United States General Accounting Office

GAO Report to the Secretary of Defense

July 1998 MILITARY HOUSING

Privatization Off to a

Slow Start and

Continued

Management Attention

Needed

GAO/NSIAD-98-178

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-279995 

July 17, 1998

The Honorable William S. Cohen

The Secretary of Defense

Dear Mr. Secretary:

This report discusses the Department of Defense’s (DOD) new military housing program known

as the Military Housing Privatization Initiative. Specifically, we reviewed the implementation of

the new initiative to (1) measure progress to date, (2) assess issues associated with privatizing

military housing, and (3) determine whether the new initiative is being integrated with other

elements of DOD’s housing program.

This report contains recommendations to you. As you know, as the head of a federal agency,

you are required under 31 U.S.C. 720 to submit a written statement on actions taken on our

recommendations to the Senate Committee on Governmental Affairs and the House Committee

on Government Reform and Oversight no later than 60 days after the date of this report. A

written statement must also be submitted to the Senate and House Committee on

Appropriations with an agency’s first request for appropriations made more than 60 days after

the date of this report.

We are sending copies of this report to appropriate congressional committees; the Secretaries

of the Army, the Navy, and the Air Force; the Commandant, U.S. Marine Corps; and the

Director, Office of Management and Budget.

If you or your staff have questions on this report, please call me on (202) 512-5140. Major

contributors to this report are listed in appendix VII.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues
Executive Summary

Purpose The Department of Defense (DOD) spends about $8 billion annually to

provide housing for military members and their families either by paying

cash allowances for members to live in private sector housing or by

assigning members to military-owned or -leased quarters. Over the past

several years, DOD has expressed concern over the poor quality of the

military housing inventory and the need for renovations and improvements

to bring the housing up to contemporary standards. To improve housing

faster and more economically than could be achieved if only traditional

military construction appropriations were used, the Congress approved

DOD’s request for a new initiative, known as the Military Housing

Privatization Initiative, that allows and encourages private sector

financing, ownership, operation, and maintenance of military housing.

Under the initiative, DOD can provide direct loans, loan guarantees, and

other incentives to encourage private developers to construct and operate

housing either on or off military installations.

Because it represents a new approach to improving military housing, GAO

reviewed the implementation of the new initiative to (1) measure progress

to date, (2) assess issues associated with privatizing military housing, and

(3) determine whether the new initiative is being integrated with other

elements of DOD’s housing program.

Background DOD officials testified before the Congress in March 1998 that about

200,000 of the existing military-owned family housing units were old, had

not been adequately maintained and modernized, and needed to be

renovated or replaced. Although GAO’s work performed in 1996 questioned

DOD’s methodology for estimating military housing requirements, it is clear

that DOD faces a significant challenge in this area.1

 Using traditional

military construction financing at current funding levels, DOD has

estimated that over $20 billion and 30 to 40 years would be required to

upgrade or replace existing family housing. In addition, DOD estimated that

most of the services’ 400,000 unaccompanied barracks spaces also were

old and needed major improvements estimated to cost about $9 billion

using traditional funding methods.

DOD concluded that these problems could be solved faster and more

economically if the military could take advantage of the private sector’s

investment capital and housing construction expertise. The basic premise

was to encourage private sector investment, rather than use government

1

Military Family Housing: Opportunities Exist to Reduce Costs and Mitigate Inequities

(GAO/NSIAD-96-203, Sept. 13, 1996).

Page 2 GAO/NSIAD-98-178 Military Housing
Executive Summary

funding, to build and operate housing on military installations or in nearby

communities where local markets could not meet military housing needs.2

As tenants in the privatized housing, military occupants would receive a

housing allowance and pay rent. DOD’s goal was to reduce the

government’s near-term outlays for housing revitalization by encouraging

the private sector to invest at least $3 in military housing development for

each dollar that the government invested.

At DOD’s request, the Congress enacted a series of legislative authorities,

termed the Military Housing Privatization Initiative, in fiscal year 1996 to

test over a 5-year period use of various incentives and arrangements to

encourage private sector investment in military housing. Among other

things, these authorities permit DOD to (1) provide direct loans and loan

guarantees to private entities to construct or revitalize housing, (2) convey

or lease existing property and facilities to private entities, and (3) allow

developers to build military housing using room patterns and floor areas

comparable to similar housing in the local communities. With the new

authorities, DOD stated that its housing problem could be solved with

current funding levels in 10 years.

Separate DOD offices have key responsibilities for the military’s housing

program. Responsibility for the new privatization initiative and for other

matters involving the construction, operation, and maintenance of military

housing lies with the Under Secretary of Defense for Acquisition and

Technology. Appropriations for military-owned and -leased family housing

are included in the services’ military construction and family housing

accounts. Responsibility for housing allowances and for all compensation

issues lies with the Under Secretary of Defense for Personnel and

Readiness. Appropriations for housing allowances are included in the

services’ military personnel accounts.

Results in Brief DOD considers privatization to be a powerful new tool to help address the

military housing problem. However, implementation of the initiative is off

to a slow start. Two years have passed since the new authorities were

signed into law, yet no new agreements have been finalized to build or

renovate military housing. More than a dozen projects are being

considered; however, only one project is close to contract signing.

2

DOD Policy Manual 4165.63M states that private sector housing in the communities near military

installations will be relied on as the primary source of family housing. The policy states that

government housing may be programmed when the local communities cannot meet the military’s need

for acceptable and affordable housing. DOD studies show that the cost to the government is

significantly less when military families are paid an allowance and live in housing in the local

communities.

Page 3 GAO/NSIAD-98-178 Military Housing
Executive Summary

According to DOD, progress has been slower than expected because the

initiative represents a new way of doing business for both the military and

the private sector. Many legal, financial, contractual, and budgetary

scoring issues had to be resolved to the satisfaction of parties representing

the government, developers, and private lenders. Although DOD expects

implementation to speed up after the first few privatization deals are

completed, it is difficult to predict how much the program can be

accelerated given the unique circumstances of individual projects. In 1997,

DOD changed its initial 10-year goal for solving the military’s housing

problem by fiscal year 2006 by extending the goal 4 years, to fiscal

year 2010.

In addition to potential benefits, implementation of the privatization

initiative raises several concerns. One concern is whether privatization

will result in significant cost savings. To a large degree, privatization shifts

funding from military housing construction, operations, and maintenance

accounts to military personnel accounts to pay for increased housing

allowances used to pay rent to developers of privatized housing. GAO’s

review of the services’ life-cycle cost analyses for two privatization

projects disclosed that the difference in the cost of privatization and

traditional military construction financing was considerably less than the

services’ estimates and relatively modest—about 10 percent or less.

Another concern is that the long term—50 years—proposed for many

privatization projects may increase the potential that the housing may not

be needed in the future, the contractor might not operate and maintain the

housing as expected, and civilians might occupy on-base housing if it is

not fully used by military members.

The privatization initiative has not been fully integrated with other

elements of an overall housing strategy to meet DOD’s housing needs in an

optimum manner. First, the services have not corrected long-standing

weaknesses in their requirements determination processes and therefore

are not assured that they are constructing, replacing, or revitalizing

housing only at installations where the local communities cannot meet the

housing needs of military families. Second, although DOD’s policy is to

reduce costs by maximizing the use of housing in local communities, DOD

has not taken full advantage of this policy. More accurate processes for

determining housing requirements, for example, would show that the

communities surrounding many installations can meet thousands of

additional family housing requirements. Comprehensive housing referral

services could also lessen the need for government housing, yet only the

Navy has aggressively pursued this option. Finally, better coordination

Page 4 GAO/NSIAD-98-178 Military Housing
Executive Summary

between the separate offices responsible for housing allowances and

military housing construction and management could ensure that their

decisions on housing matters are made in concert, rather than in isolation,

with each other. Comprehensive, better integrated plans could tie together

the elements of DOD’s housing program and help maximize the advantages

of the privatization initiative while minimizing total housing costs.

Principal Findings

Privatization Is Off to a

Slow Start

Although initial goals were aggressive and DOD actively pursued

implementation of the new initiative, actual progress has been slow. In

July 1997, DOD revised its target for solving its housing problem in 10 years

when it directed the services to plan to revitalize, divest through

privatization, or demolish inadequate family housing by fiscal year 2010, 

4 years later than the original target. According to DOD, progress has been

slower than expected because the initiative represents a new way of doing

business; and as a result, many management, legal, financial, contractual,

and budgetary scoring issues had to be addressed and resolved.

The timeline for a planned privatization project at Fort Carson, Colorado,

illustrates the slow progress in implementing an agreement under the

initiative. In October 1993, prior to the start of the initiative, the Army

requested and the Congress appropriated $16.5 million in military

construction funds to replace 142 family housing units at Fort Carson in

fiscal year 1995. The project was approved, but construction did not begin

and the funds were held in abeyance as the Army considered how

privatization might be used to finance a much larger housing project. A

DOD evaluation team visited Fort Carson in December 1995, and in June

1996, DOD concluded that Fort Carson was a good privatization candidate.

A request for proposal was issued in December 1996 for a privatization

project involving the construction of 840 new family housing units, the

revitalization of 1,824 existing units, and the operation and maintenance of

all units for a 50-year term. A contractor was initially selected in July 1997,

and in February 1998, DOD notified the Congress of its intent to award the

project. However, in April 1998, as the result of litigation, the Army

subsequently decided to cancel the proposed award, reexamine the

acquisition process for the Fort Carson project, and study corrective

action alternatives. Although DOD officials did not estimate when these

steps will be completed or when the project will again be ready for

Page 5 GAO/NSIAD-98-178 Military Housing
Executive Summary

contract award, an additional 4 to 5 years will be needed after the award to

finish construction and revitalization of the housing itself.

Implementation of the

Privatization Initiative

Raises Several Concerns

Several concerns have been raised about the privatization initiative, which

will require continued management attention. For example, questions

exist over the potential cost savings from privatization compared with

traditional military construction projects. To estimate and compare the

government’s long-term costs for a housing project financed through the

privatization initiative and through traditional military construction

methods, the services prepare life-cycle cost analyses. However, DOD has

not developed a standardized methodology for the services to use in

performing the analyses. While DOD is working on such a methodology, it

has not established milestones and a specific implementation date. Until

standardization is achieved, the services’ analyses may not be prepared

consistently and may use assumptions and estimates that do not result in

reliable cost comparisons.

GAO reviewed the services’ life-cycle cost analyses for two proposed

privatization projects, Fort Carson and Lackland Air Force Base, Texas,

and found that the savings estimated to be achieved by using the

privatization approach will be considerably less than that estimated by the

services. For example, in comparison to military construction funding, the

services had estimated that privatization will save about $197 million, or

24 percent, at Fort Carson and about $42 million, or 29 percent, at

Lackland. GAO made adjustments to the services’ analyses because some

project costs had been excluded, some cost estimates were not based on

actual budgeted amounts, and the 1998 Office of Management and Budget

discount rate was not used to adjust for the time value of money. With the

adjustments, estimated cost savings over the planned 50-year terms of the

privatization agreements will be about $54 million, or about 7 percent, at

Fort Carson and about $15 million, or about 10 percent, at Lackland.

