GRANTED IN PART : February 11, 2016

GRANTED IN PART : February 11, 2016

CBCA 3628

PJB JACKSON-AMERICAN, LLC,

Appellant,

v.

GENERAL SERVICES ADMINISTRATION,

Respondent.

Robert C. MacKichan, Jr. of Holland & Knight LLP, Washington D.C.; and Jacob W.

Scott of Vedder Price P.C., Washington, DC, counsel for Appellant.

Catherine Crow, Office of General Counsel, General Services Administration,

Washington, DC, counsel for Respondent.

Before Board Judges SOMERS, VERGILIO, and POLLACK.

POLLACK, Board Judge.

The appeal arises out of the cancellation of a lease between the General Services

Administration (GSA) and PJB Jackson-American, LLC (PJB) to house the United States

Forest Service (FS) in a building in Jackson, Mississippi. For purposes of this decision, we

will generally use the term cancellation when referring to the agency’s actions that (a)

prohibited PJB from attaining a build-out to enable tenant occupancy and (b) ultimately

repudiated the lease. Appellant claims a total of $2,967,636.90, of which $2,800,000 is for

the cancellation of the lease. The remainder is for damages after award that were associated

with maintaining the property (carrying costs), as well as costs associated with the

Government’s changes to the lease.

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Appellant claims a nineteen-month delay or nineteen months of additional carrying

costs, which it fully attributes to actions of GSA. Appellant bases its claim for cancellation

damages on a diminution of value theory, while GSA asserts that recovery must be

calculated on an expectancy basis. A hearing was held in Washington, D.C. on November 12

and 13, 2014.

At the time of the hearing, appellant added to its claimed damages $236,156.51, which

it characterized as un-reimbursed out-of-pocket costs. GSA objected, contending that the

Board lacked jurisdiction to hear this claim because appellant had not previously presented

the costs or the subject matter to the contracting officer (CO) for final decision. The Board

allowed testimony on this matter at the hearing, but reserved the issue of jurisdiction for later

determination.

The lease in issue called for a fifteen-year term, starting at the date of occupancy.

However, the lease gave the Government the right to cancel after ten years, subject to

providing the lessor with 120-days’ notice. The lease was awarded on March 8, 2011. GSA

formally directed appellant to stop work preparing the space for occupancy by letter of

December 21, 2012, prior to the lessee taking occupancy. GSA had earlier, on or about

December 5, 2012, directed appellant to stop all work, anticipating the formal notice. In the

period between award of the lease and cancellation, PJB performed significant design and

other work in preparation for occupancy, including design, as well as extensive efforts in

costing the warm lit shell and tenant improvements (TIs) necessary for occupancy. At the

time of cancellation, no physical work on either the TIs or warm lit shell had been performed.

GSA concedes that appellant is owed some compensation due to the cancellation of

the lease, money for added architectural/engineering (A/E) work, plus a small amount of

added carrying costs during part of 2012, which GSA acknowledged was attributable to the

extended time of performance. In his final decision of August 28, 2013, the CO recognized

entitlement to costs due to added carrying time caused by delays or stretch out in the design

segment of the lease, added design costs, and costs directly attributable to the cancellation.

By the time of the hearing, however, GSA changed the numbers significantly; it now denies

entitlement to the vast majority of the earlier-recognized claimed carrying costs. The parties

do not agree on the calculation of damages resulting from the cancellation of the lease. At

the time of the final decision, appellant had not yet entered into a mitigating lease.

Therefore, that was not reflected in the final decision calculation. Both parties agree that a

reduction for mitigation is appropriate, although they disagree as to the amount. To date,

GSA has paid nothing on any segment of the claim.

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Findings of Fact

Nicholas Properties, LLC (Nicholas) entered into a lease with GSA on March 8, 2011.

The lease was for in excess of 28,000 rentable square feet of office area and related space in

an existing building located in Ridgeland, Mississippi. The facility was to be used by the FS.

A substantial portion of the existing building was a warehouse, with the remainder being

offices. The initial lease provided for occupancy to begin on July 2, 2011, and to continue

through June 30, 2026, subject to termination and renewal rights as otherwise set forth in the

lease.

The solicitation for offers provided at paragraph 1.3, “The lease term is for fifteen

(15), ten years firm years. GSA may terminate this lease in whole or part after (10) years on

120 days written notice to the Lessor.” Paragraph 6 of the lease provided that the

Government would develop space plans subsequent to award and that all tenant alterations

were to be completed by the lease effective date identified under paragraph 2. The lease

further provided, “Lease term to be effective on the date of occupancy, if different from the

date identified in Paragraph 2.” Paragraph 2 indicated a July 2011 occupancy date.

Prior to the FS taking occupancy, appellant had to complete the design and then

construct the warm lit shell (which included lobbies, common areas, and core areas of the

building, as well as complete TIs called for by GSA to meet specific needs of the FS. The

cost for warm lit shell improvements was to be borne by the lessor. The TIs were items

specific to the area being rented by the agency and ultimately were to be recovered through

the rent being paid to the lessor. Payment of rent was not to commence until the work on the

warm lit shell and TIs was completed. At that time, the building would be deemed to be

ready for occupancy.

On or about April 25, 2011, PJB purchased the property from Nicholas for

$1,800,000. Thereafter, PJB and GSA entered into a novation agreement, dated

May 17, 2011, with PJB taking over the lease. Nothing in the novation agreement or original

lease addressed lost value as a damage, should the lease end prematurely. There was no

termination for convenience clause. Mr. Bruce Ash, one of the principals of PJB, testified

that PJB’s primary focus has been properties with federal tenants, leased through GSA.

The March 2011 lease was supplemented through Supplemental Lease Agreement

(SLA) 2. SLA 2 provided that it was effective April 27, 2011. However, SLA 2 was not

signed until June 24, 2011. SLA 2 amended various provisions of the original lease and

specifically increased the rentable square feet and rent. The SLA eliminated an earlier

reference to the occupancy and rent starting in July 2011, and substituted language which

provided that rent was estimated to begin December 8, 2011, and run through 2021. In its

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brief and in the certified claim, counsel for PJB has stated that SLA 2 established an

occupancy date for the premises of December 8, 2011. The Board finds that December 8 was

an estimated, not firm, occupancy date. Curiously, SLA 2 was signed by Nicholas rather than

PJB, even though PJB was the lessor by June. Neither party has raised that as a material

matter.

The building shell rental rates included in the lease were full service rates and

included property financing (exclusive of TIs), insurance, real estate taxes, management fees,

profit, and other costs. The required TI costs for the FS were estimated by GSA and the FS

to be $826,255, and that cost was to be recovered over time through the rent. No number was

set out in the lease or preliminarily identified for costs of preparing the warm lit shell. That

was because the warm lit shell costs were to be fully absorbed by the lessor. As to the TI

costs, if the costs to appellant for the TIs exceeded the amount estimated by GSA and the FS,

then the balance due the lessor was to be paid by rental adjustments or a lump sum to be

determined by the Government. If the entire TI allowance was not used, then the lease

provided that the Government could adjust the rental rate downward to offset the difference.

Under SLA 2, operating costs were set at $126,725.05 per year. Those operating costs were

subject to change based upon the consumer price index (CPI) and were to be paid by the

lessor. SLA 2 also called for the lessor to pay GSA $144,726.65 in broker commission

credit, with fifty percent due after award and the remainder at occupancy. The lease

identified the nature of the shell requirements in sections 1.12 and 5-8 of the lease.

The lease called for the TIs to be based on the lowest of three bids to the lessor. The

specific language read, “The Lessor understands in lieu of Cost and Pricing Data, his

contractor or each of his subcontractors shall solicit three (3) bids for work completed as part

of the initial tenant alterations; e.g. for electrical, plumbing, etc. The lowest responsive bid

will be accepted. This does not apply to the shell build out.” In defending the claim as to

the stretch out of the design phase, GSA asserts appellant often failed to meet the three-bid

specification and contends that after February 2012, it was that failure which was largely

responsible for much of the delay to the project. In his testimony, Mr. Ryan Johnson, the

CO, confirmed that the lack of adequate price competition was a problem, but also stated that

the more significant issue was arriving at agreed pricing and allocation between the TIs and

warm lit shell.

While the costing for the shell and TIs were separate, from a practical standpoint, the

costs to complete the two were intertwined. A contractor or subcontractor bidding work to

PJB or its prime, such as a price for heating, ventilating, and air conditioning (HVAC) or

ceilings, would not break out or allocate pricing between what was going to be needed for

the warm lit shell and what was needed as part of the TIs. The appellant generally got a

single price for the work and it then was up to the appellant and GSA to allocate the costs.

