Report to the Subcommittee on Military

Construction, Committee on

Appropriations, House of

Representatives

GAO

June 2002 MILITARY HOUSING

Management

Improvements Needed

As the Pace of

Privatization Quickens

GAO-02-624
Why GAO Did This Study

Renovating or replacing 168,000

inadequate military family

housing units using traditional

military construction methods

would take over 20 years and

cost about $16 billion. In 1996, to

improve housing faster and more

economically, Congress

authorized the Military Housing

Privatization Initiative to allow

private-sector financing,

ownership, operation, and

maintenance of military housing.

At the request of the

Subcommittee on Military

Construction, House Committee

on Appropriations, GAO

examined the reliability of

military housing needs

assessments, as well as

achievement of privatization

financial goals and government

protections in contract

provisions.

June 2002

MILITARY HOUSING

Management Improvements Needed As

Privatization Pace Quickens

This is a test for developing Highlights for a GAO report. The full report, including GAO's objectives, scope, methodology, and analysis is available

at www.gao.gov. For additional information about the report, call Carol Schuster at (202) 512-4013. To provide comments on this test Highlights, call

Keith Fultz at (202) 512-3200 or send an email to HighlightsTest@gao.gov.

Highlights of GAO-02-624, a report to the Subcommittee on Military Construction, House Committee

on Appropriations

What GAO Recommends

GAO recommends that DOD use a

broader range of factors in

defining its military housing

requirements, modify its guidance

for performing life-cycle cost

analyses, and implement several

changes to enhance government

protections in the privatization

program.

In commenting on a draft of this

report, DOD generally agreed with

the recommendations and

outlined ongoing or planned

management actions to address

the concerns noted in the report.

United States General Accounting Office

What GAO Found

Privatization projects are not supported by reliable needs assessments,

and the overall requirement for military housing is not well-defined. With

uncertain requirements, the military may be entering into long-term

privatization contracts to construct, replace, or renovate housing that

may not be needed.

DOD exceeded its overall goal for leveraging government funds with

private-sector financing. By investing about $185 million in the first 10

awarded projects, DOD should obtain housing improvements that would

have required about $1.19 billion in military construction funds without

private-sector contributions. However, it is not clear whether DOD will

achieve its goal that each project’s life-cycle costs be the same or less

than that of an equivalent military construction project. Use of DOD

guidance for performing the analyses shows that each of the first 10

projects will cost less. However, these results might not be reliable,

because weaknesses in the methodology outlined in the guidance can

make the privatization option appear more favorable than is justified.

Moreover, steps need to be taken to further protect the government’s

interests. In seven projects, developers will receive about $369 million

more in profits and fees than anticipated because the contracts did not

fully anticipate increases in servicemember housing allowances, which

are used to pay rent in privatized housing. Furthermore, the department

appears to have limited oversight of future project spending decisions.

This could lead to unnecessary or inappropriate project spending. GAO

also found no department guidance for contract assumptions and fees for

services paid to developers. As a result, it is unclear whether contract

assumptions and fees are reasonable and result in the lowest costs.

Newly constructed military family housing at Fort Carson, Colorado. A private developer was

contracted to renovate 1,823 existing units, construct 840 new housing units on base, and own,

operate, and maintain all 2,663 units for 50 years.

G A O

Accountability Integrity Reliability

Highlights
Page i GAO-02-624 Military Housing

Letter 1

Results in Brief 2

Background 4

Military Family Housing Requirements Assessments Are Unreliable 7

Key Financial Goals Generally Achieved 12

Privatization Program Includes Government Safeguards, but

Improvements Are Possible 18

Conclusions 26

Recommendations for Executive Action 27

Agency Comments and Our Evaluation 28

Appendix I: Differences Over Budgetary Scoring for DOD’s

Military Housing Privatization Program 31

Appendix II: Scope and Methodology 33

Appendix III: Description of First Ten Privatization Projects 35

Appendix IV: DOD’s Military Housing Privatization Program

Implementation Status and Plans 37

Appendix V: Services’ Life-Cycle Cost Estimates 38

Appendix VI: Comments from the Department of Defense 39

Appendix VII: GAO Contacts and Staff Acknowledgments 45

Contents
Page ii GAO-02-624 Military Housing

Tables

Table 1: Leveraging Ratios for the First 10 Projects 13

Table 2: GAO Alternative Life-Cycle Costs Estimates for the First

10 Projects 16

Table 3: DOD Property Conveyances Not Included in Budget

Scored Amounts 18

Table 4: DOD and Private Sector Contributions to Project

Development Costs 19

Table 5: Government Financial Exposure in the First 10 Projects 20

Table 6: Projected Extra Rental Revenues, Profits, and Fees

Resulting from the Housing Allowance Initiative 21

Table 7: Services’ Estimates of Life-Cycle Costs 38

Figures

Figure 1: Projected Cumulative Amounts Available for

Reinvestment in the Projects 23

Figure 2: Cumulative Number of Housing Units Under Contract 37

Abbreviations

DOD Department of Defense

GAO General Accounting Office
Page 1 GAO-02-624 Military Housing

June 21, 2002

The Honorable David L. Hobson

Chairman

The Honorable John W. Olver

Ranking Minority Member

Subcommittee on Military Construction

Committee on Appropriations

House of Representatives

The Department of Defense (DOD) estimates that about 168,000 military

family housing units are inadequate, lacking modern amenities, and in

need of major renovation or replacement. According to DOD, completing

this work using traditional military construction methods would take more

than 20 years and cost about $16 billion. To improve housing faster and

more economically than could be achieved if only traditional military

construction funds were used, the Congress, at DOD’s request, enacted

legislation in 1996 to authorize the Military Housing Privatization

Initiative.1

 This program allows private-sector financing, ownership,

operation, and maintenance of military housing.2

 Under the program, the

department can provide direct loans, loan guarantees, and other incentives

to encourage private developers to construct and operate housing either

on or off military installations. Servicemembers, in turn, may use their

housing allowance to pay rent and utilities to live in the privatized housing.

Department financial goals for the program state that (1) government

funds should be leveraged with private sector investment to obtain at least

three dollars in military housing improvements for each dollar that the

 1

This report does not include two Navy projects (589 total units at three locations: Corpus

Christi and Kingsville, Texas, and Everett, Washington) approved under a prior legislative

authority which 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 (see section

2803 of Public Law 103-337). The authority to use limited partnerships is now available to

all services under the 1996 law establishing the privatization initiative. The Kingsville and

Everett privatization projects mentioned throughout the remainder of this report refer to

separate projects that were subsequently approved under the privatization initiative.

2

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

This legislation also provides authority to facilitate private sector financing, ownership,

operation and maintenance of unaccompanied housing, commonly referred to as barracks.

However, due to the services’ mandatory assignment policies for single junior enlisted

personnel and the lack of funds to pay housing allowances for these servicemembers, DOD

has not undertaken any privatization projects for unaccompanied housing. Thus, this report

focuses on DOD’s use of privatization to improve family housing.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-624 Military Housing

government invests, and (2) the government’s estimated total costs for a

privatization project should be equal to or less than the total costs for the

same project financed by military construction funding. The services

perform a project life-cycle cost analysis to estimate and compare these

costs prior to solicitation as part of a project’s approval process.

In response to your request, this report addresses the following questions:

(1) Are privatization projects based on reliable assessments of housing

requirements? (2) Is DOD achieving its financial goals for the privatization

program? (3) Do DOD’s privatization contracts protect the government’s

interests? In addition, as requested, we address the differences between

the Office of Management and Budget and the Congressional Budget

Office over budgetary scoring for the privatization program (see app. I).

Our analysis included site visits, reviews of DOD data, and consultations

with military and civilian officials. A more detailed description of our

scope and methodology is included in appendix II.

Although DOD has awarded contracts to construct or improve about

16,000 units and has plans to privatize an additional 96,000 units by the end

of fiscal year 2006, privatization projects are not supported by reliable or

consistent needs assessments, and the overall requirement for military

family housing is not well-defined. Accurate requirements determinations

can help DOD to construct and maintain government housing, whether

privatized or not, only at installations where the local communities cannot

meet the military’s family housing needs. Yet, DOD has failed to fix this

longstanding problem. Our current and past work, as well as the work of

others, including the DOD inspector general, has shown that the services

use inconsistent methodologies to determine the availability of privatesector housing for military families in communities surrounding military

installations, and these methodologies often underestimate the ability of

the private sector to meet housing needs. As a result, the requirement for

government housing is often overstated. Further, although an initiative to

increase housing allowances should make community housing more

affordable and reduce the need for government housing, DOD has not

analyzed on an installation basis the potential impact of this initiative on

military housing requirements. Finally, contrary to DOD’s stated policy of

relying on community housing, a disparity exists between on-base and offbase housing standards that creates an incentive for servicemembers in

lower enlisted pay grades and with larger families to seek government

housing rather than community housing. DOD has not assessed the effect

of these different standards on housing requirements or the merits of a

Results in Brief
Page 3 GAO-02-624 Military Housing

program that would adjust housing allowances according to family size.

With its housing requirements uncertain, the department may be entering

into long-term privatization contracts to construct additional housing or

replace or renovate existing inadequate military housing that may not be

needed.

The department has generally achieved two key financial goals for the

privatization program—leveraging of government funds and lower project

life-cycle costs. First, DOD exceeded its overall goal for leveraging

government funds with private-sector financing in the first 10 privatization

projects awarded under the military housing privatization initiative.3

 In the

aggregate, by investing about $185 million in the 10 projects, DOD should

obtain housing improvements that would have required about $1.19 billion

in military construction funds had only government funds been used. This

is a leveraging ratio of 6.4 to 1. On an individual project basis, only 1 of the

first 10 projects did not achieve DOD’s leveraging goal of at least 3 to 1.