Another concern has been the long-term nature of many proposed

privatization agreements—usually 50 years. In an April 1997 report on the

privatization initiative, the Center for Naval Analyses discussed several

risks associated with long-term agreements. The report noted that when

rents are fixed at levels other than market rates, such as in the planned

Fort Carson agreement where rent will equal a member’s housing

allowance, a contractor has little economic incentive to maintain the

property. The contractor can increase profits by limiting maintenance and

repairs and can cut costs by hiring less qualified managers and staff and

Page 6 GAO/NSIAD-98-178 Military Housing
Executive Summary

using inferior supplies. In short, under fixed-rent arrangements,

contractors may have an incentive to cut services in ways that, although

difficult to predict, could erode the quality of life for residents. To help

ensure adequate contractor performance, DOD plans to include

maintenance standards, modernization schedules, required escrow

accounts, and other safeguards in each privatization agreement. However,

enforcing the agreements could be difficult, time-consuming, and costly.

An additional concern of long-term privatization projects, as well as for

projects financed with traditional military construction funds, is whether

the housing will be needed over the life of the projects. DOD housing

officials stated that accurate forecasts of housing needs beyond 3 to 

5 years cannot be assured. Yet, without this assurance, risks increase that

all of the units will not be needed over the 50-year term of some proposed

agreements. If units are not rented by the military, privatization

agreements provide for civilians to rent the units even if the units are

located on an installation. The matter of civilians living on base raises

some questions that have not been fully answered by DOD. For example, if

civilians rented privatized housing units on base, would security concerns

be increased at some installations and would the government be required

to pay education impact aid to the community for each civilian child?

Privatization Initiative Can

Be Better Integrated With

Other Elements of DOD’s

Housing Program

Although the privatization initiative provides a powerful new option for

addressing DOD’s housing problem, it is only one of several tools available

to meet the housing needs of servicemembers and their families. DOD can

best hope to maximize the advantages from the initiative and minimize

total housing costs if it ensures that (1) accurate determinations are made

of housing needs and the ability of the local communities to meet these

needs at each installation, (2) maximum use of existing private sector

housing is achieved in accordance with existing DOD housing policy, and

(3) decisions on the structure of housing allowances and housing

construction are made in concert with each other. Although each of these

elements is ostensibly part of DOD’s overall housing strategy, DOD has

tended to view and manage these elements separately, rather than as part

of a well-integrated strategy.

First, an accurate assessment of housing requirements is the foundation

upon which construction decisions should be based if DOD is to minimize

costs and avoid building or revitalizing housing that is not needed. Yet, the

services have not corrected long-standing weaknesses in their housing

requirements determination processes, which often understate the ability

Page 7 GAO/NSIAD-98-178 Military Housing
Executive Summary

of local communities to meet military housing needs and tend to result in a

self-perpetuating requirement for government housing. A 1996 GAO

evaluation of the housing requirements analyses for 21 installations

showed that methodology problems understated the ability of the private

sector to meet military needs at 13 installations. DOD has recognized this

problem, and in December 1997, it convened a working group that

included representatives from each service to examine the services’

housing requirements determination processes. However, milestones for

the working group and for implementing improvements to the

requirements processes had not been developed as of March 1998.

Second, maximizing the use of existing housing in local

communities—DOD’s stated policy—is important to contain costs.

According to GAO’s estimates in 1996, total annual costs to the government

were about $5,000 less for a military family that lived in local community

housing instead of government-owned housing. Yet, DOD and the services

have not taken full advantage of this policy. For example, the Army and

the Air Force have reported that the communities surrounding many

military installations could, in fact, meet thousands of additional family

housing requirements, thus reducing the need for government housing. In

addition, providing comprehensive housing referral services to

servicemembers has proven to be an effective means of promoting greater

use of community housing. The Navy, for example, has pursued a more

aggressive, or enhanced, approach to housing referrals to help families

find suitable housing since 1994. Working with local landlords and

apartment managers, the Navy in many cases has obtained preferences for

military families such as reduced rental rates, waiving of some rental fees

and deposits, and unit set-asides in which certain vacancies are offered to

military families before they are offered to civilians. More aggressive

programs by the other services, similar to the Navy’s approach, could have

the effect of reducing the need for new construction, whether it be

through privatization or traditional military construction.

Third, decisions related to housing allowances and military housing

construction should be made in concert, rather than in isolation, with each

other. Effective coordination between the two DOD offices that separately

manage housing allowances and the privatization initiative is important

since changes in housing allowances could affect the amount of local

housing that is affordable to military families and significantly affect

privatization agreements in which the rental rates are equal to the

servicemembers’ housing allowance. Yet, when a new allowance program

that will index housing allowances to local housing costs was developed in

Page 8 GAO/NSIAD-98-178 Military Housing
Executive Summary

1997, there was little coordination between the two DOD offices to ensure

that the impact of the new program on the privatization initiative was fully

analyzed.

In November 1997, DOD took an important step in its planning by directing

the services for the first time to submit plans for eliminating inadequate

family housing. The services were directed to submit plans that identify by

installation, housing revitalization requirements and the potential for

privatization. However, DOD did not provide written guidance for the

services to use in determining these elements of a plan. Further, to

optimally address housing problems, comprehensive plans are needed that

integrate all elements of DOD’s housing program, establish an improved

process to more accurately determine housing requirements, maximize

use of existing private sector housing, explore how referral services can

be enhanced, and ensure better coordinated decisions on housing

allowances and military construction.

Recommendations To ensure that the privatization initiative is effectively integrated with

other elements of DOD’s housing program, GAO recommends that the

Secretary of Defense expand the directive to the services concerning their

plans for eliminating inadequate housing. Specifically, the Secretary

should direct the services to prepare detailed, integrated housing plans

that will (1) describe their plans for addressing long-standing weaknesses

in their housing requirements determination processes, (2) demonstrate

how they will attempt to maximize their reliance on community housing in

accordance with DOD’s stated policy, and (3) outline improvements in

housing referral services. The plans should also include analyses of the

estimated impact of the new housing allowance program on the

availability of housing in local communities and show how housing

allowances, traditional military construction, and the privatization

initiative will be used in concert to meet DOD’s housing needs in the most

economical manner. Each service plan should include estimated

milestones for achieving the goals of the plan.

GAO also recommends that the Secretary (1) establish a mechanism to

promote more effective coordination between the offices responsible for

housing allowances and housing management and (2) expedite DOD’s

effort, including establishing and monitoring milestones, to develop a

standardized methodology for comparing life-cycle costs of proposed

privatization projects with military construction alternatives.

Page 9 GAO/NSIAD-98-178 Military Housing
Executive Summary

Agency Comments DOD provided comments on a draft of this report that are included in

appendix VI. DOD partially concurred with GAO’s report and

recommendations. DOD’s comments and GAO’s evaluation of them are

included in the report where appropriate.

With respect to the pace of the program, DOD stated that taking time to

resolve critical program issues was necessary to ensure effective

implementation of subsequent projects and that proceeding more rapidly

would have created long-term problems for the program. GAO is not

suggesting that DOD should have moved more quickly to implement this

new program. As noted in GAO’s conclusion, the initiative does represent a

new way of doing business, and many issues needed to be resolved. GAO’s

intent was simply to factually report on the program’s implementation.

With respect to integration of housing elements, DOD agreed with the need

to integrate the privatization program with other elements of its housing

program and outlined actions related to several elements of GAO’s

recommendation. DOD stated, however, that it would not turn its attention

to integrating the various elements of the overall housing program until it

had demonstrated success in the privatization initiative. GAO does not

agree that DOD should wait to demonstrate success with the privatization

initiative before focusing on integration. Better integration of housing

elements is needed now to maximize the advantages of the initiative and

ensure that housing is revitalized or constructed only at installations

where the local communities cannot meet the military housing

requirements. An expanded directive to the services in preparing their

housing plans would help focus the services’ attention on how they can

use the full range of tools available to them in concert to address their

housing problems in the most economical way.

With respect to a life-cycle cost analysis, DOD stated that it is developing a

standard methodology for comparing costs between traditional military

construction and privatization. However, it did not set a milestone for

completing this task as GAO recommended. In view of the large number of

projects proposed for privatization, GAO believes that expediting efforts to

adopt a standardized methodology is important and that setting a

milestone for completing this task can best ensure that this methodology

is in place as soon as possible.

Finally, DOD agreed that coordination between the offices responsible for

housing allowances and housing management is necessary but believes

that existing coordination mechanisms are effective. GAO believes that the

Page 10 GAO/NSIAD-98-178 Military Housing
Executive Summary

uncertainty among service officials concerning the impact that the new

housing allowances might have on the privatization program illustrates

that better coordination is needed. A better understanding of this impact is

important since the new housing allowance program could result in

making more local community housing affordable to military families, thus

reducing the need for privatized housing in some locations.

Page 11 GAO/NSIAD-98-178 Military Housing
Contents

Executive Summary 2

Chapter 1 

Introduction

14

DOD’s Housing Problem 14

The Military Housing Privatization Initiative 15

Managing the Privatization Initiative 17

Objectives, Scope, and Methodology 18

Chapter 2 

Privatization Is Off to

a Slow Start and

Requires Continued

Management

Attention

20

Implementation Has Been Slower Than Expected 20

Savings From Privatization Appear Modest 23

Long-Term Privatization Agreements Include Concerns 26

Using Privatization to Improve Unaccompanied Housing Is

Unlikely

28

Conclusions 29

Recommendation 30

Agency Comments and Our Evaluation 30

Chapter 3 

Privatization Initiative

Can Be Better

Integrated With Other

Elements of DOD’s

Housing Program

32

Accurate Housing Requirements Determinations Provide Starting

Point

32

Maximizing Use of Civilian Housing Has Been Most Economical 33

Use of Housing Allowances Is a Key Tool but Requires

Coordination

35

Some Steps Have Been Taken to Improve Housing Plans 37

Conclusions 38

Recommendations 38

Agency Comments and Our Evaluation 38

Appendixes Appendix I: Summary of Authorities in the Military Housing

Privatization Initiative

42

Appendix II: Privatization Projects Under Consideration as of

January 1998

44

Appendix III: Navy’s Limited Partnership Agreements for Housing

at Corpus Christi, Texas, and Everett, Washington

45

Appendix IV: DOD’s and Our Assumptions Used in Life-Cycle

Cost Analysis for Fort Carson

51

Appendix V: DOD’s and Our Assumptions Used in Life-Cycle Cost

Analysis for Lackland Air Force Base

52

Appendix VI: Comments From the Department of Defense 53

Page 12 GAO/NSIAD-98-178 Military Housing
Contents

Appendix VII: Major Contributors to This Report 57

Tables Table 1.1: DOD Family Housing Improvement Fund Activity 18

Table 2.1: Life-Cycle Cost Comparison for Two Privatization

Projects

25

Table III.1: Out-of-pocket Costs at Portland in 1997 46

Table III.2: Occupancy at Portland in January 1998 46

Table III.3: Out-of-pocket Costs at Kingsville in 1997 47

Table III.4: Occupancy at Kingsville in January 1998 48

Table III.5: Out-of-pocket Costs at Everett in 1997 49

Table III.6: Occupancy at Everett in January 1998 50

Abbreviations

DOD Department of Defense

HRSO Housing Revitalization and Support Office

Milcon Military Construction

OMB Office of Management and Budget

Page 13 GAO/NSIAD-98-178 Military Housing
Chapter 1 

Introduction

The Department of Defense (DOD) spends about $8 billion annually to

provide housing for families of active-duty military personnel. Seeking to

provide military families with access to adequate, affordable housing, DOD

either pays cash allowances for families to live in private sector housing or

assigns families to government-owned or government-leased units. The

housing benefit is a major component of the military’s compensation

package.

