PUBLIC-PRIVATE

PARTNERSHIPS

Key Elements of

Federal Building and

Facility Partnerships

United States General Accounting Office

GAO Report to the Honorable Stephen Horn

Committee on Government Reform

House of Representatives

February 1999

GAO/GGD-99-23

United States

General Accounting Office

Washington, D.C. 20548

General Government Division

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Page 1 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

GAO

February 3, 1999

The Honorable Stephen Horn

Committee on Government Reform

House of Representatives

Dear Mr. Horn:

The U.S. government is one of the world’s largest property owners, with a

real estate portfolio of almost 435,000 buildings and over half a billion

acres of land. Most of the government’s real property holdings are national

parks, forests, other public lands, and military facilities. Overall,

government-owned real estate is under the custody and control of at least

30 federal agencies, although most is under the jurisdiction of 8

organizations. These organizations are the Departments of Agriculture,

Defense, Energy, the Interior, and Veterans Affairs; the General Services

Administration; the Tennessee Valley Authority; and the U.S. Postal

Service.

As federal agencies find themselves under budgetary constraints with

increasing demands to improve service, the importance of making the

most effective use of capital assets grows.1

 To do this, federally owned

buildings and land should be strategically acquired, managed, and disposed

of so that the taxpayers’ return on the investment is maximized.2

 To

maximize returns on buildings and facilities, federal agencies are

increasingly interested in managing them in a more businesslike manner,

including exploring the formation of partnerships through contracts or

agreements between the federal government and the private sector.3

These arrangements, which sometimes are called “public-private

ventures,” typically involve a government agency contracting with a

private partner to renovate, construct, operate, maintain, and/or manage a

facility or system, in part or in whole, that provides a public service.

You asked us to identify the key elements of partnerships between the

federal government and the private sector that were formed to help the

 

1

 See Budget Issues: Budgeting for Capital (GAO/T-AIMD-98-99, March 6, 1998).

2

 Federal Real Property: Key Acquisition and Management Obstacles (GAO/T-GGD-93-42, July 27,

1993).

3

 See, for example, Executive Order 12893, Principles for Federal Infrastructure Investments, January

26, 1994; and Executive Order 12803, Infrastructure Privatization, April 30, 1992.
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government acquire and operate federal real estate and facilities more

efficiently and effectively. This report responds to your request by

describing key elements and related experiences from six federal

partnerships. The six were projects of three agencies: the National Park

Service (Park Service) within the Department of the Interior, the

Department of Veterans Affairs (VA), and the U.S. Postal Service (Postal

Service). (See apps. II through IV for more information about each of the

projects.)

Although each of the six projects we reviewed tailored its efforts to

address its specific needs and environments, there also were elements that

were common among the projects that appeared to be key to their

implementation. These elements are shown in figure 1.

Results in Brief
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Note: The sequence in which these key elements occurred during implementation varied by project.

a

 Business plans may identify issues that require legislative action.

Source: GAO analysis of selected federal building and facility public-private partnerships.

Figure 1: Key Elements of Public-Private Partnerships
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First of all, there was a catalyst for change that led each of the three

agencies to form a partnership with the private sector. For example,

community pressure and fiscal constraints were the catalyst in the two

Park Service projects we reviewed, in which the Park Service decided to

enter into public-private partnerships mainly to obtain partners that could

finance needed preservation efforts.

Second, for all six projects we reviewed, Congress enacted legislation that

provided a statutory basis for the agency to enter into the partnership and

keep the revenues it received from that partnership. The legislation was

either project-specific, as it was for one of the Park Service projects, or

broader in scope, as was the 1991 law that authorized VA to lease its

properties and retain the resulting revenues. According to building and

facility managers in all of the projects we reviewed, a primary reason for

an agency to enter into these partnerships was the incentive to keep for its

own use the revenue that it would receive from the partnership.

Third, the agencies we reviewed also told us that they established

organizational structures and acquired the necessary expertise to interact

with private sector partners to ensure effective partnership

implementation. For example, VA established an Office of Asset and

Enterprise Development to promote the partnership concept within VA,

design and implement public-private partnership projects, and be a single

point of contact with VA’s private sector partners. The office was staffed,

VA officials said, with professionals experienced in portfolio management,

architecture, civil engineering, and contracting.

Fourth, in all six projects we reviewed, asset management officials used

business plans or similar documents to make informed decisions and

protect the government’s interests. According to Postal Service officials,

the development and execution of a business plan, which included

information about the division of risks and responsibilities between the

Postal Service and its private sector partner, was critical to its success in

implementing its large-scale real estate development projects. For each of

the projects we reviewed, business plans were drafted jointly between the

public and private sector parties to help ensure close involvement of both

parties in the design and implementation of the project.

Finally, support from project stakeholders was an important factor in

developing and implementing the public-private partnerships. In all of the

projects we reviewed, agencies had the support of the local community

and other stakeholders to create the partnership. For example, in the two

Park Service projects, community leaders who were worried about
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preserving historic structures without over-commercialization became

sponsors of the projects.

Generally, federal partnerships entail contractual arrangements between a

federal agency and one or more private sector partners. Under these

arrangements, the agency may retain ownership of the public facility or

system, but the private party generally invests its own capital to design and

develop the properties. The private partner may be a nonprofit

organization or a for-profit business. Some federal agencies also enter into

such partnerships with a state or local government.

According to the federal building and facility managers whom we spoke

with, most partnerships fall into one of three general categories:

lease/develop/operate, lease/purchase, and contract services. There are

different public and private sector responsibilities and benefits associated

with each of these types of partnerships. For example, under a

lease/develop/operate partnership, the private party leases a facility from a

public agency; invests its own capital to renovate, modernize, and/or

expand the facility; and then operates it under a contract with the public

agency.4

 In a lease/purchase partnership, which is typically used for new

construction, the private sector finances and builds a facility that it then

leases to a public agency. At the end of the lease term, the public agency

owns the facility or purchases it at the cost of any remaining unpaid

balance in the lease.