Second, it is not clear whether DOD will achieve its goal that each

project’s life-cycle costs be the same or less than that of an equivalent

military construction project. Use of DOD guidance for performing lifecycle cost analyses shows that each of the first 10 privatization projects

will cost less than the equivalent military construction projects.4

 However,

this guidance can make the privatization option appear more favorable

than justified because it does not expressly state that government contract

oversight costs should be included and uses methods that can result in

overstated operation and maintenance costs for the military construction

option. On the other hand, DOD officials pointed out that the guidance

also excludes other costs that can make the military construction option

appear more favorable than justified. Changes in the guidance could

improve the accuracy and reliability of life-cycle cost analyses and provide

for more informed decisions on future privatization proposals.

While DOD has included provisions designed to protect the government’s

interests against adverse events, we found some areas where DOD could

further enhance protections to the government. First, some contracts did

not fully anticipate the increased rent that will be paid to project

developers as a result of a DOD initiative to increase housing allowances

 3

Appendix III contains a description of the first 10 privatization projects.

4

See Memorandum for House Privatization Points of Contact, Subject: Final Housing

Privatization Life Cycle Cost Policy, Office of the Under Secretary of Defense (Feb. 11,

2002).
Page 4 GAO-02-624 Military Housing

for servicemembers. As a result, project revenue may increase by about

$1.3 billion over the life (up to 50 years) of seven projects, and developers

may receive $369 million more in profits and fees than DOD anticipated.

On a cumulative basis, most of the additional rental revenue is not

expected to go to the developers. Second, although military installation

officials will participate with developers in making project improvement

decisions valued at about $3.9 billion over contract terms of nine projects,

DOD and service headquarters oversight of these decisions appears

limited. A lack of oversight could lead to unnecessary or inappropriate

spending on project improvements. Third, we found wide variation in the

privatization contracts regarding assumptions and fees for services paid to

developers. As a result, it is unclear whether DOD is minimizing its costs.

Finally, although DOD has developed a semi-annual report to help it

monitor and evaluate financial and management data and assess the

performance of individual projects, the reports have not been completed

in a timely manner, do not include all relevant information, and are not

subject to independent verification.

We are recommending that DOD revise its housing requirements

determination process by taking into account greater use of community

housing to fulfill housing needs and the potential impact of the housing

allowance initiative on military housing requirements. We are also

recommending that DOD improve privatization implementation by

modifying its guidance for performing life-cycle cost analyses and making

several changes to enhance government protections in the program. In

comments on a draft of this report, the department generally agreed with

the report’s findings and recommendations and outlined management

actions to address the concerns noted in the report. The department also

provided technical clarifications, which we incorporated as appropriate.

DOD plans to spend over $11 billion in fiscal year 2002 to provide housing

for families of active-duty military personnel. DOD’s policy is to rely on the

housing in local communities near military installations as the primary

source of family housing. About two-thirds of all military families in the

United States live in community housing and receive a cash housing

allowance to help defray the cost of renting or purchasing a home. Until

2001, the housing allowance covered an average of 81 percent of the

typical housing costs, and servicemembers paid the rest out of pocket. The

remaining military families live in government-owned or privatized

housing. These families pay no out-of-pocket costs for housing or utilities.

Families in government housing receive no housing allowance, while

families in privatized housing use their housing allowance to pay rent and

Background
Page 5 GAO-02-624 Military Housing

normal utility costs. DOD plans to eliminate this inequity in out-of-pocket

costs between servicemembers who live in local community housing and

those who live in government-owned or privatized housing. An initiative

started in 2001 is intended to increase housing allowances and reduce

average out-of-pocket costs to zero by 2005.5

 As a result, more existing

local community housing will be affordable to military families, families

already living in local community housing should be better able to cover

their housing costs, and developers of privatized housing will receive

higher rents.

According to DOD, the quality of government-owned housing has declined

for more than 30 years, primarily because maintaining the housing was not

a priority. Concerned that poor-quality housing could cause

servicemembers to leave the military, DOD proposed a privatization

initiative aimed at solving its housing problem faster and more

economically by taking advantage of the private sector’s investment

capital and housing construction expertise. The resulting Military Housing

Privatization Initiative, enacted in 1996, authorized DOD to enter into a

variety of arrangements with private-sector entities to build and renovate

military housing both on and off military bases. With private-sector

investment, DOD planned to obtain at least three dollars in military

housing improvements for each dollar that the government invested,

thereby reducing the amount of government funds initially required to

revitalize housing and accelerating the elimination of inadequate housing.

DOD’s Competitive Sourcing and Privatization Office, which reports to the

Deputy Under Secretary of Defense (Installations and Environment),

provides oversight of this program, but the primary responsibility for

implementing it rests with the individual services.

Although implementation of the privatization program started slowly, DOD

has picked up the pace and plans to use the program as the primary means

to meet a revised goal of eliminating inadequate military family housing by

2007, instead of the original goal of 2010. Also, to bring additional attention

and priority to achieving this goal, the Bush administration has increased

emphasis on the program by making privatization of military housing 1 of

14 key initiatives for improving government management and

 5

For 2002, servicemembers’ average out-of-pocket share is 11 percent of typical housing

and utility costs in each geographic area of the country. DOD’s plans call for additional

increases in the housing allowance so that the average out-of-pocket share falls to 8

percent in 2003, 4 percent in 2004, and to zero in 2005.
Page 6 GAO-02-624 Military Housing

performance. Appendix IV includes details about DOD’s privatization

implementation status and plans.

Since 1998, we have issued three reports on DOD’s military housing

program—two about the military housing privatization initiative and one

about DOD’s process for determining military housing requirements. In

July 1998, we reported several concerns. These included (1) whether

privatization would result in significant cost savings and whether the long

contract terms of many projects might result in building housing that will

not be needed in the future, (2) whether controls were adequate to protect

the government’s interests in the event developers might not operate and

maintain the housing as expected, and (3) whether DOD would face

certain problems if privatized housing units were not fully used by military

members and were subsequently rented to civilians, as the contracts

permit.6

 In March 2000, we reported that initial implementation progress

was slow, the services’ life-cycle cost analyses provided inaccurate cost

comparisons because DOD had not issued standardized guidance for

preparing the analyses, and DOD lacked a plan for evaluating the

effectiveness of the program.7

 Subsequently, DOD implemented several

key recommendations, such as issuing life-cycle cost analysis guidance

and developing a privatization program evaluation plan. In an August 2001

report, we noted that despite earlier recommendations, DOD had not

implemented a standard process for determining military housing

requirements.8

 In that report, we pointed out that the initiative to increase

housing allowances heightened the urgency for a consistent process,

because the initiative could lessen the demand for military housing by

making housing in local communities more affordable. This effect is

possible because personnel surveys have consistently shown that military

personnel would prefer to live in surrounding communities rather than in

military housing if they did not incur additional out-of-pocket costs.

 6

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? See U.S. General Accounting Office,

Military Housing: Privatization Off to a Slow Start and Continued Management

Attention Needed, GAO/NSIAD-98-178 (Washington, D.C.: July 17, 1998).

7

U.S. General Accounting Office, Military Housing: Continued Concerns in Implementing

the Privatization Initiative, GAO/NSIAD-00-71 (Washington, D.C.: Mar. 30, 2000).

8

U.S. General Accounting Office, Military Housing: DOD Needs to Address Long-Standing

Requirements Determination Problems, GAO-01-889 (Washington, D.C.: Aug. 3, 2001).
Page 7 GAO-02-624 Military Housing

Fundamental to the success of DOD’s housing program is a process that

consistently and accurately determines the services’ housing needs and

the ability of the local community to meet those needs at each installation.

Accurate requirements determinations can help DOD to construct and

maintain government housing, whether privatized or not, only at

installations where the local communities cannot meet the military’s

family housing needs, as specified by DOD policy. Yet, DOD has failed to

fix this longstanding problem. Our current and past work, as well as the

work of others, including the DOD inspector general, has shown that the

services use inconsistent methodologies to determine the availability of

community housing and often overstate the amount of housing DOD

should provide. Complicating the task of determining housing

requirements is the uncertainty about future demand for governmentprovided housing caused by the initiative to increase housing allowances.

Moreover, DOD housing standards for servicemembers differ—depending

on whether they live in government-owned or privatized housing or in

community housing—and may be boosting the demand and requirements

for government-owned or privatized housing, which is inconsistent with

DOD’s stated policy of relying to the maximum extent on community

housing.

The DOD Housing Management Manual 4165.63M states that a housing

market analysis should be performed at installations where acquisition of

housing is programmed. This market analysis should help to determine

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

those needs. Each analysis normally includes a detailed estimate of the

installation’s housing requirements, taking into account servicemembers’

pay grades and bedroom needs relative to family size. The services

compare these military family housing requirements with the inventory of

government-owned housing units and with the estimated number of

available community housing units that meet the military’s criteria for

suitability and affordability.9

 The process is intended to predict whether an

installation will have a housing surplus or deficit in the near future.

Predicted deficits can form the basis for justifying a privatization project

to construct new—or replace or renovate existing—military housing.

 9

To be considered suitable by DOD’s criteria, a dwelling must be located within a 1-hour

commute of the installation, meet minimum net square-footage requirements, be well

maintained, and pose no health, safety, or fire hazard. The criteria for affordability

considers a dwelling’s rental cost in comparison with the servicemember’s housing

allowance.

Military Family

Housing

Requirements

Assessments Are

Unreliable

Services Use Inconsistent

Methods to Determine

Housing Requirements
Page 8 GAO-02-624 Military Housing

Predicted surpluses can indicate a need to close government-owned units

when they are no longer useful.