DOD Policy Manual 4165.63M states that private sector housing in the

communities near military installations will be relied on as the primary

source of family housing. About 569,000, or two-thirds, of the military

families in the United States live in private housing. These families receive

assistance in locating private housing from housing referral offices

operated at each major installation and are paid housing allowances to

help defray the cost of renting or purchasing housing in local

communities. Housing allowances, which totaled about $4.3 billion in

fiscal year 1997, cover about 80 percent of the typical family’s total

housing costs, including utilities. The families pay the remaining portion of

their housing costs out of pocket.

The remaining 284,000, or one-third, of the military families in the United

States live in government-owned or -leased housing. These families forfeit

their housing allowances but pay no out-of-pocket costs for housing or

utilities. In fiscal year 1997, DOD spent about $3 billion to operate and

maintain government-owned and -leased family housing. In addition, about

$976 million was authorized to construct and renovate government family

housing units in fiscal year 1997.

Unaccompanied and single enlisted personnel in lower paygrades

normally are required by service policy to live in government-owned

barracks when space is available. Single officers and single senior enlisted

personnel usually can choose to live in civilian housing and receive

housing allowances.

DOD’s Housing

Problem

According to DOD officials, the military services face three significant

housing problems. First, in March 1998, a DOD official testified before the

Congress that about 200,000 of the military-owned family housing units

were old, had not been adequately maintained and modernized, and

needed to be renovated or replaced. Using traditional military

construction (Milcon) financing at current funding levels, DOD has estimated

that over $20 billion and 30 to 40 years would be required to accomplish

Page 14 GAO/NSIAD-98-178 Military Housing
Chapter 1 

Introduction

this task.1 Second, according to DOD estimates, about 15 percent of the

military families living in private housing are considered unsuitably

housed primarily because of the high cost of the housing in relation to

their housing allowances. Third, DOD officials have stated that most of

DOD’s 400,000 barracks spaces also are old, do not meet current suitability

standards, and need major improvements estimated to cost about

$9 billion using traditional funding methods.

DOD has undertaken several initiatives to address these problems,

including requests to the Congress for more housing construction funding

and increased housing allowances to make privately owned housing more

affordable to military members. The Congress approved DOD’s request for a

new housing allowance program starting in January 1998. The new

allowance program replaced the Basic Allowance for Quarters and

Variable Housing Allowance with a single allowance designed to better

match the allowance amount with the cost of housing in each geographic

area. Under the new program, housing allowances will be determined on

the basis of costs for suitable civilian housing in each geographic area and

allowance increases will be tied to growth in housing costs. According to

DOD, the new allowance program should result in higher allowances in

expensive housing areas and could result in lower allowances in some

low-cost housing areas. The higher allowances in some areas could result

in increasing the quantity of housing that is considered affordable to

military families. Under the old program, housing allowances often did not

keep up with changes in housing costs and in many cases servicemembers

paid higher out-of-pocket costs than originally intended. The new

allowance program is being phased-in over a 6-year period because of

budget considerations and the desire to keep any allowance reductions

gradual.

The Military Housing

Privatization Initiative

To improve its existing family housing and barracks inventory more

economically and at a faster rate, DOD concluded that a new initiative was

needed. The new initiative, known as the Military Housing Privatization

Initiative, called for new authorities to allow and encourage private sector

financing, ownership, operation, and maintenance of military housing.

1

On the basis of our prior work, we recognize that DOD faces significant housing problems, but we do

not fully agree with DOD on the magnitude of the problems. In a September 1996 report, Military

Family Housing: Opportunities Exist to Reduce Costs and Mitigate Inequities (GAO/NSIAD-96-203,

Sept. 13, 1996), we noted that the private sector can meet additional family housing requirements and

eliminate the need to renovate or replace many military owned units. Our work also found that

because DOD uses new construction standards to assess the condition of military owned housing

units, many housing units that DOD classifies as inadequate are not dilapidated but only lack modern

amenities such as a separate utility room or a carport.

Page 15 GAO/NSIAD-98-178 Military Housing
Chapter 1 

Introduction

In May 1995, DOD requested the Congress to approve a variety of new

authorities that, among other things, would allow DOD to (1) provide direct

loans and loan guarantees to private entities to acquire or construct

housing suitable for military use, (2) convey or lease existing property and

facilities to private entities, and (3) pay differential rent amounts in

addition to the rent payments made by military tenants. The new

authorities would also allow DOD to make investments, both limited

partnership interests and stock and bond ownership, to acquire or

construct housing suitable for military use and permit developers to build

military housing using room patterns and floor areas comparable to

housing in the local communities. The authorities could be used

individually or in combination. Appendix I contains a complete list and

description of the authorities.

The Congress approved the new authorities, and the initiative was signed

into law on February 10, 1996.2

 However, the Congress limited the new

authorities to a 5-year test period to allow DOD to assess their usefulness

and effectiveness in improving the military housing situation. Based on the

results of the test, the Congress will consider whether the authorities

should be made permanent.

Potential Benefits From

Privatization

The basic premise behind the initiative is for the military to take advantage

of the private sector’s investment capital and housing construction

expertise. DOD has noted that the private sector has a huge pool of housing

investment capital. By providing incentives, such as loan guarantees or

co-investments of land or cash, the military can encourage the private

sector to use private investment funds to build or renovate military

housing.

Use of private sector capital can reduce the government’s near-term

outlays for housing revitalization by spreading costs, specifically increased

amounts for housing allowances, over a longer term. DOD’s goal is to have

the private sector to invest at least $3 in military housing development for

each dollar that the government invests. By leveraging government funds

by a minimum of 3 to 1, the military can stretch its available construction

funds so that significantly more housing can be revitalized in comparison

with traditional Milcon financing. DOD officials stated that, with leveraging,

the housing problem could be solved with current funding levels in only

10 years. DOD also noted that privatization can reduce the average cost of

military housing through the use of commercial specifications and

2

The National Defense Authorization Act for Fiscal Year 1996 (Public Law 104-106, 110 Stat. 186).

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Introduction

standards and local building codes and practices. A DOD housing official

stated that the military’s cost for a house built with Milcon funding—about

$135,000, excluding land—is substantially higher than private industry

averages, primarily due to government procurement practices and overly

detailed specifications. Under Milcon financing, contractors normally are

faced with specifications, standards, and housing sizes different from

industry or local practices. As a result, some contractors do not compete

for these jobs and those that do often raise their prices to cover the higher

costs associated with the requirements. According to DOD, use of

commercial building standards and practices can also reduce costs by

increasing competition and by reducing developer risk because the homes

are more marketable to nonmilitary families, if not used by

servicemembers and their families.

Managing the

Privatization Initiative

In September 1995, in anticipation of the enactment of the new authorities,

DOD established the Housing Revitalization Support Office (HRSO) to

facilitate implementation of the initiative. With a staff of 16 full-time

personnel and support from consultants, HRSO is responsible for

overseeing and assisting the services in using the new initiative. The

individual services are responsible for nominating potential privatization

projects; working with HRSO in reviewing projects and recommending

which authorities should be used; preparing requests for proposals; and

managing the contract competition, award, and implementation processes.

Under the privatization initiative, the Office of Management and Budget

(OMB) and DOD have agreed on guidance regarding the amount that should

be recognized and recorded as an obligation of DOD at the time a

privatization agreement is signed. The guidance refers to this process as

scoring. In this report, we use the word “scoring” to refer to the

application of this guidance to agreements made under the privatization

initiative.

Funding for the privatization initiative is accomplished through two funds

established by the authorizing legislation—the DOD Family Housing

Improvement Fund and the DOD Military Unaccompanied Housing

Improvement Fund. The funds receive sums by direct appropriations and

transfers from approved Milcon projects and from proceeds from the

conveyance or lease of property or facilities. The two funds are used to

implement the initiative, including the planning, execution, and

administration of privatization agreements. The two funds must be

managed separately and amounts in the two funds cannot be commingled.

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Table 1.1 shows the sources and uses of funds in the DOD Family Housing

Improvement Fund for fiscal years 1996 and 1997. No appropriations were

made to the fund for fiscal year 1998.

Table 1.1: DOD Family Housing

Improvement Fund Activity

Fiscal year

Dollars in millions

1996 1997 Total

Additions to fund

Appropriations $22.0 $25.0 $47.0

Transfers from Milcon 5.9 5.9

Total additions $52.9

Expenditures from fund

Funding for projects 9.5 5.9 15.4

Administration and consultants 3.0 6.0 9.0

Request for proposal development 0.8 0.8

Total expenditures $25.2

Fund balance end of fiscal year 1997 $27.7

Source: HRSO.

In fiscal year 1997, $5 million was appropriated for the DOD Military

Unaccompanied Housing Improvement Fund. About $100,000 from this

fund was used to pay for an Air Force study on developing privatized

unaccompanied housing projects.

Objectives, Scope,

and Methodology

Because it represents a new approach to improving military housing, we

reviewed the implementation of the Military Housing Privatization

Initiative to (1) measure progress to date, (2) assess issues associated with

privatizing military housing, and (3) determine whether the initiative is

being integrated with other elements of DOD’s housing program. We

performed work at HRSO and the DOD offices responsible for housing

management and housing allowances. We also performed work at the Air

Force, the Army, the Navy, and the Marine Corps headquarters offices

responsible for implementing the initiative and at the OMB office

responsible for reviewing privatization agreements. At each location, we

interviewed responsible agency personnel and reviewed applicable

policies, procedures, and documents.

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To measure implementation progress and assess issues associated with

privatizing military housing, we reviewed DOD’s and the services’

implementation plans, compared the plans to progress made, and explored

reasons for differences. We discussed potential barriers and concerns

about the privatization initiative with DOD and service officials to obtain

their views and to determine how they were dealing with the concerns. We

also reviewed estimated cost savings from the initiative and examined the

assumptions and estimates the services used in preparing life-cycle cost

analyses for proposed privatization projects at Fort Carson, Colorado, and

Lackland Air Force Base, Texas. In addition, we visited Navy privatization

projects at Corpus Christi, Texas, and Everett, Washington, that were

implemented under a previous initiative to test the use of limited

partnerships to improve housing in the Navy. At each site, we toured the

new housing units, reviewed occupancy statistics and rental costs, and

discussed with local service officials their views of the initiative.

To determine whether the new initiative is being integrated with other

elements of DOD’s housing program, we reviewed DOD’s and the services’

housing policies, programs, initiatives, and plans. We also examined

previous reports and studies related to military housing issues, reviewed

DOD and service housing organization and management structures, and

discussed the need for well-integrated housing plans with DOD, service, and

OMB officials.

We conducted our review between June 1997 and March 1998 in

accordance with generally accepted government auditing standards.

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Initially optimistic about how quickly the new privatization authorities

could solve the housing problem, DOD officials now recognize that

implementation will be slower than expected. For a variety of reasons,

final privatization agreements have not been signed for any proposed

housing projects initiated since the authorities were signed into law in

February 1996. DOD officials believe that progress may speed up after the

first few projects are approved; however, each project is unique and will

require individualized planning and negotiation. In 1997, DOD revised its

initial goal for solving the DOD housing problem in 10 years by delaying the

target 4 years, to fiscal year 2010. Other issues, such as potential savings

from privatization, risks associated with long-term privatization

agreements, and use of the authorities to improve barracks, are also of

concern and will require continued monitoring and attention from DOD

management.

Implementation Has

Been Slower Than

Expected

In May 1995, DOD first announced its proposal to use private sector

financing and expertise to improve military housing. In a May 8, 1995,

press release, DOD stated that the quality of military housing had declined

for many years because of a lack of priority and because earlier attempts

at solutions ran into regulatory or legislative roadblocks. However, with

congressional approval of new authorities to acquire help from the private

sector, DOD stated that its 30-year housing problem could be solved in

10 years. DOD officials repeated this claim in subsequent testimony before

several congressional committees.

