Lease Risk Model Analysis in the Northeast Area
October 23, 2013 (Report Number SM-AR-14-001)
The U.S. Postal Service spends more than $805 million annually to lease about 24,000 facilities nationwide. The Northeast Area spends more than $184 million annually to lease more than 3,300 facilities. Officials in the Northeast Area begin the lease renewal process 12 to 24 months before a lease ends by reviewing lease information provided by the Postal Service’s Facilities organization. In conjunction with Facilities, area officials balance their portfolio of existing facilities with current and projected space needs by conducting node studies. Node studies are done to look for rightsizing possibilities at existing facilities or opportunities to sell a vacated, existing owned building or terminate an existing leased facility. The studies also identify any changes or new construction that existing facilities may need.
During fiscal year (FY) 2012, the U.S. Postal Service Office of Inspector General (OIG) developed a predictive risk model, the Lease Building Renewal Risk Model (LBRRM), to determine whether the Postal Service is renewing leases at a fair price and whether it needs the leased space that is due for renewal. The model evaluates each Postal Service lease and uses risk metrics related to safety, fraud, facility worth, facility lease rate, and facility capacity. The OIG determined that the Northeast Area could realize cost savings in 52 percent of its facility lease renewals and, of those, the risk model indicated above-market rates for 250 that are expiring within 2 years. This represents $6.6 million in potential savings over the duration of the leases. Thirty-nine of these leases were for significantly underused facilities based on decreases in revenue, mail volume, and hours worked.
The Northeast Area and Facilities could use these OIG risk model results to further target the area’s node studies on underused facilities, potentially save money on lease payments, and better target resources to determine facility optimization. The Postal Service currently identifies facilities for node studies based on leases that expire within the current fiscal year, primarily having an annual rent greater than $400,000 and containing excess space; however, the LBRRM results would allow the Postal Service to consider high-risk leases for capacity when determining areas for possible optimization efforts.
The Postal Service will continue to utilize its robust optimization and leasing program, but are always open to new and improved methodologies to pinpoint ways to realistically capture savings. However, they do not believe the OIG risk model allows them to accurately achieve those results.