```
                                                                 
Defense Infrastructure: Greater Management Emphasis Needed to	 
Increase the Services' Use of Expanded Leasing Authority	 
(06-JUN-02, GAO-02-475).					 
                                                                 
The military services face significant challenges in addressing  
facility sustainment, restoration, and modernization needs with  
limited funds. These challenges are magnified by the 20 to 25	 
percent of the Department of Defense's (DOD) real property that  
it views as not being needed to meet current mission		 
requirements, but that adds to costs. To reduce these costs and  
acquire additional resources to maintain its facilities, DOD has 
developed a multi-part strategy involving base realignment and	 
closure, housing and utility privatization, competitive sourcing 
of non-inherently governmental functions, and demolition of	 
facilities that are no longer needed. While the services continue
to use the leasing authority provided for traditional type of	 
leases, they have made limited efforts to use the expanded	 
leasing authority enacted by Congress in fiscal year 2001. The	 
services have identified a number of impediments that have	 
limited the use of the expanded leasing authority and that could 
adversely affect the program in the future.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-475 					        
    ACCNO:   A03503						        
  TITLE:     Defense Infrastructure: Greater Management Emphasis      
Needed to Increase the Services' Use of Expanded Leasing	 
Authority							 
     DATE:   06/06/2002 
  SUBJECT:   Leases						 
	     Military budgets					 
	     Military cost control				 
	     Military expense allowances			 
	     Military facilities				 
	     Military housing					 
	     Real property					 

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GAO-02-475
     
Report to the Secretary of Defense

United States General Accounting Office

GAO

June 2002 DEFENSE INFRASTRUCTURE Greater Management Emphasis Needed to
Increase the Services? Use of Expanded Leasing Authority

GAO- 02- 475

Page i GAO- 02- 475 Defense Infrastructure Letter 1

Results in Brief 2 Background 3 Use of Expanded Leasing Authority Limited 6
Factors Affecting the Services? Current and Future Use of the

Expanded Leasing Authority 7 Conclusions 14 Recommendations for Executive
Action 14 Agency Comments and Our Evaluation 15

Appendix I Scope and Methodology 17

Appendix II Department of Veterans Affairs Enhanced- Use Leasing Authority
18

Appendix III List of Army?s Projects Under Consideration 19

Appendix IV Comments from the Department of Defense 20

Appendix V GAO Contacts and Staff Acknowledgments 23 Contents

Page 1 GAO- 02- 475 Defense Infrastructure

June 6, 2002 The Honorable Donald H. Rumsfeld The Secretary of Defense

Dear Mr. Secretary: The military services face significant challenges in
addressing facility sustainment, restoration, and modernization needs with
limited funds. These challenges are magnified by the 20 to 25 percent of the
Department of Defense?s real property 1 that it views as not being needed to
meet current mission requirements, but that nevertheless adds to costs. To
reduce these costs and acquire additional resources to maintain its
facilities, the Department has developed a multi- part strategy involving
base realignment and closure, housing and utility privatization, competitive
sourcing of non- inherently governmental functions, and demolition of
facilities that are no longer needed. The Department?s strategy also
involves leasing its underused real property to reduce infrastructure and
base operating costs.

Under specific authority, 2 the services have for years leased real property
not currently needed for mission requirements to reduce infrastructure and
base operating costs. Through leasing, the services have been able to put
their surplus capacity to productive use and to generate cash and inkind
consideration of approximately $32 million between 1999 and 2001. The Floyd
D. Spence National Defense Authorization Act for Fiscal Year 2001
significantly expanded the services? leasing authority, 3 which the
Department believes the services could use to significantly reduce
infrastructure and base operating costs.

1 According to DOD, real property consists of land or land together with the
improvements, structures, fixtures located on that land (such as a fuel tank
farm), and other buildings and permanent structures. 2 10 U. S. C. section
2667.

3 These changes included broadening the authorized use of lease revenue both
cash or inkind consideration to (1) include services, facilities, and new
construction, and (2) allow the services to use lease revenue at any
property or facility under their control, rather than at only the
installation leasing the property.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 475 Defense Infrastructure

Because of the potential to reduce infrastructure and base operating costs
offered by the expanded leasing authority, we initiated this review to (1)
assess the extent to which the services have used the new authority since
its enactment in fiscal year 2001, and (2) identify any factors that may
limit use of the new authority. The scope and methodology of our work is in
appendix I.

While the services continue to use the leasing authority provided under 10
U. S. C. 2667 for traditional type of leases (such as agricultural grazing
and space for banks and credit unions), they have made limited efforts to
use the expanded leasing authority enacted by Congress in fiscal year 2001.