The third category of partnership, contract services, consists of two

subtypes: (1) operations and maintenance; and (2) operations,

maintenance, and management. Under both of these categories, the public

partner retains ownership of the public facility. Under the first category

the public partner contracts with a private partner to provide and/or

maintain a specific public service or system. In the second, a public agency

contracts with a private partner to operate, maintain, and manage a facility

or system providing a public service and may invest its own capital in the

facility or system.

One project in our review made use of another type of partnership—

design/build/operate. In this type of partnership, a single contract is

awarded for the design, construction, and operation of a capital

 

4

 In addition to lease/develop/operate arrangements, the Park Service has used develop/operate

arrangements as part of cooperative agreements. The only difference in these arrangements is that in a

cooperative agreement the Park Service charges no rent. Instead, the private sector partner agrees to

renovate, maintain, and operate the facility. This was the case with the Fort Mason project discussed

in this report.

Background
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improvement. Title to the facility remains with the public sector. A

glossary that provides additional information on various types of

partnerships appears at the end of this report. Table 1 identifies the

projects that we reviewed and their related agencies.
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Projects and related agencies Type Brief description of projects

Department of the Interior,

National Park Service

1. Fort Mason Foundation, San

Francisco, CA, 1976, extended in

1984.

2. Thoreau Center at the Presidio,

San Francisco, CA, 1995.

Cooperative

agreement to

develop/

operate (20

years)

Lease/develop/

operate (55

years)

These two urban parks were once military bases

and contain many historic but deteriorating

structures. In each instance, the Park Service

contracted with a private sector partner to obtain

funding to restore historic structures while

keeping the park in public use. The partners rent

the restored structures to nonprofit tenants.

Department of Veterans Affairs

3. VA Regional Office, Houston, TX,

1993.a

4. Cold Spring Medical Facility,

Indianapolis, IN, 1995.a

Design/build/

operate (35

years)

Lease/develop/

operate (35

years)

VA used statutory authority to enter into revenuegenerating leases for both projects. In Texas, a

private developer constructed a VA regional office

building on VA’s medical campus. VA then leased

land to the developer on the medical campus. The

developer constructed buildings on the land and

rents space in them to commercial businesses. VA

must approve the buildings’ tenants. In Indiana,

the state leased underutilized land and facilities

from VA to use as a psychiatric care facility. The

leasing revenue that VA receives from both sites is

to be used to fund veterans programs.

U.S. Postal Service

5. Grand Central Station Post Office,

New York, NY, 1987.

6. Rincon Center Post Office, San

Francisco, CA, 1985.

Lease/develop/

operate (99

years)

Lease/develop/

operate (65

years)

In both cities, the Postal Service owned an

outdated, historic building in a highly desirable

downtown location. It leased each property to

private developers who built a commercial

building adjacent to and/or on top of the historic

structure. The Postal Service earns revenue from

its lease with the developer, and the developer

earns revenue from renting out commercial space

in the new and historic buildings.

a

Both of these projects fall under the authority granted under VA’s

Enhanced-Use Lease (EUL) legislation.

Table 1: Public-Private Partnership Projects We Reviewed
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Use of public-private partnerships by the federal government is not new.

Although there is no inventory of public-private partnerships involving

federal entities, several properties owned by the federal government (e.g.,

post offices, former military bases) have been renovated through such

partnerships. The federal asset managers we spoke with said that the

federal government’s use of partnerships has grown in recent years,

although the number is probably still small.

To identify the key elements and related experiences of federal agencies in

creating and implementing innovative partnerships, we used a multistep

process to identify and select projects to review. To identify projects to

review, we surveyed 51 public and private sector individuals who were

knowledgeable about privatization matters and asked them to nominate

projects using certain criteria, including projects (1) identified in

privatization literature as being innovative or models; (2) that were

ongoing or completed; (3) that they believed provided significant public

benefit (e.g., dollars saved, revenue generated, efficiency gained); and (4)

that would represent a variety of federal departments.

Fifty-two individual projects or programs were nominated, and we asked

the appropriate agencies to provide data on their projects. Using the

resulting information and with further research and consultation with

several building and facility management experts that were included in our

survey, we selected six projects to discuss in this report. We selected these

projects because they were among those nominated the most frequently,

and they were actually operating as partnerships at the time of our review.

Those projects were two National Park Service projects (San Francisco),

two VA projects (Indianapolis and Houston), and two Postal Service

projects (New York City and San Francisco). We contacted officials from

the six projects to obtain information about their experiences. To obtain

information about the projects, we developed and used a structured data

collection guide to interview 42 individuals from the projects, including top

agency officials, project managers, property and facility managers,

financing officials, and attorneys who played key roles in the partnership

efforts. These 42 individuals worked for the agencies, state and local

governments, public nonprofit organizations, and private entities involved

with the 6 projects.

We reviewed these officials’ answers to our interview questions and other

project information we gathered from them, looking for common elements

that respondents believed contributed to the success of the partnerships.

We developed from that analysis a list of five key elements that appeared

to be important to the implementation of the projects. Finally, we verified

Scope and

Methodology
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with the public and private officials from each project in our study that

these elements were critical to the implementation of their partnerships.

Because our objective was to identify key elements experienced by the six

projects, we did not evaluate the results that the partnerships said the

projects achieved or independently verify the accuracy of the information

the partnerships provided. The elements are not generalizable to

partnerships in other federal agencies. Appendix I contains a more detailed

discussion of our objective, scope, and methodology.

We did our work at the project locations (Houston, Indianapolis, New York

City, and San Francisco) and in Washington, D.C., from August 1997

through October 1998 in accordance with generally accepted government

auditing standards. In November 1998, we provided the Secretaries of the

Interior and Veterans Affairs as well as the Postmaster General with a draft

of this report for review and comment. Their comments are discussed near

the end of this letter.

Officials from each of the three agencies said they were confronted with

the need to look for new ways to effectively manage their buildings and

facilities. Governmentwide management reforms as well as fiscal and

community pressures were among the factors that led agencies to seek

ways to better manage their properties—including the formation of

partnerships with the private sector. These partnerships were designed to

permit the agencies to effectively support their core agency missions

and/or increase revenues while minimizing the cost of maintaining certain

properties.

