. After you have received your assignment, get in touch with the building management to gain access (GSA will provide this contact information in your contract materials). An early and thorough inspection will give you an understanding of the unique characteristics of the subject, so you can select the comparable properties that allow for the most realistic comparisons for all characteristics, including the subject’s size (largest tenant) and lease term (10-years).

● REVIEW BUILDING SPACE CLASSIFICATION REPORTS AND FLOOR

PLANS PRIOR TO THE BUILDING INSPECTION TO UNDERSTAND

DIFFERENCES BETWEEN THE TENANTED FLOOR R/U AND THE GSA

BILLING R/U.

● As you conduct your inspection, make sure you fully understand the building; ask questions, seek clarification. Understand relevant recent improvements that could affect rent.

● Analyze supply and demand factors in your market. Understand how space in your market is measured and how load factors and R/U ratios are determined. This will guide and limit your selection of comparable rental properties.

Issued May 5, 2015 Page 13

● Develop Comparable Data Sheets for each lease you are using for comparison. State rents per Rentable area (RSF), fully serviced,

● As you gather information on comparable leased properties, make sure you understand the measurements employed in the leases, their applicable R/U ratios, their TIs, services, etc. These elements are critical to the analysis of GSA properties.

● Enter your data in the Contractor’s Data Summary and Conclusions page of the Contractor Tools workbook as soon as possible. This will help you understand the subject building in relation to your comparables and the market. Entering that data will populate fields throughout the Contractor Tools workbook.

● We will provide the Building Space Classification Report and floor plans. GSA recognizes the general guidelines of the American National Standards Institute (ANSI) and the Building Owners and Managers Association (BOMA), together known as the ANSI/BOMA standards in categorizing space but there are some differences. Generally, you will not need to measure the building or tenant spaces.

Please review any building detail we have provided as you walk through our property.

● The character of the building, its common areas, intended and existing uses, and its overall quality and appeal will guide your consideration of relative building efficiencies.

● NOTE: In spaces with excess ceiling height (courtrooms, etc.) GSA charges tenants extra for that amenity. Accordingly, you can appraise without regard for excess ceiling height.

How is the value conclusion reported?

The Contractor Tools workbook only recognizes rates per rentable square foot (RSF). We know that some markets use and recognize other than RSF for establishing and reporting rents. If your market typically leases space on the basis of usable area, restate your rates in terms of RSF to enter them in the adjustment grid. If restating your rates, provide rationale for your conversion methodology on the Rent Comparable Data Sheet.

From your concluded market rate based on the Tenanted Floor R/U, the Contractor Tools workbook CONVERTS THE CONCLUDED RATE TO GSA’s BILLING RATE and calculates the prospective values based on your trend factors, with the same factor applied to all future years. This conversion accommodates GSA’s unique approach to space assignment and billing systems.

Issued May 5, 2015 Page 14

How does GSA define building areas?

The following table outlines the major space definitions applicable to this assignment: Note that GSA does not distinguish between Building and Floor Common areas. This variation from BOMA can result in a higher calculated R/U ratio.

GSA Term (other industry terms)

GSA Working Definition Notes

Usable Area (ANSI Usable)

All assignable and Joint Use space within the building. This calculation is used to determine the actual space occupied by tenants.

For purposes of this assignment, this is the Usable area provided by GSA.

Building Common Area

The area that provides services, support, or horizontal circulation to building tenants.

Does not include Nonassignable space (see below). Building Common area can include hallways and corridors, rest rooms, mechanical areas, and custodial areas, etc.

GSA identifies common areas and classifies space based on guidelines outlined in the PBS Space Assignment Guidance and other parameters. Definitions of common areas generally follow BOMA guidelines; however GSA does not distinguish between Building Common and Floor Common areas in our calculations.

Rentable Area

(ANSI

Rentable)

The tenant’s Usable area plus their share of Building Common area. Nonassignable areas (see below) are not included in this calculation. Total Rentable area is all Usable area plus all Common area.

