emption to itself. In general, other service beneficiaries have no such mandating power and, thus, if it is so determined under local administrative procedures, will pay the property tax or face a judicial proceeding and possibly a tax sale. *

The argument to eliminate the federal property tax exemption is quite straightforward. By acquiring real property, the government has assumed a responsibility borne by private taxable property owners. Thus, it should make payments in lieu of taxes on much the same basis as owners of private property pay real estate taxes. Failure to treat the federal government in this manner violates the horizontal equity canon of public finance, that "equals be treated equally," with the index of equality here being the value of the real property that is owned.

Leasehold vs. Ownership

In addition to the major structural inequities between the federally exempt and privately taxable owners of real properties discussed above, local governments must contend with another set of inequities created by the federal presence. Specifically, the federal government has, over time, institutionalized certain inequities regarding property it owns and leases, thereby creating an even more confused situation of federal tax immunity. The problem arises because some federal activities are carried out on property leased from the private sector while others are conducted on federally owned properties. A dichotomy in tax policy exists because the federal government, through its operations on leased property, pays local real property taxes by way of its rental payments. However, if the federal agency happens to be located on federally owned property, no real property tax is paid, even indirectly. Indeed, this situation is so arbitrary that the federal government's property tax bill would appear to be an accidental by-product of the largely nontax decision to lease rather than

own.

Numerous property management regulations

*The exception is, of course, the state governmentmandated exemption from local real property taxation. Although these state and state-mandated exemptions for some private institutions are every bit as legitimate a concern as is the federal exemption, they are not within the scope of this report.

apply to rental arrangements and are entered into by the federal government primarily through the General Services Administration (GSA). For example, the Economy Act of 1972 stipulates that rents paid cannot exceed 15% of the established fair market value of the rented premises, nor can they exceed the appraised value of the rented building. 12 Also, leases over $2,000 must have an appraisal of the fair rental value for the premises. The value of alterations to the rented premises cannot exceed 15% of the first year's net rent and/or 25% of the amount of the rent for special major improvements and alterations. All of these leases are updated as the leased properties are reappraised (typically about every three years). In practice, the base contract rent is usually established below the commercial rate for comparable private space, and then a standard-level user charge (SLUC)—which can reflect the cost for maintenance and operation and security of the rented property-is added to that base. The sum yields a general market rental rate.

Thus, in its bid for rental space, the federal government must agree to pay market rental prices in order to assure the private owner(s) a fair rate of return on their property investment. These rental rates will reflect-and of course include the private owner's state and local real estate taxes. The federal government's payments on account of taxes here may not actually be by design, but de facto, they are just as important and variable as many of its other payment programs that have been discussed.

ACIR has estimated the real estate tax payments made by the federal government through its rental payments by using information on annual rental costs and square feet leased by the federal government each year, as contained in the GSA Summary Report of Real Property Leased to the United States Throughout the World as of September 30, 1977. It has also obtained information on property taxes actually paid for commercial properties, as included in the Building Owners and Managers Association (BOMA) annual report, Downtown and Suburban Office Building Experience Exchange Report. * The BOMA report contains ex

pense and income data for a large national sample of office buildings and is widely recognized as a reliable and, indeed, the only source of information in this property management

area.

The Experience Exchange Report does not report in as great a detail for governmentowned buildings; national samples, as reported by GSA to BOMA, are listed as a total and disaggregated by downtown and suburban geographic regions only. The expense and income data on government buildings are also more limited, including only the operating and maintenance costs and the vacancy and occupant rental space information. Nevertheless, information on private sector costs, such as average private property tax payments, can easily be applied to the government data, where necessary, to fill these gaps. In computing these rental tax payments, data on both private and government buildings were used.

Based on 1977 data in the BOMA report (the most recent available), the average amount of property tax per square foot of private buildings is:

The amount of property taxes paid on space the federal government was leasing can thus be estimated by multiplying either of these sets of figures by the number of square feet leased by the government in 1977.* However, the use of the private buildings' data would establish the widest parameters of the imputed federal property tax payments. Considering that 219,100,000 square feet and 1,633 acres of land (or an additional 71,133,480 square feet) were leased by the federal government at the end of FY 77, depending upon the location of the leased property, property tax payments might have ranged as follows:

Total $1.38 $1.46 $.936 Totals are the weighted average of downtown and suburban samples. Some totals may be rounded.