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The record shows that the lessor anticipated spending significantly less to improve the shell

than what was perceived by GSA. The FS number for the TIs was understated through most

of the process. Both elements contributed to the difficulty in reaching a final number and to

the start of construction, a prerequisite for occupancy.

The improvements as to both the warm lit shell and TIs were to be based on a design

concept provided to the lessor by the Government. From that concept, appellant was

expected to produce design intent drawings (DIDs) and, thereafter, produce construction

drawings (CDs). Construction and the follow-on occupancy could not proceed until the

costing for TIs was agreed to (allocating costs between TIs and the warm lit shell). Because

rent payments would not start until the physical work was completed and the FS took

occupancy, it was important for the parties to settle on a design and to negotiate the

allocation as to the shell and TIs.

Although lease payments were not to begin until occupancy, the award of the lease

started appellant’s performance obligations. The obligations and time for completion of

various tasks were set out in section 5.12 of the lease. The lease provided that within thirty

days of award, the lessor was required to provide DIDs showing the planned TIs. The DIDs

were to be based upon the final design requirements provided by the Government. The

Government then was to review the DIDs within ten days of receipt, and if necessary,

pursuant to section 5.12(B)(2), the lessor was to be provided five days to cure any defects in

the DIDs. Once DIDs were approved, the lessor was required to produce CDs, within twenty

days. The Government had ten days to review the CDs and appellant had five days to cure

any GSA concerns. Within ten days of Government approval of CDs, the lessor was to

submit a proposal detailing the cost to complete the TIs. Those costs were to be absorbed

by the Government. Once the price of the TIs was negotiated, the Government was to issue

a notice to proceed (NTP) for the start of construction. TIs were to be completed within

ninety days of receipt of that NTP. At the close of the ninety days, the space was to be ready

for acceptance and inspection, with the Government having five days to do that.

The pre-construction design tasks identified in the lease (starting from award) were

to consume ninety days. Thereafter, the parties needed to complete price negotiation and

allocation of costs between the TIs and the warm lit shell, and thereafter proceed with ninety

days for construction. While the lease did not specify a time to be allotted for final

negotiation of the TIs and warm lit shell pricing, or allocate time for issuing a NTP with

construction, appellant in its certified claim allocated ten days to NTP and further

acknowledged that a commercially reasonable time would have been anticipated for

negotiation. GSA has provided no alternative time frames for the above.

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The parties disagree as to the start date for counting performance for carrying cost

purposes. Appellant measures its delays and carrying time by using a start date of March 11,

2011, which pre-dates PJB’s involvement in the lease. GSA uses May 19, 2011. We find

GSA’s date to be the appropriate start date. We note that PJB took over from Nicholas on

May 17, 2011, and all costs are those of PJB. Using May 17th as the start, if we allocate thirty

days for negotiation of price (including the NTP), add on the time for design in the SLA and

the ninety days for construction, the total time that appellant should have been anticipated

for its efforts was 210 days. If we measure 210 days from mid-May 2011, that puts us into

mid-December 2011.

Through much of the time leading up to December 2011, issues arose as to the FS

having sufficient funds to complete what it wanted for TIs, as to costs to be allocated to the

warm lit shell versus TIs, and as to changes in criteria. Negotiations were in part driven by

pressure to lower the TI costs to meet the FS budget and in part by disagreements over how

much went into the shell and how much was to be attributed to TIs. It is undisputed that until

the design parameters were set and the pricing negotiated, appellant could not start

construction. Moreover, until the property was ready for occupancy, rent payments could not

begin. Nevertheless, for the period prior to occupancy, the appellant was incurring carrying

costs for the property as well as design costs. The negotiations as to the TIs and the shell

appeared to move with fits and starts.

For purposes of this decision, we need not go into detail as to all issues argued by the

parties as to who is responsible for the carrying time. Rather, we focus on several limited

milestones. The most significant are in August and December 2011, February 2012, and then

the cancellation by GSA in December 2012. The parties agree that once appellant was

initially able to proceed with design, it was not until August 2011 that the Government

approved the final schematic design. Appellant could not prepare the initial DIDs until that

was done. Work then proceeded. However, on or about December 11, 2011, GSA told

appellant to stop the process, as the FS was significantly re-working the design parameters.

The FS was going from a plan with offices to a more open environment. Much of the work

done to that date by PJB was nullified and appellant could not proceed with the preparation

of CDs (the step after approval of DIDs) and of course not proceed with construction until

GSA and the FS gave it the criteria needed.

It was not until February 28, 2012, that the FS and GSA completed a re-review of the

revised DIDs and worked out an alternate DID layout. That essentially reset the clock for

the project. There is no evidence showing that actions of PJB unreasonably delayed the DID

progress after GSA issued the December 2011 stop order. Moreover, once the DIDs were

approved, that reset the start of the preparation of CDs. The change in DIDs and CDs, in

turn, caused PJB to redo pricing and other work, and required it to engage architects a second

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time to rework the CDs. GSA, as noted later in these findings, has agreed that appellant is

due $48,269 for architectural work that was properly attributed to the redesign. None of that

amount has been paid.

Starting February 29, 2012 (the day after approval), appellant was free to move

forward. The schedule shows that after the approval of DIDs (forty-five days), the lease

contemplated that appellant had 125 days (thirty-five remaining for design and ninety for

construction) to complete the property for occupancy. In addition, as noted above, appellant

has conceded that ten days should be allocated to issuing the notice to proceed (for start of

construction) and (although no time was set for negotiation of the TIs) thirty days would be

reasonable for negotiation. That totals 145 days and reflects the amount of time that was

indicated in the initial lease for completing the tasks remaining, once DIDs were approved.

It is clear that a continuing issue in 2012 was the determination and allocation of

pricing for the TIs versus the warm lit shell. The parties identified and allocated costs for

the TIs through the submission by appellant of TIC1 sheets, which were documents formatted

by GSA that were structured to show a cost breakdown between TI and warm lit shell for a

number of general construction categories, such as HVAC, electrical, finishes, other trades,

and administrative costs. The TIC sheets first appeared to be used in May 2012, and they

continued to be submitted through the fall and into December 2012.

Typically, the costs for construction line items, such as HVAC and finishes, were

allocated between warm lit shell and TIs. Therefore, when the dollars attributed for a

particular line item to the warm lit shell increased, there was typically a decrease for the TI

dollars under that category. Accordingly, it benefited the Government when a greater

proportion of an item was allocated to shell, as that generally triggered an equal decrease in

TI costs for that category.

In its initial TIC sheet, which appears to have been submitted in May 2012, appellant

priced the warm lit shell at $80,000. Appellant has conceded that the amount was not

reasonable. In appellant’s next submitted TIC sheet (A-4), it showed the warm lit shell costs

as $356,495.36. Prior to the final submission in December 2012, submissions for costs for

the warm lit shell ranged from a low of $352,712.65 to a high of $392,076.14. TIC sheet A-6

showed $392,076.14 for the warm lit shell and TIs at $1,680,210.52. The TIC sheet just

prior to the final submission, A-7, showed $356,495.36 for the warm lit shell. The costs for

TIs on the various TIC sheets ranged from $1,070,109 to $1,721,447. In the final TIC sheet,

1

costs.

Although not addressed in the record, the initials “TIC” stand for tenant improvement

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submitted on December 4, 2012, PJB costed the warm lit shell at $490,463 and TIs at

$1,396,784.

Not all TIC sheets included costs for all categories. For example, as pointed out by

GSA, A-7 lacked a cost for doors and windows for the warm lit shell, even though the prior

submitted TIC sheet, A-6, showed a cost for those items at $92,076 for the warm lit shell.

In its brief, GSA cites a statement from Mr. Bruce Ash, president of PJB, in which he

stated that he was elated at the $490,463 number. While Mr. Ash did at the time express

satisfaction, he clarified and qualified the matter at the hearing. He testified that he and PJB

were not particularly happy with the number at the time and stated that the figure was

proposed to GSA on the basis that it would free up the start of the lease. He stated that

appellant had been carrying the property for almost eighteen months and was anxious to get

it to a rent payment stage. He stated that the real number that appellant expected to pay for

the warm lit shell was significantly lower than the December offer. He said that had the lease

gone forward to completion, appellant would have been obligated to provide the items set

for the warm lit shell, but could not be denied the benefit of doing the work for less cost.

The record contains no written agreement as to acceptance of the $490,463. GSA took no

steps in reliance upon it, and appellant had the opportunity to do the warm lit shell work

cheaper, if it could. While Mr. John Culbertson, the GSA valuation expert, stated in

supporting the reasonableness of the $490,463 that it met the “laugh test,” he was neither a

contractor nor an estimator.