At the Department of the Interior, for example, when Congress created the

Golden Gate National Recreation Area (GGNRA) in 1972, two former army

bases located in San Francisco near the Golden Gate Bridge—Fort Mason

and the Presidio—were to be transformed into urban parks and made part

of GGNRA.

The Presidio and Fort Mason contain about 1,250 historic structures

protected by the National Historic Preservation Act of 1966.5

 However, the

structures required restoration. Park Service officials said the agency

 

5

 The National Historic Preservation Act of 1966, 16 U.S.C. 470 et seq., established a national

preservation program and a system of procedural protection to encourage both the identification and

protection of historic and cultural resources at the federal, state, and local levels through the use of a

federal-state-local partnership and State Historic Preservation Officers. Section 106 of the act directs

federal agencies to consider the effects of their activities on properties that are listed, or are eligible for

listing, in the National Register.

Catalyst for Change
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lacked sufficient capital funds and technical expertise to restore them all

to a reasonable standard consistent with the act. But they also said that the

Park Service did not want the structures to continue to degrade and

become even more costly to restore. The Park Service therefore

considered two options for obtaining restoration funds: issuing

concessions contracts for some or all of the facilities at the two sites or

using a partnership approach to draw in the private sector.

Although the decisions were made separately nearly 20 years apart, the

Park Service decided to use a partnership approach for certain

installations in both parks. In each case, according to leasing documents,

the Park Service partnered with an entity that agreed to continue its

public-use philosophy for the park and to restore the historic structures.

To restore the piers and warehouses located in lower Fort Mason, the Park

Service partnered with a nonprofit foundation; and to restore an old

military hospital located in the Presidio, it partnered with a for-profit

entity. Funding for capital improvements of the historic structures has

come essentially from private sector financing and philanthropic sources

obtained by the private partners. These partners repay their loans from

rents they charge their park tenants. However, the Park Service funded

some infrastructure costs and is responsible for overseeing all restoration.

Park Service officials said that through lobbying efforts, the local

community helped to influence the Park Service’s decision to use

partnerships rather than over-commercializing the parks’ facilities. They

said that the local community, which had a history of being actively

involved with the operations of and decisionmaking for the two parks, did

not want the two parks to become overly commercialized.

The two Postal Service projects that we reviewed illustrate situations

where the considerable revenue-generating potential of the partnership

projects served as the catalyst for the Postal Service to partner with the

private sector. The two properties were located in New York City

(midtown Manhattan) and downtown San Francisco and, because of their

locations, had high commercial value. Each property included a large

building that housed mail processing operations and post office services.

According to planning documents obtained from the Postal Service, the

Rincon Annex Post Office building in San Francisco was an underutilized

and outdated structure that the Postal Service planned to sell. These

documents also show that Grand Central Station Post Office in New York

City, though still used, was in need of significant renovation. Both

buildings were historic structures, subject to preservation laws, and the

Postal Service could not demolish them.
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According to planning documents, in the case of both properties the Postal

Service decided to enter into partnerships with private sector developers

in order to (1) obtain long-term revenue sources and (2) uphold the

historic preservation of the buildings. The Postal Service leased one

property for 99 years and the other property for 65 years. The developers

built over the existing building (New York) or adjacent to and over the

existing building (San Francisco). The San Francisco property included a

large parking lot on which the developer constructed a new building. In

both New York and San Francisco, the Postal Service maintained a portion

of the property for postal purposes. The Postal Service operates in a

businesslike manner in attempting to maximize the revenue potential from

its properties. Postal Service officials said that the Postal Service, like

federal agencies and private businesses, must be concerned with the views

of local communities toward its projects. For example, these officials told

us that historic preservationists in San Francisco were particularly vocal

about preserving the building there.

In all of the projects we reviewed, Congress had enacted legislation that

enabled (1) the partnership to take place and (2) the agency to use for its

mission any revenue it would receive from the partnership. According to

building and facility managers in all of the partnerships we reviewed,

obtaining legislative approval for a public-private partnership can take

several years because of the time it can take to obtain consensus among an

often diverse set of stakeholders.

The building and facility managers we spoke with said that a primary

reason for an agency to enter into partnerships is the incentive to keep for

its own use the revenue it would receive from the partnership. The federal

real property disposal rules prohibit most agencies from using revenues

from the lease or sale of excess properties. Thus, in each case, a statute

was needed in order to allow the organizations we reviewed to enter into a

partnership to lease its facilities and keep the revenues generated. As one

federal asset manager explained, “true asset management requires you to

examine all of your properties, including the lease or disposal of properties

to generate revenue in order to further enhance the agency’s core

mission.”6

 

6

 Currently, the general rule for most federal agencies is that all proceeds from the sale of federal land

and buildings go either to the general treasury or the Land and Water Conservation Fund. Under the

Federal Property and Administrative Services Act of 1949, when an agency declares a piece of property

excess, GSA generally tries to find another use for it at another agency or at the state or local

government level. If GSA cannot find another taker, it is to declare the property surplus and sell it on

the private market. Some federal agencies are exempt from this general property disposal rule.

Statutory Basis
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For all six projects, the legislation enabling the partnership was either

project specific (i.e., for a single, identified project) or was broader in

scope without identifying any one project. The Park Service project at the

Presidio is an example of legislation that was project or site specific. In

1993, Congress authorized the Secretary of the Interior through Public Law

103-175 to lease the former Letterman hospital complex, including what is

known now as the Thoreau Center at the Presidio, and to retain the

proceeds from such a lease for the preservation, restoration, operation,

maintenance, and other related expenses incurred with Presidio

properties.

A 1991 law that enabled VA to engage in partnerships7

 is an example of

authorization that is broader in scope. The two VA projects we reviewed

were undertaken using this authority. In 1991, Congress enacted legislation

authorizing the Secretary of VA to enter into long-term agreements called

“Enhanced-Use Leases” (EUL). The enhanced-use leasing concept is a

revenue-generating approach to asset management. Some of the basic

elements of the EUL authority follow.

• The lease allows for non-VA uses or activities on VA property in the form

of services, activities, or facility development provided that such uses or

activities are not inconsistent with VA’s mission.