As we have reported since 1996, the services use inconsistent

methodologies to determine the availability of private-sector housing for

military families in communities surrounding military installations, and

these methodologies often underestimate the ability of the private sector

to meet housing needs. As a result, the requirement for government

housing is often overstated. For example, the housing market analyses for

some installations first matched military family housing requirements with

existing government housing units before considering community-housing

units. In other cases, the analyses required a minimum number of

government housing units regardless of the community’s ability to meet

needs. These procedures are inconsistent with DOD’s policy of relying first

on community housing and can lead to unjustified support for retaining

government-owned housing units. Another problem is that some of the

services’ analyses assumed that only small portions—in some cases less

than 12 percent—of a community’s vacant rental units were available for

military families to occupy. As a result, the analyses underestimated

community housing availability because they excluded from consideration

hundreds of suitable vacant units.

Without a reliable, consistent process for determining military family

housing requirements, DOD cannot know with assurance how many

housing units it needs, where it needs them, whether its housing

investment decisions are justified, and whether its overall housing costs

are minimized. Constructing and maintaining military family housing,

whether financed through military construction funding or privatization,

costs more than paying housing allowances and relying on local

community housing. Past studies have reported that DOD annually saves

from $3,200 to more than $5,000 per family by providing a housing

allowance instead of using military construction funds to build and

maintain a government-owned house.10 Even when compared to

privatization financing, providing housing allowances and relying on

community housing is less expensive. We compared the life-cycle costs of

the first 10 privatization projects using DOD’s life-cycle guidance with

 10See Congressional Budget Office, Military Family Housing in the United States,

(Washington, D.C.: Sept. 1993); U.S. General Accounting Office, Military Family Housing:

Opportunities Exist to Reduce Costs and Mitigate Inequities, GAO/NSIAD-96-203

(Washington, D.C.: Sept. 13, 1996); and RAND, An Evaluation of Housing Options for

Military Families, MR-1020-OSD (1999).
Page 9 GAO-02-624 Military Housing

housing allowance costs, assuming all servicemembers included in the

projects could have lived in the local communities. The analysis showed

that reliance on community housing would cost about $315 million, or 6

percent, less than privatization. This is not to say that the local

communities could have met the housing needs included in these 10

privatization projects, nor that suitable community housing within

reasonable commuting distances is available at all locations. But costs can

only be minimized through accurate analyses of housing requirements and

aggressive application of DOD’s policy of relying on community housing.

DOD agrees that it needs a framework for a single, consistent process for

determining housing requirements that relies first on civilian community

housing. DOD housing officials stated that they have been developing a

new process that should be finalized this year. However, even after the

new process is in place, the officials stated that it will take years to update

housing requirements DOD-wide, because new housing market analyses

must be performed base by base. In the meantime, DOD risks investing in

privatization projects to build or improve housing that may not be needed.

Also, notwithstanding DOD’s plans for finalizing a new process by the end

of 2002, DOD has reported such plans for several years and each time

failed to reach a consensus with the services on a new requirements

determination process.

The initiative to increase servicemember housing allowances and reduce

their average out-of-pocket costs to zero by 2005 will have a significant

impact on the military housing program. First, increased allowances

should result in an increased number of community housing units that are

affordable to servicemembers. This should decrease the requirement for

government-owned or privatized houses by making housing in local

communities more affordable. Second, over time, increased allowances

could result in private housing developers building new housing near

military installations as developers see opportunities to profit from renting

to servicemembers at market rates. This would increase the supply of

community housing available to military families and could decrease the

requirement for government-owned or privatized housing. Third, increased

allowances should allow DOD to better satisfy the preferences of most

servicemembers to live off base and result in reduced demand for

government housing. We previously reported that, based on the results of

DOD’s 1999 Survey of Active Duty Personnel, military members prefer

civilian housing if costs are equal. Of those currently receiving a housing

allowance or living in military housing, about 72 percent said they would

prefer community housing if costs were equal, while 28 percent said they

Impact of Housing

Allowances Initiative on

Requirements Not Fully

Assessed
Page 10 GAO-02-624 Military Housing

would prefer military housing.11 In 1999, RAND reported that only about 20

percent of military members prefer military housing, and that the

predominant reason servicemembers live in military housing is that they

do not need to pay any money out of pocket, as they would if they lived in

the local community.12 Although some families may still elect to live in

military housing, by 2005 the allowance initiative should eliminate the

economic incentive to do so by eliminating the need for those living in the

local community to pay money out of pocket for their housing.

Despite these significant impacts of the allowance initiative, DOD has not

conducted detailed studies and analyses on an installation basis to

determine how the initiative will affect the requirement for governmentowned or privatized housing. Thus, DOD plans call for replacing or

renovating most of its existing housing inventory by 2007, even though

some of this housing may not be needed after community housing

becomes more affordable for military families. Further, if increased

allowances result in servicemembers’ reduced use of privatized housing

located on base, surplus housing could be rented to civilians, thereby

raising concerns about civilians living on military installations.

The difference in DOD’s housing standards for servicemembers living in

government-owned or privatized housing and for those living in

community housing inflates the demand for military family housing. DOD

considers family size when determining military housing requirements and

assigning servicemembers to government housing, but ignores family size

when determining housing allowances for servicemembers living in local

communities. As a result, many servicemembers are entitled to a larger

residence in government or privatized housing than they are able to afford

in the local community.

DOD’s current standards for community housing were determined in 1998,

when it developed a new method for establishing housing allowances.

Under this method, servicemembers’ housing allowances are based on the

costs of housing typically occupied by civilians with comparable incomes.

To determine allowances, DOD identified six housing standards, ranging

from a one-bedroom apartment to a four-bedroom single-family detached

 11U.S. General Accounting Office, Military Personnel: Higher Allowances Should Increase

Use of Civilian Housing, but Not Retention, GAO-01-684 (Washington, D.C.: May 31, 2001).

12RAND (MR-1020-OSD, 1999).

Differences in Housing

Standards Inflate Demand

for Military Family

Housing
Page 11 GAO-02-624 Military Housing

house. DOD then associated, or anchored, those standards to each military

rank, or pay grade, matching them to the type of housing normally

occupied by civilians with comparable incomes. The housing allowances

do not vary by family size. For example, the housing allowance for a

married servicemember in a lower enlisted pay grade is roughly equivalent

to the cost of renting a two-bedroom apartment or a two-bedroom

townhouse in the local community. The allowance is the same regardless

of the number of people in the servicemember’s family.

In contrast, DOD standards for servicemembers living in government or

privatized housing consider family size and often provide for larger

housing units. First, the services do not have typical apartment units onbase. Government housing units normally consist of townhouses,

duplexes, and single-family units. Second, the services generally assign

servicemembers with more dependents to housing units with more

bedrooms. For example, a married junior enlisted member in pay grade

E-4 with two children typically would be assigned to a three-bedroom

townhouse or single-family detached house. However, if this same

servicemember lived in community housing, the housing allowance would

only cover the cost of a typical two-bedroom apartment or townhouse.

The disparity in housing standards creates an incentive for

servicemembers in lower pay grades and with larger families to seek

government housing. This is because the servicemember can secure a

larger home for his or her family in government or privatized housing

without having to pay any out-of-pocket costs, as the servicemember

would be required to do to secure comparable housing in the community.

This situation creates demand for government housing that might not exist

were it not for this incentive. The standards disparity can also result in

increased government housing requirements because the services’ housing

market analyses consider family size, and, as a result, fewer housing units

in the local community are considered affordable. Eliminating the

standards disparity could result in reduced demand for government

housing and increased reliance on local community housing. For example,

if housing allowances for junior personnel increased with family size,

more community housing with three or more bedrooms would become

affordable. Thus far, DOD has not studied the benefits and costs of options

to address the standards disparity.
Page 12 GAO-02-624 Military Housing

DOD has generally achieved two key financial goals—leveraging of

government funds and lower life-cycle costs—for the privatization

program. DOD exceeded its overall goal for leveraging government funds

with private-sector financing in the first 10 privatization projects, based on

Office of Management and Budget’s guidance. However, it is not clear

whether DOD will achieve its goal that each project’s life-cycle costs be

the same or less than the military construction alternative. Although use of

DOD’s guidance for performing life-cycle cost analyses shows that each of

the first 10 privatization projects most likely will cost less than an

equivalent military construction project, use of the guidance causes some

uncertainty in the accuracy of these estimates. Furthermore, project

leveraging ratio calculations and estimated life-cycle costs do not include

the value of some government contributions to privatization projects

because certain contributions are not required to be included in these

analyses. Thus, the value of many DOD contributions to privatization

projects was not apparent during our review of these program assessment

tools.

According to DOD, a key advantage of privatization is the ability to

leverage available government funds with private-sector financing to

improve military housing faster than would otherwise be possible. DOD

incurs certain costs to secure each privatization project, such as making

cash contributions, loans, or loan guarantees. DOD’s goal is for each

project to result in at least three times as much housing improvement as

government funds alone would have produced. In leveraging government

funds by a minimum ratio of 3 to 1, DOD officials state that the military

can revitalize three times as many housing units as it could with a military

construction project for the same initial amount of money, thus solving the

housing problem three times faster.

The leveraging ratio is calculated by dividing the estimated cost of an

equivalent military construction project by the privatization project’s

budgetary scored amount—defined as the amount of appropriated funds

the Office of Management and Budget determines should be recorded as

an obligation at contract award. As shown in table 1, all but 1 (Everett) of

the first 10 privatization projects exceeded DOD’s 3-to-1 leveraging goal,

based on Office of Management and Budget’s guidance. In aggregate, by

investing about $185 million in the 10 projects, DOD should obtain housing

improvements that would have required about $1.19 billion in military

construction funds had only government funds been used. This is a

leveraging ratio of 6.4 to 1. As discussed in appendix I, the Congressional

Budget Office estimated higher budgetary scoring amounts than the Office

Key Financial Goals

Generally Achieved

Most Projects Exceed Goal

for Leveraging

Government Funds, Based

on the Office of

Management and Budget’s

Guidance
Page 13 GAO-02-624 Military Housing

of Management and Budget, which would have affected whether the

projects would have achieved the leveraging goal.