Anticipating congressional approval of the initiative, the Secretary of

Defense established a fiscal year 1996 goal to use the new authorities to

execute projects affecting at least 2,000 family housing units and 2,000

barracks spaces. During congressional hearings in March 1996 and 1997,

DOD officials stated that about 8 to 10 projects with up to 2,000 family

housing units should be awarded within the next year and that the goal

was to increase the number of units planned for construction and

revitalization to 8,000 in fiscal year 1997 and to 16,000 units in fiscal

year 1998. This planned ramp-up would have to actually occur and

continue for DOD to solve its housing problem within the initial 10-year

time frame, by fiscal year 2006.

Although the initial goals were aggressive and DOD actively pursued

implementation of the new initiative, progress has been slow. Since the

authorizing legislation was signed in February 1996 through the end of

February 1998, no new agreements were finalized to build or renovate

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military housing. In January 1998, DOD was actively considering more than

a dozen projects for privatization and many others were in the early

planning stages. However, only one, Lackland Air Force Base, apparently

is close to contract signing, which is the beginning point for implementing

housing improvements. Appendix II shows details of the projects being

considered in January 1998.

DOD officials often point to two Navy projects as the first examples of

improvements under the initiative. The projects—404 new units at Corpus

Christi, Texas, and 185 new units at Everett, Washington—were

constructed off base on private property under limited partnership

agreements between the Navy and private developers. However, the

authority for these projects was not the legislation that established the

initiative, but was legislation approved in October 1994. This legislation

gave only the Navy authority to test the use of limited partnerships in

order to meet the housing requirements of naval personnel and their

dependents.1

 Appendix III provides details on the Navy’s limited

partnership agreements at Corpus Christi and Everett.

The proposed Fort Carson privatization project illustrates the slow

progress in implementing an agreement under the initiative. In

October 1993, the Army requested $16.5 million in Milcon funds to replace

142 family housing units at Fort Carson in fiscal year 1995. The project was

approved, but construction did not begin because the Army became

interested in leveraging the funds through privatization to finance a much

larger housing improvement effort at the installation.

A HRSO team visited Fort Carson in December 1995, and after study and

analysis, concluded in June 1996 that government housing at Fort Carson

was a good candidate for privatization. The proposed privatization

project—to construct 840 new family housing units, revitalize 1,824

existing units, and operate and maintain all of the units for a 50-year

term—was approved in August 1996, and the request for proposal was

issued in December 1996 for offers from the private sector to accomplish

the requirements of the project. A contractor was selected in July 1997,

and final negotiations began prior to contract award. On February 10,

1998, DOD notified the Congress of the Army’s intent to transfer Fort

Carson’s 1995 Milcon appropriation into the DOD Family Housing

Improvement Fund and to award the contract. However, in April 1998, as

the result of litigation, the Army decided to cancel the proposed award,

1

See section 2803 of Public Law 103-337, October 5, 1994. The authority to use limited partnerships is

now available to all services under the 1996 legislative initiative.

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reexamine the acquisition process for the Fort Carson project, and study

corrective action alternatives. Although DOD officials did not estimate

when these steps will be completed or when the project will again be

ready for contract award, DOD estimated an additional 4 to 5 years will be

needed after the award to finish construction and revitalization of the

housing itself.

In July 1997, DOD revised its target date for solving its housing problem

when it issued planning guidance for fiscal years 1999 through 2003. The

guidance directed the military services to plan to revitalize, divest through

privatization, or demolish inadequate family housing by or before fiscal

year 2010, 4 years later than the original target.

Reasons for Slow Progress According to DOD officials, privatization implementation has been slower

than expected primarily because the initiative represents a new way of

doing business for both the military and the private sector. Initially, HRSO

had to develop protocols for site visits and new tools and models to assess

the financial feasibility of using the various authorities to help solve the

housing problem at an installation. Then, as detailed work began on

developing potential projects, many legal issues had to be addressed

relating to the applicability of the Federal Acquisition Regulations and the

Federal Property Regulations to the projects. Also, new financial and

contractual issues had to be resolved such as establishing loan guarantee

procedures to insure lenders against the risk of base closure, downsizing,

and deployment; developing a process to provide direct loans to real

estate developers; and creating documents for conveying existing DOD

assets to developers.

HRSO officials stated that the process has been slow to obtain concurrence

on the details of the proposed Fort Carson and Lackland project

agreements from lawyers representing the government, the developers,

and the potential lenders. In addition, the officials noted that because the

initiative has had high visibility both within and outside of DOD, much care

and attention were devoted to ensuring that no mistakes were made as the

initial agreements were developed. However, once the first one or two

deals are completed, the officials believe that subsequent deals should

proceed much faster.

Another factor that slowed implementation was initial disagreement

between DOD and OMB on how projects that used the various authorities

should be scored. Discussions between the agencies continued for several

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months until a written agreement was adopted on June 25, 1997, which

provided detailed scoring guidance applicable to the first 20 privatization

projects. After these projects are completed, the agreement will be

reviewed to determine whether any changes are needed.2

Savings From

Privatization Appear

Modest

Privatization allows DOD to address its military housing problem more

quickly by securing private sector financing of housing improvements.

However, whether privatization also saves the government money in the

long term, and if so, how much money are questions that have not been

answered.

Under traditional Milcon financing of military housing, the military pays the

initial housing construction or renovation costs and then pays the annual

costs to operate, maintain, and manage the units. The military does not

pay monthly housing allowances since occupants of the units forfeit their

allowances when living in government-owned housing. Under most

proposed privatization projects, the military initially uses some funds to

secure an agreement with a private developer and then pays monthly

housing allowances to the servicemembers that occupy the housing, since

the housing is not government-owned. The servicemembers use their

housing allowances to pay rent to the developer. In addition, under most

privatization options, the military continues to pay some housing

management costs for servicemember referral services and for contract

oversight. Thus, although the exact budgetary consequences from use of

the various privatization authorities are not known, it appears that

privatization largely results in a shift in funding from military housing

construction, operations, and maintenance accounts to military personnel

accounts to pay for additional housing allowances.

Performing accurate cost comparisons between privatization and Milcon

alternatives is difficult because the comparisons involve many variables

and assumptions. However, one key issue in the comparisons is whether

the housing under each alternative is the same. To illustrate, developers of

projects under the initiative might use local building practices and

standards to construct or revitalize housing that may be different in size

and amenities from that constructed under Milcon building standards and

specifications. For example, HRSO officials stated that privatized housing

2

Because planning for the first two projects, Fort Carson and Lackland Air Force Base, was well

underway before the scoring guidance agreement was adopted, OMB agreed that the guidance would

not apply to these projects. As a result, the military can provide utilities at no cost to the developers or

the military occupants in these projects without incurring a scoring impact. In all other privatization

agreements, the cost of utilities will be scored if the military pays.

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for married junior enlisted personnel based on local standards may result

in garden-style apartments with no carports or garages. Normally, Milcon

housing for married junior enlisted personnel results in larger townhouse

type units with a carport or a garage. Because of such differences, a cost

comparison between Milcon and privatization alternatives may not always

result in an analysis of comparable housing.

HRSO and service analyses of potential privatization projects have primarily

focused on the financial feasibility of the deals. In other words, the

analyses attempt to determine whether deals can be made that are

attractive to developers while still meeting DOD’s leveraging goals. HRSO did

not initially focus on comparing the long-term or life-cycle costs of a

potential privatization project with the costs to perform the same project

using traditional Milcon financing.

Nevertheless, prior to finalizing a privatization agreement, the services

perform a life-cycle analysis comparing project costs using both

alternatives. HRSO, however, has not provided guidance for how these

analyses should be completed, including what costs to consider and what

assumptions to use. As a result, the services’ life-cycle analyses may not be

prepared consistently and may use assumptions and estimates that do not

result in reliable cost comparisons. HRSO officials stated that this is a

concern and that they have tasked a consultant to develop a standard

methodology for performing the analyses. Although milestones and a

specific implementation date have not been established, HRSO officials

stated that the services will be required to use the standardized

methodology when it is completed and approved by HRSO.

We reviewed the services’ life-cycle cost analyses for two proposed

privatization projects at Fort Carson and Lackland Air Force Base to

compare estimates of the government’s long-term costs for housing

financed with Milcon funds and through the privatization initiative. The Fort

Carson analysis, which was included in the February 10 congressional

notification of DOD’s intent to enter into the Fort Carson agreement,

estimated that over the 50-year term of the agreement privatization will

cost about $197 million, or 24 percent, less than Milcon. The Lackland Air

Force Base analysis, which might be revised before the contract is

awarded, estimated that privatization will cost about $42 million, or

29 percent, less than Milcon.

In our review, we made adjustments to the services’ analyses because

some project costs had been excluded, some cost estimates were not

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based on actual budgeted amounts, and the 1998 OMB discount rate was

not used to adjust for the time value of money. We made no adjustments

for possible differences in the size or amenities of the housing resulting

from each alternative. As shown in table 2.1, our review showed that

although privatization was less costly for each project, the overall

estimated cost savings to the government were considerably less than the

services’ estimates—about $54 million less, or about 7 percent, at Fort

Carson and $15 million less, or about 10 percent, at Lackland. Appendixes

IV and V provide details on the assumptions used in DOD’s and our review

of Fort Carson and Lackland life-cycle cost estimates.

Table 2.1: Life-Cycle Cost Comparison for Two Privatization Projects

Service estimate Our estimate

Estimated total costs

Project description Privatization Milcon Difference Privatization Milcon Difference

Fort Carson: construct 840 new units,

revitalize 1,824 existing units, operate

and maintain for 50 years.

$640 $837 $197 $679 $733 $54

Lackland Air Force Base: construct 420

new units, operate and maintain for 

50 years.

$103 $145 $42 $130 $145 $15

With no other cost comparisons to review at this time and with each future

privatization agreement having unique circumstances and costs, it is

difficult to draw conclusions on the extent of cost savings available from

the privatization initiative. However, Army and Air Force officials have

stated opinions that long-term savings to the government through the

privatization initiative may be minimal. For example, an Army housing

official stated that, although privatization can help solve the Army’s

housing problems faster than Milcon, privatization does not significantly

reduce the Army’s total costs because reduced family housing costs are

offset by higher personnel costs, which are used to pay for additional

housing allowances. Also, the Air Force completed a hypothetical analysis

comparing life-cycle costs to revitalize 670 family housing units through

privatization and Milcon. The analysis showed that there would be less than

a $1-million difference between the two alternatives in total costs to the

government over the life of the project.

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Long-Term

Privatization

Agreements Include

Concerns

According to DOD officials, most of the potential privatization projects now

under consideration call for long-term agreements between DOD and the

developers. Many proposed deals are for 50 years with an option for

another 25 years. HRSO officials stated that long-term agreements are

needed to make the proposed projects financially feasible by providing a

long-term cash flow to cover the developers’ investment costs for new

construction and revitalization.

To illustrate, the privatization proposal for Fort Carson calls for a

whole-base deal in which the developer will revitalize existing units,

construct new units, and operate and maintain all units for 50 years. Land

related to the project will be leased to the developer. At the end of the

50-year term, providing that the government does not exercise an option to

extend the agreement for another 25 years, the developer will be required

to vacate the premises and may be required to remove the housing. The

developer is expected to invest about $220 million to construct and

revitalize the units and will recoup this cost, as well as the operating and

maintenance costs, excluding utilities, from the rents paid by the

occupants over the term of the agreement. Military families have first

preference in renting the units and will pay rent equal to the members’

housing allowances. If military families do not rent the units, the units can

be rented to civilians. DOD plans to provide a loan guarantee for funds that

the developer borrows to construct and revitalize the units. However, the

loan guarantee only covers the risks of base closure, deployment, and

downsizing. In the event of a base closure default, the government could

be obligated to pay off the loan and assume ownership of the project for

disposal.