Some markets determine R/U ratios by floor and utilize basic Rentable area in determining load factors

Nonassignable Area

All of the areas within a building NOT assignable to tenants (and not included in Rentable area) including: Structured Parking (STP), including garages, rooftop parking and parking decks that are within the Gross area of the building. Unmarketable:

all space within the building that cannot be assigned. Vertical Penetrations: stairs, elevator shafts, flues, pipe shafts, vertical ducts, and their enclosing walls.

Vertical Penetrations built for the private use of a tenant are classified as Usable space and are designated as Tenant Floor Cuts (TFC). Examples of TFC spaces include connecting stairs, private elevators, and double-height courtrooms (where the courtroom has a slab penetration).

Building Gross Area

For office buildings: Rentable + Nonassignable spaces. For warehouse buildings, Gross area is generally the area of the building based on exterior measurements.

For practical purposes, this is the measurement that encompasses all space within the building. Some markets rent on the basis of Gross area, but Gross area leases are usually applicable only to single-tenant buildings.

Tenanted Floor Area

This area considers the typical tenanted floors in the subject. It typically excludes basement, mechanical and penthouse floors from impacting the R/U ratio.

The Tenanted Floor R/U ratio recognizes rentable and usable space throughout the tenanted floors. It is used when adjusting comparables to the subject.

Billing Area This area includes the Tenanted Floor Area, plus basement, mechanical, penthouse floors, and an allocation of any facility common area. This represents the area measured and used by GSA’s billing systems.

The Billing R/U ratio recognizes rentable and usable space throughout the entire building and an allocation of any facility common area. This ratio is used to convert the concluded rates in the report to accommodate GSA’s billing systems.

Voids Per ANSI/BOMA: “Absence of a floor within the exterior enclosure of a building in excess of 10 square feet (GSA-PBS uses 9 square feet or greater) where a floor might otherwise be expected or measured, that is typically in the plane of the upper floors adjacent to the following Non-assignable space: multi-story atria or lobbies, light wells, auditoria or the area adjacent to partial floor, permanent mezzanine, or unclassified mezzanine at a given floor level. Voids are distinguished from major vertical penetrations as defined in ANSI/BOMA Z65.1-2010.

Issued May 5, 2015 Page 15

How does GSA ‘s rent component compare to the private sector

GSA terminology Industry equivalent

Unserviced Rent Shell Rent (plus RE taxes and Insurance)

Services Operating Expenses (except security, RE taxes and insurance)

Full Service Rent = Unserviced Rent + Services Full Service Rent = Shell Rent + Operating Expenses

Warm-Lit-Shell Rent * Cold-Dark-Shell plus base GSA TI in place

*See chart on Page 47 for further clarification on GSA Warm-Lit-Shell requirement

How do private sector R/U ratios relate to GSA R/U ratios?

R/U ratios, Common Area factors (CAF), load factors, and core factors are terms describing the relationship between Usable area and Rentable area. Local practices differ with regard to the description of this relationship. You must compare the relative efficiency of your comparables to your subject property (Tenanted Floors.)

Consider among other factors, relative R/U ratios; how R/U ratios were calculated; the nature of the common areas, how well those common areas support the intended and existing federal tenant use of the building, and how your local market measures and treats similar areas in your comparable properties. In many markets, load factors across the market are fairly consistent, and within an acceptable range, do not influence rent.

GSA R/U ratios4 are often greater than buildings in the private sector. However, sometimes the market defines its load factor using basic Rentable; differing practices may produce different units of comparison. Our Usable areas are often less than what they would be in the market as we do not distinguish between Floor Common and Building Common nor do we differentiate between single-tenanted and multi-tenanted spaces. Conversely our basements or mechanical areas are often larger than basements found in private sector buildings and are included in Rentable area. The appraiser must fully understand how each comparable has been handled and be able to compare it to the subject. We provide the Tenanted Floor R/U ratio as the basis for analysis, in that it is more consistent with market norms than the Billing R/U.