Appellant contends that from February 28, 2012, until the date of cancellation, it was

still not able to complete obligations as planned, asserting that GSA thwarted appellant’s

attempts to move ahead. GSA in contrast says that any delays were due in large part to

appellant not providing competitive bids and not giving GSA adequate pricing on TIs and

the warm lit shell. There is substantial correspondence in which the parties take competing

positions as to what should be warm lit shell and what should be TIs. The correspondence

is not conclusive as to which party is correct. Both GSA and appellant relied on outside

firms to provide costing support. GSA had contracted with U.S. Costs to assist it during the

project in negotiating and estimating the costs for warm lit shell and TIs. PJB used Mr. Don

Parks of Parks Contracting and Consulting for setting pricing and making allocations. PJB

also appeared to rely on its architect, and GSA relied to some degree on Mr. David Culp, an

architect with the FS. None of these individuals was produced as a witness. Rather, GSA

attempted to rely in part on Mr. Culbertson, and PJB essentially relied on the documents in

the record and on Mr. Johnny Nelson, a Mississippi architect. The later had some but not full

information on GSA lease requirements.

Exhibit A-29 of the appeal file contains most of the documents dealing with the

competing positions. The exhibit contains over 300 pages, composed of letters, meeting

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minutes, e-mail messages, and invoices. The documents paint a picture of ongoing problems

as to a number of items. From the spring of 2012 forward, appellant could not get

competitive bids on security as specified in the lease agreement, because only one firm in the

area could meet GSA requirements due to unique scope and warranty requirements. Finally,

in late fall, the security work was removed from the project. There were issues as to what

was included and how to allocate work on the HVAC system. PJB pointed to a letter of

November 6, 2012, where GSA said the cost allocation for HVAC was fair at 50/50 due to

the conversion of warehouse space into office space. Prior to that time, the FS and GSA had

resisted such an allocation. Further, in a letter dated November 15, 2012, appellant’s

architect addressed an issue regarding handicapped parking. He said the work being

identified as warm lit shell was added for additional FS flexibility and access and that the

work would not have been required but for FS choices. He identified the work as a TI cost

and suggested it be removed from the project. He also disputed some doors and windows

that were designated shell, but he thought should be TI. His rationale, however, was not

detailed. These items contributed to the stretch out of appellant’s work into December 2012.

Documents in September 2012 from U.S. Costs focused on four items that it identified

as not yet reasonably priced by appellant, those being HVAC, security, painting, and

sprinkler work. The sprinkler work had been an issue since May 2012, and the security

specification, as noted above, had been an ongoing issue and was ultimately removed. In

correspondence in October 2012, Mr. Culp of the FS concurred that the lessor’s price was

fair and reasonable, except for certain items, identifying those as access control, security, and

certain elements of finishes. He questioned some of the allocation as to TI and shell, relying

on U.S. Costs. He then made the following recommendations, which implicitly indicate that

the FS was still attempting to reduce scope so as to reduce costs. He recommended the

removal of the access and control security system at $104,000, removal of telecom and

wiring at $48,000, and re-alignment of the sprinkler system. The first and third items had

been at issue for some time. Another item identified by GSA was delay attributed to

appellant not obtaining sufficient bidding competition so as to allow GSA and the FS to

evaluate TI costs. While Mr. Eugene Wright, the GSA leasing specialist, identified that some

of the delay after February 2012 was due to appellant providing inadequate price

competition, he noted that probably the biggest issue was insuring that the costs were

properly allocated among TIs and the shell.

On October 8, 2012, PJB’s Mr. Ash sent a letter to the CO, Mr. Johnson, referencing

delays that he claimed PJB had experienced since December 15, 2011, and specifically the

stop work order at that time. Mr. Ash noted that on February 14, 2012, PJB participated with

the FS and GSA to develop a new revised scope. He said that while PJB and its

representatives were able to reduce costs of construction by $649,860, the tenant added

features which increased construction costs by $282,004. He noted that PJB had recently

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completed reconsideration and calculation of all TI costs and had completed its review. Mr.

Ash advised that PJB had incurred what he characterized as delay costs through September

30, 2012, of $162,548.79. He identified the following classes of costs: interest expenses

from the lending bank, landscaping expenses, owner’s association maintenance contribution,

real estate taxes, return on investment, and utilities and other payments to local providers.

GSA identified December 12, 2012, as the date that the FS issued a notice to cancel

the need for the space. The notice advised that the FS was no longer interested in the space.

Appellant took that as a repudiation of the lease. GSA then requested that the lessor provide

an offer to buy out the lease. GSA says the lessor stated it would start assembling

documentation. However, according to GSA, before GSA could determine whether to offer

a lump sum buyout or hold the property and begin to pay its rental obligation month to month

(which GSA says was its usual practice), the lessor retook possession of the property and

entered into a replacement lease with the State of Mississippi (State). The replacement lease

was agreed to on August 20, 2013. Appellant says that on January 7, 2013, GSA confirmed

the repudiation, when GSA sought to have appellant agree to release GSA from the contract.

Appellant filed its certified claim on April 26, 2013. At the time it had not entered

into a mitigating lease. In the claim, appellant sought both what it called delay damages and

costs for breach of the lease. It identified claimed delay dates running from March to August

2011, and then from December 16, 2011, to December 21, 2012. It contended it was entitled

to be paid for a total of 256 work days or 372 calendar days. At that time, PJB did not claim

costs from August 24 to December 15, 2011. While appellant designated the claim as delay,

as we have addressed earlier in this decision, the costs were generally carrying costs caused

by the actions of the FS in stretching out or delaying appellant’s ability to provide the CDs

and move on with construction. Until construction was completed, the FS could not take

occupancy and rent payment was contingent on occupancy. There also are several costs

claimed, specifically the architect and legal costs, which are more in the nature of change

claims.

Appellant broke down its delay costs into several categories: carrying costs, contract

administration costs, and legal costs, for a total of $27,791. The legal costs were incurred

from January to October 2012. Appellant described the legal and administrative costs as

needed to assist in negotiations of a price adjustment, caused by the GSA delay and redesign.

Appellant provided redacted legal bills for the time period. The redacted bills do not reflect

interaction by counsel with GSA officials or specific reference to negotiations. Appellant

claimed additional architectural fees of $48,269. These costs were incurred as a result of the

Government’s decision to start the job anew in 2012.

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In presenting its claim, appellant provided monthly and/or daily costs for March 2011

into December 2012. The presentation broke costs into categories, most of which were

categories that GSA did not challenge. Although GSA challenged appellant’s attribution of

delay and stretch out time; GSA did not provide counter numbers to those of PJB or

challenge the accuracy of the PJB daily or monthly rates.

The CO issued a decision on August 28, 2013, allowing $1,635,194.34 as

compensation for both cancellation of the lease and delay. Of that amount, $114,815.44 was

attributable to delay and the remainder to the cancellation. Of the amount identified for

delay, $48,269 was allowed for added architectural costs and the remainder was attributed

to categories such as real estate and management. At the time of the final decision, GSA was

unaware that appellant had secured a mitigating tenant. Therefore, the CO decision does not

reflect any reduction or mitigation against the repudiation number. Both parties agree that

mitigation is proper and the net proceeds from the replacement lease must be deducted to

reach a final amount. In reaching the proper compensation for repudiation, GSA calculated

payment on an expectancy basis. That has remained its position. Appellant had submitted

its claim on repudiation as a claim for breach and sought recovery on a diminution of value

basis. Both parties provided experts to discuss valuation, which is detailed below.

In his final decision, the CO asserted that DIDs were to be completed by

May 19, 2011, based on an agreement at the initial programing meeting, held on

April 7, 2011, where both the Government and lessor agreed that DIDs would be due thirty

working days later. Appellant has provided no evidence to challenge that GSA statement.

The CO also stated in the decision that as of December 4, 2012, the TIs from PJB were fully

compliant with the lease. GSA accepts that it was liable for delay, as of December 5 to the

date of the stop order on December 21, 2012. The lease never resumed. GSA also accepted

responsibility for an additional ten days associated with a May 9, 2012, submission, and an

additional two days on or about May 23, 2012, attributed to GSA not reviewing submittals

within the specified period. GSA allowed some relief for the following categories of

carrying costs claimed by appellant: real estate taxes, management fees, landscape fees,

utilities, power, and insurance. It also separately allowed contract administration costs of

$32,705.97 and architectural fees of $48,269. The contract administration costs included

$27,791.99 for attorney fees, running from January to October 2012, and $4913.98 for

additional architectural fees identified as needed for negotiations.