Forecasts of Housing

Needs

Long-term privatization agreements present several concerns that require

careful consideration. For example, before the military invests in a

long-term housing project through a privatization agreement or traditional

Milcon funding, the military should know with a high degree of certainty the

installation’s future housing needs. To do this, the military must first

determine whether the installation will be needed in the future;

specifically, whether the installation is a likely candidate for closure

during any future reductions in military infrastructure. If the installation is

predicted to be needed, then the military must forecast (1) the

installation’s future mission, military population, and family housing

requirement; (2) future private housing availability and affordability in the

local community; and (3) future military family housing preferences for

on-base or off-base housing.

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According to several service officials, making accurate forecasts of these

variables beyond a 3- to 5- year period cannot be assured. Yet, without

long-term assurance that the privatized housing will be needed, risks

increase that the service will not need all, or any, of the housing over the

term of the agreement.

Contractor Performance Another concern associated with long-term privatization agreements is the

potential for poor performance or nonperformance by the contractors. A

major concern, particularly for on-base privatization projects, is whether

contractors will perform housing repairs, maintenance, and improvements

in accordance with the agreements. Although maintenance standards,

modernization schedules, required escrow accounts, and other safeguards

will be included in the agreements, enforcing the agreements could be

difficult, time-consuming, and costly.

In an April 1997 report on the privatization initiative, the Center for Naval

Analyses discussed concerns with long-term agreements.3

 The report

noted that when rents are fixed at levels other than market rates, such as

in the proposed Fort Carson and Lackland agreements where rent equals a

member’s allowance, a contractor has little economic incentive to

maintain the property. The contractor can increase profits by limiting

maintenance and repairs and can cut costs by hiring less qualified

managers and staff and using inferior supplies. In short, under fixed-rent

arrangements, contractors may have an incentive to cut services in ways

that, although difficult to predict, could erode the quality of life for

servicemembers.

The report also noted that long-term agreements contain disincentives that

can occur late in the agreement. For example, the report stated that the

long-term financial incentive for the developer during the last 20 years may

be to disinvest so that the value of the physical assets foregone at the end

of the term has been drained by use. Further, if the value of the units

declines and military families do not rent the units, the potential exists for

civilians to move on base, paying lower rents and creating an on-base

slum.4

3

Housing Benefits: Analysis of Public-Private Authorities, Center for Naval Analyses, CRM 97-27,

April 1997.

4

Under proposed privatization agreements, military families will not be required to occupy privatized

housing.

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Prospects of Civilians

Living on Base

Privatization agreements provide for civilians renting the housing units if

they are not rented by military families. Long-term agreements increase

the potential that civilians will eventually live on base. For example, over a

period of years, housing allowances could increase and more community

housing could become available, making it more likely that military

families would choose to live off base. In this circumstance, the contractor

could rent vacancies to civilians.

In some locations, installation commanders may welcome civilians living

on base. However, in other locations, the civilians may not be welcomed.

Marine Corps officials stated that most Marine installation commanders

did not want civilians living on base because of security reasons and

because of the tradition of having a military housing community available

to members and their families.

In addition to possible security concerns at some installations, the

prospect of civilians living on base also raises some questions that have

not been fully answered. For example, if civilians rented privatized

housing units on base, would the government be required to pay education

impact aid to the community for each civilian child,5

 and would law

enforcement responsibilities be more complicated because both local

community and base police could be involved in matters related to on-base

civilian tenants?

Using Privatization to

Improve

Unaccompanied

Housing Is Unlikely

According to DOD and service officials, there would be little financial

advantage in using privatization to improve unaccompanied housing. The

primary problem lies in the services’ mandatory assignment policies for

single junior enlisted personnel and the budgetary scoring impact from

mandatory assignments.

The current policy in each service requires mandatory assignment of single

junior enlisted members to the barracks, providing that space is available.

According to DOD officials, most military leaders strongly support this

policy because they believe that such assignment provides for military

discipline and unit integrity. However, in accordance with the guidance

established for recording obligations under the privatization initiative,

mandatory assignment of military personnel to privatized housing

5

Education impact aid is paid to local governments to help cover the cost of educating dependents of

military members. The impact aid for each dependent is significantly higher for students that live with

their families in government housing because government housing is not subject to local property

taxes. When military families live in housing in the local communities, a much smaller amount is paid

for each student because the housing is subject to local property taxes.

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constitutes an occupancy guarantee, which results in a government

obligation to pay rental costs over the entire term of the agreement. Thus,

when a privatization project includes an occupancy guarantee, DOD must

set aside funds to cover the value of this guarantee up front. Because the

funds required to cover the guarantee could approximate the amount of

funds required under traditional military construction financing, funding

for a privatized barracks project would not meet DOD’s goal to have the

private sector to invest at least $3 for each dollar the government invests.

This issue is not a problem in military family housing because mandatory

assignments normally are not made. In most cases, married members in all

paygrades can decline government-owned housing, if available, and decide

where they want to live. Because installation commanders do not appear

to be willing to change the current policy regarding barracks assignments,

privatizing unaccompanied housing does not appear to be a financially

viable alternative.

An additional barrier to privatized barracks cited by DOD officials is a lack

of funding to pay for increased housing allowances. If privatized,

occupants would begin receiving housing allowances to pay rent. In family

housing, there is a separate budget account for housing operations and

maintenance that can provide a funding source to help pay for increased

allowances. However, barracks operations and maintenance is not funded

by a similar separate account. Instead, barracks operations and

maintenance is funded from the overall base operating budget. According

to service officials, this budget account often is underfunded and,

therefore, does not have sufficient funds to help pay for increased housing

allowances for unaccompanied personnel.

Of the $5 million appropriated for the Military Unaccompanied Housing

Improvement Fund in fiscal year 1997, about $100,000 was used to pay for

an Air Force study on developing privatized unaccompanied housing

projects. Because of the barriers to developing privatized barracks

projects, it is uncertain whether the remaining funds will be used as seed

money for privatized unaccompanied housing projects

Conclusions DOD officials are aware of the issues discussed in this chapter. Since the

beginning of the privatization initiative, DOD has attempted to speed

implementation and address issues associated with potential savings from

privatization, risks associated with long-term agreements, and using the

authorities to improve barracks. However, the initiative does represent a

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new way of doing business, and DOD has been appropriately deliberate in

its implementation. As implementation continues and progress is made,

continued management attention can help ensure that benefits from the

initiative are realized, potential risks are minimized, and program changes

are adopted when needed. DOD has already recognized the need to

standardize the methodology the services use in preparing life-cycle

analyses comparing costs of privatization and Milcon alternatives. However,

DOD needs to ensure that a standardized methodology is developed and

implemented as quickly as possible. Without a standard methodology, DOD

officials cannot be assured that the services’ estimates of cost differences

between the two alternatives for proposed projects are consistent and

reliable.

Recommendation We recommend that the Secretary of Defense expedite HRSO’s effort to

develop a standardized methodology for comparing life-cycle costs of

proposed privatization projects with military construction alternatives.

This action should include establishing and monitoring milestones for the

development and implementation of the methodology.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD noted that the time it has

taken to initiate the program was appropriate and necessary to resolve

critical program issues that will ensure timely and effective

implementation of all subsequent projects. DOD stated that proceeding

more rapidly would have created major long-term problems for the

program. We are not suggesting that DOD should have moved more quickly

to implement this new program. As noted in our conclusion, the initiative

does represent a new way of doing business, and many issues needed to

be resolved. Our intent was simply to factually report on the program’s

implementation. The fact remains that DOD established several goals for

the program, which included having 16,000 units planned for construction

by fiscal year 1998. To date, no units have been constructed or revitalized

and it is unlikely that any units will be before the end of fiscal year 1998.

Moreover, although DOD expects implementation to accelerate once it

completes its first projects, we believe it is important to recognize that

each proposed project will come with its own unique circumstances and

that it may be unrealistic to assume that the program can be greatly

accelerated.

With respect to life-cycle cost comparisons of family housing construction

under Milcon and privatization, DOD noted that although our life-cycle cost

Page 30 GAO/NSIAD-98-178 Military Housing
Chapter 2 

Privatization Is Off to a Slow Start and

Requires Continued Management Attention

savings estimates under privatization for Fort Carson and Lackland Air

Force Base are less than DOD’s estimates, the savings are still significant.

DOD also stated that the type of economic analysis by which we made its

estimates between the two alternatives tend to obscure an important

underlying reality—that family housing military construction funding is

not available at the levels estimated in the comparisons. We did not

develop a unique cost analysis for these two projects but rather used the

cost analysis developed by the military services. As we stated in our

report, we made adjustments to the services analyses because some

project costs had been excluded, some cost estimates were not based on

actual budgeted amounts, and the 1998 OMB discount rate was not used to

adjust for the time value of money. Also, the fact that DOD has required a

life-cycle cost comparison for all proposed projects suggests that it, too,

believes that life-cycle cost analyses are necessary to accurately evaluate

housing alternatives. Without a standardized life-cycle cost methodology

in place, privatization projects could be undertaken that are more costly

than other alternatives. Our intent was simply to provide an independent

life-cycle cost analysis as a check against the DOD estimates. Lastly, we

agree that military construction funds would not likely be available at the

same levels available under privatization since the privatization initiative

seeks to leverage government funds by a minimum of three to one.

DOD partially concurred with our recommendation regarding a

standardized methodology for comparing life-cycle costs of proposed

projects under both alternatives. DOD agreed that a consistent presentation

of life-cycle cost comparisons is desirable and necessary and stated that it

is developing such a standard methodology for application to all future

projects. Our recommendation, however, was aimed at expediting this

effort, and DOD did not provide specific information concerning a schedule

for developing and implementing its standardized methodology. In view of

the large number of projects that the services have proposed for

privatization, we believe that adopting a standardized methodology as

soon as possible is important. Use of a standardized methodology across

service lines would provide a consistent way of comparing costs and

permit more informed decisions about the relative merits of housing

alternatives.

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The privatization initiative is only one of several tools, including housing

allowances and traditional military construction, available to meet the

housing needs of servicemembers and their families. To be most effective,

the initiative needs to be integrated with the other tools and elements of

an overall housing strategy. For example, to maximize the advantages

from the initiative and minimize total housing costs, privatization needs to

be part of a strategy that ensures (1) accurate determinations of housing

needs and the ability of the local communities to meet these needs at each

installation, (2) maximum use of private sector housing in accordance

with DOD housing policy, and (3) coordinated decisions on the structure of

housing allowances and housing construction. Although DOD and the

services have tended to view and manage these elements separately,

rather than as part of a well-integrated strategy, DOD has recently taken

some steps to improve planning for eliminating inadequate family housing.

However, to optimally address housing needs, additional steps can be

taken to develop comprehensive plans that integrate all elements of DOD’s

housing program.

Accurate Housing

Requirements

Determinations

Provide Starting Point

Foundational to an integrated housing plan is a process that accurately

determines the services’ housing needs and the ability of the local

communities to meet those needs at each installation. Accurate

requirements analyses can help ensure that government housing, whether

Milcon or privatized, is provided only at installations where the local

communities cannot meet the military’s family housing needs, as specified

by DOD policy. However, our prior work and the work of others have found

significant, long-standing problems in the processes the services use to

determine their housing requirements.