The Department envisioned the services using the expanded authority for
larger and more complex projects that would significantly increase leasing
revenues and in turn reduce infrastructure and base operating costs. To
date, the Army has completed two such projects and has several others under
consideration that meet these criteria. On June 21, 2001, the Army signed a
lease, with a developer who will restore several buildings at Fort Sam
Houston, San Antonio, Texas, and sublease them. The Army expects to receive
$253 million in revenue over the next 50 years from this project. 4 On
September 26, 2001, the Army signed a 33- year lease with the University of
Missouri, which will develop and sublease 62 acres on Fort Leonard Wood,
Missouri, for a technology park. According to an Army official, the Army
will receive $500 annually for each sub- leased acre and seven percent of
the net proceeds collected from the sublease. While the Air Force and Navy
have not completed any projects using the expanded authority, they told us
they are in the process of identifying potential projects.

The services have identified a number of impediments that have limited the
use of the expanded leasing authority and that could adversely affect the
program in the future. Specifically, the services identified a new round of
base realignment and closure in 2005, force protection requirements, mission
compatibility, budget implications, legal requirements, and personnel who
lack sufficient real estate experience to undertake the more complex real
estate transactions expected by the Department under

4 The developer will restore the buildings once sub- leases are signed.
However, the Army will not receive any revenue until the developer recovers
its costs, which is expected to take approximately 6 years after the first
sublease is signed. Currently, the Army and developer are negotiating the
type and amount of revenue to be received, both cash and inkind
consideration. Results in Brief

Page 3 GAO- 02- 475 Defense Infrastructure

the new authority. The absence of a strong program emphasis has also limited
the services? use of the authority. For example, to date each service has
issued policy memoranda outlining the goals and purpose of the expanded
leasing authority, but these memoranda tend to simply reiterate the Office
of the Secretary of Defense?s overall goal of expanding leasing efforts to
reduce infrastructure and base operating costs. The services? memoranda do
not identify measurable goals in terms of savings to be achieved. Also, the
services have not provided detailed guidance, such as criteria for
identifying properties with the most potential for generating revenues, to
their installation commanders. In addition, revenue from some services?
lease projects has not been accurately accounted for nor distributed to
their installations, which may discourage installation commanders from
pursuing future lease projects. Further, service accounting systems are not
equipped to account for in- kind consideration in lieu of cash payments.

This report contains recommendations for executive action designed to
increase program emphasis and accurately account for all lease revenues,
both cash and in- kind consideration. In commenting on a draft of the
report, the Department generally concurred with most of our recommendations
but was noncommittal about establishing more specific program goals to
provide increased program emphasis and to help monitor progress toward
meeting those goals.

The military services face the challenge of dealing with a large backlog of
facilities maintenance and repair and insufficient funding devoted to
sustainment, restoration and modernization. To address this issue, DOD is
pursuing an installation strategy to reduce infrastructure and base
operating costs and reshape military installations to meet the needs of the
21st century. After the Cold War, military force structure was reduced by 36
percent. Consequently, the Department was left with infrastructure it no
longer needed for current military operations. To address this imbalance,
the Department has undergone four rounds of base realignment and closures
that have reduced its infrastructure holdings by about 21 percent. Even
after the four rounds of base realignment and closures, the Department
estimates that 20 to 25 percent of its infrastructure is not needed to meet
current mission requirements. Meanwhile, service budgets frequently have
been insufficient to address facility needs. In December 2001, Congress
passed the National Defense Authorization Act for Fiscal Year 2002 giving
the Department the authority for another round of base realignment and
closure in 2005. The Background

Page 4 GAO- 02- 475 Defense Infrastructure

Department estimates it will save approximately $3 billion annually
following these actions.

Although the Department views the base realignment and closure process as
having the greatest impact in terms of savings, it is only one initiative in
a multi- part strategy to reshape and make the services? installations more
efficient. Other important initiatives include, but are not limited to,
housing and utility privatization, competitive sourcing of non- inherently
governmental functions, demolition, and leasing of real property and
facilities.

DOD?s leasing authority can be traced back to the Act of July 28, 1892. The
act provided general authority for the Secretary of War to enter into leases
for a maximum of 5 years for property that was ?not for the time required
for public use.? The Navy received similar authority under a separate law in
1916. Neither statute permitted the services to retain cash proceeds or
accept non- cash or ?in- kind? consideration. Additionally, the
Miscellaneous Receipts Act required all cash payments to be deposited in the
Treasury. Congress expanded the Department?s leasing authority in 1947. The
expansion permitted the service secretaries to enter into leases for longer
periods, grant the lessee a first right to buy the property in case of sale,
and accept in- kind consideration. The expansion also provided that in- kind
consideration could be applied specifically to the leased property or to the
entire installation, if a substantial part of the installation was leased.
Congress also provided limited relief from the Miscellaneous Receipts Act by
permitting the services to be reimbursed for the costs of utilities or
services provided in connection with a lease.

The basic authority remained relatively unchanged until 1990, when Congress
amended 10 U. S. C. 2667 to establish special accounts for cash payments.