• The lease’s overall objective must enhance VA’s mission or program.

• In return for the lease, VA may obtain any combination of monetary

consideration, services, facilities, or other benefits from the operation of

the non-VA uses so long as the benefit is determined by the VA Secretary

to be “fair consideration.”

In the two VA projects we reviewed, the revenue that VA receives from the

two property leases is to go into funds that serve veterans. Also, as part of

the partnership agreement in one of the projects, VA’s private sector

partner built an office building that it sold to VA. VA purchased the

building, according to VA officials, at a price that was about one-third less

than the amount appropriated for the building’s construction.

The legislation that opened the way for the Postal Service to enter into

partnerships was broader still than the legislation behind the partnership

projects of the other three agencies. Under the Postal Reorganization Act

of 1970, the Postal Service is to operate in a businesslike manner and is

 

7

 P.L. 102-86 (38 U.S.C. Sections 8161-8169).
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authorized to manage its properties using businesslike arrangements.8 In

addition, the 1970 act generally phased out appropriated funds for the

Postal Service, and it no longer receives appropriated funds for its basic

operations.9

Officials in the three agencies told us that they established organizational

structures and acquired the necessary expertise to interact with private

sector partners to ensure effective partnership implementation. The

officials said these organizational structures were each built with a team of

employees experienced in building and facilities management. They said if

a team lacked needed expertise, the agencies acquired that expertise

through contract with the private sector.

According to officials in these three agencies that had established such

structures, new organizational units were often needed because an

agency’s cultural resistance to change can hamper partnership

implementation. These officials said that they generally had to create units

to overcome or bypass a strong federal culture that discouraged the use of

federally owned assets for generating revenue. Moreover, agency officials

told us that they created a team that provided a single point of contact to

facilitate interaction with the private sector partner. Officials from these

agencies said that private sector partners prefer to work with a single

point of contact within the partner agency. Establishing that single point of

contact, they said, is crucial to the success of partnerships.

The organizational structures established by the agencies to conduct dayto-day partnership activities ranged from full-time permanent offices to

task force teams. For example, VA established an Office of Asset and

Enterprise Development within its Facilities Management Office to

promote the partnership concept within VA and develop policies and

procedures to carry out the day-to-day tasks of designing and

implementing partnership projects. Moreover, according to VA officials,

this office provided a single point of contact for the partnership and was

staffed with professionals experienced in portfolio management,

architecture, civil engineering, and contracting. This office also drew on

the expertise available in VA’s Facility Management Office and General

 

8

 The Postal Reorganization Act of 1970 (P.L. 91-375, 84 stat. 719 (1970)) reorganized the U.S. Post

Office Department into the U.S. Postal Service.

9

 The Postal Service does not depend on appropriations for its basic operations, but it receives some

funds to subsidize free and reduced-rate mail. In fiscal year 1998, the Postal Service reported about

$60 billion in operating revenues and about $67 million in appropriated funds for free and reduced-rate

mail.

Organizational

Structure
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Counsel’s Office to provide single-point service to its VA clients and the

private sector.

According to experienced former federal asset managers with whom we

consulted, the amount and type of planning that takes place between the

governmental partner and the private organization involved in a publicprivate partnership project differ greatly from the planning ordinarily

found when an agency simply contracts out to a private developer. These

managers said that when the government contracts out to the private

sector, an agency typically plans the project, obtains authorization and

funding, and contracts for implementation generally without involving the

private contractor. They said, as a result of this, the views, analysis, and

experience of the private sector contractor that will actually implement

the project are usually not taken into account before the design is set and

the contract is finalized.

By their very nature, public-private partnerships typically require an

agency to work closely with its private partners and create very detailed

plans along the way. Federal asset managers in our review told us that

partnership projects are different in that the agency prepares its business

plan in close conjunction with its private sector partner. This plan forms

the basis for the final project contract. The business plans we reviewed

generally addressed such detailed topics as the responsibilities and risks

that are to be undertaken by both the federal agency and the private

partners, existing and projected marketplace conditions affecting the

project, and project financing. Some plans we examined also identified

issues, such as required legislative authority. Asset managers we spoke

with said that these types of issues were often absent from the business

plans submitted by agencies that simply contract with the private sector to

implement predetermined plans.

A detailed business plan (or a set of similar documents acting in this

capacity) was prepared for each of the partnerships we reviewed. We

found that usually the agency’s building and facilities management staff

created these plans in close coordination with the project’s private sector

partner and before formal partnership contracts were executed. Officials

of the three agencies told us that the use of business plans helped them to

make informed partnership decisions, made these decisions easier to

justify to potential critics and to implement, and helped protect the

government’s interests.

For example, in connection with the partnership project at the Presidio,

the Park Service and its private sector partner negotiated a letter of intent;

Detailed Business

Plans
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a preliminary lease agreement; and the detailed leasing agreement, a 55-

year ground lease. According to Park Service officials, the letter of intent

and preliminary lease agreement served as the business plan. These

documents spelled out mutual performance criteria and milestones that

had to be accomplished before the ground lease was signed. To implement

these agreements, the Park Service appointed a staff project manager to

provide full-time coordination during the lease development phase and a

historic architect to coordinate the Park Service’s responsibilities for

historic preservation, construction oversight, and review of building

alteration plans proposed by tenants. The private partner was responsible

for obtaining approved construction documents, appropriate insurance,

and evidence of in-place project financing before the Park Service would

sign the final ground lease.

Detailed planning documents were also a key element of the Postal

Service’s partnerships in both New York City and San Francisco.

According to the former Postal Service Asset Manager responsible for both

sites, selection of a private partner by the Postal Service was followed by a

series of negotiations between the Postal Service asset managers and

attorneys and private sector teams. These groups produced several

planning documents that functioned collectively as a business plan for

each of these projects. These plans detailed topics such as project

financing, time frames, the various risks for the Postal Service and the

private sector, and how those risks were to be divided between the two

parties. This Postal Service official told us that much of this analysis, as

well as the subsequent agreements stemming from this process, was

ultimately incorporated into the final leases drawn up between the Postal

Service and its private sector partners.