For example, in our 1996 report on military family housing, we noted that

DOD and the services relied on housing requirements analyses that

(1) often underestimated the private sector’s ability to meet family housing

needs and (2) used methodologies that tended to result in a

self-perpetuating requirement for government housing. Our 1996

evaluation of the housing requirements analyses for 21 installations

showed that methodology problems understated the ability of the private

sector to meet military needs at 13 of the installations. The Congressional

Budget Office, the Center for Naval Analyses, and others have reported

similar problems with the services’ housing requirements determination

processes.

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In our report, we recommended that DOD revise the housing requirements

determination process by considering the results of an on-going DOD

Inspector General’s review of the services’ requirements processes. In

response to our recommendation, DOD stated that it would consider the

results from the Inspector General’s review and would implement

accepted recommendations. The Inspector General’s report was issued in

October 1997. The report stated that “DOD and Congress do not have

sufficient assurance that current family housing construction budget

submissions address the actual family housing requirements of the

Services in a consistent and valid manner.”

The Inspector General recommended developing a DOD standard process

and standard procedures to determine family housing requirements. In

response, DOD officials stated that a working group, including

representatives from each service, was convened in December 1997 to

address the problems in the housing requirements determination process.

However, milestones for the working group and for implementing

improvements to the requirements process had not been developed at the

time of our review in March 1998.

Maximizing Use of

Civilian Housing Has

Been Most

Economical

Integrated housing plans founded on accurate requirements

determinations can help ensure implementation of DOD’s policy of relying

first on existing private sector housing to meet the military’s family

housing needs. Implementation of this policy has been the most

economical form of privatization. When servicemembers are paid housing

allowances and families live in suitable private housing in local

communities, the government’s cost for housing is minimized and the

military is effectively out of the housing business. To illustrate, in our 1996

housing report, we compared the government’s costs to provide housing

for a military family in government-owned and private sector family

housing units in fiscal year 1995. The comparison showed that the

government spent an average of $4,957 less for each family that lived in

private sector housing. The difference resulted because a typical family

living in private housing paid $2,016 of its housing costs out of pocket and

the government paid $1,416 less in education impact aid because private

housing is subject to local taxes. The remaining amount represented the

estimated difference in the annual cost of a housing unit constructed,

operated, and maintained by the military and a unit constructed, operated,

and maintained by the private sector.

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Integrated With Other Elements of DOD’s

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There are other advantages to relying on private housing. In the current

environment of constrained defense budgets and DOD’s requests for future

rounds of base closures, the short-term flexibility offered by maximum use

of private sector housing appears preferable to the long-term

commitments required by Milcon and most privatization agreements.

Existing private sector housing also can offer military members a greater

selection of housing options to fit their needs instead of limiting them to

what is available in military housing.

The services have not always maximized use of existing private sector

housing in accordance with the DOD policy. In our 1996 report, we stated

that the communities surrounding many military installations could meet

thousands of additional family housing needs. For example, the Army

reported in 1996 that over 34,000 government family units at 59 Army

installations were occupied but were considered surplus—meaning that

the communities near these installations had affordable housing available

that could meet these requirements. Similarly, the Air Force reported that

over 4,000 government units at 13 Air Force installations were surplus. The

Navy and the Marine Corps did not accumulate comparable housing

information on their installations.

We are not suggesting that the scope of any planned privatization project

is not justified. A sufficient quantity of affordable private sector housing is

not available at many U.S. military installations. We do believe, however,

that long-range, integrated housing plans can provide the focus needed to

ensure that maximum use is made of civilian housing before new

investments are made in military housing. In particular, when local

communities can meet additional military family housing requirements,

this focus can ensure that government housing units are closed when the

units reach the end of their economic life rather than renovated or

replaced through Milcon or privatization. By ensuring that privatization

authorities are used only where needed, the military’s risks are reduced

and costs are minimized for incentives to private developers, education

impact aid, on-base housing utilities, and police and fire support for

on-base housing.

Navy’s Enhanced Housing

Referral Services Have

Expanded Private Housing

Opportunities

Providing comprehensive housing referral services to servicemembers has

proven to be an effective means of promoting greater use of existing

private sector housing. Effective referral services that result in placing

more military families in suitable private sector housing could reduce the

need for new construction, whether it is accomplished through

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Integrated With Other Elements of DOD’s

Housing Program

privatization or Milcon. DOD policies currently require each installation to

assist servicemembers and their families in finding suitable private

housing in the local communities. The Navy, however, has adopted a more

aggressive, or enhanced, approach to housing referrals to help families

find suitable housing.

According to Navy officials, the Navy has pursued enhanced housing

referral services since 1994. Under this approach, Navy housing officials

work with local landlords and apartment managers to obtain preferences

for military families such as reduced rental rates, waiving of some rental

fees and deposits, and unit set-asides in which certain vacancies are

offered to military families before they are offered to civilians. For

example, Navy housing officials at Everett, Washington, stated that they

had signed agreements with 39 housing complexes that had resulted in

providing affordable housing for about 350 servicemembers and their

families. This approach also includes welcome centers, which

servicemembers can visit to obtain detailed information on area housing

and receive personal assistance in securing suitable housing.

DOD officials stated that the Navy’s approach has been successful and

probably would be beneficial if adopted by the other services. However,

the officials stated that there is no current initiative to implement

enhanced referral programs in the other services.

Use of Housing

Allowances Is a Key

Tool but Requires

Coordination

Long-range, integrated plans can emphasize the use of housing allowances

as a key tool in addressing the military’s housing problem. Adequate

housing allowances can help military members and their families secure

suitable housing in the local communities, reducing the need for on-base

housing. However, because use of allowances to address the services’

housing problems can directly affect the use of other tools, such as

privatization and military construction, coordination is required to manage

the impacts. This coordination has not always occurred. In some cases,

DOD initiatives relating to housing allowances and to construction and

management of military family housing have been viewed and managed

separately rather than in combination to achieve a synergistic impact.

One reason for this is that separate DOD organizations manage these two

key components of the family housing program. Housing allowances are

the responsibility of the Under Secretary of Defense for Personnel and

Readiness and primarily are managed centrally at DOD headquarters by the

organization responsible for all compensation issues, including basic pay

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Integrated With Other Elements of DOD’s

Housing Program

and other types of allowances. Appropriations for housing allowances are

included in the services’ military personnel accounts. Construction,

management, and privatization of military housing are the responsibility of

the Under Secretary of Defense for Acquisition and Technology. This

organization establishes overall DOD housing policy and delegates primary

housing management responsibility to the individual services, their major

commands, and individual installations. This organization is responsible

for most housing initiatives, including the Milcon program and the

privatization initiative. Appropriations for the family housing program are

included in the services’ military construction and family housing

accounts.

DOD officials stated that the two organizations work together and

coordinate on matters relating to housing allowances. However, each

organization is responsible for its own initiatives, and an overall strategy

has not been developed to ensure optimum integration of all initiatives.

For example, when a new housing allowance program was developed,

there was little discussion between the two organizations on how the

program would affect the privatization initiative, even though allowance

changes could affect not only the affordability of existing private sector

housing but also privatization agreements where rental rates are equal to

the servicemembers’ housing allowances.

The Congress approved DOD’s request for major changes to DOD’s housing

allowance program starting in 1998. Allowances in the future will be based

on average housing costs in each geographic area. As the new program is

phased in over a 6-year period, DOD officials stated that allowances in

high-cost areas are expected to increase and allowances in low-cost areas

are expected to remain constant or decline. However, largely because of

limited coordination between the DOD offices responsible for housing

allowances and housing management, service officials told us that they

were uncertain how the new allowance program would affect the

privatization initiative, but they did voice some concerns. For example,

some officials questioned how a contractor under a privatization

agreement would respond if rents were based on housing allowances and

the allowances declined. Conversely, if allowances increased significantly,

rental payments to the contractor could increase significantly, creating the

potential for windfall profits.

Also, Marine Corps housing officials stated that if housing allowances

increased, the need for on-base housing could decrease. For example, with

larger allowances some occupants of privatized on-base housing might

Page 36 GAO/NSIAD-98-178 Military Housing
Chapter 3 

Privatization Initiative Can Be Better

Integrated With Other Elements of DOD’s

Housing Program

move to community housing, leaving on-base vacancies available to

civilians. This view appears to be supported by a 1997 study on military

housing issues by the RAND organization. The study stated that the

primary reason military families choose on-base housing is economics.

Many families, particularly in lower paygrades, believe that the value of

the on-base housing exceeds the amount of allowance they forfeit to live

there. RAND also found that few families would choose to live in on-base

housing if their housing allowances would permit them to obtain suitable

housing in the community without considerable out-of-pocket costs.

Some Steps Have

Been Taken to

Improve Housing

Plans

In November 1997, DOD took an important step in its planning by directing

the services for the first time to submit plans for eliminating inadequate

family housing. The services were directed to submit plans by May 1, 1998,

that identify by installation, housing revitalization requirements and the

potential for privatization. Although this information could be an

important first step in developing comprehensive housing plans, DOD did

not provide written guidance for the services to use in determining

revitalization requirements and privatization potential. Further,

comprehensive plans that integrate not only privatization but also other

elements of DOD’s housing program are needed. The DOD direction to the

services did not require the plans to include steps to improve the

requirements determination processes; maximize existing private sector

housing; develop enhanced referral services; or coordinate use of

allowances, military construction, and privatization options.

On its own initiative, the Air Force appears to have recognized the need

for comprehensive, integrated housing plans. Air Force officials stated that

privatization alone will not solve the housing problem and that the

ultimate solution lies within an integrated approach. With this in mind, in

August 1997, the Air Force began working with consultants to develop a

housing master plan for each Air Force installation. Air Force officials

stated that the master plans will define the most effective housing

investment strategy by integrating construction, operations and

maintenance revitalization, privatization, and reliance on local community

housing. The Air Force expects the first portion of the plans, potential for

privatization, to be completed by May 1998 to comply with the DOD

direction. The overall master plans are expected to be completed in

December 1998.

Page 37 GAO/NSIAD-98-178 Military Housing
Chapter 3 

Privatization Initiative Can Be Better

Integrated With Other Elements of DOD’s

Housing Program

Conclusions DOD needs to ensure that the services develop long-range, integrated

housing plans that rely on and use all of the available tools; not in

isolation, but in a coordinated, optimum manner. Such plans can provide

the focus needed to ensure accurate housing requirements determinations,

maximum use of suitable civilian housing, use of enhanced housing

referral services, coordination of housing allowances changes, and

appropriate use of privatization and Milcon alternatives.

DOD has taken some initial steps to developing better planning. However,

additional steps can be taken to ensure that the military’s housing

problems are addressed in an optimum manner. Also, achieving a more

integrated approach has been somewhat hampered by separate DOD

organizations responsible for housing allowances and housing

construction and management. Although there may be valid reasons for

keeping these functions in separate offices, greater efforts are needed to

ensure effective coordination on housing issues.

Recommendations We recommend that the Secretary of Defense expand the directive to the

services concerning their plans for eliminating inadequate housing.

Specifically, the Secretary should direct the services to prepare detailed,

integrated housing plans that will (1) describe their plans for improving

their housing requirements determination processes, (2) demonstrate how

they will attempt to maximize their reliance on community housing in

accordance with DOD’s stated policy, and (3) outline improvements in

housing referral services. The plans should also include analyses of the

estimated impact of the new housing allowance program on the

availability of housing in local communities and show how housing

allowances, traditional military construction, and the privatization

initiative will be used in concert to meet DOD’s housing needs in the most

economical manner. Each service plan should include estimated

milestones for achieving the goals of the plan.