Table 1: Leveraging Ratios for the First 10 Projects

Dollars in millions

Project

Military

construction

alternative cost

Budgetary scored

amount Leveraging ratio

Fort Carson $196.9 $10.2 19.3

Fort Hood 273.5 52.0 5.3

Lackland 50.0 6.2 8.1

Robins 50.1 12.6 4.0

Dyess 50.3 16.3 3.1

Elmendorf 135.3 23.4 5.8

Kingsville 20.4 6.2 3.3

Everett 47.8 17.5 2.7

Camp Pendleton 87.3 19.4 4.5

San Diego 274.5 20.9 13.1

Total $1,186.1 $184.7 6.4

Source: GAO analysis of DOD cost data.

The overall average leveraging ratio of 6.4 achieved in the first 10 projects

would have been closer to 3.9 had the budgetary scored amounts included

the government’s costs to pay utilities for military families occupying

privatized housing at DOD’s first two projects, at Fort Carson and at

Lackland Air Force Base. Normally, the Office of Management and Budget

would have included the government’s estimated utility costs over the life

of the 50-year contracts as part of each project’s budgetary scored amount.

However, the Office allowed an exception for these projects because the

budget scoring rules for the privatization program were not finalized at the

time the projects were awarded. Had utility costs been included in the

budgetary scored amounts, neither project would have met the 3-to-1

leveraging goal. Specifically, Fort Carson’s leveraging ratio would have

been 1.7 instead of 19.3 and Lackland’s ratio would have been 2.5 instead
Page 14 GAO-02-624 Military Housing

of 8.1.13 With these ratios, however, DOD might not have approved the

projects.

According to DOD, although the amount of government funds needed to

initiate housing projects under the privatization option can be

substantially less than needed under the military construction option, the

government’s long-term total costs for the projects will not necessarily be

less under privatization because annual costs differ under each option.

The services prepare life-cycle cost analyses to estimate and compare the

government’s long-term costs for proposed projects financed through

privatization and through military construction. They then use the results

to help decide whether proposed privatization projects should be

approved. Because life-cycle cost analyses use numerous assumptions and

estimates, actual costs from implemented privatization projects will vary

from the results of the analyses. Nevertheless, the analyses are an

important tool to evaluate the merits of proposed projects.

We used two methods to estimate and compare the life-cycle costs for the

first 10 privatization projects with the military construction alternative.

First, we computed the life-cycle costs for each project using DOD’s

February 2002 guidance. Then, we recomputed these costs, deviating from

DOD’s guidance to include contract oversight costs in the privatization

estimates and apply an alternative method for determining operations and

maintenance costs in the military construction estimates. We deviated

from the guidance on these two points to compensate for two areas where

use of the guidance can make the privatization option appear more

favorable than justified.

The February 2002 DOD guidance lists the assumptions and types of costs

that the services are to use in performing the analyses. For example,

among the costs to be included in the analysis of the privatization option

are cost estimates for project planning, housing allowances, and the

budgetary scored amount. These costs are to be offset by any expected

project monetary returns to the government. Among the costs to be

included in the analysis of the military construction option are cost

 13After our analysis was completed, DOD officials told us that the developer of the Fort

Carson project recently agreed to begin reimbursing the government for the cost of utilities

for the military families occupying the privatized housing. Under this scenario, the Office of

Management and Budget’s original budgetary score for the project would have been in line

with normal budgetary scoring rules for privatization projects.

Results from Life-Cycle

Costs Analyses Are

Uncertain

Life-Cycle Cost Analysis Based

on DOD Guidance
Page 15 GAO-02-624 Military Housing

estimates for initial construction, out-year revitalization, and annual

operation and maintenance costs.

Using this guidance, and considering current DOD cost information such

as the increased housing allowances resulting from the allowance

initiative, we estimated that each of the 10 projects will most likely cost

less than the military construction alternative. The cost differences

averaged about 17 percent and ranged from 2 percent in the San Diego

project to 42 percent in the Kingsville project.

The services had previously estimated that each privatization project

would cost from 6 to 27 percent less than the military construction

alternative (see appendix V for details). However, our estimates differed

from the services’ estimates for several reasons. First, our analyses use

current cost estimates, whereas the services used cost estimates available

when they prepared their analyses months or years prior to project

approval. Second, our analyses considered the increased costs of

privatization resulting from the housing allowance initiative, which

increases allowances by about 19 percent between 2000 and 2005. Because

allowances are used by servicemembers to pay rent for privatized housing,

the initiative will significantly increase privatization costs over the long

terms of the projects. Only three of the services’ analyses had considered

the impact of the allowance initiative. Third, the services’ analyses did not

use DOD’s guidance, because it was not issued until February 2002. As a

result, the services’ analyses were inconsistently prepared, and many did

not include all relevant costs.

We recomputed the life-cycle costs of the 10 privatized projects after

making two adjustments to DOD’s guidance. First, we included costs that

will be incurred to oversee the project contracts in the privatization

estimates. Second, we used an alternative method to determine operation

and maintenance costs in the military construction estimates. The

alternative method used conventional apartment data—instead of

federally assisted apartment data as called for in the guidance—and

excluded the cost of real estate taxes from the data. Based on these two

adjustments, we estimated that privatization will likely cost less than

military construction in seven of the projects and cost more in the other

three projects (Lackland, Elmendorf, and San Diego), as shown in table 2.

Life-Cycle Cost Analysis Based

on Modified Assumptions
Page 16 GAO-02-624 Military Housing

Table 2: GAO Alternative Life-Cycle Costs Estimates for the First 10 Projects

Dollars in millions

Project

Privatization

option

Military

construction

option Difference

Percentage

difference

Fort Carson $895 $929 $-34 -4

Fort Hood 1,638 1,970 -332 -17

Lackland 130 127 3 2

Robins 151 189 -38 -20

Dyess 87 105 -18 -17

Elmendorf 376 354 22 6

Kingsville 30 40 -10 -25

Everett 86 91 -5 -5

Camp Pendleton 207 227 -20 -9

San Diego 1,289 1,094 195 18

Total $4,889 $5,126 $-237 -5

Note: Life-cycle cost analyses estimate all costs—including future costs—in current dollars to

consider the time value of money.

Source: GAO analysis of DOD cost data.

We believe that this recomputation is a more accurate reflection of relative

costs. First, costs will be incurred to monitor contract implementation and

developer performance adequately, and the services are already paying

consultants to help with this oversight. Yet, DOD’s guidance does not

specifically require that such costs be included as a cost of the

privatization option. Second, for simplicity and consistency in estimating

operations and maintenance costs for the military construction option, the

guidance directs the services to use operations and maintenance data for

federally assisted apartments published annually by the Institute for Real

Estate Management. The institute also publishes this data for conventional

apartments. We did not determine whether use of institute data is the best

method for estimating military construction operations and maintenance

costs, and DOD provided little support to show that use of this data was

the best choice. We also did not evaluate the relative merits of using these

two respective data sets. However, incomes of most military families may

be more like those of civilian families renting conventional apartments

than those of families in federally assisted apartments; consequently, we

used the conventional apartment data. Further, the institute’s data

includes expenses for real estate taxes normally paid by private-sector

developers but which would not be paid under the military construction

alternative. Using this data without making an adjustment for real estate

taxes increases the cost of the military construction alternative
Page 17 GAO-02-624 Military Housing

inappropriately and makes the privatization option appear more favorable

than it should. On the other hand, DOD officials pointed out that the

guidance also excludes other costs, such as capital repair and replacement

costs, from the military construction option. Excluding these costs from

an analysis makes the military construction option appear more favorable

than justified.

The bottom line is that the many assumptions and uncertainties in the

estimates used to determine life-cycle costs make it difficult to achieve

reliable estimates of costs over the terms of the contracts. Thus, complete

and precise guidance for performing these analyses would increase the

likelihood that the analyses contribute to informed decisions about future

privatization proposals. In cases where military construction appears to be

the less costly alternative, privatization may still be DOD’s preferred

option because, according to defense officials, annual military

construction funding would need to increase substantially over current

levels—and beyond what Congress might consider acceptable—to finance

an equivalent number of housing units.

Although DOD often conveys existing government-owned housing to

privatization developers and leases or conveys government land to the

developers at no cost, the value of these contributions is not included in

most financial analyses for the privatization projects. DOD is permitted to

convey or lease existing property and facilities to developers as part of the

agreements to obtain improved housing. Because such conveyances or

leases do not require government expenditures and do not affect the

federal budget, there is no requirement that the value of property

conveyed or leased be included in project budgetary scored amounts,

leveraging ratio calculations, or life-cycle cost analyses.

DOD made conveyances of housing and land that were not included in the

scored amounts of 7 of the first 10 projects, as shown in table 3. For 5 of

the projects, DOD also leased land to developers at no cost over the

contract terms but did not estimate the value of the leases.

Some DOD Contributions

to Projects Are Not

Included in Financial

Analyses
Page 18 GAO-02-624 Military Housing

Table 3: DOD Property Conveyances Not Included in Budget Scored Amounts

Dollars in millions

Project

Number of housing

units conveyed

Acres of land

conveyed

DOD estimate of

conveyance value

Fort Carson 1,823 0 $69.7

Fort Hood 5,622 0 53.3

Robins 670 270 6.5

Elmendorf 584 0 38.0

Kingsville 244 30 0.3

Camp Pendleton 512 0 7.6

San Diego 2,660 0 97.1

Total 12,115 300 $272.5

Source: GAO analysis of DOD data.