By policy, VA’s EUL projects must have business plans and the Secretary

of VA must approve them. In both VA cases that we reviewed, the

Department followed this policy.

In projects we reviewed, agencies had to have the support of the local

community and other stakeholders to create the partnership. As noted,

sometimes the local community acted as a catalyst for change, predating

the partnership. For example, in the two Park Service projects we

reviewed, local community groups wanted the historic properties

preserved. According to Park Service officials, over a several-year span

these community groups were able to effectively lobby political leaders to

help change the Department of the Interior’s property management

policies. They said these changes enabled local organizations to provide

Stakeholders’ Support
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the parks with day-to-day management and assist in making needed repairs

to the historic structures.

Sometimes ascertaining stakeholders’ views was required by law. VA’s

EUL authority requires that public hearings be held on proposed

partnerships to determine their possible impact on veteran services,

employees, local commerce, and the community. According to VA officials

and our review of the VA projects, public hearings were advertised in local

newspapers, and written notices were given to individuals or groups who

had an interest in the projects or their potential impacts.

In November 1998 we sent a draft of this report to the Secretaries of the

Interior and Veterans Affairs and the Postmaster General for their review

and comment. On December 8, 1998, VA officials provided minor technical

suggestions, which we incorporated in the report where appropriate. Also,

on December 8, 1998, we received clarifying and technical suggestions

from the Office of Facilities and the Office of General Counsel, United

States Postal Service, that are reflected in the report where appropriate.

Officials from these offices also told us that the Postal Service is in the

process of selling the bulk of the Rincon Project to the private sector

developer. They said that this transaction is likely to close in the first

quarter of 1999. We added this information to appendix IV. On December

10, 1998, we received written comments from the Assistant Secretary for

Fish and Wildlife and Parks, Office of the Secretary of the Interior,

indicating agreement with the report and offering some clarifying and

technical suggestions that we incorporated in the report where

appropriate.

As agreed, unless you announce the contents of this report earlier, we plan

no further distribution until 30 days from the date of this letter. At that

time, we will send copies of this report to the Chairman and Ranking

Minority Member of the Senate Committee on Governmental Affairs; the

Chairman and Ranking Minority Member of the House Committee on

Government Reform; the Chairman and Ranking Minority Member of the

Senate Committee on Environment and Public Works; the Chairman and

Ranking Minority Member of the Public Buildings, Economic

Development, and Special Transportation Subcommittee; the

Agency Comments and

Our Evaluation
 B-278675

Page 17 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Secretaries of the Interior and Veterans Affairs; the Postmaster General;

and other interested parties. Copies will be made available to others upon

request.

The major contributors to this report are listed in appendix V. Please

contact me on (202) 512-8676 if you have any questions.

Sincerely yours,

J. Christopher Mihm

Associate Director, Federal Management

and Workforce Issues
Page 18 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Contents

1 Letter

Appendix I 22

Objective, Scope, and

Methodology

26

Overview of National Park Service Projects 26

The Fort Mason Project 27

Thoreau Center Project at the Presidio 32

Appendix II

Department of the

Interior, National Park

Service

38

Overview of Department of Veterans Affairs Projects 38

The Houston Regional Office Center Project 39

The Cold Spring Medical Facility Project 43

Appendix III

Department of

Veterans Affairs

47

Overview of United States Postal Service Projects 47

The Grand Central Station Project 48

The Rincon Center Project 52

Appendix IV

United States Postal

Service

Appendix V 56

Major Contributors to

This Report

57

Types of Public-Private Partnerships Discussed in This

Report

57

Other Terms Related to Public-Private Partnerships 58

Glossary

Table 1: Public-Private Partnership Projects We Reviewed 7 Tables

Figure 1: Key Elements of Public-Private Partnerships 3

Figure II.1: The Fort Mason Project 31

Figure II.2: Thoreau Center Project at the Presidio 37

Figure III.1: The Houston Regional Office Project 42

Figures

Figure III.2: The Cold Spring Medical Facility Project 46
Contents

Page 19 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure IV.1: The Grand Central Station Post Office

Project

51

Figure IV.2: The Rincon Center Project 55
Contents

Page 20 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Abbreviations

API Amelang Partners, Inc.

EUL enhanced-use lease

GGNRA Golden Gate National Recreation Area

GSA General Services Administration

NYCRR New York Central Railroad

RCA Rincon Center Associates

RFP request for proposal

RFQ request for qualifications

TCP Thoreau Center Partners

VA Department of Veterans Affairs

VAMC VA Medical Center
Page 21 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix I

Objective, Scope, and Methodology

Page 22 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Our objective was to identify the key elements and related experiences of

federal agencies in creating and implementing innovative public-private

partnerships that were formed to make use of federal real estate and

facilities. To meet this objective, we went through a multistep process to

identify projects to survey and conducted background research on

selected projects. We then contacted officials from those projects to obtain

additional information and insights on their partnership experiences.

To develop a list of potential federal partnership projects to review, we

surveyed 51 public and private sector individuals whom we identified as

knowledgeable about privatization matters from congressional testimony,

studies, and other published literature. These individuals included federal

building and facility managers and individuals with partnership knowledge

and experience from research organizations, major accounting firms, and

asset management companies. We identified the 51 individuals from our

past work on privatization, our review of partnership literature, our review

of documents associated with legislation on federal partnership activities,

and our early discussions with public and private sector real property asset

managers.

We sent a survey form to the 51 individuals asking them to nominate

projects that they believed would be “good candidates” to review. In

making nominations, we asked them to use the following criteria:

• Consider projects identified in privatization literature and by public-private

partnership experts as being innovative and projects that would be

recognized as models.

• Consider projects that were ongoing or completed.

• Consider projects that they believed provided significant public benefit

(e.g., dollars saved, revenue generated, efficiency gained).

• Consider projects that would represent a variety of federal departments.

Fifty-two individual projects or partnership programs were nominated.

Twenty-two individuals nominated projects; the other 29 individuals did

not, citing a lack of knowledge on federal partnerships. Approximately half

of the 29 individuals who declined to nominate projects said they knew of

partnership activities at the state or local government level.