The amendment required the services to use the accounts for environmental
restoration or facilities maintenance and repair. The amendment provided
that, to the extent provided in appropriation acts, half of the proceeds
were to be returned to the installation where the property was located and
the other half was to be available for use by the services. The services had
the option of allocating some or all of a service?s half of the cash
proceeds to the installation leasing the property or retaining it for any
property owned by the service.

Even with these amendments to 10 U. S. C. 2667, the Department believed that
further revisions were needed to make the statute a better tool for
utilizing its property. Section 2814 of the Strom Thurmond National DOD?s
Leasing Authority

Page 5 GAO- 02- 475 Defense Infrastructure

Defense Authorization Act for Fiscal Year 1999 required the Department to
provide Congress with an assessment of its authority to lease real property
and proposed adjustments to 10 U. S. C. 2667. In its report, 5 the
Department proposed four changes that would have allowed the Department, in
its view, to use its surplus capacity more effectively to further reduce
installation support costs. The proposed changes included (1) allowing the
use of cash proceeds without the additional step of congressional
appropriation, (2) permitting environmental indemnification, (3) expanding
the use of in- kind consideration, and (4) permitting new construction as
in- kind consideration. Congress acted on these proposals, but did not
implement all of the Department?s proposals.

In the Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001, Congress significantly expanded the services? authority to accept
inkind consideration. Specifically, Congress expanded authorized use of
inkind consideration to include additional services, such as construction of
new facilities. It also allowed service secretaries to accept in- kind
consideration at any property or facility under their control, rather than
at only the installation leasing the property. Congress made similar changes
to the authority to use funds from the special accounts for cash payments.
These accounts may now be used for acquisition of facilities and facilities
operation support, as well as construction of new facilities. The Department
of Veterans Affairs has had similar enhanced leasing authority since 1991,
which permits it to lease property for the purpose of generating revenues to
improve services to veterans. Appendix II provides examples of Veterans
Affairs? use of their enhanced leasing authority.

The services have leased real property on their bases for years as a means
to reduce infrastructure and base operating costs. The military services
leased space for banks, credit unions, ATMs, storage, schools, and
agricultural grazing. These projects served the needs of the community and
generated modest amounts of revenues. From 1994 to 1998, the services
entered into approximately 1, 800 real property leases that generated $21. 9
million. Agricultural and grazing leases comprised 36 percent of the total
number of leases for all military Departments combined. Revenues from
agricultural and grazing leases are retained to cover administrative costs
of leasing and to cover financing of land- use

5 Department of Defense Report to Congress: Leasing of Non- Excess Military
Property, June 1999. The Services? Historical

Use of Leasing

Page 6 GAO- 02- 475 Defense Infrastructure

management programs at installations. Service revenues from leasing
increased to $10. 7 million in fiscal year 1999, $14. 4 million in fiscal
year 2000, and $12. 9 million in fiscal year 2001. These amounts do not
include in- kind consideration. The Department estimates that, including in-
kind consideration, the services collected the equivalent of $22 to $25
million annually for the 3- year period. This figure represents
approximately onethird of 1 percent of the Department?s $6 billion
facilities capital improvement requirement.

In the Department of Defense?s 1999 leasing report to Congress, the
Department estimated that the expanded leasing authority could increase its
revenues to $100 to $150 million annually after the first 5 years of the
expanded authority. To accomplish this, the Department expects the services
to focus on larger and more complex leases, to include major development
projects that involve real estate developers who lease the property, restore
it, and in turn sublease the property to a variety of tenants. The services
are also exploring ways to share in future revenues with developers as part
of lease agreements.

The services continue to use 10 U. S. C. 2667 for traditional leases, but
the services have made limited efforts to use the expanded leasing
authority, which was expected to result in larger and more complex projects.
As a result, the services may not meet the Department?s expectations of
generating $100 to $150 million in annual revenues from the expanded
authority. To date, the Army has completed two projects based on the
expanded authority and has identified several other potential projects. (See
app. III for more details on the projects currently under consideration by
the Army using the expanded leasing authority.) On June 21, 2001, the Army
signed a lease, with a developer who will restore several buildings at Fort
Sam Houston, San Antonio, Texas, and sublease them. The Army expects to
receive $253 million in revenue over the next 50 years from this project. On
September 26, 2001, the Army signed a 33- year lease with the University of
Missouri, which will develop and sublease 62 acres on Fort Leonard Wood,
Missouri, for a technology park. The University of Missouri Systems and the
State of Missouri will provide an initial investment of $4 million.
According to an Army official, the Army will receive $500 annually for each
sub- leased acre and 7 percent of the net proceeds collected from the
sublease. This project will enhance the installation?s mission by enabling
industry and academic partners to co- locate on the installation. Use of
Expanded

Leasing Authority Limited

Page 7 GAO- 02- 475 Defense Infrastructure

According to Air Force and Navy officials, they are in the process of
identifying potential projects that would use the expanded leasing
authority. However, as noted below, the services have cited numerous factors
that were likely to limit the use of the expanded leasing authority.