We also recommend that the Secretary establish a mechanism to promote

more effective coordination between the offices responsible for housing

allowances and housing management.

Agency Comments

and Our Evaluation

DOD partially concurred with our recommendations, stating that it is aware

of the need to integrate effectively all the elements of its housing program.

DOD said that the services already have begun making specific plans about

whether privatization or military construction should be pursued at each

Page 38 GAO/NSIAD-98-178 Military Housing
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Privatization Initiative Can Be Better

Integrated With Other Elements of DOD’s

Housing Program

installation. DOD also stated that development of standard procedures for

determining housing requirements is the subject of a working group first

convened in December 1997, which includes representatives from each

service. However, DOD stated that the legislative authority for privatization

expires in 2001, unless extended or made permanent. As a result, DOD

stated its immediate focus is on demonstrating at several prototype sites

how housing privatization can be an effective tool for addressing DOD’s

housing problems. DOD stated that only after succeeding in this

demonstration and in a demonstration of how other new elements of DOD’s

housing program can succeed will its focus turn toward the imperative of

better integrating these new tools with all the other aspects of its housing

program.

Although the steps DOD outlined are positive, we do not agree that DOD

should wait until it can demonstrate successes in its privatization program

before focusing on integrating the elements of its overall housing program.

Better integration of housing elements is needed now to maximize the

advantages of the initiative and ensure that housing is revitalized or

constructed only at installations where the local communities cannot meet

the military housing requirements. Also, we believe all the elements of our

recommendation are important aspects of such integration. While DOD

mentioned steps related to certain elements, it did not directly address

those aimed at promoting maximum reliance on community housing. For

example, DOD did not state whether it would encourage the services to

improve their housing referral programs or analyze the impact of the new

housing allowance program on available housing in the community before

proceeding to revitalize or build new housing. We continue to believe that

DOD should expand the directive to the services concerning development

of installation housing plans to cover each element of our

recommendation to help ensure maximum reliance on community

housing. An expanded directive to the services in preparing their housing

plans would help focus the services’ attention on how they can use the full

range of tools available to them in concert to address their housing

problems in the most economical way. Moreover, requiring the services to

set milestones for achieving their housing goals would help DOD measure

progress in improving military housing.

DOD also agreed that coordination between the offices responsible for

housing allowances and housing management is necessary and

appropriate but stated existing coordination mechanisms are adequate and

effective. We believe that improved coordination during development and

implementation of the new allowance program could have increased

Page 39 GAO/NSIAD-98-178 Military Housing
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Integrated With Other Elements of DOD’s

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understanding of how the new program will affect the privatization

initiatives. As noted in our report, service officials were uncertain about

the relationship of the two initiatives. Moreover, as we pointed out, the

new program could result in making more local community housing

affordable to military families, thus reducing the need for privatized

housing in some locations. We continue to believe that the relationship

between military housing and allowances is extremely close, improved

coordination between the offices responsible for these issues can lead to a

more integrated approach to housing, and new mechanisms are needed to

help achieve this improved coordination.

Page 40 GAO/NSIAD-98-178 Military Housing
Page 41 GAO/NSIAD-98-178 Military Housing
Appendix I 

Summary of Authorities in the Military

Housing Privatization Initiative

1. Direct loans: The Department of Defense (DOD) may make direct loans

to persons in the private sector to provide funds for the acquisition or

construction of housing units suitable for use as military family or

unaccompanied housing. (10 U.S.C. 2873(a),(1))

2. Loan guarantees: DOD may guarantee a loan to any person in the private

sector if the proceeds of the loan are used to acquire or construct housing

units suitable for use as military family or unaccompanied housing. 

(10 U.S.C. 2873(b))

3. Build and lease: DOD may enter into contracts for the lease of military

family or unaccompanied housing units to be constructed under the

initiative. (10 U.S.C. 2874)

4. Investments in nongovernmental entities: DOD may make investments in

nongovernmental entities carrying out projects for the acquisition or

construction of housing units suitable for use as military family or

unaccompanied housing. An investment under this section may include a

limited partnership interest, a purchase of stock or other equity

instruments, a purchase of bonds or other debt instruments, or any

combination of such forms of investment. (10 U.S.C. 2875(a),(b))

5. Rental guarantees: DOD may enter into agreements with private persons

that acquire or construct military family or unaccompanied housing units

under the initiative to guarantee specified occupancy levels or to

guarantee specific rental income levels. (10 U.S.C. 2876)

6. Differential lease payments: Pursuant to an agreement to lease military

family or unaccompanied housing to servicemembers, DOD may pay the

lessor an amount in addition to the rental payments made by military

occupants to encourage the lessor to make the housing available to

military members. (10 U.S.C. 2877)

7. Conveyance or lease of existing property and facilities: DOD may convey

or lease property or facilities, including ancillary supporting facilities, to

private persons for purposes of using the proceeds to carry out activities

under the initiative. (10 U.S.C. 2878)

8. Interim leases: Pending completion of a project under the initiative, DOD

may provide for the interim lease of completed units. The term of the lease

may not extend beyond the project’s completion date. (10 U.S.C. 2879)

Page 42 GAO/NSIAD-98-178 Military Housing
Appendix I 

Summary of Authorities in the Military

Housing Privatization Initiative

9. Conformity with similar local housing units: DOD will ensure that the

room patterns and floor areas of military family and unaccompanied

housing units acquired or constructed under the initiative are generally

comparable to the room patterns and floor areas of similar housing units

in the locality concerned. Space limitations by paygrade on military family

housing units provided in other legislation will not apply to housing

acquired under the initiative. (10 U.S.C. 2880(a),(b))

10. Ancillary supporting facilities: Any project for the acquisition or

construction of military family or unaccompanied housing units under the

initiative may include the acquisition or construction of ancillary

supporting facilities for the housing. (10 U.S.C. 2881)

11. Assignment of members of the armed forces to housing units: DOD may

assign servicemembers to housing units acquired or constructed under the

initiative. (10 U.S.C. 2882)

12. Lease payments through pay allotments: DOD may require

servicemembers who lease housing acquired or constructed under the

initiative to make lease payments by allotment from their pay.

(10 U.S.C. 2882(c))

Page 43 GAO/NSIAD-98-178 Military Housing
Appendix II 

Privatization Projects Under Consideration

as of January 1998

Number of units

Estimated construction

costs

Dollars in millions

Service Project Replaced Renovated

Additional

new housing Total

Site:

located on

base or off

base

Estimated

fiscal year

for contract

award Total

Government

contributiona

Army Fort Carson 0 1,824 840 2,664 On 1998 $220.0 $9.6

Fort Hood 700 4,240 1,043 5,983 On 2000 $315.0 $39.0

Fort Stewart 141 2,785 133 3,059 On 2000 $179.0 $4.4

Fort Lewis 730 2,619 366 3,715 On 2000 $305.0 $9.4

Air Force Dyess 0 0 402 402 Off 1999 $25.8 $19.9

Elmendorf 0 320 300 620 On 1999 $79.3 $12.5

Kirtland 1,066 759 0 1,825 On 1999 b $26.4

Lackland 272 0 148 420 On 1998 b b

Mt. Home 0 497 0 497 On 1999 $21.2 $11.0

Peterson A 0 0 200 200 Off 1999 b b

Peterson B 0 0 182 182 On 1999 $57.0 b

Robins 0 300 370 670 On 1999 $44.9 $12.0

Navy Everett II 0 0 400 400 Off 1999 b b

Marine

Corps

Pendleton 0 512 204 716 On 1998 b $20.0

Albany 160 0 0 160 On 1998 b b

Total 3,069 13,856 4,588 21,513

Note: This table does not include many potential privatization projects that are in the early

planning stages. For example, the Navy has begun planning a potential regional privatization

project in San Diego, California, and the Marine Corps has begun planning for projects at

Beaufort, South Carolina, and Camp Lejeune, North Carolina.

aThe government contribution column does not include the value of any government assets

conveyed.

bAn estimate was not available at the time of our review in January 1998.

Source: Data provided to us in January 1998 by service officials.

Page 44 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

The Congress approved legislation in October 1994 that gave the Navy

authority to test the use of limited partnerships with the private sector to

develop family housing for Navy servicemembers and their families. The

Navy initiated two limited partnership agreements using this earlier

authority to help meet family housing shortages for enlisted

servicemembers in the Corpus Christi, Texas, and the Everett,

Washington, areas.

Housing at Corpus

Christi, Texas

At Corpus Christi, the Navy entered into a limited partnership agreement

in July 1996 with a private developer to build and operate 404 family

housing units at two locations. The units, all completed and ready for

occupancy by November 1997, were built off base using commercial

building standards and practices. The Navy contributed $9.5 million to the

project, and the developer financed the balance of the project’s $32 million

total cost. In return for its contribution, occupancy preferences were given

to Navy families, and rents were targeted to be affordable on the basis of

enlisted paygrade E-5 housing allowances. When a vacancy occurs, the

developer gives the Navy 45 days to find a military tenant. If a Navy family

does not rent the vacant unit, the developer can offer the unit to civilians.

Each tenant, military or civilian, is responsible for paying utilities.

The limited partnership agreement lasts 10 years, with a 5-year option

period. At the end of the partnership, the units will be sold. The agreement

calls for the developer to repay the Navy its initial equity contribution, plus

one-third of the net sale proceeds.

The units include two-bedroom, three-bedroom, and four-bedroom

townhouse units. Each unit includes a range, a refrigerator, a dishwasher,

a microwave oven, washer and dryer connections, and a carport. The

two-bedroom unit has about 1,030 gross square feet and two baths, the

three-bedroom unit has about 1,207 gross square feet and two baths, and

the four-bedroom unit has about 1,355 gross square feet and two baths.

The 404 units were constructed at two locations—Portland and

Kingsville—to serve separate Navy installations in the area. To serve the

Corpus Christi Naval Air Station and the Ingleside Naval Station, 302 units

were constructed near Portland, a community about 22 miles from the

Naval Air Station and about 16 miles from the Naval Station. The

partnership agreement established the initial rental rates for the units and

stated that the rates could be adjusted annually on the basis of the

percentage change in a specified housing cost index. The 1997 monthly

Page 45 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

rents at Portland for two-bedroom, three-bedroom, and four-bedroom

units were $598, $660, and $798, respectively. Local Navy housing officials

estimated that monthly utilities averaged $136. Thus, total estimated

monthly costs were $734, $796, and $934 for two-bedroom, three-bedroom,

and four-bedroom units, respectively.

The 1997 monthly housing allowance for a paygrade E-5 member at

Corpus Christi was $588. Thus, a paygrade E-5 servicemember that rented

a two-bedroom unit at Portland paid $146, or about 25 percent, more than

the member’s housing allowance. In comparison, a paygrade E-4 member

renting a two-bedroom unit paid $207, or about 39 percent, more than the

allowance for an E-4 member, and a paygrade E-6 member paid $93, or

about 15 percent, more than the allowance for an E-6 member. On average,

throughout the United States, military members living in civilian housing

pay about 20 percent more for their housing than their allowances. 

Table III.1 provides more details on out-of-pocket costs at Portland.

Table III.1: Out-of-pocket Costs at Portland in 1997

Paygrade E-4 Paygrade E-5 Paygrade E-6

Out-of-pocket costsa

Unit type

Rent plus

estimated

utilities Amount Percent Amount Percent Amount Percent

2 bedroom $734 $207 39 $146 25 $93 15

3 bedroom $796 $269 51 $208 35 $155 24

4 bedroom $934 $407 77 $346 59 $293 46

aOut-of-pocket costs represent the difference between rent plus estimated utilities and the

member’s housing allowance.