Our next step was to pare down the 52 nominations to a more manageable

number for further review. We did so by focusing our further efforts on

projects that were identified more frequently than others. We took the

view that the more times a project or program was independently

nominated, the greater its potential for identifying the key elements in
Appendix I

Objective, Scope, and Methodology

Page 23 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

creating and implementing a public-private partnership. Projects and

programs in six agencies were identified by four or more survey

respondents who nominated projects: the National Institutes of Health;

U.S. Postal Service; General Services Administration; and the Departments

of Defense, Veterans Affairs, and the Interior.

We further reviewed and collected data on the nominated projects and

programs from the six agencies. For the nominated programs, we asked

the agencies to provide data on their projects. We then compared their

specific project data against the criteria we had asked our survey

recipients to use. Next, after consultation with several public and private

sector real property asset management experts, most of whom were drawn

from among the 22 respondents to our survey who nominated projects, we

selected 6 completed projects in 3 agencies to review further and report

on. These partnership projects were completed in the sense that a contract

or partnership agreement had been executed. The six projects were the

• Department of the Interior Fort Mason Foundation project, San Francisco,

California;

• Department of the Interior Thoreau Center at the Presidio, San Francisco,

California;

• Department of Veterans Affairs, Houston Benefits Center project, Houston,

Texas;

• Department of Veterans Affairs Cold Spring Medical Facility, Indianapolis,

Indiana;1

• U.S. Postal Service, Grand Central Station project, New York City, New

York; and

• U.S. Postal Service, Rincon Center project, San Francisco, California.

We used a structured data collection guide to obtain additional

information and documents from 33 public and private sector officials

whom we interviewed during our visits to the 6 partnership projects. We

designed the data collection guide to collect information—to the extent it

was available—on the experiences of project officials in creating and

implementing the projects. The guide included the topics that the requester

asked us to cover in reviewing these projects. These topics included

• project background (year initiated/completed, type of partnership,

partners, and location);

 

1

 This partnership arrangement was a public-public partnership in which VA entered into a long-term

leasing arrangement with the State of Indiana instead of a private sector entity. We chose this largescale project because it was often mentioned by experts we surveyed, and it met all of our other

project selection criteria.
Appendix I

Objective, Scope, and Methodology

Page 24 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

• participants’ reason/rationale for partnering (e.g., to satisfy unmet federal

needs or gain access to private sector innovations);

• contractual arrangements (e.g., responsibilities of the private sector

partner, procurement issues, innovative practices used, and financing

arrangements);

• challenges that may have arisen and strategies employed to overcome

them (e.g., legislation, funding);

• events, conditions, or individuals that facilitated the project’s progress

(e.g., legislative authorities or special conditions that allowed the projects

to succeed); and

• project-reported results (e.g., cost savings, tax revenue, and unmet needs

served).

The officials we interviewed at the six projects included top management

officials, public and private sector project managers, facility and property

managers, financing officials, and attorneys who played key roles in the

partnership effort. We reviewed documents, such as pertinent legislation,

business plans, requests for proposals and qualifications, policy and

procedural guidance, budget documents, legislative analyses, audit reports,

and site photographs. We also contacted the Office of the Inspector

General at each project’s parent agency to obtain any audit and oversight

data it had on the project.

To determine the key elements involved in the creation and

implementation of the six projects, we reviewed the responses of project

officials to our structured data collection guide and interview questions.

We also reviewed documents officials provided that described their

projects. On the basis of our analysis of this information, we derived a list

of major elements that the projects shared in common. We confirmed from

public and private experts in the use of partnerships for buildings and

facilities that these elements were generally key to the successful

implementation of the partnership projects we reviewed.

Because our objective was to identify key elements of the partnership

projects we visited, we did not evaluate the results that the partnerships

said the projects achieved or independently verify the accuracy of the

information they provided. The elements are not generalizable to

partnerships in other federal agencies because they were derived from our

review of a select and limited number of partnerships. We also prepared a

glossary so that the various types of partnership we refer to in this report

can be understood in the context of the range of public-private efforts that

can occur. The glossary appears at the end of the report.
Appendix I

Objective, Scope, and Methodology

Page 25 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

We did our work at the project locations (Houston, Indianapolis, New York

City, San Francisco) and in Washington, D.C., from August 1997 through

October 1998 in accordance with generally accepted government auditing

standards. In November 1998, we provided the Secretaries of the Interior

and Veterans Affairs as well as the Postmaster General with a draft of this

report for review and comment. We have incorporated their comments

where appropriate.
Appendix II

Department of the Interior, National Park

Service

Page 26 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

The U.S. National Park Service was founded in 1916 to promote, regulate,

and protect the 40 national parks and monuments that existed at the time

so that they would be “unimpaired for the enjoyment of future

generations.”1

 Over the more than 80 years that have passed since its

founding, the Park Service has grown to encompass 378 national sites,

including parks, recreational areas, battlefields, and scenic trails and other

units that occupy over 80 million acres.

Accompanying this growth in the size of the park system has been a large

increase in the number of visitors to national parks. According to the Park

Service, the annual number of visitors has grown from 198 million in 1980

to over 275 million in 1997, an increase of almost 40 percent. Financial

constraints and increasing service demands have led the Park Service to

search for new and creative approaches to improve the upkeep of the

lands and buildings in its charge as well as improve the programs and

services it provides to the increasing numbers of visitors. One such

approach is the Park Service’s expanded use of partnerships with such

organizations as state and local governments, nonprofit entities, and some

private sector organizations. The Park Service has worked with nonprofit

cooperating associations to operate visitor centers and gift shops since

1920.

Since the 1970s, the role and scope of the Park Service partnerships with

outside entities have expanded beyond concession contracts. A 1976

cooperative agreement between the Park Service and the communitybased Fort Mason Foundation in San Francisco was one of the first

examples of an arrangement between the Park Service and an outside

partner to develop and manage facilities that did not primarily support an

existing park function. More recently, the Park Service leased buildings on

the property of the Presidio, a historic Army installation on San Francisco

Bay, to a private, for-profit enterprise, Thoreau Center Partners, that

financed the rehabilitation of the buildings. This enterprise subleases

space in the buildings to other organizations while being required to pay

for the ongoing operations and maintenance of the buildings.