The services have identified a number of factors that have limited the use
of the expanded leasing authority and that could adversely affect the
program in the future. However, the Army?s leasing experience indicates that
leasing opportunities may exist notwithstanding these factors. A significant
factor that could hinder the use of the expanded leasing authority may be
the absence of strong program emphasis, including detailed program guidance
and goals and a financial system capable of tracking revenues and in- kind
consideration from leases.

The services have identified a number of impediments that have made them
cautious about using the expanded leasing authority. Some of their concerns
have been raised by the congressionally authorized round of base realignment
and closure scheduled for 2005 and force protection issues resulting from
the events of September 11. Other potential impediments include mission
compatibility, budget implications, legal requirements, and resource
availability.

Navy and Air Force officials cite the planned base realignment and closure
process authorized for 2005 as one of the main obstacles to expanding their
leasing efforts in the short- term. The services are hesitant to lease
property on bases that might be subject to a base realignment and closure
action or may be required for future mission needs. Navy officials expressed
concern about having to terminate leases if an installation should
subsequently be subject to a base realignment and closure action, citing
costs it had inccurred under similar circumstances. For example, Navy
officials stated they had to maintain the utilities at a base in El Toro,
California, for a year after the base was closed because it could not
terminate a lease without incurring substantial costs.

The services also want to reserve property in the event that they have to
accommodate missions from realigned or closed installations. An Air Force
official stated that leased property might be needed for missions
transferring from realigned or closed bases. The official added that the Air
Force has significantly reduced its infrastructure by demolishing over
300,000 square feet of property and closing 31 bases in the previous base
closure rounds. Thus, according to Air Force officials, there are not as
Factors Affecting the

Services? Current and Future Use of the Expanded Leasing Authority

Impediments Affecting the Services? Use of the Expanded Leasing Authority

Base Realignment and Closure

Page 8 GAO- 02- 475 Defense Infrastructure

many opportunities to lease. Also, according to a Navy official, laws and
regulations, community interest, and the local congressional delegation can
limit the service?s ability to terminate leases, making the leases nearly
irreversible commitments of assets. Consequently, the Navy and Air Force are
hesitant to use the expanded leasing authority until the future base
realignment and closure process identifies those installations that will be
closed or realigned.

All three of the services expressed concern about the impact of leasing on
force protection and base security issues. For example, according to
services officials, installation commanders are concerned about their
ability to strengthen security and limit base access if they open their
bases to private tenants. The events of September 11, 2001, have increased
their concerns about these issues.

Despite the need for increased emphasis on force protection and security
concerns, the services may be able to mitigate, according to an Army
official, the impact of force protection issues somewhat by locating leasing
projects near the periphery of an installation. In addition, heightened
security may be an advantage in attracting lease projects. The Army, for
example, has chosen to emphasize the benefits of heightened security to
potential leasing clients. It will promote additional security measures as a
benefit in future lease proposals.

Service officials also cited mission compatibility as an obstacle to leasing
projects for some installations. These officials indicate that they do not
want to create new missions on their installations and have issued memoranda
stating that leases should be consistent with an installation?s mission.
However, according to service officials, finding projects that are mission
related could be difficult. For example, the Navy has turned down proposals
to lease and develop naval property because the leases would have conflicted
with the Navy?s mission. According to a Navy official, the Navy is concerned
that the more involved it becomes with a community through leasing projects,
the less flexibility and control it has over its installation. Furthermore,
some officials have indicated that generating interest in leasing Navy
properties is difficult because naval buildings and property generally have
very specific uses and may not be easily modified to satisfy the needs of
potential lessees. For example, naval shipyards have very specialized
missions that limit the activities that can be conducted on them. Similarly,
Air Force officials are concerned that joint use of an installation could
compromise its mission. For example, if a private firm wanted to lease an
aircraft hangar and allow private aircraft to take off Force Protection and
Base

Security Mission Compatibility

Page 9 GAO- 02- 475 Defense Infrastructure

and land, the Air Force would then have to coordinate those private flights
with its flight schedule, which could affect its mission.

The services may be able to overcome this issue by subleasing to government
contractors and other service units that are currently leasing private
property, and they may be able to find lease projects with private companies
that reinforce their missions. For example, the Army is hoping to take
advantage of San Antonio?s medical industry to identify and attract leases
at Fort Sam Houston, which has a large medical mission. Similarly, the Army
is structuring a lease that would provide for a joint- use hot- test track
in Yuma, Arizona. The Army would be able to test the durability of its
vehicles in desert conditions in conjunction with a private vehicle
manufacturer.