The estimated average property tax per square foot of government-owned buildings can be similarly derived by applying the percentage of operating expenses attributable to property taxes in private buildings to the corresponding operating expenses that were listed for government buildings. The procedure yields:

*It contains considerable detail in its statistical tables, including: operational and maintenance expenses, construction expenses, fixed charges, other miscellaneous expenses, and rental incomes for each office building sample. Vacancy ratios, as well as average square feet per tenant and total building occupants, are also detailed. This information is presented for all buildings in the national sample, and is disaggregated by downtown and suburban location, and geographic regions. The national samples are also separately detailed by certain building size, building age, story height, and/or city size categories. The operating and income characteristics, including average property taxes, are listed for each of these categories.

24,185,383 10,598,889 (Suburban)

Again, the estimated taxes paid through federal rent payments will vary according to the actual locations of the leased facilities.

Another set of "pass-through" property-tax payments can be added to this total from the leases paid by the Federal Home Loan Bank (FHLB). The taxes it pays on its leased buildings (which are not documented by the bank) can be reasonably estimated as 20% of this rental amount, based upon the downtown location of all their facilities. Table 10 details these estimates.

At least three additional types of rental arrangements, which also facilitate federal payments of real estate taxes, are used in federal leases. Unlike the rental "pass-through" payments, however, these are actually charged against the federal lessees and included in their leases by specially designed tax clauses. The first type of rental clause was initiated to facilitate long-term, multiyear leases, which have become more popular with many federal

agency lessees. In this situation, a real estate tax and operating cost escalator clause has been used to cover some of the lessor's multiyear costs that are rising rapidly because of highly inflated and other inordinately high utility and operational costs. In fact, as of 1977, GSA adopted policies to include in its leases annual escalation clauses which provide for both tax and operating costs. * Prior to that time, the government had entered into one or both of these provisions, depending upon the

* The method for computing the rise in operating costs varies from that employed with the taxes. The additional annual amount is determined by multiplying the total first year's estimated cost of the following items (if not provided by the government), as negotiated and established for the first lease year prior to award of the lease contract: cleaning services supplies and materials; elevator maintenance; trash removal; landscaping; water and sewer charges; heating; electricity; administration expenses for building engineers and/or building managers, by the percentage of increase, if any, in the cost of living index over and above the cost of living index at the commencement of the lease term. Such increases in the cost of living index are measured by the U.S. Department of Labor's Revised Consumer Price Index for Wage Earners and Clerical Workers (CPI-W), as published by the Bureau of Labor Statistics of the U.S. DOL.

1979 $ 241,480 (1,207,400) 45,820

( 229,100) 38,340 ( 191,700) 49,540 (247,300) 41,400 ( 207,000)

9,660 (48,300)

32,000

(* 160,000)

24,800 ( 124,000)

rental market pressures in a particular jurisdiction or region.

This tax payment is made to the lessor as a lump sum, the proportion of the tax increase being based on the area occupied by the government in the building relative to the total rental area in the building (the same as for leased land). The clause also reserves to the government the right to contest the amount of any valuation for general real estate taxes by appropriate legal proceeding, either in the name of the government or in the name of the lessor, or in both names. These reimbursements to the lessor for increases in real estate taxes are limited by the Economy Act provisions stated earlier; however, in the event of any decreases in the taxes (or operating costs), the government's rental amount would also be reduced accordingly.

The U.S. Postal Service (USPS) has probably made the most extensive use of real estate tax clauses or riders in its rental leases over the past decade. As of mid-1979, the USPS leased approximately 28,000 buildings or building areas, 5,000 of which had a tax clause in the lease. 14 The exact form of the clause varies, however, as USPS regulations allow "(a)ny clause reflecting an arrangement as to taxes which is most advantageous to the Postal Service in the particular circumstances (to) be included in a lease solicitation or in a negotiated lease contract."15 Thus, four alternative tax arrangements have evolved:

1. Zero Tax Clause (or rider). Under this arrangement, the Postal Service pays all general real estate taxes applicable to the leased premises.