Keep in mind, even in markets where all rents are stated on a Usable area basis, the costs of maintaining Building Common areas are part of the income/expense formula and are reflected in rents. How such costs are treated will influence your conclusion. Your analysis, your report, and your conclusions must accurately describe and incorporate that load on a consistent and realistic basis. You must convey an understanding of how the load is applied in each lease and

4 Although our buildings may have greater than typical R/U ratios, they are not all inherently inefficient, as a large R/U ratio might imply. The additional Common area present in many GSA buildings significantly enhances appeal and improves the functionality of intended uses. On the other hand, other buildings have inefficiencies that do not enhance the functionality of the building such as inordinate basement Common area. The adjustments you make and the rate you ultimately select should consider federal tenant use and realistically reflect the market reaction to the actual characteristics of the building you are appraising.

Issued May 5, 2015 Page 16 make appropriate adjustments.

I understand the process requires forecasting rents. What are the requirements for prospective rents?

Because of the Federal budget cycle, our Federal tenants need to project rent expense in advance.

We establish rent levels 18 to 36 months in advance of new or renewing occupancy agreements (OA). This means you as an appraiser will effectively be estimating (projecting) several rates, based on current rates. Your report will reflect rates for:

● The appraisal date (which is the date of your inspection).

● The effective date (which is the first day of the targeted fiscal year).

● Interim dates (the first days of the fiscal years between the appraisal date and the effective date).

Our Contractor Tools workbook is designed to help calculate trends from the appraisal date to the effective date and to calculate interim projections as well. For instance, an appraisal performed June 10, 2015, would have an appraisal date of June 10, 2015, and an effective date of October 1, 2017, which is the first day of FY 2018. The Contractors Summary spreadsheet will also indicate your projected rates for 10/01/2015, and 10/01/2016. GSA may use any of these rates in OAs, depending on the timing and specific guidance.

Your contract will specify the targeted fiscal year. In the Contractor Tools workbook, the Contractor’s Data Summary and Conclusions page, you would enter the appraisal date (date of your inspection) and the effective date of the targeted fiscal year (e.g., 2018). The spreadsheet calculates interim dates at the beginning of earlier fiscal years.

The spreadsheet will show Prospective values5. Compliant with USPAP, your report must disclose that these are Prospective values and address the uncertainties related to projecting values. We have included that language in the Report Template. It is important to discuss and support your reasoning for the trend rates you select.

Occasionally, we may require retrospective rates. The spreadsheet will handle the dates and calculations in the same manner for retrospective appraisals.

I’ve analyzed market rents before. How is this different?

The basic process is probably the same as other market rent analyses you have done, but there are several critical differences. Many of our buildings are unique; some are the only large buildings in their markets; many have R/U ratios that differ from other buildings in the market;

many include finishes and construction characteristics well beyond office standards. You should consider federal tenant use in determining the utility of the subject building and in making adjustments to comparable lease rates.

In this appraisal you are determining a single rate that would apply to the tenanted space in the building, rather than a specific unit or defined space. We have included language to that effect in

5 By default, the Contractor Tools workbook converts the concluded rate for tenanted floors to a GSA Billing rate and calculates the Prospective values based on your trend factors, with the same factor applied to all future years.

You can change the formulas for the projections to reflect different trend factors if you need different rates for each year.

Issued May 5, 2015 Page 17 the Report Template.

● Determine and describe the generally accepted method of measurement in your market. Describe how expenses for common areas are addressed in the market and in each lease used in the comparison process. This is critical to the process and is a major element of our review process.

● Analyze and understand the manner in which your market handles TIs. In this appraisal, you are assuming average TIs in the building, unless you are asked to provide warm-lit-shell rates, renovated rates, or multiple rates. Understanding your market and the individual leases you are analyzing will help you realistically adjust to the subject’s existing TI. (See the additional discussion of TIs in the addenda.)

In this appraisal, in addition to the fully serviced rent, the result must reflect the appropriate rate for a 10-year level unserviced rent.

Your final rate indication, after all adjustments (except levelization) and reconciliation must reflect a realistic value for a starting rate for a 10-year term.