The GSA position has changed since the CO decision, as to what items are payable

and as to dollars that are owed. The $48,269 in architectural fees accepted in the final

decision is not one of the contested items.

On August 20, 2013, just a few days prior to the CO decision, PJB executed a lease

with the State of Mississippi (State) for a term of fifty-nine months. The lease was later

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changed to cover sixty months. The lease was to begin November 1, 2013, and obligated the

State to pay monthly rent of $27,447.92 for 26,350 square feet of office space, to be used by

the Department of Health, Statistics and Vital Records (DHSVR). The lease contained the

provision that in the event space were to become available to the lessee in any State-owned

building, the lease shall be terminated within thirty days from and after the date of written

notice. The lease was being used as swing space by DHSVR while its permanent facilities

were being renovated. It was a certainty that at some point the State would move out when

renovations were finished. GSA has asserted, and statements from state officials support,

that it was likely the State would stay the sixty-month term and possibly longer. Having said

the above, the lease did not have an option as to any time beyond the first sixty months.

From the time of the CO’s decision until the time of the hearing, GSA’s position

changed substantially as to both delay liability and the amount it owed appellant for

cancellation of the lease. As to the delay segment, the current GSA position is that appellant

is entitled to no more than $64,817.16. Of that, $48,269 is attributable to architectural fees.

The remainder is real estate taxes of $7763.60, management fees of $3126.81, landscaping

of $2604.64, utilities (water and sewage) of $275.60, utilities (power) of $154.33, and

insurance of $2623.18. It appears that GSA allowed time for days that were identified by the

CO during the period starting after December 2011. The CO disallowed any costs associated

with claimed delays between March 2011 and December 2011. In its pre-trial brief, GSA

provided no allowance for contract administration costs (which were identified by appellant

as being composed of legal fees, running from January to October 2012), or for additional

architectural fees of $4913.98 incurred in May and June 2012. Appellant says the legal and

architectural costs were incurred to negotiate a price adjustment required as a result of the

delay and redesign of the project. GSA objects to that payment, asserting that there is no

authority to obligate the Government to pay for appellant’s consultations with its counsel or

architect to understand what the lease stated.

After the final decision, and leading up to the hearing, the parties exchanged expert

reports. At the hearing, GSA relied primarily on the November 3, 2014, report of Mr. John

Culbertson, a senior real estate specialist with GSA. Appellant relied upon the

October 29 and November 10, 2014, reports of Mr. Robert E. Dietrich, Senior Real Estate

Director for Collier International. Mr. Dietrich had extensive experience in commercial real

estate appraisals. Both experts produced submissions on valuations. Both parties prepared

spreadsheets which, while not identical (but similar in format), attempted to capture the net

proceeds to be expected from the GSA lease, minus what should reasonably be credited as

mitigation due to the current follow-on lease with the State and a likely follow-on with some

other tenant. Mr. Culbertson’s calculation, used during the hearing, showed appellant would

have netted $2,112,256 in rent from the GSA lease. His sheet showed two scenarios for what

CBCA 3628

13

the mitigation leases or leases might yield, those being $1,055.805 and $1,112,845

respectively.

At the close of the hearing, appellant’s expert was given the opportunity to file

additional information, in order to respond to unexpected testimony from a state official.

GSA’s expert was given the right to file a response to appellant’s expert’s filing. Appellant

then moved to strike the GSA expert’s report of November 26th for going beyond the scope

of a permissible response. By order of December 16, 2014, the Board limited some aspects

of the filing and allowed GSA to re-file. The spreadsheet of December 24, 2014, was

submitted as that refiling. To the extent the matters involved in the motion to strike and GSA

filings are still relevant to our decision, they will be addressed in the discussion.

At the hearing, appellant identified additional costs it now seeks to recover which it

contends arise out of the same operative facts as before us in this claim. Those costs had not

previously been presented to GSA and essentially are costs associated with the purchase of

the building by PJB. In its brief, counsel for PJB asserts that significant expenses were

incurred by the lessor after the execution of the lease and before the breach. It claims

$236,156.51 for various expenses associated with acquiring ownership. Mr. Ash said that

if there had been no cancellation of the lease, PJB would not be asking for the costs. The

Board allowed testimony, but said it would take it as a proffer and later decide if it had

jurisdiction to consider the costs being sought.

The costs involved in the proffer were $41,213.05 in closing costs that PJB incurred

to obtain financing to construct the TIs and $70,006.46 in broker fees paid to Jones Lang

LaSalle. Other costs were $2167 in personal reimbursements, $4025.62 in accounting fees,

$32,392.01 in loan interest, $1666.66 in landscaping fees, and $7980 in insurance fees.

There is also an additional $76,705.25, which PJB attributes to architectural fees. The

architectural fee amount is the difference between $122,254.25, which is architectural fees

related to GSA lease, and the $48,269 in added A/E costs. The later, which were

acknowledged in the CO decision are not being challenged by GSA in this proceeding, and

have been included in our award, relating to delay and carrying costs. Additionally, in its

brief, appellant conceded that closing costs totaling $41,213.05 should not have been

included in this part of the claim, thereby leaving $194,943.46 in issue.

In its briefing, GSA presented arguments as to a lack of a critical path analysis by

appellant and asserted that any delay could only be measured starting in December 2011.

Also, GSA argued that any delays in processing of CDs and other items after February 2012

were to be attributed to appellant. GSA, for example, contended that there was a thirty-day

delay in providing a working set of CDs after appellant was given the go-ahead on

February 28, 2012. It says PJB should have taken twenty working days from February 29 to

CBCA 3628

14

March 27, 2012, to provide a working set of CDs but a working set was not produced until

May 8, 2012, equating that to a thirty-day lessor delay. GSA charges that on June 5, 2012,

the TI bid it received from appellant was not compliant with the lease and from that date until

August 23, 2012, any delay is due to the appellant.

Calculation of Damages for Termination of the Lease

Both parties provided expert reports and testimony to establish the amount due

appellant because of the cancellation of the lease. Throughout the dispute, both parties

presented several spreadsheets to support their valuations. Appellant took the position that

compensation should be measured on the basis of diminution of value. GSA’s expert

contended that valuation must be based on an expectancy calculation and described

expectancy as measuring and being based upon the loss of income. He identified expectancy

as the method regularly used by GSA, when measuring damages for leases that are

prematurely ended. Diminution, as presented by appellant, measures loss of value to the

property due to the breach of the lease, comparing the value of the property to a purchaser,

with and without the GSA lease in place. Nothing in the lease addressed a guarantee of value

of the property, be that at the start, the middle, or the end of the lease. The lease covered

what the Government would pay for the use of the space.

Mr. Dietrich, appellant’s expert, testified that expectancy is not a common method of

valuation; instead, the common commercial valuation method is diminution of value. He

provided some back-up for how he arrived at his damage number of $3,030,000, but the

back-up was not detailed. Essentially, he set out $5,230,000 as the fair value of the property

with the GSA lease in place, deducted expenses for the warm lit shell and TIs, and set the

adjusted value at $4,205,540. He then deducted from that what he designated as the fair

market value of the building with the State lease. He set that fair market value at $1,730,000,

and after deducting TIs, he arrived at a value of $1,181,000. His written and verbal

explanations, as to his valuations and as to why it was superior to or more accurate than the

GSA approach, was largely conclusory and lacking detail. It also was largely based upon

property valuation, a speculative element. In contrast, the valuation regarding the use of

expectancy, albeit also using estimates, was better developed. Although there was

conflicting testimony from Mr. Dietrich and Mr. Culbertson as to the use of expectancy and

assignment of dollars to the mitigation leases, one could use their testimony to come to a

damage figure that appeared both fair and reasonable and which relied less on speculation

than the diminution approach.

The calculations of the parties as to expectancy were similar in many respects as to

format and content. However, they differed on some key points. In general, the spreadsheets

as to expectancy took the calculated income from the lease if performed, deducted from that

CBCA 3628

15

the expenses that were anticipated to be incurred in order to earn the rent, and then deducted

the income from the State lease as mitigation. Some figures were hard numbers, while others

were estimates.

Mr. Culbertson, GSA’s expert, provided five different spreadsheets (those of

November 26 and December 24, 2014, being very similar), each coming up with different

totals. Each of Mr. Culbertson’s calculations used an expectancy approach. Both experts

calculated their final numbers for present value (PV). PV adjusts dollars to account for the

fact that PJB will receive payment now for money and expenses it would have been paid or

incurred over a several-year period. Both experts made it clear that coming up with the

present value was an art, not a science, and part of arriving at a number included estimates

and questions of risk assessment. The results, when adjusted for PV, ranged from damages

for the cancellation of $800,000 to $1,101,000.