 

1

 National Park Service Organic Act, 16 U.S.C. 1.

Overview of National

Park Service Projects
Appendix II

Department of the Interior, National Park Service

Page 27 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Public: The Golden Gate National Recreation Area (GGNRA) in

California,2 which the Department of the Interior’s National Park Service

manages.

Private: The Fort Mason Foundation, a private, nonprofit organization

that is governed by a Board of Directors consisting of cultural, civic, and

business leaders from the San Francisco Bay area.

The partnership between GGNRA and the Fort Mason Foundation was a

develop/operate arrangement as part of a cooperative agreement.3

 Under

the agreement, the Park Service provides the buildings rent free. In return,

the Foundation is required to renovate, maintain, and operate the lower

Fort Mason area, located in San Francisco and consisting of three historic

piers, five warehouses, and several smaller buildings. It is also required to

develop and administer the Fort Mason Center4

 to provide programs that

allow public participation at minimum or no cost in a variety of cultural,

recreational, and educational programs. It accomplishes this by leasing

low-cost to nonprofit groups and to other outside parties for events,

meetings, and exhibits, at rates approved by the Park Service. In addition,

the Foundation is required to maintain the facilities and to pay all utility

costs. The Park Service is to replace particular facility elements (e.g.,

foundations and roofs). GGNRA has a veto right over the nature and type

of merchandise, services, and activities that may be sold or furnished by

the Foundation.

The original 1976 agreement expired in 1984 and was replaced by another

agreement, which expires on March 28, 2004. According to Park Service

officials, a longer term agreement was needed to enable the Foundation to

expand operations to attract private financing and philanthropic support.

 

2

 Congress established GGNRA in 1972 to preserve for public use and enjoyment certain areas in Marin

and San Francisco counties in California, including the Presidio.

3

 This is similar to a lease/develop/operate arrangement. However, instead of a lease, the Park Service

used a cooperative agreement, and no rent was charged to the Fort Mason Foundation.

4

 The Fort Mason Center encompasses nine buildings and two of the three piers within the lower Fort

Mason area. According to Park Service officials, negotiations are currently under way to incorporate

the third pier into the Fort Mason Center and develop it into a marine learning center.

The Fort Mason Project

Participants

The Form of Public-Private

Cooperation
Appendix II

Department of the Interior, National Park Service

Page 28 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

The lower Fort Mason area, located in San Francisco, was one of a number

of U.S. Army installations transferred to GGNRA upon its creation. The

area is historically significant as the major point of embarkation for

American troops bound for the Pacific Theater during World War II. In

1973, GGNRA assumed responsibility for the maintenance, restoration, and

use of the lower Fort Mason area.

In 1975, a Park Service study found that the unoccupied structures of the

lower Fort Mason area had been subject to vandalism and general

deterioration. According to Park Service officials, the lower Fort Mason

area was a difficult property for the Park Service to manage because the

area was one of the largest, most capital-intensive installations in its

purview, and it had a large number of buildings that could not be torn

down because of their historic significance. These officials said that they

realized that GGNRA lacked sufficient funds and expertise to restore and

develop the lower Fort Mason facilities to the standard required by the

Historic Preservation Act of l966.

Also in 1975, a number of nonprofit groups in San Francisco expressed

interest in locating to the area, which is located near the heart of central

San Francisco, and the Park Service held a series of meetings with those

groups. In 1976, business and civic leaders created the Fort Mason

Foundation for the purpose of negotiating with the Park Service on behalf

of the nonprofit community to renovate the installation, serve as its

administrator, and manage rental agreements with resident nonprofit

organizations.

In 1977, the Foundation provided a plan that met the objectives of GGNRA

and the Park Service—to administer warehouses and piers located in the

lower Fort Mason area as low-cost public use space and to assist nonprofit

organizations in their efforts to provide cultural, educational, and

recreational activities to the public at little or no cost to the public and the

federal government. The creation of the Foundation allowed the Park

Service to deal with just one entity, rather than the multitude of entities

that would ultimately repair and occupy space and operate programs in the

lower Fort Mason area.

Several factors facilitated the formation of a partnership between the Park

Service and the Fort Mason Foundation. First, according to Park Service

documents, GGNRA was financially unable to provide the necessary

restoration or rehabilitation work for the many historic buildings within

the park that needed to be restored and maintained. The public-private

partnership at the Fort Mason complex provided a way for the Park

Background

Major Facilitating or

Constraining Factors
Appendix II

Department of the Interior, National Park Service

Page 29 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Service to address the problem of decaying buildings without requiring a

substantial increase in funding or staff at GGNRA. Second, according to

Park Service officials, there was strong support in the San Francisco

community, especially among local nonprofit organizations, for the

creation of a nonprofit center in order to avoid over-commercialization of

the site. The extent of this support can be seen in the founding of the Fort

Mason Foundation in 1976. This organization brought together numerous

small and fragmented groups into one body so that they could more

effectively negotiate with the Park Service. Park Service officials said that

dealing with one nonprofit with a strong, unified organization was key to

implementing the partnership approach. Third, both Park Service and Fort

Mason Foundation officials told us that the General Superintendent of

GGNRA at the time was a young, dynamic, and creative force who was

willing to innovate and take some risks including those posed by a publicprivate partnership.

In creating their partnership, both the Park Service and the Fort Mason

Foundation also encountered constraints. Among these was the fact that

the newly formed Fort Mason Foundation had no track record in the

business it was about to undertake. However, this constraint was mitigated

somewhat by the relevant experience, expertise, and resources of the

individuals chosen to serve on the Foundation’s board of directors.

According to Park Service officials, this partnership appears to be meeting

the chief objective of the Park Service—the preservation of the historic

character of the lower Fort Mason area. The nine buildings and two piers

that make up the Fort Mason Complex have been fully renovated and

maintained over the last 22 years at minimal cost to the Park Service.