Source: Service housing officials at Corpus Christi Naval Air Station.

At the time of our visit in January 1998, not all of the units were occupied.

Of the 302 units, 178 units were occupied by the military, 61 units were

occupied by civilians, and 63 units were vacant. (See table III.2.)

Table III.2: Occupancy at Portland in

January 1998 Occupant category Number of units Percent

Enlisted E-5 and below 82 27

Enlisted E-6 and above 78 26

Officer 18 6

Civilian 61 20

Vacant 63 21

Total 302 100

Page 46 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

Representatives from the Navy and the developer stated that the vacancies

existed because (1) many units were completed during the fall after the

time when most members transfer to the area and (2) the units had not

been aggressively marketed to civilians. The developer’s representative

stated that plans existed to increase marketing to civilians. Navy

representatives also stated that there were 493 servicemembers on the

waiting list for family housing at Corpus Christi. However, because these

families had not chosen to rent at the Portland project, they apparently

preferred waiting for on-base family housing at Corpus Christi, which

would result in no out-of-pocket costs and a shorter commute to work.

To serve the Kingsville Naval Air Station, 102 two- and three-bedroom

units were constructed on private property in Kingsville, a community

located about 40 miles from Corpus Christi. The 1997 monthly rent at

Kingsville was $498 for a two-bedroom unit and $598 for a three-bedroom

unit. Local Navy housing officials estimated that monthly utilities averaged

$121. Thus, total estimated monthly costs were $619 and $719 for

two-bedroom and three-bedroom units, respectively.

The 1997 monthly housing allowance for a paygrade E-5 servicemember at

Kingsville was $553. Thus, a paygrade E-5 servicemember that rented a

two-bedroom unit at Kingsville paid $66, or about 12 percent, more than

the member’s housing allowance. In comparison, a paygrade E-4 member

renting a two-bedroom unit paid $154, or about 33 percent, more than the

allowance for an E-4 member; and a paygrade E-6 member paid $17, or

about 3 percent, more than the allowance for an E-6 member. Table III.3

provides more details on out-of-pocket costs at Kingsville.

Table III.3: Out-of-pocket Costs at Kingsville in 1997

Paygrade E-4 Paygrade E-5 Paygrade E-6

Out-of-pocket costsa

Unit type

Rent plus

estimated

utilities Amount Percent Amount Percent Amount Percent

2 bedroom $619 $154 33 $66 12 $17 3

3 bedroom $719 $254 54 $166 30 $117 19

aOut-of-pocket costs represent the difference between rent plus estimated utilities and the

member’s housing allowance.

Source: Service housing officials at Kingsville Naval Air Station.

At the time of our visit to the Kingsville units in January 1998, all of the

units were occupied. Of the 102 units, 90 units were occupied by the

Page 47 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

military, and 12 units were occupied by civilians. However, the majority of

the units, 68 units, were occupied by military officers rather than enlisted

personnel. (See table III.4.)

Table III.4: Occupancy at Kingsville in

January 1998 Category of occupant Number of units Percent

Enlisted E-5 and below 15 14

Enlisted E-6 and above 7 7

Officer 68 67

Civilian 12 12

Vacant 0 0

Total 102 100

Although all of the units at Kingsville were occupied, Navy officials stated

that the project was not serving junior enlisted members to the extent

envisioned when the project was developed. Most of the units were

occupied by single, junior-level officers, many of whom shared the units

with another single, junior-level officer. The partnership agreement did not

provide for specific rental preferences for enlisted servicemembers with

families, and local housing officials did not attempt to secure vacancies for

enlisted members.

Housing at Everett,

Washington

In March 1997, the Navy entered into a 10-year limited partnership with a

private developer to build and operate 185 family housing units in the

Everett, Washington, area. The housing was intended primarily to serve

servicemembers assigned to the Everett Naval Station, located about 

18 miles away. The Navy contributed $5.9 million to the project, and the

developer financed the balance of the project’s $19 million total cost.

Beginning in the 6th year, 20 percent of the units will be sold annually.

Navy families occupying the units will be given an opportunity to purchase

the units. The Navy will share in the net proceeds from the sales, and by

the end of the agreement, the Navy will have been repaid its initial equity

contribution plus one-third of any additional net sale proceeds. In return

for its contribution, occupancy preferences were given to Navy families,

and rents were targeted to be affordable on the basis of enlisted paygrade

E-5 housing allowances. When a vacancy occurs, the developer gives the

Navy 30 days to find a military tenant. If a Navy family does not rent the

vacant unit, the developer can offer the unit to civilians. Each tenant,

military or civilian, is responsible for paying utilities.

Page 48 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

The Everett units were constructed off base using commercial building

standards and local practices. Each townhouse unit includes a range, a

refrigerator, a dishwasher, a washer, a dryer, and a two-car garage.

Excluding the garage, the two-bedroom unit has about 1,160 gross square

feet and two baths, the three-bedroom unit has about 1,212 gross square

feet and two and a half baths, and the four-bedroom unit has about

1,556 gross square feet and two and a half baths.

The partnership agreement established the initial rental rates for the units

and stated that the rates would be adjusted annually on the basis of the

percentage change in a specified housing cost index. The 1997 monthly

rents for two-bedroom, three-bedroom, and four-bedroom units were $725,

$750, and $850, respectively. Local Navy housing officials estimated that

average monthly utilities for two-bedroom, three-bedroom, and

four-bedroom units were $130, $140, and $155, respectively. Thus, total

estimated monthly costs were $855, $890, and $1,005 for two-bedroom,

three-bedroom, and four-bedroom units, respectively. The 1997 monthly

housing allowance for a paygrade E-5 servicemember at Everett was $712.

Thus, a paygrade E-5 servicemember that rents a two-bedroom unit paid

$143, or about 20 percent, more than the member’s housing allowance. In

comparison, a paygrade E-4 servicemember renting a two-bedroom unit

paid $269, or about 46 percent, more than the allowance for an E-4

servicemember; and a paygrade E-6 servicemember paid $38, or about

5 percent, more than the allowance for an E-6 member. Table III.5

provides more details about out-of-pocket costs at Everett.

Table III.5: Out-of-pocket Costs at Everett in 1997

Paygrade E-4 Paygrade E-5 Paygrade E-6

Out-of-pocket costsa

Unit type

Rent plus

estimated

utilities Amount Percent Amount Percent Amount Percent

2 bedroom $855 $269 46 $143 20 $38 5

3 bedroom $890 $304 52 $178 25 $73 9

4 bedroom $1,005 $419 71 $293 41 $188 23

aOut-of-pocket costs represent the difference between rent plus estimated utilities and the

member’s housing allowance.

Source: Service housing officials at Everett Naval Station.

At the time of our visit to Everett in January 1998, all of the units were

occupied. Of the 185 units, 184 units were occupied by the military, and 

Page 49 GAO/NSIAD-98-178 Military Housing
Appendix III 

Navy’s Limited Partnership Agreements for

Housing at Corpus Christi, Texas, and

Everett, Washington

1 unit was occupied by a civilian, the on-site project manager. (See 

table III.6.)

Table III.6: Occupancy at Everett in

January 1998 Category of occupant Number of units Percent

Enlisted paygrade E-5 and

below

112 60

Enlisted paygrade E-6 and

above

72 39

Officer 0 0

Civilian 1 1

Vacant 0 0

Total 185 100

Local Navy housing officials stated that management attention helps

ensure that junior enlisted servicemembers receive preference in renting

units at the Everett project. The local housing office maintains separate

waiting lists for paygrades E-6 and below and paygrades E-7 and above.

When notified of a vacancy, the housing office takes a proactive role in

getting an enlisted servicemember to fill the vacancy.

Page 50 GAO/NSIAD-98-178 Military Housing
Appendix IV 

DOD’s and Our Assumptions Used in

Life-Cycle Cost Analysis for Fort Carson

Alternative and cost factor DOD estimate Our estimate

Comments on differences in cost

factors

Military Construction:a

Construction costs for new units (per unit) $123,550 Same

Revitalization costs for existing units (per unit) $65,729 Same

Operations and maintenance costs (annual

per unit)

$8,102 $6,385 Our estimate was based on Army’s fiscal

year 1999 budget request, including

utilities.

Revitalization costs for all units in year 25 of

operation (per unit)

$65,729 Same

Education impact fee (annual per unit) $1,995 Same

Privatization alternative:

Government contribution $36,577,000 Same

Housing allowances (annual average per unit) $8,528 $8,040 Our estimate was based on 1998

allowances for paygrades of proposed

occupants.

Utilities costs (annual average per unit) $0 $1,414 Army pays utilities. Our estimate was

based on Army’s fiscal year 1999 budget

request for utilities.

Housing management costs (annual average

per unit)

$113 Same

Education impact fee (annual per unit) $1,995 Same

Both alternatives:

Discount rate 3.6% 3.8% Our estimate was based on the 1998

Office of Management and Budget (OMB)

discount rate.

Total years in analysis 50 Same

aMilcon.

Page 51 GAO/NSIAD-98-178 Military Housing
Appendix V 

DOD’s and Our Assumptions Used in

Life-Cycle Cost Analysis for Lackland Air

Force Base

Alternative and cost factor DOD estimate Our estimate

Comments on differences in cost

factors

Milcon alternative:

Construction costs for new units (per unit) $131,575 Same

Operations and maintenance costs

(annual per unit)

$6,325 Same

Revitalization costs for year 25 of operation

(annual set-aside per unit)

$2,887 $0 We assumed Milcon funds appropriated

for revitalization in year 25 of operation.

Revitalization costs for all units in year 25 of

operation

$0 $65,729 We assumed Milcon funds appropriated

for revitalization in year 25 of operation.

We used same amount per unit as the

Army used in the Fort Carson analysis.

Education impact fee (annual per unit) $0 $2,000 We included an estimate for education

impact fees.

Privatization alternative:

Government contribution $18,301,000 Same

Housing allowances (annual average per unit) $6,361 $7,307 Our estimate was based on 1998

allowances for paygrades of proposed

occupants.

Utilities costs (annual average per unit) $2,316 Same

Housing management costs

(annual average per unit)

$0 $150 We estimated this cost based on one-third

of current budgeted amount for housing

management costs.

Education impact fee (annual per unit) $0 $2,000 We included an estimate for education

impact fees.

Both alternatives:

Discount rate 3.0% 3.8% Our estimate was based on the 1998

OMB discount rate.

Total years in analysis 40 50 We used the expected term of the

agreement.

Page 52 GAO/NSIAD-98-178 Military Housing
Appendix VI 

Comments From the Department of Defense

Page 53 GAO/NSIAD-98-178 Military Housing
Appendix VI 

Comments From the Department of Defense

Page 54 GAO/NSIAD-98-178 Military Housing
Appendix VI 

Comments From the Department of Defense

Now on pp. 9 and 38.

Page 55 GAO/NSIAD-98-178 Military Housing
Appendix VI 

Comments From the Department of Defense

Now on pp. 9, 30, and 38.

Page 56 GAO/NSIAD-98-178 Military Housing
Appendix VII 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Carol Schuster, Associate Director

William Solis, Assistant Director

Charles Perdue, Senior Economist

Norfolk Field Office Gary Phillips, Evaluator-in-Charge

James Ellis, Senior Evaluator

(703244) Page 57 GAO/NSIAD-98-178 Military Housing
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