Mr. Culbertson’s spreadsheets used a ten-year period for calculations, which was

based on the fact that GSA only agreed to a ten-year period. Anything beyond that was

deemed to be at appellant’s risk. Mr. Dietrich used a fifteen-year period (with some

adjustment), contending that historically, there is at least a 90% chance that GSA completes

a lease, and therefore, fifteen years was more reflective of what was to be expected. The use

of fifteen years (by Mr. Dietrich) results in significant dollar difference from the ten-year

term.

The Culbertson spreadsheet, ultimately relied on by GSA, was prepared in

December 2014. It followed the same format as the prior Culbertson spreadsheets and was

generally consistent with the format used by Mr. Dietrich. It accumulated the fixed lease

payments on the GSA lease, less expenses, and then deducted from that a mitigation figure

for the State lease. The parties appear to agree as to the basic framework of deducting

expenses and agree on a number of the costs associated with establishing what would have

been netted had the FS lease run its course. Two major differences are the expense to

provide GSA with a warm lit shell and the cost for TIs on a replacement lease, should the

State vacate prior to ten years.

To determine what is owed appellant, we use the format of the December 2014 sheet

prepared by Mr. Culbertson. We identify where his and Mr. Dietrich’s numbers line up.

There is no material disagreement as to yearly rent. Since we find that ten years is the correct

basis for calculations, the rate is multiplied by ten. On his spreadsheet, Mr. Culbertson

calculated ten years of lease payment at $548,207 per year, for a total of $5,482,070. For

purposes of our calculations, we do not separately adjust for PV, but rather use the numbers

as set out on the source documents.

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16

Mr. Culbertson deducted expenses for each year of rental. Most of the expenses he

identified either conformed on a yearly basis with those of Mr. Dietrich or were close. A

primary exception is the cost for the warm lit shell work, which GSA priced at $490,463.61.

GSA used that figure primarily because appellant proposed that figure in its TIC sheet of

December 4, 2012. Appellant showed TI costs of $1,396,784 on that same sheet. According

to Mr. Culbertson, $490,463.61 passed the “laugh test,” implying that the cost provided was

low. GSA also claimed that in answers in a November 26, 2012, letter regarding the warm

lit shell costs, appellant expressed no material disagreement, thereby confirming that it and

GSA were on the same page as to warm lit shell costing. GSA also contended that all TIC

sheets provided by appellant prior to December 4 sheet omitted key items. A compilation

of alleged missing items was prepared by Mr. Culbertson and provided in his post-hearing

submission of November 26, 2014. While the numbers he cited in his filing were in the

record, his commentary moved the matter beyond a simple compilation. We agree with

appellant that the late submission deprived appellant of a fair opportunity to cross-examine,

clarify, or provide rebuttal. Accordingly, we have given no weight to his commentary on this

item.

Several calculations, used by both parties, established the value of the GSA lease, the

State lease, and any follow-on to the State lease. For purposes of this decision, we have

selected as our starting point the December 24, 2014 spreadsheet calculations presented by

Mr. Culbertson, which are generally consistent with the earlier calculations of both

Mr. Culbertson and Mr. Dietrich. We also chose the December format because it contained

more of the accepted (agreed to) dollars than did other sheets. That allowed for our changes

and calculations to be easier and more readily followed.

We now turn to our calculation of what is owed appellant due to the cancellation. We

start with the rent of $548,207 per year for each year of the ten-year period that totals

$5,482,070. For purposes of determining what appellant would net after expenses,

Mr. Culbertson set out the following numbers. He deducted for year one of the lease the cost

of warm lit shell at $490,463; the estimated cost of TIs at $826,255; twice the first year of

broker commission of $72,363, or $144,723; operating costs of $126,725; real estate taxes

of $32,960; and other costs, such as reserves and insurance, at $31,152. He then applied a

first year negative net rent figure of $1,104,074. The first year rent is not subject to

adjustment for PV. Adjustments are applied for years two through ten. Mr. Culbertson then

addressed each of the following nine years, starting with each year’s rent at $548,207 and

then deducting for each year, yearly operating expenses at an even $126,725 per year, taxes

at $32,960 and reserves at $31,152. That yielded, for each of years two through ten, a net

rent to lessor of $357,370 per year for a total of $3,216,330. That total was then combined

with the negative rent for year one, leaving the net rent after expenses at $2,112,256.

CBCA 3628

17

To achieve a final total, Mr. Culbertson applied a PV calculation at 4.25 % for each

year. For purposes of this decision (because we change many numbers) we will not calculate

PV on each year, but will leave that to the parties. Ultimately, in order to come up with the

final recovery due to the breach, a PV calculation for each year must be made. By

performing a PV calculation, the total dollar recovery for each year is decreased, to reflect

the present value of being paid now for income that would have occurred in the future (that

is, the later year dollars). Mr. Culbertson’s total, using that PV, was $1,523,078 before

taking into account the State lease mitigation.

Mr. Culbertson then calculated a mitigation amount for the State lease based on the

assumption that the State would leave after five years and there would be a six-month

vacancy before appellant secured a replacement lease. He used an estimated market rate of

$14.71 per square foot (psf) for the time after the State left. His calculation additionally

escalated the rent for each replacement year (years six through ten) by 2.5% per year (noting

that such was consistent with Mr. Dietrich’s appraisal in October 29, 2014). The Dietrich

appraisal he cited, however, used a number of different parameters and is not fully

comparable. The Culbertson calculation provided for rent from the State of $361,000 for the

first year and $329,375 for years two through five. Appellant has not challenged the amount

allotted for the actual State lease. Thereafter, for the remaining years (the time after the State

lease would potentially expire), Mr. Culbertson estimated the follow-on lease at a rate of

$14.71 psf, with that being escalated by 2.5% each year. His total for gross rent mitigation

before deductions and the application of PV was $3,852,428. To account for the six-month

vacancy in his calculation, Mr. Culbertson choose to show half of a year’s rent as an expense,

rather than reduce the rent directly.

As was the case with the GSA lease, appellant would have incurred expenses in order

to secure the mitigating rent. Mr. Culbertson made deductions to the State lease and followon that were consistent with the GSA lease deductions. Certain costs in his calculation were

deducted for year one and do not carry over to follow-on years. Year one shows a full

service rent of $361,000. From that he deducted operating costs of $168,957, tenant

improvements for the State of $460,000, and a broker commission of $80,000, leaving a

negative net rent for year one of $347,957. Because year six was to be a transition year and

the year where there would be a six month vacancy (for bringing on a new tenant), he made

several adjusted deductions at year six. Those were deductions of $139,907 for operating

costs; $206,792 for the six-month loss of rent, $280,000 for re-tenanting improvements and

concessions, and $124,000 in broker commission. Those deductions yielded a negative rent

of $229,435 for year six, as expenses exceeded income and positive rent for the remaining

time. We choose not to go into further detail, but note that the end result was a gross of

$3,852,428, less deductions of $2,954,188, for a net of $898,240 to be deducted as

mitigation. That final figure does not reflect PV, which is separately applied to each year.

CBCA 3628

18

Had the GSA lease been performed, Mr. Culbertson calculated that the result would

have been a net rent to the lessor of $2,112,256 for the GSA lease and a net rent for the

mitigating lease or leases of $898,240. PV calculations would have to be applied to the raw

numbers. GSA has sought to add an additional $40,000 deduction to account for saved

janitorial costs. The record shows that the lease payments began in November 2013 and that

as of May 2014, the State had not moved in. Accordingly, we see saved costs for seven

months which at a rate of $2500 a month, for a total of $17,500.

A number of the figures used by Mr. Culbertson in his mitigation calculation bear

comment. He assumed operating expenses would increase 2% annually for any follow-on

tenant. That position was not presented by GSA until Mr. Culbertson submitted his posthearing response. It introduced a new element that went beyond what was to be covered in

his response. There was no evidence addressing the basis on which escalation of operating

expenses was assumed. While the lease would have permitted an increase, GSA provided

no evidence to show operating costs would escalate in the Jackson market. While there was

a time, years ago, when increases for both would have been almost certain, and therefore

assumed, we take judicial notice that such is not the case in recent years.