2. Reimbursable Percentage Tax Clause. Here, the Postal Service obligates itself to reimburse the lessor for only a specified percentage of any increase in taxes.

3. Adjustment of Rental Rates Under Renewal Options. This type of tax arrangement provides that the annual rental rate for each renewal option period will be adjusted upward or downward, when the option is exercised, by an amount representing the difference between taxes paid by the lessor during the first

and the last full tax years of the basic lease term.

4. Tax Escalation Clause. This provision generally requires annual adjustment of the rental rate, as described earlier. Because the tax clauses in a lease can be protection for the lessor and lessee alike, a "zero" tax clause is generally viewed by USPS to be the most useful in eliminating a lessor's inclination to pad bids or assessed values. USPS has developed regional tax and rental parameters as well as appeals procedures for overassessment in response to such problems. * Conversely, a tax clause providing for partial or full tax compensation can obviously provide to the private lessor some protection against inflationary assessments and tax rates.** The type of tax arrangment in use is thus evidence that the USPS-and the federal government-leasing process may involve bilateral, negotiated considerations.

As

The specific cost of GSA real estate tax escalation clauses can be estimated from the aggregate budget figures reflecting both GSA tax and operating cost escalator clause payments. Based upon conservative-and incomplete-estimates of the magnitude of each of these subtotals by GSA staff, some rough estimates of these tax payments were made. suming that one-fourth of the escalation clauses include both tax and escalation costs in one escalation figure, and, of the remaining three-fourths about 33% is attributable to increases in taxes, a rough estimate of at least part of the amount paid on account of rising taxes on leased property can be derived. These figures are presented in Table 11.

*See also the discussion in Chapter 3 regarding assessment appeals. Even simple administrative responsibilities that accompany tax escalation clauses may be avoided here if zero tax clauses are used. **The lessor's continued interest and participation in local proceedings on tax matters is desirable yet hard to maintain in this situation. The USPS Realty Acquisition and Management Handbook notes at least two cases where the tax clause is typically a preferable alternative to the zero tax clause arrangement: (1) leasing a new facility in an area where delayed commercial growth is anticipated with a potential increase in taxes to cover expanded public service to the area; and (2) leasing a facility in an area where prior experience with this type of tax clause has proven more beneficial than the zero tax clause. USPS, Realty Handbook, at 6-203.2.

SOURCE: ACIR staff computations.

A second type of federal leasing arrangement has become increasingly common in federal government leases in the western states. It provides for a tax rider on improvements made to the leased property by the lessee, and may be used in conjunction with one of the tax clauses described above. Under this arrangement, the owner or lessor is relieved of the responsibility for real estate taxes based on the assessed value of the property's improvements. Again, this provision might be especially appropriate for Postal Sevice use as its leased facilities may frequently require major alterations to accommodate bulk mailing or other special purpose activities. Under this lease agreement, then, the additional tax liablity is passed through to the government for specific renovations, alterations, or new construction.

The third method of federal property tax payment included in federal leasing arrangements is perhaps the most dramatic example of the major structural inequities between federally exempt and privately taxable owners of real properties. These payments are included as part of GSA's purchase-contract agreements for the construction of a backlog of approved, but

unfunded, projects.* Under this package arrangement, GSA makes semiannual payments to the contractors for interest, real estate taxes, and amortization of principal. At the end of the contract period, which is usually 30 years, title to the building vests with the government. An alternate "dual contract arrangement," with separate contracts for the construction and financing of building projects, is part of the purchase-contract agreement, and it also stipulates that GSA pay the project's real estate taxes "to help ease the burden of the federal presence on the local community during the purchase-contract term."16

The reasons for developing a federal building, tax payment program such as this are numerous. Foremost among them, however, is that it is an expedient alternative to the present method of financing federal construction and the Congressional delays in appropriating large

*The Public Buildings Purchase Contract Act of 1954 (P.L. 83-519) and the Public Buildings Amendments of 1972 (P.L. 92–313), contain the short-term, threeyear authorizations for these agreements which, in the private real estate market, are also referred to as "owner-leaseback" agreements.