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PLRD-83-8 1 (1982-11-01)

handle is hein.gao/gaobabmrp0001 and id is 1 raw text is: UNITED STATES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C. 20546 119844 B-208937 NOVEMBER 1,1982 The Honorable Gerald P. Carmen Administrator of General Services Dear Mr. Carmen: Subject: Use of Escalation Clauses in GSA Leases (GAO/PLRD-83-8) We have reviewed the use of escalation clauses in General Services Administration (GSA) leases. GSA has used the Consumer Price Index (CPI) since 1978 as a basis for making annual adjustments to rent payments to cover increases in lessors' operating costs. In our November 1978 report (LCD-78-340), we expressed concern about GSA's use of changes in the CPI as a basis for annually adjusting rent for increases in operating costs. We pointed out that the CPI is a composite figure comprised of various consumer items that do not necessarily reflect those items that determine building operating costs. We recommended that, among other things, GSA cancel the April 1978 instruc- tion requiring use of the CPI for calculating annual operating cost adjustments in all new or superseding leaseg. At that time, GSA disagreed with our recommendation and stated that to rescind the annual escalation clause would be a step. backward because the private sector used an annual escalation clause. Only about 9 percent of the GSA leases in effect in 1978 contained various operating cost escalation clauses. These clauses did not include the CPI as a basis for determining escalation. Since then there has been a dramatic increase in the use of escalation clauses. As of March 1982, 3,695 leases, or about 69 percent of all GSA leases, contained escalation clauses--2,764 of these had CPI escalation clauses. Operating cost subject to escalation based on changes in the CPI 'is about $62 million. If the annual increase in the CPI is 5 percent, GSA's rent will increase automatically by about $3 mil- lion. At 10 percent, the rent will increase by about $6 million. (945505)

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