Mr. Culbertson also assumed that the rental rate for the follow-on lease would be

greater than that of the lease with the State. He justified using a higher rent for the follow-on

tenant on the basis that the State was likely to renew another five years, and if it did so, then

appellant could get a favorable rate from the State. He acknowledged that there was no

escalation clause for rent in the State lease and provided no evidence to support his

prediction of a higher rate.

In addition to using a higher rent, Mr. Culbertson proposed using a 2.5% escalation

to be applied to rent. He cited as his basis the fact that Mr. Dietrich had used a 2.5%

escalation in one of Mr. Dietrich’s earlier calculations. The Dietrich calculation, however,

had different numbers and different durations. Mr. Culbertson did not use an escalation for

rent in any of his spreadsheets prior to December 2014.

In his December 24 spreadsheet, Mr. Culbertson assumed a vacancy period of six

months between the State lease and start of a new tenant. In another calculation, he had used

eighteen months. In a third, he showed the State renewing.

A final issue was janitorial costs. In answers to interrogatories, appellant identified

the janitorial costs as $30,000 a year. Per answer to an interrogatories, appellant did not

incur janitorial costs for the State lease until at least May 2014. Rent was to start in

November 2013. Therefore, there were no janitorial expenses for the first seven months of

the State lease.

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19

Because GSA was insisting that expectancy was the basis for measuring payment to

PJB, Mr. Dietrich, at the request of PJB counsel, initially provided a ten-year analysis based

on expectancy. Later, however, he provided a fifteen-year calculation. He acknowledged

that GSA had a right to terminate after the tenth year of an otherwise fifteen-year term, but

pointed out that GSA has historically not terminated earlier than the expiration of the full

term in the vast majority of cases. GSA did not contest that point, as to history, but relied

upon the lease clause giving it the right to end the lease at ten years. Based on past history

Mr. Dietrich calculated that there was a 90% likelihood that GSA would remain for the full

fifteen years. He weighed the percentage possibility in his valuation as to PV. By running

his calculation over fifteen years, he increased the amount due to the lessor under the

calculations for the total recovery.

The parties differed as to the cost for making improvements for a follow-on tenant to

the State (assuming the State left after five years). It was agreed that if the State left, added

costs would be needed to prepare the space for a new tenant. Mr. Dietrich identified

$592,858 as the costs to make those improvements. It was not clear if his costs were based

on past experience or on client information and there was minimal detail. Mr. Culbertson

contended that Mr. Dietrich used an exorbitant figure for improvements on a second

replacement lease and supported that point by noting that the building had already been

converted from warehouse to office space and the TIs from the State lease would only be five

years old. He noted that the total spent on construction for State was about $392,000 (PJB

actually spent $466,171.96 to secure the State lease and prepare for occupancy; however, of

that $392,000 was for construction). Mr. Culbertson used $280,000 as an estimated cost.

His costs were not detailed and the source of his information was not clear.

Both parties adjusted the lease calculations for PV. Present value involves

discounting future dollars to reach a sum which reflects what later-paid money would have

been worth at an earlier time. Much of reaching a rate is market and risk driven. The process

of coming up with a discount rate for present value is part science and part art. In Mr.

Culbertson’s final filing, he applied 4.25% to the GSA lease and 8% to the State lease.

Those are the same numbers he used in his earlier November 3, 2014, report and spreadsheet.

Mr. Dietrich used a slightly higher rate of 4.75% for the GSA lease in his fifteen-year

calculation, and he used 6.79% in his final calculation as to the State lease and follow-on.

The higher the PV rate the lower the value of the dollars.

CBCA 3628

20

Discussion

We do not fully adopt either party’s position as to what is owed for what the parties

have identified as additional days that were required (beyond those contemplated in the lease)

to perform the pre-occupancy design and costing tasks called for in the lease. For purposes

of this decision, we refer to the additional days as delay. Both parties have attempted to

segregate out delays to work during both 2011 and 2012, and then have calculated and

applied dollars to those segments of delay. Appellant in its briefing asserts that it is entitled

to compensation based upon a nineteen-month delay, which essentially runs from award in

March 2011 until the cancellation in December 2012. In its final decision, GSA accepts

limited responsibility for some time segments in 2011 and in 2012. However, in its final

presentation to the Board and in briefing, GSA has significantly reduced what it accepts as

responsibility for the stretch out costs and concludes that, at best, the total due appellant is

$64,817.

We find the identification as to delay to be less complex than how it has been framed

by the parties. Accordingly, we will not analyze the approaches that have been presented,

but instead will identify where we find the delay or liability and why. Where appellant is due

compensation, we address how the dollars are to be calculated.

Extra carrying charges covered two distinct periods. The first was from the agreed

planned approval date for DIDs to the actual date of approval of the revised DIDs in

February 2012 by GSA. GSA has conceded that the approval for DIDs was not given until

February 28, 2012, because of the change in design. GSA acknowledges that such date

effectively was a restart for the project. Because appellant should have been able to complete

the DID process and proceed with CDs considerably earlier, but could not do so until

February 28, 2012, we find appellant is entitled to compensation for costs due to the

Government-caused delay through February 28, 2012. It was only at that point that GSA

approval of the DIDs allowed for appellant to proceed with CDs.

The only remaining issue as to this period is to determine from what date we measure

the delay. PJB should have expected to incur carrying charges for the period prior to

occupancy, as it needed to perform design and construction. The time allotted for that (as

well as adjustment for notice to proceed and negotiations) is 210 days. GSA asserts that if

there was a delay, the delay could not start until at least May 19, 2011, based on an

agreement by the parties that moved the initial date for providing DIDs to May 19th. Both

the Government and appellant agreed at an initial program meeting in April 2011 that DIDs

would be due on May 19, 2011. We find no evidence to suggest that this was not voluntary

or that appellant raised objections. The date also coincides closely with when PJB took over

the contract.

CBCA 3628

21

May 19, 2011, was the due date for the lessor to provide GSA with DIDs. Thereafter,

the lease schedule allowed for ten days for GSA to approve the DIDs after receiving them

from the lessor. Since the February 28th date was the approval date for DIDs, we have to

account for the 10 day review period and therefore add ten days to May 19th. That results in

measuring any delay as to carrying costs from May 29, 2011. There are 276 days from May

29, 2011, to February 28, 2012. While we recognize that there was some work being done

in 2011, and there were interim delays in that work during 2011, any interim delays are not

material to our decision, as the DIDs were not approved until February 28, 2012, and the start

of CDs could not proceed until that approval.

Starting on February 29, 2012, the project progressed, albeit sometimes in fits and

starts, until the cancellation on December 21, 2012. There are 297 calendar days in the

period of February 29 to December 21, 2012. Appellant seeks daily or monthly costs for that

entire period. That is not reasonable. First, under any analysis, a substantial segment of the

297 days was required to do the work. Since appellant is seeking compensation to recover

what it would have earned had the lease been completed, the 297 days must be reduced to

reflect the time needed for it to do base work required for occupancy. That base time

included designated design tasks, negotiation of the TIs and warm lit shell costs, and actual

construction. As set out in our findings of fact, we have added together the time to

accomplish the various activities in the lease, including time for negotiation and notice to

proceed. We calculated that total to be 210 days. Had the lease not been canceled, that time

would have had to have been expended by appellant in order for the appellant to have earned

the rent. The appellant cannot be paid extra for those days.

For purposes of assessing appellant’s claim, we note that the lease provides thirty days

for submission of the DIDs and ten days for approval. Those forty days were in fact

completed as of February 28th. Accordingly, we deduct those forty days from the 210 needed

to complete the work. Counting from February 28th, that leaves 170 days needed for work

completion. When we deduct those 170 days from the 297 days identified above, we are left

with 127 days that are not accounted for. Those are the remaining days in dispute during

what we designate the second period.

Appellant, in its claim, has identified various GSA actions that impeded its ability to

proceed. The principal items identified were HVAC, sprinkler, security, and handicapped

access to parking. GSA similarly identified items that it claims were caused by appellant not

complying with the contract or not providing GSA with required information. Among issues

identified by GSA were the pricing of the warm lit shell, lack of competition, the scope of

responsibility for HVAC, and the pricing of finishes. In its briefing, GSA asserts that its

actions caused no added stretch out or delay from February 28th forward.

CBCA 3628

22

We find neither party to be entirely correct in allocating the remaining 127 days in

dispute. In the CO decision, GSA conceded responsibility for a delay of sixteen days, from

December 5 to December 21, 2012, while GSA was deciding on the stop work order.

Appellant has not provided a basis for rejecting that figure. We therefore allot sixteen days.