Section 2667 of title 10, United States Code, provides that at least 50
percent of lease revenues must be returned to the installation where the
lease is located. The Department and services view this as an incentive to
installation commanders to identify and lease available property to help
defray base operating support costs. However, according to the Department of
Defense?s leasing report to Congress, the Office of Management and Budget
and Congress may view lease revenues as a substitute for direct
appropriations and may reduce the Department?s appropriation dollar- for-
dollar by the increase in lease revenue. The Department may in turn reduce
the services? budgets thus reducing or eliminating an incentive for them to
identify and lease additional properties.

This disincentive may be offset to some extent by the expanded leasing
authority?s broadened use of in- kind consideration to include additional
services and new construction. In addition, in- kind consideration can
remain at the installation, which allows the installation to immediately
realize all of the benefits.

Department and service information has indicated that the McKinneyVento
Homeless Assistance Act, National Historic Preservation Act, and
environmental indemnification issues can discourage leasing of their
facilities. However, others suggest that this is not always the case.

The Department?s report to Congress stated that the McKinney- Vento Homeless
Assistance Act could discourage leasing. The McKinney- Vento Act mandates
that providers for the homeless must be given an opportunity to use federal
real property identified as not currently needed for mission requirements.
However, service officials have found that while Budget Implications

Legal Requirements

Page 10 GAO- 02- 475 Defense Infrastructure

compliance with the McKinney- Vento Act is a time- consuming process, it
does not necessarily impede their ability to respond to leasing
opportunities.

Also, service officials stated that the National Historic Preservation Act
could hinder the leasing program. Many of the buildings on the three
services? installations are historic properties and are protected by the
National Historic Preservation Act. For example, the Army estimates that
approximately 15, 000 of its properties are listed on or eligible for the
National Register of Historic Places. Service officials stated that numerous
regulations on maintenance, preservation, and restoration of historic
properties could limit a leasing project?s success by limiting the
developer?s ability to attract tenants. Specifically, at Army property
leased at Fort Sam Houston (where, according to Army officials, 57 percent
of the buildings are historic), the state historic preservation office
wanted the developer to retain walls that were blocking natural light.
Through lengthy negotiations, the developer was able to convince
preservation officials that they would be unable to secure a sufficient
number of tenants to make the lease profitable, without the ability to
design space with natural light. While the National Historic Preservation
Act can create issues for a developer, the act can also be an incentive
because of the potential tax credits a developer can receive for restoring
historic property. For example, even though leased property is involved, the
developer at Fort Sam Houston is seeking tax credits for the property, which
he stated might be used to lower the rental rate of its sub- leases,
including leases to the federal government. If the developer at Fort Sam
Houston is successful, the tax credits could potentially attract developers
and lessees to installations that would otherwise not be considered
desirable due to location or other issues. In addition, a DOD official
stated that the services could capitalize on their historic property by
marketing the property to the film industry, which could generate
substantial revenue.

The Department?s report and service officials stated that environmental
indemnification (i. e., to hold harmless the lessee from liability for
Department- related environmental contamination) is also a significant
barrier to leasing. According to DOD, there is a perception in the private
sector that military property has a high potential for being contaminated,
even when current studies indicates otherwise. Potential lessees who are
concerned about the liability for cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act may be discouraged
from leasing military property. Although the Department has stated that
under any leasing arrangement it is responsible for all

Page 11 GAO- 02- 475 Defense Infrastructure

environmental cleanup cost, potential lessees may be reluctant to engage in
an agreements without indemnification.

Limited resources, including well- trained personnel and funds may also
impede the services? leasing efforts. The expanded authority, to the extent
used or envisioned, could involve large, complex real estate transactions
that require experienced legal and real estate personnel to complete.
According to service officials, the lack of a sufficient number of staff
members with the necessary real estate knowledge is an impediment to
expanding leasing efforts. Service officials added that installation
commanders- whom the services are relying on to identify potential leasing
opportunities and prepare business cases supporting the project- have not
received any formal training and lack the necessary expertise. In addition,
according to service officials, the services are reluctant to assume the
risks of expending their limited resources on potential projects that may
not result in a lease.

According to Navy officials, the Navy has a limited number of trained real
estate staff and many of them are involved with higher priority issues, such
as utility privatization and its Ford Island 6 development project. One Navy
official stated that installation personnel are not trained to identify,
complete, and manage leasing projects. Air Force officials expressed similar
concerns, stating that installation commanders are not currently trained to
manage property. Likewise, the Air Force has also dedicated its personnel to
other priority projects, including its demonstration project at Brooks Air
Force Base, 7 limiting its ability to undertake additional leasing projects.