DOD officials stated that its contribution to a privatization project,

whether included in the project’s scored amount or not, is a key ingredient

that makes the project financially feasible for private-sector developers.

Also, most of the housing units conveyed were the inadequate units that

the developers will replace or renovate. Our point is only to note that the

value of many DOD contributions to privatization projects is not apparent

from a review of the normal financial tools used to assess the program.

Also, DOD’s valuation of some contributions is subject to question. For

example, the Navy estimated that the value of its conveyance of 244

housing units and 30 acres of land was $300,000 in the Kingsville project.

Navy officials stated that the estimate only included the value of the land,

because the conveyed housing was old, dilapidated, and not up to current

codes. Yet, the developer has recently begun placing newspaper

advertisements offering the housing for rent starting at $600 monthly for

each unit.

DOD has required the private sector to bear most of the financial risks in

the first 10 privatization projects and has designed privatization contracts

to help protect the government’s interests. During our visits to Fort

Carson, Lackland Air Force Base, and Kingsville Naval Air Station, we

discussed project implementation results with local officials. In each case,

the officials stated that implementation was proceeding on or ahead of

schedule, the quality of the housing improvements exceeded expectations,

and the developers added some upgrades to units at no cost to the

government. The officials stated that military families occupying privatized

units were very satisfied with the developers’ operation and maintenance

of the housing, and this was supported by our observations. The officials

Privatization Program

Includes Government

Safeguards, but

Improvements Are

Possible
Page 19 GAO-02-624 Military Housing

added that they knew of no examples of poor developer performance,

although contract provisions were available to deal with poor

performance, if needed. Still, we found DOD could further enhance

protections to the government with contract provisions for unanticipated

events, required oversight of future project reinvestment decisions,

guidance for contractual assumptions and fees paid to developers, and

improvements to the privatization program evaluation report.

Private sector equity and loans provided $1.03 billion, or 82 percent, of the

$1.26 billion in initial development costs for the first 10 privatization

projects, as shown in table 4. DOD’s cash and loans provided the

remaining $231 million, or 18 percent. DOD’s contributions in cash and

loans to the individual projects ranged from zero percent at Fort Carson to

79 percent at Dyess Air Force Base, where DOD provided the first

mortgage loan.

Table 4: DOD and Private Sector Contributions to Project Development Costs

Dollars in millions

Private equity and loans DOD cash and loans

Project Amount

Percentage

of total Amount

Percentage

of total

Total

project

development

cost

Fort Carson $228.6 100 $0 0 $228.6

Fort Hood 223.3 81 52.0 19 275.3

Lackland 31.3 75 10.6 25 41.9

Robins 34.2 61 22.3 39 56.5

Dyess 7.5 21 28.9 79 36.4

Elmendorf 61.9 56 48.0 44 109.9

Kingsville 7.8 54 6.7 46 14.5

Everett 30.1 71 12.2 29 42.3

Camp

Pendleton

53.9 65 29.4 35 83.3

San Diego 346.6 94 20.9 6 367.5

Total $1,025.2 82 $231.0 18 $1,256.2

Source: GAO analysis of DOD data.

The government’s total financial exposure in the first 10 projects is greater

than its $231 million contribution in cash and loans. This is because in 4 of

the projects—Fort Carson and Lackland, Robins, and Elmendorf Air Force

Bases—DOD provided loan guarantees to private lenders in the event of

project financial failure caused by base closure, downsizing, or significant

Private Sector Bears Most

Financial Risks
Page 20 GAO-02-624 Military Housing

deployment.14 According to DOD officials, loan guarantees are provided in

some cases to improve the availability of private-sector financing or obtain

a lower interest rate. Thus, with the guarantees, the government’s total

financial exposure would be significantly higher in a worst-case scenario

where (1) these four bases closed and the developers defaulted on their

loans and (2) the remaining six projects failed financially, leaving the

government unable to recover its cash contributions and not receive

repayment for its loans. In such a case, the government’s maximum

financial exposure would be about $481 million for all 10 projects, or

about 38 percent of the total development costs for the projects (see table

5).

Table 5: Government Financial Exposure in the First 10 Projects

Dollars in millions

Government financial exposure

Project

Total project

development

costs Cash and loans Loan guarantee Total

Fort Carson $228.6 $0 $147.0 $147.0

Fort Hood 275.3 52.0 - 52.0

Lackland 41.9 10.6 29.4 40.0

Robins 56.5 22.3 25.6 47.9

Dyess 36.4 28.9 - 28.9

Elmendorf 109.9 48.0 48.0 96.0

Kingsville 14.5 6.7 - 6.7

Everett 42.3 12.2 - 12.2

Camp Pendleton 83.3 29.4 - 29.4

San Diego 367.5 20.9 - 20.9

Total $1,256.2 $231.0 $250.0 $481.0

Source: GAO analysis of DOD data.

Because privatization contracts cover long periods of time—often

50 years—contract provisions cannot be written for every event that could

affect the operations or financial performance of the projects. Yet

contracts without provisions for unanticipated events that significantly

change planned project revenues and expenses can result in unanticipated

profits or losses to the developers. Although the privatization program is

 14With the enactment of the National Defense Authorization Act for fiscal year 2002,

Congress authorized DOD to conduct another round of base realignments and closures

beginning in 2005.

Some Contracts Did Not

Adequately Provide for

Unanticipated Increases in

Project Revenue
Page 21 GAO-02-624 Military Housing

relatively new, DOD has already experienced the impact of one such

event—implementation of the housing allowance initiative.

DOD’s initial contracts did not include adequate provisions to minimize

potential unanticipated profits accruing to developers from unanticipated

revenue increases. As a result, for some projects, the increased rental

revenue from the allowance initiative will flow in part or in total to the

developers in the form of extra profits and fees. For example, in 1998,

when the Lackland Air Force Base project was awarded, few would have

anticipated an initiative to increase housing allowances by 19 percent to

eliminate out-of-pocket costs. The Lackland project did not include a

provision to capture unexpected revenue increases or to compensate the

developer for any revenue decreases. As a result, all extra rental revenue

resulting from the allowance initiative will flow to the developer. We

estimated that the allowance initiative will increase Lackland’s rental

revenues by approximately $64 million over the contract term, all of which

will go to developer profits or fees.

The contracts for 7 of the first 10 privatization projects did not consider

the increased rental revenue that will result from the housing allowance

initiative. For these projects, table 6 shows the extra rental revenue

expected from the allowance initiative and the amount of this extra

revenue projected to go to the developers in profits and fees.

Table 6: Projected Extra Rental Revenues, Profits, and Fees Resulting from the

Housing Allowance Initiative

Dollars in millions

Developer’s portion of extra rental revenue

Project

Extra rental

revenue Extra profit Extra fees

Total extra

profit and

fees

Percentage of

extra rental

revenues

Fort Carson $317.2 $51.9 $12.7 $64.6 20.4

Fort Hood 516.4 5.1 20.7 25.8 5.0

Lackland 63.9 62.0 1.9 63.9 100.0

Robins 52.0 40.2 1.7 41.9 80.6

Elmendorf 168.9 73.1 10.3 83.4 49.4

Kingsville 7.0 4.4 .8 5.2 73.4

Camp

Pendleton

175.6 79.2 5.3 84.5 48.1

Total $1,301.0 $315.9 $53.4 $369.3 28.4

Source: GAO analysis of DOD data.
Page 22 GAO-02-624 Military Housing

Table 6 also shows that, on a cumulative basis, most of the additional

rental revenue is not expected to go to the developers. This is because,

except for Lackland, the projects included contract provisions designed to

capture at least a portion of any unanticipated rental revenues that

exceeded project expenses and expected developer profits. Controlled by

contract provisions, the captured funds will accumulate into project

reinvestment accounts and can be used to pay for future renovations,

improvements, and amenities for the projects during their contract terms.

In accordance with the contract provisions of some projects, such as Fort

Hood, relatively little of any unanticipated revenue increases or expense

reductions is expected to go the developers. DOD officials stated that DOD

expects that all future project contracts will include reinvestment account

provisions to capture a portion of extra revenues or reduced expenses.

However, DOD has not issued guidance requiring this or providing

parameters for establishing the amounts needed in the reinvestment

accounts to meet future project needs.

Projects with reinvestment accounts normally include contract provisions

stating that the accumulated funds can only be used to benefit the project

and that service officials and the developer decide how to spend the funds.

Generally, rental revenue funds flow into the reinvestment account in

accordance with the contract provisions after payment of normal project

expenses and developer profits. Reinvestment funds are supposed to be

used to pay for future renovations and major improvements. Large sums

are expected to be deposited into the reinvestment accounts of some

projects, particularly with the increases caused by the housing allowance

initiative. For the first 10 projects, we estimate that about $3.9 billion will

be deposited to the reinvestment accounts over the terms of the contracts

(see figure 1).

Required Oversight of

Reinvestment Decisions

Appears Limited
Page 23 GAO-02-624 Military Housing

Figure 1: Projected Cumulative Amounts Available for Reinvestment in the Projects

Note: Amounts shown do not include reserves for routine project maintenance.

Source: GAO analysis of DOD data.