In addition, the final decision identified a three-day and a separate six-day period as

compensable, noting that GSA reviews took longer than set out in the lease. Neither party

provided testimony to support this as a delay, and we simply do not find that a few day delay

in a review, even if caused by GSA, automatically qualifies for reimbursement. The record

does not demonstrate that the lessor’s progress was materially impeded by those short periods

or that it should have expected perfect turn-around. Accordingly, we do not add in those

days, which leaves 111 days unaccounted for. Those are the potential delay days remaining

in dispute for the period of February 29 and December 21, 2012.

For the remaining 111 days of delay, each party has identified contested issues, but

neither has conclusively established who was to blame. Documentary evidence revealed a

substantial shared responsibility as to delays after February 29, 2012. Witnesses were

generally not helpful in sorting out or refining a shared liability. On the whole, the record

does not demonstrate which party is responsible for any particular period of delay or

demonstrate liability for a given issue.

Still, there are several items that can be attributed to one or the other party. We find

that GSA was responsible for some delays attributable to the HVAC, security specifications,

handicapped access, sprinklers, and unrealistic TI costs. Similarly, there were items

attributable to appellant. For example, appellant at times failed to approach the warm lit shell

costs in a reasonable manner, did not fully comply with securing competitive pricing, and

was partially responsible for some of the HVAC and finish issues.

The claim for time and money in this matter is appellant’s claim. Therefore, it carries

the burden of proof. Taking that into account, we find on a jury verdict basis that of the

remaining 111 days in dispute, the record establishes that GSA is responsible for 30% of the

time and the remainder either falls on appellant or is not attributable to either party. That

calculates to an additional thirty-three days of delay, or thirty-three days of additional

carrying costs.

We find appellant had to carry the property beyond what was reasonable for 325 days.

That is composed of 276 days up to February 28, 2012; sixteen days from December 5 to

December 21, 2012; and thirty-three days for the remainder. Counting 325 days back on the

calendar from December 21, 2012 (the date of cancellation) puts us into January 2012. We

find that appellant should have been able to proceed with occupancy no later than some point

CBCA 3628

23

in January 2012, but instead was held up on the project, without any compensation for

carrying costs, until December 2012.

Appellant has provided dollars in its certified claim for almost the full time period

during 2011 and 2012. We find that we can calculate either a monthly or daily figure from

appellant’s submission. GSA has not provided competing calculations. Accordingly, we use

appellant’s dollars as a basis. Appellant has identified the following categories of timerelated costs: real estate taxes, management fees, landscaping fees, utilities, and insurance.

The CO, in the final decision, accepted each of these categories of costs as compensable. To

calculate compensation for time-related costs, we take the rate used in appellant’s certified

claim for the period running from January 2012 forward, and then multiply that rate by the

days of delay. The calculations are as follows:

Real estate taxes

Management fee

Insurance

Landscaping

Utilities

$80.21 x 325 days

$32.26 x 325 days

$26.87 x 325 days

Water

Sewer

$26,068

$10,485

$ 9,309

$ 8,733

$ 1,985

$ 4,356

The above totals $60,836.

In addition to the time-related costs noted above, appellant claims $27,791.99 in legal

fees and $4913.98 for architectural costs, the latter incurred in May and June 2012 for what

appellant contends was to assist in negotiating a price adjustment. The two items total

$32,705.97. GSA allowed both in the final decision but now says neither is payable,

characterizing them as administrative costs that are to be borne by a contractor. Appellant

put on minimal evidence to connect the legal costs to negotiations or to show that such costs

were outside the realm of general legal costs that would normally be included in overhead.

Similarly, there was no specific evidence, but for billing, to support the additional $4913.98

sought for added architectural fees to assist in negotiations. Appellant has the burden of

recovering the fees. That the CO allowed the costs is not relevant, as the Board considers

the claim de novo. Based on a lack of evidence, we deny these claims.

Having found entitlement as noted above, we briefly comment on defenses raised by

GSA asserting defects in appellant’s proof as to delays. We find no merit in GSA’s

contention that, because there is no critical path analysis, we cannot determine delay. First,

the contract does not call for appellant to provide any critical path analysis. Second, the bulk

of the delay is at the front end and is obvious. As to the delay in 2012, we agree it is not tied

into specific dates and therefore benchmarks would have been helpful. However, lack of the

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benchmarks is not fatal if delay is clear. In this case, we have assessed the time after

February 28, 2012, and have allocated delay based upon the record. Because the burden of

proving delay was appellant’s, we gave GSA the benefit of the doubt in our calculation of

compensable carrying time. Costs associated with added architectural work are independent

of the number of delay days.

In summary we find $60,796 due for the delay and added carrying time as well as

$48,269 for the architectural fees that have been acknowledged in the CO decision and not

challenged in this proceeding.

Expectancy Versus Diminution and Length of Term

The initial question before we calculate dollars for the cancellation is whether to use

the expectancy approach, as presented by GSA, or the diminution in value theory, as

presented by appellant.

Appellant’s diminution theory is predicated on measuring damages based on the loss

of value of the property for a future sale. It arrives at its number by comparing the value of

the property at the time of breach with the GSA lease in place and the value of the property

on that same date with a lesser tenant in place. It contends that its approach is commonly

used in commercial practices and asserts that measuring damages in that manner was

foreseeable.

GSA seeks to pay on the basis of expectancy. There, it takes the full value of the

lease, as if performed, which involves deducting from the gross rent, the expenses that were

needed to perform the lease. GSA then mitigates those costs by what appellant will recover

through the current State lease and an anticipated follow-on lease. The result puts appellant

in the same position it would have been had the lease been completed. It does not take into

account how, if at all, the cancellation of the lease affected the sale value of the property at

some future date. GSA says appellant should not be placed in a better position dollar-wise

than if GSA had completed the lease. GSA points out that it entered into an agreement with

appellant to pay rent and not to guarantee the value of the sale value of property.

We have considered the evidence of the respective parties and find that the expectancy

approach is appropriate. We find the presentation on diminution to lack detail, specifically

as to its application to the property at hand. Moreover, the expectancy approach is in our

view less speculative, more subject to analysis, and we find that it allows us to determine a

fair result. Further, while diminution may be the standard in the commercial market between

private parties, it is not the standard as to GSA leases. GSA uniformly applies an expectancy

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approach when valuing uncompleted lease damages. Appellant purported a familiarity with

GSA leases. Therefore, any expectation of another valuation method was not warranted.

The second matter to resolve before we calculate damages is determining the

appropriate term for the lease. The evidence is clear that ten years is the appropriate term.

The contract clearly gives GSA the right to end the lease after ten years. While appellant

asserts that such a walk-away from the lease was unlikely, that does not change the fact that

the lease clearly gave GSA that option. For us to use fifteen years would ignore the lease

provisions.

Having determined that we will use expectancy over a ten-year period, we now turn

to calculating the recovery. The parties presented a number of expectancy scenarios to the

Board. In some, the dollars were similar. However, there was significant disagreement as

to some figures. We point out that each expert acknowledged that valuation is not an exact

science. We are dealing with educated estimates and assumptions. We do not chastise the

experts for the multiple choices, but instead, simply recognize that they were attempting to

fashion what they consider a fair remedy.

In calculating the proper expectancy damages, we use the spreadsheet of

December 24, 2014, for format and as a starting point. We find that neither party provided

us a calculation which we could accept in full. Therefore, at times, we modify various cost

elements to conform with what we find to be fair and to be consistent with the evidence. The

primary adjustments are for: (1) the cost for appellant to complete the warm lit shell, and (2)

the mitigation value of the State and potential follow-on lease. To the extent we find other

issues material, those are separately addressed.

Both parties agree that the cost for preparing the warm lit shell was to be deducted

from whatever gross rental the appellant would have received. GSA contends the warm lit

shell should be valued at $490,463, relying on the fact that appellant proposed the number

to GSA in December 2012. It also relies on the opinion of Mr. Culbertson, who described

it as passing the laugh test. GSA also cites in support a statement by Mr. Ash as to his being

pleased with the number. Appellant, in contrast, states it could have completed the warm lit

shell work for $198,000. It, however, provides very limited support for that figure. Appellant

mostly relies on testimony from the architect that PJB used for work on the State lease. We

found the architect’s testimony to be unconvincing. He did not appear to have full

knowledge of what was actually required for the warm lit shell in the GSA lease. We find

that $198,000 understates the cost.