To address the shortage of personnel, the Army at Fort Sam Houston converted
its Total Quality Management Office into a business practices office to
handle the leasing project. As a result of these efforts, the Army has
projected that it will receive approximately $253 million in revenue over
the lease?s 50- year term. This has led the Army to encourage its major

6 In 1999, the Navy received special legislative authority under 10 U. S. C.
2814 to develop the historic Ford Island site in Hawaii to include a
combination of conveyances and leasing. 7 Section 136 of the Military
Construction Appropriation Act of 2001 gave the Air Force the

authority to convey property at Brooks Air Force Base in San Antonio, Texas,
and lease back those facilities needed to meet its mission requirements.
Limited Resources

Page 12 GAO- 02- 475 Defense Infrastructure

commands to establish business practices offices at their installations to
handle, among other things, leasing functions.

The services lack a strong program emphasis that would encourage the use of
the expanded leasing authority. They have neither identified program goals
in terms of desired savings and timelines for achieving them, nor have they
developed implementation guidance. In addition, the services have not
accurately accounted for existing lease revenue, and their accounting
systems are not equipped to track in- kind consideration.

The military services control and are responsible for the operation of their
installations; therefore, DOD has essentially deferred to the military
services to establish program guidance for implementing the expanded leasing
authority. However, the services have not developed this guidance to include
measurable goals and detailed guidance that will enable them to take full
advantage of the expanded authority. Each service has issued policy
memoranda outlining the goals and purpose of the expanded leasing authority,
but these memoranda generally reiterate the Office of the Secretary of
Defense?s overall goal of expanding leasing efforts to reduce base operating
costs and to improve installation efficiency. The services? memoranda do not
identify measurable goals in terms of the amount of savings the services
want to achieve and when they want to achieve them. Additionally, the
services have not provided detailed guidance, such as criteria for
identifying facilities and space available for leasing, nor a methodology to
identify those projects that have the potential to return the most lease
revenues. For example, although the Army is aggressively pursuing lease
projects that could potentially generate millions of dollars in savings, it
has not selected these projects systematically or determined how many
projects it can successfully undertake given the complex nature of the
leases. Instead of a formal management framework, the services have relied
upon installation commanders to identify and pursue leasing opportunities.
Service officials admit that many installation commanders may not be
adequately prepared to handle these duties, as they lack personnel with both
real estate and leasing experience.

Where leasing has occurred, historically, the services have not accurately
accounted for lease revenue, and their accounting systems are not equipped
to track in- kind consideration received in lieu of cash. In the case of
cash revenues, the law provides that at least 50 percent of the revenue must
be returned to the installation where the leased property is Program
Emphasis Lacking

Page 13 GAO- 02- 475 Defense Infrastructure

located. According to service officials, returning lease revenue acts as an
incentive to installation commanders to identify and lease as much of their
real property as is reasonable. However, we found that two of the three
services were unable to accurately track cash revenues, which resulted in
installations from two services receiving less revenue than anticipated or
no revenue:

 In fiscal year 2000, Air Force installations reported that they should
have about $2. 1 million in lease revenue. However, DOD?s treasury leasing
account records showed that Air Force installations only deposited about $1.
4 million in the account, resulting in a $700, 000 discrepancy, which the
Air Force has yet to reconcile. Because of the $700,000 discrepancy, the Air
Force pro- rated the lease revenues, giving each installation and its major
command a share of the $1. 4 million, but not necessarily 100 percent of the
revenue they had generated, which is ordinarily Air Force policy. The Air
Force is unable to identify whether the $700, 000 was collected or
incorrectly recorded into another account.

 According to Department records, the treasury leasing account showed that
the Navy deposited $4.7 million in lease revenue in fiscal year 2000.
However, the Navy?s Financial Management and Budget Office is unable to
identify the source of 48 deposits totaling approximately $800,000, and,
therefore, the Navy has not distributed $2. 35 million (50 percent of the
revenues) back to the installations, as provided by 10 U. S. C. 2667.
However, the Navy has already distributed 50 percent of the revenue for
other service needs.

Each of the services lacks a service- wide accounting system to track inkind
consideration, which can be accepted in lieu of cash payments and can
include construction of new facilities or maintenance and repair services.
In- kind consideration currently accounts for about 40 percent of lease
revenue, according to Department of Defense officials, who encourage in-
kind consideration as an alternative to cash revenue. While the expanded
authority gave the services the ability to use in- kind consideration at any
installation under its control, the lack of visibility over in- kind
consideration at the service level limits the services? ability to
accurately account for a significant portion of its leasing revenue.
Consequently, the services may be unable to determine the success of their
leasing efforts, which may limit their ability to use in- kind consideration
for their highest priority projects.