Normally, military installation officials and project developers make joint

decisions on how to spend money from the reinvestment accounts. Fort

Carson officials stated that they will work with the developer to make

these decisions on their project. Navy officials stated that they are usually

partners with the developer in their projects, and, as such, will participate

in decisions to spend reinvestment money. According to service officials,

amounts remaining in the reinvestment accounts at the end of the

contracts will, as a rule, be returned to DOD and be available to help

finance other privatization projects. However, it is questionable how much

money might actually revert to DOD, since incentives exist for local

service officials and developers to spend all funds accumulated in the

reinvestment accounts. For example, local officials want the privatized

housing to offer the highest possible quality of life to military families

occupying the housing. They also know that funds not spent by the end of

the contract will revert to DOD and be unavailable for use in the project.

Developers also want to provide the best housing possible so that military

families will continue to choose to live in the housing. Also, the developers
Page 24 GAO-02-624 Military Housing

can benefit from decisions for additional construction or renovations and

earn additional fees and profits when they perform the work.

For these reasons, required oversight of major reinvestment spending

decisions is important to add assurance that the decisions are appropriate.

For example, inadequate oversight could result in decisions to use

reinvestment funds to add improvements and amenities to privatized

housing to the point that the housing exceeds typical community housing

standards. Contrary to encouraging servicemembers to live in local

communities, this could result in creating artificial demand for the

privatized housing because servicemembers could not secure the same

housing in the local community without paying out-of-pocket amounts.

Further, inadequate oversight could result in using reinvestment funds to

construct housing units beyond the number approved in the original

project scope without following the normal justification and review

process. Yet oversight procedures for major reinvestment decisions have

not been clearly defined, and there is no requirement that service

headquarters and the Office of the Secretary of Defense review and

approve expenditures.

Contractual assumptions and fees can affect DOD’s privatization costs,

and thus it is important that the services have guidance to help establish

appropriate assumptions and fees. Although several nationally recognized

organizations publish private-sector data that could be used to help

establish suitable benchmarks, DOD has not provided such guidance for

the services’ use. During our review of the first 10 privatization projects,

we found wide variation in some assumptions used to estimate project

revenues and expenses, expected developer internal rates of return, and

the types and ranges of project fees charged.

Developers make certain assumptions—such as the expected vacancy rate

in privatized housing and allowances for unpaid rents—to estimate project

revenues and expenses. The accuracy of these assumptions is important

because they affect the estimated amount of project revenue that will be

available for expenses, profits, and reinvestment accounts. Yet the

vacancy rate assumptions for the first 10 projects varied from 2 to 5

percent, and only one project included an assumption for unpaid rents—

1 percent.

Another area of concern is related to the expected internal rate of return

on the developer’s equity in the project. A developer’s expected internal

rate of return is known at the time of contract award because privatization

Widely Varied Contractual

Assumptions and Fees Can

Affect DOD Costs
Page 25 GAO-02-624 Military Housing

contracts include forecasts of expected project revenue, expenses, and

profits. The actual internal rate of return will vary depending on the

performance of the project and the effects of any unanticipated changes in

revenue and expenses. DOD officials stated that the normal internal rate of

return for similar housing projects in the private sector ranges from 12 to

14 percent. For the first 10 projects, the expected internal rate of return at

contract award varied from 1.6 to 16.7 percent. However, the increased

rental revenue resulting from the housing allowance initiative has

increased the expected internal rate of return for 7 of these projects.

Considering the impact of the allowance initiative and the terms of the

individual contracts, and assuming no other changes in expected revenue

and expenses, we estimate that the developer’s internal rates of return will

actually range from 3.3 to 25.7 percent.

Finally, most contracts included fees to be paid to the developers during

operation of the privatized housing over the contract terms. For example,

all contracts included a property management fee, which is designed to

pay for the daily management and oversight of the housing project. The fee

is normally assessed as a percentage of rental revenues. In the first 10

projects, this fee varied from 2.5 to 5.1 percent. Because revenues are

significant in some cases, a difference of just 1 percent can result in

increasing the property management fee by over $400,000 each year. In 4

of the 10 projects, the services also included a property management

incentive fee to be paid on the basis of specified criteria. This incentive fee

ranged from 1.0 to 2.0 percent. In 2 of the 10 projects, the services

included payment of an asset management fee. This fee covers services to

monitor and oversee financial aspects of the projects, and, according to a

national association representing large multi-family housing owners, the

fee normally ranges from 2 to 3 percent. However, for one project, the fee

was 4.5 percent of net operating income, and for another project the fee

was 60 percent of net cash flow up to a maximum of $80,000 annually

(averaging about 10 percent of net operating income over the contract

term).

In our March 2000 report on the privatization program, we noted that DOD

had not developed an evaluation plan to consistently measure the progress

and effectiveness of the program from project identification through the

end of each contract.15 We recommended development of an evaluation

 15See GAO/NSIAD-00-71.

Program Evaluation

Report Has Not Met Its

Potential
Page 26 GAO-02-624 Military Housing

plan that would be used by all services, include performance measures to

help officials determine whether the program is meeting goals, provide a

means to evaluate the merits of the individual authorities, compare the

estimated and actual costs of each project, assess key aspects of developer

performance, collect statistics on the use of the housing, and assess

servicemembers’ satisfaction with the housing.

DOD agreed with our recommendation, and on January 10, 2001, issued

final reporting requirements for a new privatization program evaluation

report. The services are required to summarize and report semi-annually

on many financial and management aspects of each awarded project, and

DOD officials have stated that the report will be used to oversee the

program’s implementation and overall financial management.

Although the report is an extensive and potentially useful tool for

monitoring and evaluating program implementation, the value of the

report has been limited because (1) the report has not been completed in a

timely manner—the report for the period ending June 30, 2001, was due by

September 15, but was not completed until February 2002; (2) the report

does not include information on funds accumulated in project

reinvestment accounts; and (3) key elements of the report are not

subjected to periodic independent verification to check accuracy. As a

result, the report has not been as useful to decisionmakers as originally

envisioned in helping to evaluate program effectiveness, address questions

and concerns, and identify whether program modifications are needed.

DOD appears to be positioned to significantly increase its use of

privatization to eliminate inadequate military family housing over the next

several years. Yet, because of inconsistent housing needs assessments,

significant uncertainty exists in both the number and location of housing

units that will be required in the future. This could lead DOD to enter into

long-term contracts for privatized housing, some of which might not have

been needed in areas where local communities might have provided

housing at lower costs. Also, although DOD’s stated policy is to rely on

community housing to the extent possible, officials have acknowledged

that the disparity in on-base and off-base housing standards creates an

incentive for servicemembers in lower enlisted pay grades and with larger

families to seek government housing rather than community housing.

Further, increased housing allowances will result in increased life-cycle

costs for privatization projects. As a result, the long-term savings from

privatization may be less than estimated, although accurate estimates of

life-cycle costs are hindered by use of DOD’s guidance for performing the

Conclusions
Page 27 GAO-02-624 Military Housing

analyses. Improved DOD guidance for performing life-cycle cost

analyses—that is, including privatization contract oversight costs in the

analyses and validating the types and sources of data used to estimate

military construction operations and maintenance costs—would lead to

more accurate analyses and better informed approval decisions on

proposed privatization projects.

Although privatization contracts have included provisions designed to

protect the government’s interests, contract provisions could be

strengthened to better protect any extra revenues generated from

unanticipated financial results. Without such provisions, developers stand

to gain unanticipated profits from money that might more appropriately be

channeled into reinvestment accounts for possible future project

improvements. Furthermore, projects with reinvestment accounts have

limited required oversight of spending decisions. Thus, DOD and the

services’ headquarters do not know precisely how the funds are used or

whether spending decisions made at the installation level are appropriate.

Inappropriate spending decisions could waste money and result in

privatized housing with amenities far beyond typical community housing

standards, leaving less money available to DOD to help finance other

privatization projects. DOD’s approval of expenditures over an established

threshold would provide more control over such expenditures.

Privatization contracts vary widely owing to a lack of guidance to establish

appropriate contract revenue, expense, and reinvestment assumptions and

project fees. Assumptions and fees outside of normal ranges may result in

hundreds of thousands of dollars in extra payments to developers.

Providing contract guidance for the services’ use would establish a

common framework for arriving at appropriate revenue and expense

assumptions and project fees. Opportunities also exist to strengthen

DOD’s privatization program evaluation report. Currently, the value of the

report as a tool for monitoring and evaluating program implementation is

diminished because it is not being completed on time, it omits critical data,

and its contents are not independently verified.

We recommend that the Secretary of Defense direct the Deputy Under

Secretary of Defense (Installations and Environment) to revise the

department’s housing requirements determination process to take into

account greater use of community housing to fulfill needs and the

projected impact that the housing allowance initiative might have on

military installation housing requirements. As part of the effort to revise

the department’s process, the Deputy Under Secretary should also

determine the effect of the difference in the department’s housing

Recommendations for

Executive Action
Page 28 GAO-02-624 Military Housing

standards for servicemembers living in government-owned or privatized

housing and for those living in community housing on the requirement for

military family housing. This should include identifying the benefits and

costs derived from a program that would provide increased allowances

based on the number of family members and determining the extent to

which such a program could reduce requirements for government-owned

or privatized housing. In addition, we recommend that the Secretary of

Defense direct the Deputy Under Secretary of Defense (Installations and

Environment) to take the following steps to improve implementation of

the military housing privatization program:

• improve the guidance for performing life-cycle cost analyses by requiring

the inclusion of privatization contract oversight costs and validating the

types and sources of data used to estimate military construction

operations and maintenance costs;

• require provisions in all future privatization contracts to direct the benefits

from unanticipated increased revenues or reduced expenses to flow, in

total or in part, into a project reinvestment account for possible future use

in the project;

• require service headquarters and the Office of the Secretary of Defense to

review and approve privatization project reinvestment account

expenditures over an established threshold;

• provide guidelines to help establish appropriate privatization contract

revenue, expense, and reinvestment assumptions and project fees; and

• improve the value of DOD’s privatization program evaluation report by

completing the report on time, including information on funds

accumulated in project reinvestment accounts, and obtaining periodic

independent verification of key report elements.