We find also, however, that $490,463 overstates the amount reasonably needed to

prepare the warm lit shell. We conclude from the testimony of Mr. Ash that the proposed

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$490,463 was not an arms-length offer or proposal. His testimony convinces us that

appellant offered the $490,463 because appellant needed to get the job moving. At the time,

it had been carrying the project for well over a year-and-a half with no compensation, but

was nevertheless incurring carrying costs on a daily basis. Absent getting GSA to agree to

a price to be allocated to the warm lit shell and TI price (the two working in tandem), no

occupancy date was in sight. Appellant proposed the figure under those terms. Further,

appellant was not locked into that number. It was entitled to do the work cheaper, if it could.

We find the most likely cost for the warm lit shell to be $392,071, which is the cost

submitted by appellant on TIC sheet A-6. There is no evidence that A-6 was not an arm’slength proposal. While A-6 was not submitted immediately prior to the proposal for

$490,463 (A-7, at $369,051, being the last sheet submitted), we find A-6 (which is higher)

to be more accurate. A-6 more fully includes costs for doors, windows, and some other items

that were not reflected in A-7. Accordingly we use $392,071 for the warm lit shell costs.

Once we substitute $392,071 for the warm lit shell number used by Mr. Culbertson,

we adopt the remainder of his December spreadsheet as to the expenses necessary for

appellant to complete the GSA lease. The gross rent total of $5,482,070 for the ten-year

period is not contested and there are no disputes as to the TI allowance, commissions,

operating expenses, and real estate taxes, nor as to the monthly figure of $31,152 designated

for other items. The net rent, after expenses, was shown by Mr. Culbertson as $2,112,256.

His total, however, reflected $490,463 for the warm lit shell expense. When we change the

warm lit shell cost to $392,07 (our adjusted figure), the net rent to be recovered is

$2,013,864. That figure is before adjusting for PV, which is discussed separately below.

The parties agree that PJB’s income from the State lease and any follow-on lease must

be deducted as mitigation. The parties disagree as to the values to be placed on those leases.

Mr. Culbertson provided several alternative calculations for valuing the State lease

and follow-on lease. The alternatives were set out on five separate spreadsheets, ranging in

dates from August 29, 2014, through the final spreadsheet of December 24, 2014. Among

the alternatives he listed were the State renewing and staying for ten years; the State leaving

after five years and then being followed six months later by a follow-on tenant; and finally,

the State leaving after five years but the vacancy lasting eighteen months. Each spreadsheet

used somewhat different figures for the rent per month and for operating expenses.

Clearly, there is no certainty as to whether the State will stay or leave, or certainty as

to how difficult it would be to find a new tenant and at what rate. We, however, must come

up with a selection, based on our best judgment, without being overly optimistic or

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pessimistic. Our best judgment is to adopt the Culbertson scenario that would have the State

leave after five years, with a six-month vacancy.

The calculation that follows incorporates the above adjustments. However, before

finalizing, we need to address several other items. An agreed element in the follow-on lease

(assuming that State leaves after five years) would be the cost of improvements for a followon tenant. Appellant uses $520,000 as the anticipated cost and GSA uses $280,000. Neither

presented testimony on its estimated figure from a construction professional, but instead

provided at best layman opinion and observation. We find neither number to be properly

supported and find there is other evidence in the record that leads us to a different result.

Prior to the State taking occupancy, the appellant paid $392,228.20 in tenant improvements

beyond the warm lit shell, to satisfy the State. While a follow-on tenant to the State would

likely require different improvements from those provided to the State, we find it would be

unlikely that the costs for a new tenant would exceed those that appellant expended for the

State. In part, that is because we expect that some of the initial tenant improvements for the

State would be useful to a follow-on tenant. Therefore, we set $392,000 (what appellant

spent on the State) as a ceiling. Because the needs of a follow-on tenant may differ from that

of the State, any number we choose will be judgmental. Predicting, as best we can, we take

a jury verdict approach and allow $336,000 for follow-on tenant improvements. That is the

average between the $280,000 proposed by GSA and the ceiling figure we set of $392,000

(paid for the State improvements).

The parties disagree as to the rental rate to use for years five through ten of the

extended State or follow-on lease. Mr. Culbertson calculated at least three scenarios. One

used the State rental rate for ten years, assuming that the State renewed. Two calculations

used higher rates for the five-year follow-on, one being $13.25 per sq. ft. and the other (in

December 2014) using $14.71 per sq ft. We recognize that each calculation is coupled with

different vacancy combinations. However, it is clear that Mr. Culbertson saw the potential

of multiple choices. No convincing testimony was provided to pick one number over the

other or to support the contention that rents would increase. Rental increase is not automatic

and has not been so for several years. Accordingly, the use of multiple rates by Mr.

Culbertson gives us pause. Of the numbers provided, the only non-estimate number is that

paid by the State. All others are predictions. In selecting the rate, we choose to rely on an

actual number, rather than speculate with unexplained estimates. We therefore apply the

State rental rate for the entire mitigation period. In our result, we are comfortable taking

judicial notice of the fact that rents in many markets have remained flat for a number of

years. While that may change, we find that fairness dictates that we not assume a higher rent

will be paid, when there is no evidence to support it.

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GSA proposes escalating rent by 2.5% per year and escalating expenses by 2% a year.

The proposal to include the escalation for rent was first presented by GSA in the December

2014 spreadsheet and thus was absent on the prior four. The escalation of operating expenses

was noted at the hearing and is part of the contract when dictated by a CPI change.

Regardless, we find no evidence to show that rent or expenses would likely increase. We

decline to use escalation when no evidence supports it.

Finally, we adopt Mr. Culbertson’s use of a six-month vacancy before a follow-on

tenant. Again, we are dealing with a prediction. On one sheet, Mr. Culbertson had the State

staying for ten years, in another he had a six-month vacancy and in another an eighteenmonth vacancy. He identified the six-month vacancy as most likely. While the State might

extend beyond the initial lease, it has no such obligation. Just as we gave weight to GSA’s

right to opt out, we equally recognize the State’s.

With the above parameters set, the mitigation calculations are as follows. We start

with the full ten-year rent at the State’s rate of $3,325,375. To account for a six-month

vacancy, we deduct $164,687 in year six, which is half of the rental ($329,375) for year six.

With that deduction, we have a gross rent of $3,160,688. We then deduct expenses. Ten

years of operating expenses, at a level rate, is $1,689,570. On his spreadsheets,

Mr. Culbertson deducted 50% of expenses for a six-month vacancy. We deduct those costs

to account for that six months, adjusting the operating expenses to $1,605,100. We then

deduct tenant improvements actually spent on the State lease of $460,000, an additional

$336,000 for estimated improvements to satisfy a follow-on tenant, and $204,000 in broker

commissions. As to the janitorial costs, we find savings of $17,500.

The numbers set out above are net numbers and are not subject to a PV calculation.

We recognize that the application of PV is applied to each year (but for year one) and uses

a formula based upon the PV rate to be applied. For purposes of this decision, we have

provided net numbers and have set the rates to be used. We leave the application of and

calculation for PV to the parties.

The last three Culbertson spreadsheets showed a consistent PV of 4.25% for the GSA

lease and an 8% for the State lease. However, in its brief, GSA argues that the best appellant

should get is 4.75% and 6.75%, citing that those figures were used by Mr. Dietrich in his

calculations in exhibit A-12. In his revised calculations submitted in A-12, Mr. Dietrich used

4.77% for the GSA lease discount rate (PV) and 6.49% for the State lease. That, however,

was based on fifteen years. When Mr. Dietrich performed a ten-year calculation, he used

12% rate to calculate PV. Both parties agreed that PV is a function of variables. The final

PV value we use must be based on our best judgement. We have assessed the information

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presented and find that a factor of 8% is to be applied to the State and follow-on leases and

4.25% to the canceled GSA lease.

Other Costs, Certification Issue

Appellant claimed additional costs at the hearing. While the costs arise out of the

same operative facts, the cancellation of the lease, appellant has offered an entirely new set

of numbers for a different cost category. The central test for deciding if a claim is separate

and thus needs certification is whether the CO’s right to adjudicate is undermined by

circumventing the CO statutory role to receive and pass judgment on claims. This is not a

case where an the appellant is adding a theory to sustain the same recovery that has been

sought. Rather, these are new dollars involving a different facet of the costing. It opens an

entirely new legal analysis. Accordingly, the claim can only move forward after certification.

Absent that, we do not have jurisdiction over this item.

Decision

The appeal is GRANTED IN PART. Appellant is granted $109,105 associated with

the delay and extra design work. Appellant is entitled to recovery for the cancellation of the

lease in accordance with the guidance set out in this decision. Interest is to run from the date

on which the contracting officer received the certified claim.

HOWARD A. POLLACK

Board Judge

We concur:

JERI KAYLENE SOMERS

Board Judge

JOSEPH A. VERGILIO

Board Judge