Page 14 GAO- 02- 475 Defense Infrastructure

In an era of reduced budgets for infrastructure and base operating costs,
leasing can be an important tool that allows the services to help meet some
of their most critical infrastructure needs. We recognize that the
impediments identified by the services are likely to limit the use of the
expanded leasing authority somewhat. However, recent and on- going efforts
by the Army to use the expanded authority suggest that with sufficient
emphasis, opportunities may still exist to lease under this expanded
authority. At present, the program lacks needed emphasis and planning in
terms of formally developed goals or detailed guidance. Consequently, the
services are not systematically identifying potential lease projects and
have not determined how many of these projects to undertake at one time. In
addition, revenue from existing lease projects has not been accurately
accounted for and distributed to installations, which may discourage
installation commanders from initiating projects under the expanded leasing
authority. In- kind consideration represents approximately 40 percent of the
benefits from these existing leases and is expected to increase. However,
the services have not accounted for these receipts, which may prevent the
services from assessing the full extent of their success.

To make better use of the expanded leasing authority, we recommend that the
Secretary of Defense require the Under Secretary of Defense for Acquisition,
Technology, and Logistics to work with the Secretaries of the Air Force,
Army, and Navy to place greater emphasis on an expanded leasing program in
the form of

 program goals and measurements to monitor progress in reducing
infrastructure and base operations costs;

 specific program guidelines, such as criteria for project selection; and

 accurately accounting for all cash revenues and developing a new system to
account for in- kind consideration to ensure that all of the benefits from
leasing are captured.

As you know, 31 U. S. C. 720 requires the head of a federal agency to submit
a written statement of the actions taken on our recommendations to the
Senate Committee on Governmental Affairs and the House Committee on
Government Reform not later than 60 days after the date of this report. A
written statement must also be sent to the House and Senate Committees on
Appropriations with the agency?s first request for appropriations made more
than 60 days after the date of this report. Conclusions

Recommendations for Executive Action

Page 15 GAO- 02- 475 Defense Infrastructure

In commenting on a draft of this report, the Deputy Under Secretary of
Defense (Installations and Environment) generally concurred with most of our
recommendations while partly concurring with the recommendation to develop
program goals and measurements to monitor progress in reducing
infrastructure and base operations costs. While partially concurring with
this recommendation, the Department noted two policy memoranda already
issued identifying goals and objectives, and noted that while it believes
there are opportunities to increase the number and the scope of leases under
the expanded authority, it is dependent on a number of factors affecting
individual projects. It was noncommittal regarding development of additional
program goals. We found that while the Department has issued general program
guidance, that guidance does not contain specific goals and measurements for
tracking progress in using the expanded leasing authority. We continue to
believe that despite likely limitations in the program, as outlined in the
report, development of goals and measurements to monitor progress is
important to fostering increased program emphasis. This is especially
important, because as noted in the Department?s comments, use of the
expanded leasing authority is a key element of the Department?s efficient
facilities initiative. Therefore, we are making no change to our
recommendation.

The Department also provided observations on the challenges it faces in
identifying and implementing projects under the expanded leasing authority.
Among them are such challenges as identifying land and/ or buildings that
have sufficient market appeal to attract one or more private sector or
public entities, as well as be of sufficient size and scope to permit a
sufficient rate of return to the developer for the project to be
accomplished. We agree that these are significant challenges along with
others we have pointed out in our report. The Department?s comments are
included in this report as appendix IV.

We are sending copies of this report to the Secretary of the Army, the
Secretary of the Navy, the Secretary of the Air Force, the services? offices
of installations and environment, and interested congressional committees
and members. We will also 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. Agency Comments

and Our Evaluation

Page 16 GAO- 02- 475 Defense Infrastructure

Please contact me at (202) 512- 8412 if you or your staff has any questions
concerning this report. Major contributors to this report are listed in
appendix V.

Sincerely yours, Barry W. Holman, Director Defense Capabilities and
Management

Appendix I: Scope and Methodology Page 17 GAO- 02- 475 Defense
Infrastructure

To assess the extent to which the services have used the expanded leasing
authority since its enactment in fiscal year 2001, we identified current
leasing projects and talked to services officials and private sector
representatives. In addition, we visited an installation that has a project
using the expanded leasing authority. Specifically, we interviewed officials
at the Office of the Secretary of Defense; Office of the Assistant Secretary
of the Navy Installations and Environment, Rosslyn, Virginia; Office of the
Assistant Secretary of the Army Installations and Environment, Washington,
D. C.; Office of the Assistant Chief of Staff for Installation Management,
Army Headquarters, Washington, D. C.; Office of the Deputy Assistant
Secretary of Army, Resource Analysis and Business Practices, Washington, D.
C.; Naval Facilities Engineering Command Headquarters, Washington, D. C.;
Air Force Real Estate Agency, Bolling Air Force Base, Washington, D. C.;
Naval Sea Systems Command, Washington, D. C.; and Naval Air Systems Command,
Crystal City, Virginia. In addition, we visited Fort Sam Houston, San
Antonio, Texas, where the Army recently completed a lease under the expanded
leasing authority.

To identify factors that limited the services? use of the new authority, we
identified and reviewed congressional legislation, Department of Defense and
the services? memoranda, policies, and procedures, and accounting records.