In commenting on a draft of this report, DOD generally agreed with the

report’s findings and recommendations and outlined ongoing or planned

management actions to address the concerns noted in the report. Although

DOD believes that our report undervalues the strides the department has

made thus far in the program, we believe the report accurately describes

the progress made to date and the success it has achieved in meeting

financial goals. In particular, DOD believes that the Everett project met the

leveraging goal of 3.0 rather than our calculated ratio of 2.7. The details of

our respective calculations are contained in a note to DOD’s comments

(see app. VI).

Agency Comments

and Our Evaluation
Page 29 GAO-02-624 Military Housing

DOD noted that it partially concurred with three of our recommendations.

First, in responding to our recommendation to improve the guidance for

performing life-cycle cost analyses, DOD stated that existing guidance

requires the services to include all costs for both the privatization and

military construction alternatives. However, the guidance does not specify

that privatization oversight costs should be included in the analysis. DOD

stated that it would modify the guidance and also validate the data used to

estimate operations and maintenance costs under the military

construction alternative. We believe that the planned actions will meet the

intent of our recommendation and improve the department’s guidance for

performing life-cycle cost analyses.

Second, concerning our recommendation that the military services and the

Office of the Secretary of Defense review and approve privatization

project reinvestment account expenditures over an established threshold,

DOD stated the services and the Office of the Secretary of Defense should

have oversight of these expenditures but that only the services should

review and approve specific project expenditures. We agree that the

military service level is the appropriate review level for most project

reinvestment spending decisions. However, in some cases, reinvestment

decisions could involve substantial amounts, such as a decision to use

reinvestment funds to construct housing units in addition to the number

initially approved (follow-on projects). We continue to believe that major

reinvestment expenditures over an appropriately determined threshold

should be reviewed and approved by the Office of the Secretary of

Defense and have retained our original recommendation.

Third, in response to our recommendation that guidelines should be

provided to help establish appropriate privatization contract assumptions

and fees, DOD noted that the key to getting the best housing at the lowest

cost is through competition among developers and that reliance on strict

government guidelines—instead of the market’s determination of risk and

return—is not likely to create financially sound projects. We agree that

competition is a key to successful privatization projects and that each

project is unique. However, we believe that the services could benefit from

guidelines that provide ranges for normally expected contract

assumptions for revenues, expenses, reinvestment amounts, and fees.

Such guidance would provide a framework to identify project proposals

that fall outside of normal ranges. This could help focus management

attention during the project review and approval process to ensure that

each proposal is appropriate and in the best interest of the government.

Accordingly, we have retained our original recommendation.
Page 30 GAO-02-624 Military Housing

DOD’s comments are included in this report in appendix VI. We have also

incorporated DOD’s technical comments as appropriate.

We are sending copies of this report to the appropriate congressional

committees; the secretaries of Defense, the Army, the Navy, and the Air

Force; and the Director, Office of Management and Budget. We also will

make copies available to others upon request. In addition, the report will

be available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-3958 or Mark Little, Assistant Director, at

(202) 512-4673 if you have any questions concerning this report. Major

contributors to this report are listed in appendix VII.

Carol R. Schuster

Director, Defense Capabilities

 and Management
Appendix I: Differences Over Budgetary

Scoring for DOD’s Military Housing

Privatization Program

Page 31 GAO-02-624 Military Housing

As requested, this appendix addresses differences between the Office of

Management and Budget and the Congressional Budget Office over

budgetary scoring for DOD’s Military Housing Privatization Program. This

issue is important because the budgetary scored amount directly affects

the amount of appropriated funds needed to secure a privatization

contract, and high budgetary scores might make proposed privatization

projects financially unattractive to DOD.

Each privatization contract that DOD enters into must be scored for

budget purposes. Scoring seeks to determine the cost that should be

recognized and recorded as an obligation of DOD at the time the contract

is signed. The Office of Management and Budget is responsible for

determining the amount to be obligated, and its Circular A-11 provides

guidelines on how obligations should be recorded in the budget. The

guidelines are designed to ensure that the budget records the full amount

of the government’s commitments when it obtains capital assets.

As part of its fiscal year 2001 budget review, the Congressional Budget

Office assessed the budget scoring amounts for the first four privatization

projects. It reported that the methods used by the Office of Management

and Budget to determine the projects’ budget score amounts (estimated

obligations) were at odds with government-wide standards and that the

budget scores were too low.1

 Officials at the Office of Management and

Budget disagreed.

Scoring guidelines state that when an asset is for a “special purpose of the

government,” an obligation should be recorded up front. Further, the

guidance provides criteria to determine if a project is for a government

purpose. One criterion states that if the project is constructed or located

on government land, it is presumed to be for the special purpose of the

government. Congressional Budget Office officials concluded that since all

but two of DOD’s housing projects were located on military bases, they are

for the special purpose of the government, and the obligations should be

recorded up front. Although less clear, Congressional Budget Office

officials believe that up-front obligations were also justified for the two

projects located off the bases. Another major factor in determining if a

project is for the special purpose of the government is the question of

whether DOD guarantees occupancy of privatized housing units. Officials

 1

Congressional Budget Office, Cost Estimate, S. 2549 National Defense Authorization Act

for Fiscal Year 2001 (Washington, D.C.: May 23, 2000).

Appendix I: Differences Over Budgetary

Scoring for DOD’s Military Housing

Privatization Program
Appendix I: Differences Over Budgetary

Scoring for DOD’s Military Housing

Privatization Program

Page 32 GAO-02-624 Military Housing

of both offices agreed that if DOD guarantees occupancy, then the

cumulative value of the rents to be paid on the housing over the contract

term must be included in the scored amount. This would significantly

increase the amount of appropriated funds needed to secure a

privatization contract, and, as a result, many proposed projects would no

longer be financially attractive for DOD. However, the offices disagree on

whether DOD is, in fact, guaranteeing occupancy.

Office of Management and Budget officials stated they did not include the

value of the rents in the obligated amounts because DOD told them project

contracts do not include rental guarantees. Rather, the contracts include

provisions for civilians to rent privatized housing if military families

choose not to live there. Still, Congressional Budget Office officials

contend that for at least some projects—especially those located on

military bases—DOD provides an implicit occupancy guarantee and,

therefore, the expected rents should be included in the obligated amount.

To support its position, the Budget Office officials noted that (1) a

majority of the on-base privatized units are replacing units once occupied

by servicemembers and their families, which indicates the units have a

special governmental purpose; (2) DOD will likely restrict privatized onbase housing to use by military families because of security concerns; and

(3) DOD refers servicemembers to the privatized housing rental offices

and therefore is essentially committing itself to provide tenants for the

projects.

Although it is true that privatization contracts do not provide explicit DOD

guarantees of occupancy, some service officials told us that their service

would take any necessary actions to make their projects successful. Also,

the contract terms for the Fort Hood project stated that in the event of

declining occupancy, the Army could try to avoid or minimize renting to

civilians. The contract stated that the “Army shall have the option, in its

sole discretion, to make mandatory housing assignments... and/or to pay

the applicable rents due on unoccupied housing units.”
Appendix II: Scope and Methodology

Page 33 GAO-02-624 Military Housing

We performed work at the Competitive Sourcing and Privatization Office

and at other DOD offices responsible for housing management and

housing allowances. We also performed work at Air Force, Army, and

Navy headquarters offices responsible for implementing the privatization

program. At each location, we interviewed responsible officials and

reviewed applicable policies, procedures, and documents. In addition, we

discussed various aspects of the program with officials at the Air Force

Center for Environmental Excellence and the National Multi Housing

Council, a private organization that represents the interests of larger

apartment firms and conducts apartment-related research. To discuss

budgetary scoring for the privatization program, we met with officials

from the Office of Management and Budget and the Congressional Budget

Office.

To determine whether privatization projects are based on reliable

assessments of housing requirements, we reviewed prior reports from

GAO, RAND, and others that discussed problems with DOD’s housing

requirements determination process. We held discussions with, and

reviewed documents from, DOD housing officials about the status of plans

to improve the process. We also discussed with them potential impacts on

housing requirements from the initiative to increase housing allowances

and analyzed data showing the expected housing allowance increases

through 2005 in total and in the local communities surrounding the first 10

privatization projects. Further, we discussed with DOD housing and

housing allowance officials the differences in housing standards for

servicemembers living in government and civilian housing.

To determine whether DOD is achieving its financial goals for the

privatization program, we reviewed DOD criteria for two key financial

goals—leveraging of government funds and reducing life-cycle costs. To

measure achievement of the leveraging goal, we computed the leveraging

ratio by dividing DOD’s military construction cost estimate for each

project by the budgetary scored amount for each project. We then

compared the results with DOD’s ratio goal. To measure achievement of

the life-cycle cost goals, we reviewed DOD’s guidance for performing lifecycle cost analyses and used this guidance to estimate and compare the

life-cycle costs of the first 10 privatization projects and the comparable

military construction alternatives. We also computed alternative life-cycle

cost estimates for the 10 projects after making adjustments to the

assumptions in the guidance to include privatization program oversight

costs and to remove real estate taxes from the military construction

operations and maintenance cost estimates in order to achieve more

accurate estimates of relative costs. In both analyses, we used current

Appendix II: Scope and Methodology
Appendix II: Scope and Methodology

Page 34 GAO-02-624 Military Housing

DOD cost estimates and projected the increase in privatization costs from

the housing allowance initiative to eliminate out-of-pocket costs. We

shared the results of our life-cycle cost analyses with service officials and

revised the analyses on the basis of their comments.