Since our end goal is a levelized unserviced rent for a ten-year term, input your projected unserviced rent escalations for the subsequent nine years in the provided Rent Levelization Worksheet. Based on the selected method of escalation ($ or %) the chart will calculate a level or average unserviced rent for the entire ten-year term. The escalation factor(s) should be fully supported by the data from the comparables, market surveys, and surveys of local market participants (buyers, sellers and brokers/agents). The levelization is limited to the unserviced portion of the rent since the operating expense or the services are escalated annually on a separate schedule.

● We provide our clients with a level unserviced rent for 10 years. We adjust charges for expenses during that term, based on specific inflation factors.

● On the Rent Comparison Grids, Section 3, the current rates are the contract rates reflected in the leases you are analyzing expressed in full service and RSF basis.

● We will use your unserviced rate and your estimates of the current costs of services to establish rates for our Federal tenants.

In this appraisal, we want current and projected rates.

● The inspection date is the date of appraisal, but the effective date is the first day of the targeted fiscal year requested in your contract. In some cases, we may request retrospective appraisals. The Contractor Tools workbook can help you calculate the projected rates.

● We recognize the inherent risks of projecting values and rates into the future, but for Federal budget planning purposes it is unavoidable. Your projections must be well reasoned and adequately supported. You are not limited to straight-line projections (up or down). Your projections should reflect your best judgment regarding your market for each future year in the projection.

● In the Contractor Tools workbook, calculations default to straight-line

Issued May 5, 2015 Page 18 calculations based on the rate you enter. If you choose to use different projections, change the calculations and enter the appropriate rates in the Rental Rates Conclusions section for each fiscal year. These cells are not locked.

Explain your methodology and reasoning in your report.

The Rent Comparison Process

In this section, we will discuss the analysis of rents, as well as the data and adjustments required and encountered in the process. We will discuss the analysis of General Use (GU) or Office space, but the requirements for Warehouse space are generally the same. Analysis of parking rates does not involve as many considerations, but again, the process is much the same.

The Report Template (see Section 4: Tools) includes brief instructions for the various sections of the report (the market analysis, the property description, etc.). To provide a credible report and an informed estimate of FAR rates, you need to understand and describe the market in which the subject is located and the subject’s position in that market.

While it is not necessary to describe the global economy, the reader of your report needs to understand the major market characteristics and the property-specific characteristics affecting the subject’s ability to generate income. The reader also needs to understand the outlook for that market. Your analysis should be thorough enough to lead you to informed decisions and the reader to similar conclusions. Your report should be concise but should include all critical points.

Selection of Properties for Comparison

Your selection of the properties/leases in the comparison process is critical to the outcome of the analysis. It is your responsibility to understand the market to the extent you can make informed determinations regarding critical market elements such as building location, building class and position within the market.

Similarly, a thorough understanding of the character, quality, and condition of your building will guide your analysis and description of the subject property. It will also guide the selection of properties for comparison. Ideally, the properties (leases) you select for comparison will be similar to the subject in

● Size (competitive lease sizes based on the largest tenant space size in the buildjng),

● Building efficiency, character and quality (similar amenities and appeal) based on tenanted floor R/U,

● TIs (average as-is TI in the subject),

● Tenancy - based on ten-year occupancy

As in a traditional sales comparison approach, this rental comparison should analyze properties/leases offering a realistic comparison. They should share critical characteristics with the subject. They should represent the market that competes most directly with the defined subject, have similar income characteristics and yield realistic values. Your report should clearly explain your selection of the specific properties used in the analysis.

The data requirements for this analysis are greater than for many rent studies. You need to understand the lease structure, building characteristics, services provided, individual building R/U ratios, etc., for each property in the comparison. The addenda section titled Rent

Issued May 5, 2015 Page 19

Comparable Data Sheet (Minimum Requirements) outlines the minimum data required for this analysis. We require you analyze actual, verified, arms-length leases. Pending leases or listings may provide additional support, but at least three 6 verified leases are required as the basis of your analysis. Verification must be with a party knowledgeable of the transaction.

