Alternative Financing White Paper

Brookhaven Area Office

# 

## Laboratory/Site Description

The Brookhaven National Laboratory (BNL) was established in 1947, on the
grounds of a former U.S. Army camp, Camp Upton, as a place for research
on peaceful uses of the atom. Located on a 5,265-acre site on eastern
Long Island, New York, BNL operates large-scale facilities for studies
in physics, chemistry, biology, medicine, applied science, and advanced
technology. The Laboratory's 3,000 scientists, engineers, and support
staff are joined each year by more than 4,000 visiting researchers from
around the world. The U.S. Department of Energy (DOE) owns the BNL
facilities and property. BNL is managed and operated by Brookhaven
Science Associates, LLC (BSA), under contract to the DOE.

**Brookhaven National Laboratory Housing Reconstruction Project**

Since the founding of BNL in 1947, the Laboratory has provided on-site
rental housing for its visiting scientists. Providing on-site housing is
critical to the success of DOE's science mission at BNL for several
reasons. Many of the visiting scientists, particularly those from other
countries, do not have personal transportation, and there are no mass
transit services available at or near the Laboratory. For these people,
living offsite would make access to the Laboratory and their workplaces
extremely difficult. It would also place a hardship on the many spouses
and families that accompany visiting scientists, as they would not be
able to access many of the support services provided for them by the
Laboratory.

The availability and affordability of offsite housing are also major
issues. The housing stock in the community surrounding BNL is primarily
condominium and single-family residences. Rental units are very scarce
and rents are high, reflecting both the low inventory and the extremely
high housing values on Long Island. Landlords are also typically
unwilling to rent to persons who cannot commit to a minimum of a
one-year lease. This is a major problem for BNL users, many who come
only for a few months.

There are currently 72 apartment units in 19 World War II vintage wood
frame cottages that serve as short and extended term housing for these
BNL guests, visitors, new employees and research teams. The apartments
consist of approximately 85,000 square feet with approximately half of
the units containing two bedrooms, and the remaining units comprised of
one, three, and four bedroom units. Although upgrades such as window
replacement, electrical service, and kitchen improvements were made
during the 1990s and continue to some extent, these structures are
deteriorating and beginning to experience structural failure to a point
where at least one apartment has been permanently closed.

The BNL Housing Reconstruction Project being considered by BSA and DOE
would consist of replacing the old housing with privately developed,
funded, and owned housing on the BNL site. The project includes
construction of a 72 apartment units of varying number of bedrooms, as
well as a recreation/community center. This construction is planned for
an open field next to the existing housing area on the Laboratory site.
Under the current plan, the existing housing units would be demolished
by BNL as the replacement units are built; however, this would be done
at government expense. While the project also contains an option for an
additional 25 apartment units; however, this option may be dropped
before DOE approves the project.

Under this project, a private developer will be selected through a
Laboratory conducted competitive selection process. The selected private
developer and the DOE will execute a 26 year-long ground lease that will
permit the developer to construct the housing facilities on the leased
property (out-lease). Upon completion of the construction, the
Laboratory would lease the entire 72-unit facility through a five-year
lease, with an option for an additional five-year period (in-lease).
There would only be a token out-lease payment as long as the Laboratory
leased the apartment facility. There are no binding in-lease provisions
beyond the option period.

Should the Laboratory decide not to occupy the housing, the out-lease
will permit the developer to make such housing available to the local
community; however, the developer will be required to pay a fair market
value ground rent to DOE. The selected site for the housing is severable
from the remainder of BNL and can be made accessible by public roads. As
a result of historically high occupancy rates, the Laboratory expects
the costs of the in-lease to be recovered through the rents received
from the Laboratory employees, visitors and guests who occupy the
apartments. BSA will pass on any un-reimbursed cost of the in-lease to
DOE as a cost under the prime contract. At the end of the 26year
out-lease, the buildings will either be turned over to DOE or the
property returned to its original state by the developer.