In addition to the officials listed above, we interviewed officials in the
Office of Management and Budget, Washington, D. C.; Department of Defense?s
Office of the Comptroller, Washington, D. C.; Army Financial Management and
Comptroller Office, Washington, D. C.; Navy Financial Management and Budget
Office, Washington, D. C.; Air Force Financial Management and Budget Office;
Air Force?s Civil Engineers Operation and Maintenance Division, Crystal
City, Virginia; Defense Financial and Accounting Services, Denver, Colorado
and Cleveland, Ohio; U. S. Army Corp of Engineers, Washington, D. C.; and
private sector representatives from Roy F. Weston, Inc., and Orion Partners,
Inc., San Antonio, Texas.

We conducted our review between June 2001 and April 2002 in accordance with
generally accepted government auditing standards. Appendix I: Scope and
Methodology

Appendix II: Department of Veterans Affairs Enhanced- Use Leasing Authority

Page 18 GAO- 02- 475 Defense Infrastructure

Title 38 U. S. C., sections 8161- 69, provides the Department of Veterans
Affairs the authority to leverage its property into needed facilities,
services, or resources. Veterans Affairs can lease underutilized property
for up to 75 years in return for cash or in- kind consideration. Veterans
Affairs has used its enhanced- use leasing authority to lease space for
children?s centers, offices, parking garages, health centers, residential
lodging, and other purposes. For example, in Texas, Veterans Affairs leased
unused land to a developer on its medical campus. The developer constructed
a Veterans Affairs regional office building as well as other buildings and
rented space to commercial businesses. According to Veterans Affairs, the
project saved $6 million on construction, $10 million in operating costs,
and produced annual revenue for Veterans Affairs through revenue sharing
with the developer. In Indiana, Veterans Affairs leased underutilized land
and facilities to the state to use as a psychiatric care facility. Veterans
Affairs estimates it obtained $15. 7 million in financial benefits and $5
million per year in operational savings. The lease revenue that Veterans
Affairs receives from both sites funds veterans programs.

Veterans Affairs enhanced- use leasing authority has been in effect since
1991 and has been extended four times to a current expiration of December
31, 2011. To date, Veterans Affairs has approved 16 projects, and 11 have
been completed. According to Veterans Affairs officials, these projects have
been successful and the Department?s experiences could provide a framework
for the Department of Defense?s expanded leasing efforts. In addition,
Veterans Affairs has studied over 100 initiatives, of which more than 50 are
?in development.? Appendix II: Department of Veterans Affairs

Enhanced- Use Leasing Authority

Appendix III: List of Army?s Projects Under Consideration

Page 19 GAO- 02- 475 Defense Infrastructure

The Army has four projects under consideration using the expanded leasing
authority that it believes will reduce base operating costs, including
Picatinney Arsenal, Rock Island Arsenal, Yuma Proving Grounds, and Walter
Reed Army Medical Center.

The Army proposed leasing four buildings for joint military and commercial
use as laboratories, light manufacturing, education/ training, and
administrative facilities at Picatinney Arsenal. On July 2, 2001, Picatinney
Arsenal signed a conditional lease with a developer. The installation and
developer are currently drafting their Business and Leasing Plan for
approval by the Department of the Army.

At Rock Island Arsenal, the Army has identified 14 buildings to lease under
a joint use agreement, which would allow a private sector developer to
market the facilities. Rock Island Arsenal is currently developing its
Notice of Availability to lease, which serves as the basis for selecting a
developer.

At Yuma Proving Ground, the Army is seeking a private- sector developer to
construct a Hot Weather Test Complex. Yuma Proving Ground is currently
drafting a Report of Availability. As in- kind consideration, Yuma Proving
Ground would also be able to use the test track for mission requirements.

At Walter Reed Army Medical Center, the Army has identified one building to
be restored and utilized as an office building for health care, or
biomedical research organization, which is compatible with Walter Reed?s
mission. The building has historical significance and needs to be preserved.
Estimated renovation costs are over $40 million, which the Army envisions
would be incurred by the developer. Appendix III: List of Army?s Projects
Under

Consideration

Appendix IV: Comments from the Department of Defense

Page 20 GAO- 02- 475 Defense Infrastructure

Appendix IV: Comments from the Department of Defense

Appendix IV: Comments from the Department of Defense

Page 21 GAO- 02- 475 Defense Infrastructure

Appendix IV: Comments from the Department of Defense

Page 22 GAO- 02- 475 Defense Infrastructure

Appendix V: GAO Contacts and Staff Acknowledgments

Page 23 GAO- 02- 475 Defense Infrastructure

Ronald L. Berteotti (214) 777- 5702 Patricia J. Nichol (214) 777- 5665

In addition to those named above, Tommy Baril, Tinh Nguyen, Robert Ackley,
Susan Woodward, and Nicole Carpenter made key contributions to this report.
Appendix V: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(350080)

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