Indicate the name of that party and their relationship to the transaction on the data sheet.

The Rent Comparable Data Sheet in the addenda describes the data essential to the analysis.

You can present that data in any reasonable format, but all of the data elements presented on our Rent Comparable Data Sheet are required.

Please be advised that the Rent Comparable Data Sheet (rent comp profile page) should contain any adjustments necessary to convert the given rate to a full service rate on an RSF basis.

What if I’m appraising a single-tenanted or Special Purpose building?

We have a number of single-tenanted and Special Purpose buildings. When you appraise one of these, pay special attention to any specific instructions identified in the Appraisal Bid Sheet or otherwise provided by the regional appraiser. Before beginning such an assignment, contact the regional appraiser to go over any additional assignment conditions and special instructions. As a general rule, you should select comparables, make adjustments and provide a rate that is appropriate based on the federal building’s actual use, utility and size.

Appraisal of a single-tenant building will not differ much from the standard process. In that you’re targeting the largest tenant in the building in all appraisals, the single tenant consideration is the same. You will select comparable leases based onthat size. Additional considerations when appraising a single-tenanted building may include

● Type of tenant: Depending on the Building Class, if this is an agency headquarters building you may be selecting for corporate headquarters buildings.

● Lease size: Ideally, use leases of entire buildings, similar in size to your subject. In such cases differences in the method of measurement must be considered. Lacking whole building leases, find the leases that allow for the most realistic comparison.

● Primary market area: You may need to expand your primary market area to be consistent with nature of the tenant and the character of the building.

Additionally, Special Purpose buildings may require you to consider alternative but similar uses in order to achieve a credible basis for comparison. Examples of Special Purpose buildings may include

● Flex or high tech lab facilities

● Guest houses

● Day care centers

In any of these cases it is important to work closely with your GSA regional appraiser while you

6 The use of three properties for the comparison process is a minimum requirement. The Contractor Tools workbook allow for up to five compared properties per sheet. Many markets and buildings cannot be adequately analyzed using only three lease comparisons. It is your responsibility to provide credible results. You must examine a sufficient number of leases to conclude the leases you cite are representative of the market.

Issued May 5, 2015 Page 20 determine your scope of work.

Rent Comparison Grid Spreadsheets

General Use/Office & Warehouse Space Rent Comparison Grids

These instructions refer to the Rent Comparison Grid (Rent Grid) spreadsheets provided in the Contractor Tools workbook, which are also discussed in Section 4: Tools. They are primarily geared to analysis of the General Use/Office space and Warehouse space. A separate grid is provided for the Parking rates analysis. You may want to have a copy of the Rent Grid at hand as you read these instructions.

Section 1 of each Office and Warehouse Rent Grid sheet allows you to input identifying information about each comparable property. Provide enough data that our reviewers can adequately identify the property. Confidential data may be necessary in some cases; if that is the case, provide whatever data you can to indicate the extent to which this property allows for realistic comparison to the subject. All of the information on the grid should be included (and/or discussed) on your Rent Comparable Data Sheets.

Section 2 of the Office and Warehouse Rent Grid requires a brief description of characteristics of the subject building and of the compared properties. This allows the reader to understand the extent of similarity of the properties and identifies key characteristics about the subject. Section 2, Building Description: For Warehouse space, this section addresses somewhat different building elements that are specific to, and more critical to, warehouse properties. Include descriptions of (and later adjustments for) warehouse characteristics such as bay spacing, floor height, access, clear height, percentage of office space, sprinklers, etc., as indicated on the grid.

Section 3 of the Office and Warehouse Rent Grid allows you to input the current rents and allows for any adjustments to rents required for market conditions such as time or other conditions (owner concessions, free rent, etc.). This process results in adjusted rates that reflect similar terms: current rates; unaffected by concessions; or other special conditions.

Section 4 provides critical data regarding market-based rates for operating services in our building and provides data about the services in the compared properties. We need market-supported rates; therefore, your analysis and your description in the report must provide adequate supporting data and lead the reader to an understanding of your estimated service rates.

In analyzing market…