### Energy Sciences Building & Central Chilled Water Facility Projects 

There are a couple of other projects being considered as possible
candidates for Alternative Financing, either as third party financing or
an action under the authority of the utility incentive program
provisions of the Energy Policy Act of 1992. These potential projects
are an Energy Sciences Building and the Expansion of the Central Chilled
Water Facility. Planning for these projects is in its infancy. As such,
there is insufficient detail for either potential effort to be
incorporated as part of this review.

## Alternative Financing Experience

### Housing Reconstruction

In 1987,[^1] the Laboratory unsuccessfully pursued an alternative
financing project, similar to the current proposal. In this earlier
proposal, valued at about \$3.5 million, a private developer was
selected through a competitive process conducted by the Laboratory to
design and build a user housing complex that was envisioned as a half
motel and half dormitory facility. An out-lease of the BNL land to the
developer and an in-lease of the facility back to the Laboratory were
also going to be used in this 1987 venture. While the project reportedly
had DOE concurrence at the Area Office to go forward, there were some
financial concerns raised at the DOE Headquarters level. While these
concerns were being reviewed, the package was also sent to OMB for its
concurrence. From what can be currently ascertained, it seems that OMB
failed to act on the package and DOE never pressed the issue with OMB.
The project was ultimately abandoned due to inaction.

### Natural Gas Line Installation to Central Steam Facility

In the late 1990s, BNL partnered with LILCO (now Keyspan Energy) to
bring a natural gas line into BNL's Central Steam Facility in order to
allow burning of either natural gas or oil. LILCO constructed two miles
of natural gas line (8"), a pressure reducing station, and metering
station, valued at \$1.2 million. There were no out-of-pocket costs to
BNL. The line paid for itself through natural gas purchases over a 3 1/2
year period. (8/97 -- 3/01). With a gas rate or \$3.12/dth (mmbtu)
delivered, this rate was significantly less expensive than our
alternative fuel, No. 6 oil. DOE saved \$1.96 million in fuel costs over
the 3.5-year contract. BNL retains the flexibility to burn the least
cost fuel, natural gas or oil, and continues to save significant fuel
costs.

[Site Specific Factors]{.underline}

The site-specific factors that appear to impact most upon BNL
alternative financing ventures are simply the nature and location of the
BNL property. BNL is located in the eastern portion of Long Island, in
an area experiencing residential growth, but little industrial growth or
expansion to an already limited light industrial base. DOE owns all of
the land at BNL. BNL is essentially a federal enclave under exclusive
federal jurisdiction, except for some outer buffer acreage. BNL has also
been determined to be a Superfund site, so any leased property will
require a finding by EPA Region II that the property may be leased.
Furthermore, neither DOE nor BSA considers any BNL land as excess
property.

Any alternative financing construction project at BNL would likely share
several similar characteristics. Any building would likely be
accomplished using a lease of the BNL property from DOE to a developer,
presumably under DOE's Atomic Energy Act (AEA) 161(g) authority -- an
out-lease, accompanied with a lease of the facility between the
developer and DOE's management and operating contractor on site -- the
in-lease. The out-lease would provide for transfer of the asset to the
government at the end of the lease or contain a provision that the
property be returned to its original state by the lessee. The in-lease
would be for a set number of years, with provisions for allowing private
use or leasing of the facility if not leased to the Laboratory either
during that initial lease period or afterwards.

Under these circumstances, efforts at alternative financing at BNL run
into some Office of Management and Budget Circular A-11 (OMB A-11)
scoring hurdles that must be overcome before an effort could be
considered an operating lease arrangement.[^2] Due to BNL's location on
Long Island and type of asset built (*e.g.* a building to provide needed
laboratory or research accommodations), there might not be a private
sector market for the asset. Furthermore, the physical layout of the BNL
and its security requirements may not be able to accommodate turning
over an asset located in the middle of the BNL site to a private entity.
In order to justify using AEA 161g authority and offset the risk of
losing the BNL property to private interests, the length of the
in-lease, and amount paid under the in-lease, could exceed the OMB A-11
criteria for defining an operating lease. Building the asset on
government land with a lease provision that allows for the automatic
transfer of ownership to the government upon expiration of the out-lease
could also fail to meet the operating lease criteria and, at a minimum,
would likely be viewed by OMB as adding risk to the government.

