State auditor highlights 'exorbitant' cost of commercial office space leases by state agencies

Nebraska State Auditor Mike Foley sent a letter to the Legislature’s Performance Audit committee Monday providing recommendations on how the state could save money on state offices.

In the last five years, the amount of money the State of Nebraska has spent on leasing commercial of space for State offices risen from around $16 million to just shy of $22 million – an increase of 37% – despite the total number of state employees remaining relatively constant over that same period.

“It appears incontestable that the State is spending far more than necessary on office space for agency employees,” Foley said in a press release. “Reliance upon commercial office space comes at an exorbitant cost to Nebraska taxpayers.”

In an interview with Nebraska Public Media News, Foley said he was “astounded” to learn the state is renting 1.5 million square feet of space in 193 buildings across 37 different counties.

“By and large, these government agencies aren't going away,” he said. “So why are we doing this temporary rent situation when we know they're going to be around for decades to come?”

He said the best fiscal approach is for the state to buy buildings on the commercial market instead of paying rent money “down the drain.”

In his letter, Foley included a chart showing the price per square foot at the two largest state-owned buildings and large commercial leases.

The State of Nebraska-owned offices at 1526 K St. and 301 Centennial Mall in Lincoln had prices per square foot of $9.66 and $8.33, respectively. Meanwhile, the price per square foot at commercially owned properties ranged from $14.22 at 1221 N St. up to $33.43 per square foot at 1010 Lincoln Mall.

Foley said the rise of remote work in private sector businesses creates an opportunity for state government to buy commercial real estate.

“A lot of commercial businesses sent their people home. They like that culture. So that frees up some space. I know here in downtown Lincoln, there's buildings all over town that they have empty. Maybe we could buy some of that space,” he said.

State office buildings are purchased and leased by the State Building Division, which is part of the Nebraska Department of Administrative Services, known as DAS.

DAS Director Lee Will said that state-owned properties are cheaper than commercial leases, but the math isn’t so simple. Will said about 50% of commercial leases are paid for by federal funds, while state office building construction has to come from Nebraska state dollars.

“There is a little bit of an apples to oranges comparison, because in the lease model, you can use federal funds help supplement that lease,” he said. “Now, if you were to construct a building, you can't do the same thing.”

State-owned buildings are also exempt from property taxes, so any purchase of commercial property would result in a hit to county and school district tax rolls.

Will sent a letter of his own on behalf of the DAS to the state auditor's office, providing responses to Foley's concerns and recommendations. It was attached to the end of auditor's letter Foley's office made public Monday.

Foley said he still recommends the government buy property, but he recognizes the approach has secondary impacts.

“You’ve got to really put the pencil to the paper and do some sharp analysis to figure out what's the best economic strategy,” he said. “But when I see a cost going up over 37% in five years, millions of dollars worth of cost, I say, ‘Hey, let's hit the pause button here and really start analyzing what's happening here.’”

In early 2020, the state revealed plans to build a new state office building at 17th and K streets in downtown Lincoln. If the state had taken a 30-year loan to pay for the project at that time, it would have cost $92 million to pay back. However, the Department of Administrative Services said the project would save taxpayers $35 million over 30 years compared to leasing commercial office space.

But when the COVID-19 pandemic sent most government workers home to work remotely in the short term, plans for the building stalled.

“The thinking at the time was, look, the lights are on in terms of government operations, and the people are still being served. We're working from home in thousands and thousands of instances. So why are we building a building? Let's not build it right now. Let's put on hold or maybe cancel it all together,” Foley said.

After the pandemic, state offices were once again filled. In 2023, Gov. Jim Pillen signed an executive order requiring most state employees to return to in-person work. The 2024 annual occupancy report from the State Building Division filed last December found an overall occupancy rate of more than 97% at the seven buildings it owns and manages.

The state still owns the property at 17th and K streets, which it first acquired in 2011, and it is currently used as a geothermal wellfield as part of the State Capitol HVAC project.

Given the current budget shortfall of more than $300 million, both Will and Foley said it is unlikely that funds for the building will be made available in the budget for the next two years.

However, both agree that development of the state-owned property is not out of the question in the long term.

“We need to do something with that location,” Will said. “But it's not easy to come up with $92 million, and I think if you ask the public, ‘Hey, should we build a $92 million building for public employees?’ I don't know if we would get the support.”

Foley’s letter also addressed the potential sale of the Omaha State Office Building and its accompanying parking garage, located at 13th and Farnam streets in downtown Omaha.

In February, the State Building Division listed the property for sale, while also soliciting bids for broker services. The building’s occupancy rate was listed at 97.1%.

“Should that almost fully occupied structure be sold, commercial real estate space would be needed for those employees – at a potentially much higher rental cost per office square foot,” Foley’s letter reads.

Will said DAS hopes to buy a separate location with cheaper property costs.

“We want to sell the location, because it's right on the rail line there,” he said. “It's a prime developer location. We believe that we could sell the location, buy a new location, and return some money back to the state.”

That would require the Legislature to give the Department of Administrative Services the authority to spend the money it makes from the sale of the downtown Omaha building. Will said he is confident that authority will be in the appropriations bill the Legislature passes.

Will also said the cancelation of existing leases is in the works.

“In the next month or two, we'll be making some big announcements on canceling leases and all those types of things,” he said. “I agree with the auditor’s sentiment that it's cheaper to own space maintain it, but there’s a couple sides of that coin as well.”

Tuesday, the Legislature begins debate on the budget for the next biennium, which it must balance before the end of its session in June. Foley said his recommendation could improve the future fiscal health of the state.

“While the state is scrambling to find money to fill the budget hole, we think this is going to be at least part of the solution longer term,” he said. “Obviously, we can't solve a $100-million, $300 million deficit with this, but every little bit is going to contribute to the solution.”