To evaluate whether DOD’s privatization contracts protect the

government’s interests, we reviewed contracts and other project

documentation for the first 10 privatization projects. For each project, we

summarized DOD project cost data and other financial details from each

contract, such as the value of (1) government loans, loan guarantees, and

equity contributions, (2) developer equity, and (3) private-sector loans. We

then compared the extent of financial exposure assumed by the

government, the developer, and the private-sector lenders in each

contract, and compared contract assumptions, fee structures, and

expected internal rates of return. We also estimated the impact from the

housing allowance initiative on developer fees and profits and on amounts

available for reinvestment in the projects. Also, to discuss implementation

details and view privatized housing units first hand, we visited three

installations where privatization projects were underway—Fort Carson,

Colorado, and Kingsville Naval Air Station and Lackland Air Force Base,

Texas. At each installation visited, we reviewed housing conditions and

occupancy statistics, discussed the status of privatization implementation,

obtained opinions on the project from local service officials, obtained

information on the satisfaction of military tenants living in privatized units,

and toured new and renovated housing units completed by the developers.

We conducted our review between May 2001 and April 2002 in accordance

with generally accepted government auditing standards.
Appendix III: Description of First Ten

Privatization Projects

Page 35 GAO-02-624 Military Housing

We reviewed the first 10 projects awarded under the Military Housing

Privatization Program. Details of these projects follow.

Project Housing units

Contract award

date Description

Fort Carson,

Colorado

2,663 Sept. 1999 Government to (1) convey all existing units; (2) lease 777 acres of land;

and (3) provide first mortgage guarantee against developer default due

to base closure, downsizing, or deployment. Developer to (1) renovate

1,823 existing units; (2) construct 840 new housing units on base; and

(3) own, operate, and maintain 2,663 units for 50 years.

Fort Hood, Texas 5,912 Oct. 2001 Government to (1) convey all existing units; (2) lease the underlying

land; and (3) provide an equity investment and become a limited

partner. Developer to (1) renovate 4,624 units; (2) convert 630 twobedroom units to 315 four-bedroom units; (3) construct 973 new units

on base; and (4) own, operate, and maintain 5,912 units for 50 years.

Lackland Air Force

Base, Texas

420 Aug. 1998 Government to (1) lease 96 acres; (2) provide a second mortgage; and

(3) provide first mortgage guarantee against developer default due to

base closure, downsizing, or deployment. Developer to (1) demolish

272 existing units; (2) construct 420 new housing units on base; and

(3) own, operate, and maintain 420 units for 50 years.

Robins Air Force

Base, Georgia

670 Sept. 2000 Government to (1) convey 670 existing units and 270 acres of land;

(2) provide a second mortgage; and (3) provide first mortgage

guarantee against developer default due to base closure, downsizing,

or deployment. Developer to (1) demolish 370 existing units; (2)

construct 370 new units on conveyed land; (3) renovate 300 units; and

(4) own, operate, and maintain 670 units for 30 years (may be

extended for two additional 10-year periods).

Dyess Air Force

Base, Texas

402 Sept. 2000 Government to provide a first mortgage loan. Developer to (1) construct

402 new housing units on private land off base; and (2) own, operate,

and maintain the units for 40 years.

Elmendorf Air

Force Base,

Alaska

828 Mar. 2001 Government to (1) convey 584 existing units; (2) lease 219 acres of

land; (3) provide a second mortgage loan; and (4) provide first

mortgage guarantee against developer default due to base closure,

downsizing, or deployment. Developer to (1) demolish 176 units;

(2) construct 420 new housing units on base; (3) renovate 200 units;

and (4) own, operate, and maintain 828 units for 50 years.

Kingsville Naval

Air Station, Texas

150 Nov. 2000 Government to (1) convey 244 existing units and 30 acres of land;

(2) provide an equity investment and become a limited partner; and

(3) provide a second mortgage loan. Developer to (1) construct 150

new housing units on developer-provided land off base; and (2) own,

operate, and maintain 150 units for 30 years (Navy option to terminate

contract anytime after 15 years).

Everett Naval

Station,

Washington

288 Dec. 2000 Government to (1) provide an equity investment and become a limited

partner and (2) provide over a 15-year period limited lease payments in

addition to the servicemembers’ rental payments. Developer to

(1) construct 288 new housing units on private land off base and

(2) own, operate, and maintain the units for 30 years (Navy option to

terminate contract anytime after 15 years).

Appendix III: Description of First Ten

Privatization Projects
Appendix III: Description of First Ten

Privatization Projects

Page 36 GAO-02-624 Military Housing

Project Housing units

Contract award

date Description

Camp Pendleton

Marine Corps

Base, California

712 Nov. 2000 Government to (1) convey 512 existing units; (2) lease 132 acres of

land; and (3) provide a second mortgage loan. Developer to

(1) demolish and replace 312 units; (2) renovate 200 units; (3)

construct 200 additional new housing units on base; and (4) own,

operate, and maintain 712 units for 50 years.

San Diego Naval

Complex,

California

3,248 Aug. 2001 Government to (1) convey 2,660 existing units; (2) lease the underlying

land; and (3) provide an equity investment and become a limited

partner. Developer to (1) demolish 812 units; (2) construct 1,400 new

housing units on the leased land; and (3) own, operate, and maintain

3,248 units for 50 years.

Source: DOD.
Appendix IV: DOD’s Military Housing

Privatization Program Implementation Status

and Plans

Page 37 GAO-02-624 Military Housing

DOD’s pace for implementing the privatization program has quickened,

and its plans for future privatization are aggressive. As of January 1, 2002,

DOD had awarded 11 privatization projects involving 16,228 housing units.

Figure 2 shows, on a fiscal year basis, the cumulative number of housing

units DOD actually privatized and DOD’s plans for privatization through

fiscal year 2006. Developers had completed new construction and

renovation work on 1,740 units as of December 31, 2001.

Figure 2: Cumulative Number of Housing Units Under Contract

Source: DOD.

Appendix IV: DOD’s Military Housing

Privatization Program Implementation Status

and Plans
Appendix V: Services’ Life-Cycle Cost

Estimates

Page 38 GAO-02-624 Military Housing

Table 7 shows the results of the services’ life-cycle cost analyses for the

first 10 projects awarded under the Military Housing Privatization

Initiative. The services’ analyses were completed prior to the projects’

approval, and many costs—such as those for housing allowances—have

changed significantly since then. Their analyses show the military

construction alternative to be more costly in each case. For comparison

purposes, our estimates of life-cycle costs for these projects—made using

current information and adjustments to DOD’s life-cycle cost guidance—

are included in table 2 in the body of the report.

Table 7: Services’ Estimates of Life-Cycle Costs

Dollars in millions

Project

Privatization

option

Military

construction

option Difference

Percentage

difference

Fort Carson $640.7 $693.2 $52.5 7.6

Fort Hood 1,514.9 1,886.3 371.4 19.7

Lackland 83.2 97.9 14.7 15.0

Robins 114.0 157.0 43.0 27.4

Dyess 68.0 75.0 7.0 9.3

Elmendorf 269.3 308.7 39.4 12.8

Kingsville 31.1 42.3 11.2 26.5

Everett 71.6 98.2 26.6 27.1

Camp Pendleton 163.4 210.1 46.7 22.2

San Diego 1,041.4 1,103.9 62.5 5.7

Total $3,997.6 $4,672.6 $675.0 14.4

Source: DOD.

Appendix V: Services’ Life-Cycle Cost

Estimates
Appendix VI: Comments from the Department

of Defense

Page 39 GAO-02-624 Military Housing

Appendix VI: Comments from the

Department of Defense

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

See comment 1.
Appendix VI: Comments from the Department

of Defense

Page 40 GAO-02-624 Military Housing
Appendix VI: Comments from the Department

of Defense

Page 41 GAO-02-624 Military Housing
Appendix VI: Comments from the Department

of Defense

Page 42 GAO-02-624 Military Housing

See comment 3.

See comment 2.
Appendix VI: Comments from the Department

of Defense

Page 43 GAO-02-624 Military Housing

See comment 4.
Appendix VI: Comments from the Department

of Defense

Page 44 GAO-02-624 Military Housing

The following is our response to the Department of Defense’s (DOD) letter

commenting on our draft report.

1. Concerning the leveraging ratio for the Everett project, the project’s

budgetary scored cost was $17.5 million and the Navy originally

estimated $47.8 million, or $166,000 per unit, would be required to

build the project under the military construction alternative. Thus, the

project’s leveraging ratio is 2.7 to 1. However, the Navy later revised its

military construction cost estimate to $52.3 million, or $182,000 per

unit. This estimate results in a 3.0 ratio. In comparison, the Navy’s

military construction unit cost estimates for new units in the Camp

Pendleton and Kingsville projects were $153,000 and $136,000,

respectively. Because the $47.8 million estimate was based on a per

unit construction cost that appears more in line with other Navy

projects and because the Navy used the $47.8 million estimate in its life

cycle cost analysis for the Everett project, we believe that using this

estimate to calculate the 2.7 leveraging ratio is reasonable and results

in the most accurate estimate.

2. See our response in the Agency Comments section of the letter on

page 29.

3. See our response in the Agency Comments section of the letter on

page 29.

4. See our response in the Agency Comments section of the letter on

page 29.

GAO Comments
Appendix VII: GAO Contacts and Staff

Acknowledgments

Page 45 GAO-02-624 Military Housing

Carol R. Schuster (202) 512-3958

Mark Little (202) 512-4673

In addition to the individuals named above, Gary Phillips, James Ellis,

Janet Keller, Sharon Reid, James Vitarello, and R. K. Wild made key

contributions to this report.

Appendix VII: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Acknowledgments

(350074)

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