## Key Contractual and Legal Elements

As discussed previously, BSA is preparing a proposed path forward for
its Housing Reconstruction Project. Most of the key contractual and
legal details of this project are also discussed previously (*e.g.* 26
year out-lease, 5 year lease with a 5 year option in-lease, etc.). Since
this proposal has not been subjected to formal DOE or OBM review yet,
the contractual and legal methodologies used may or may not meet AEA
161g requirements and/or the OMB A-11 criteria as an operating lease.
BSA has argued that its proposal should qualify as an operating lease
under the OMB A-11 criteria. Even assuming that all of these criteria
are met, a DOE decision to go forward with the project has not been
made.

BSA has also argued that OMB A-11 should not be applied to the proposed
Housing Reconstruction Project at all since the Project will be revenue
generating. They contend that the intent of OMB A-11, to capture and
account for government spending and obligations, does not really apply
in this instance. BSA believes that due to the historically high
occupancy rates in BNL housing (annual average rate of 86.5%), the
rentals collected from the visiting guests, users, etc. should result in
little expenditure by the government over the life of the in-lease. This
is not a situation where the government will be paying more in lease
payments than it would if it had built the asset as a standard
government financed line item project. Though not noted as an exception
to the OMB A-11 scoring requirement, BSA is arguing that this type of
revenue generating scenario should be considered totally outside the
scope of OMB A-11 consideration or, alternatively, as an exemption from
its scoring requirements.

## Estimate of Life-Cycle Cost to DOE

BSA has maintained that the proposed Housing Reconstruction Project,
executed using an alternative financing approach, will result in a
positive long-term cost basis for DOE since the housing will be a
revenue generating arrangement for the Laboratory. Their fundamental
position is that rents collected from the users will more than offset
the in-lease costs that BSA, and ultimately DOE, might incur. BSA is
preparing a detailed cost analysis of this position to support their
Housing Reconstruction Project.

## Recommendations

As evidenced by BNL's proposed Housing Reconstruction Project, OMB A-11
criteria and scoring can create significant hurdles to alternative
financing-- some possibly insurmountable. Since the applicability of OMB
A-11 to our management and operating contractors is purely a DOE policy
determination, BAO recommends that DOE, perhaps with OMB involvement,
reconsider that policy determination. At a minimum, DOE should consider
a change in policy for revenue generating proposals.

DOE should also, with OMB and the appropriate Congressional committees
involvement, consider legislative remedies that would provide more
direct statutory authorities, guidance, and relief to engage in
alternative financing projects. The Department of Defense, through the
various military services, and the Department of Veterans' Affairs have
a history of legislation and activity that could be used for this
purpose.

[^1]: This effort predated the 1992 Office of Management and Budget
    Circular, A-11 (OMB A-11). As will be discussed, this publication
    and DOE policy implementing it have a significant impact on present
    day alternative financing projects.

[^2]: OMB A-11, Appendix A provides a scoring methodology for assessing
    budget authority and outlays to be used by federal agencies as they
    enter into a contract for the purchase, lease-purchase, capital
    lease, or operating lease of an asset. Although not applicable to
    DOE management and operating contractors by its terms, DOE made a
    policy decision in 1992 to apply OMB A-11 to its management and
    operating contractors. Using the scoring criteria in OMB A-11, one
    can determine whether or not the lease of an asset is an operating
    lease, lease-purchase, or capital lease arrangement. This
    determination is critical because it will determine the appropriate
    budget authority requirement to use. OMB A-11 essentially provides
    that for lease-purchases and capital leases, budget authority will
    be scored against the legislation in the year in which the budget
    authority is first made available in the amount of the estimated net
    present value of the Government's total estimated legal obligations
    over the life of the contract. In contrast, an operating lease only
    requires budget authority be scored against the legislation in the
    year in which the budget authority is first made available in the
    amount necessary to cover the Government's legal obligations
    (payments plus any cancellation fees).