According to Foundation and Park Service officials, the cumulative cost to

renovate and improve the Fort Mason area has been approximately $16.5

million. The Park Service estimates the government’s portion of this

expense to have been about $3.5 million and the Foundation portion to

have been about $13 million. According to the Park Service officials, the

agency’s annual operating expenses for the project have been

approximately $250,000. These officials stated that they believe that this

amount is far less than what one would expect for such an enterprise.

According to Park Service officials, the partnership arrangement also

meets the Park Service objective to assist nonprofit organizations in their

efforts to provide a broad range of cultural, educational, and recreational

activities at little or no cost to the public.

The partnership also appears to be meeting one of the principal aims of the

Fort Mason Foundation—to solicit the participation of diverse nonprofit

Reported Results
Appendix II

Department of the Interior, National Park Service

Page 30 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

groups with the ability to provide low cost or free recreational and

educational programs of both wide and specialized appeal to the public.

The Foundation leases space to a wide variety of social, cultural, and arts

organizations at the Fort Mason Center, including the San Francisco

African American Historical & Cultural Society, Museo ItaloAmericano, the

Mexican Museum, the Young Performers Theater, and the Friends of the

River. The Center also provides galleries, classrooms, meeting rooms,

pavilions for performances and other events, as well as a 440-seat theater

for the public. In 1996, resident and nonresident groups hosted

approximately 15,000 activities at the Fort Mason Center. Yearly

attendance at the Center has risen from 125,000 in 1977 to 1.8 million in

l996. According to Park Service officials, the Foundation also serves the

public by providing leased space at relatively low cost, about $8 per square

foot, for its 50 resident nonprofit organizations. These officials told us that

this rate is about 60-70 percent less than the current rental market price.

The Foundation reported that its current annual operating expenses are

about $2.3 million. Officials at the Fort Mason Foundation told us that the

Foundation reinvests any net income generated back into its operations

and into capital improvements for the site.

Figures II.1A and II.1C show conditions before and after the renovation of

the Fort Mason site. Figure II.1B provides an aerial view of the Fort Mason

area, which is located near downtown San Francisco.
Appendix II

Department of the Interior, National Park Service

Page 31 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure II.1: The Fort Mason Project
Appendix II

Department of the Interior, National Park Service

Page 32 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Public: The Golden Gate National Recreation Area (GGNRA) in

California, which the Department of the Interior’s National Park Service

manages.

Private: Thoreau Center Partners (TCP), a for-profit California real estate

limited partnership that is made up of Highwater, Inc., a for-profit

subsidiary of the nonprofit Tides Foundation, and Equity Community

Builders, a San Francisco-based real estate developer of housing and

mixed-use projects.

The partnership between GGNRA and TCP was a lease/develop/operate

arrangement. The Park Service entered into a 55-year ground lease5

 with

the for-profit TCP, which arranged conventional real estate financing in the

form of loans and equity. TCP is responsible for the design, construction,

and ongoing management of the rehabilitated buildings under the terms of

the lease with the Park Service. Under the terms of the lease, the Park

Service is to provide fire and police services and maintain the surrounding

open space, roads, and utility systems, as it is to do for the entire Presidio.

In 1989, the Department of Defense announced the closure of the Presidio

under the provisions of the Base Realignment and Closure Act of 1988.6

The Presidio covers about 1,480 acres, approximately 800 of which are

open space, and includes 870 structures, 510 of which are designated as

historic. Following the closure decision, the Departments of the Army and

the Interior signed an agreement transferring the Presidio to GGNRA on

October 1, l994. In 1998, the Presidio Trust, a wholly owned trust

established by statute, assumed administrative responsibility over the

Presidio from GGNRA.7

According to Park Service officials, the Park Service was concerned that it

would not have the funds, ability, or expertise to finance large-scale

 

5

 A ground lease is a lease for the use and occupancy of land only, usually for a long period of time. It is

also called a land lease.

6

 P.L. 100-526.

7

 P.L. 104-333.

Thoreau Center

Project at the Presidio

Participants

The Form of Public-Private

Cooperation

Background
Appendix II

Department of the Interior, National Park Service

Page 33 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

building rehabilitation, maintenance, and operation of the Presidio

buildings. In 1993, legislation was enacted authorizing the Secretary of the

Interior to lease the Letterman Complex,8

 a 55-acre former hospital and

research complex, within the Presidio, with over 1.2 million gross square

feet of built space in 47 historic and nonhistoric buildings.

From 1990 to 1994, the Park Service developed a publicly approved

management plan for the entire Presidio. Under this management plan and

the legislation authorizing the leasing of the Letterman Complex, the goal

for the site included the creation of a national and international center for

scientific, research, or educational activities, particularly those relating to

health and the environment.

In December 1993, the Park Service’s Presidio Project Office assembled a

real estate team, including Park Service staff and private sector real estate

consultants, to assist the Park Service in issuing a request for

qualifications (RFQ) for leasing buildings in the Complex.9

 Park Service

officials told us that they distributed the RFQ to more than 500 individuals,

organizations, and companies and received 16 responses.

In June 1994, the Park Service selected a proposal submitted by TCP to

serve as the lessee under a 55-year ground lease with the Park Service for

four buildings in the Letterman Complex, totaling over 75,000 square feet.

Consistent with the Presidio’s management plan, TCP proposed to lease

and rehabilitate the buildings and then sublease the improved office space

to a variety of subtenant organizations. The four buildings were to be

known as the Thoreau Center for Sustainability. According to Park Service

officials, the Park Service selected TCP’s proposal because it best met the

programmatic, rehabilitation, and occupancy goals expressed by the Park

Service in the RFQ, including the need to use private sector funds to

finance the rehabilitation of the buildings.

In September 1995, the Park Service and TCP signed the lease for Phase I

of the project, which was completed and occupied by March 1996.

Exercising an option as part of the Phase I lease, the Park Service and TCP

signed in July 1997 a Phase II lease, which was similar in its terms and

conditions. This lease covered an additional eight buildings encompassing

about 85,000 square feet, making TCP responsible for the restoration,

 

8

 P.L. 103-175.

9

 The Park Service stated that it used an RFQ rather than a request for proposal (which would have

specified the details of the project) because that format allowed respondents to propose a wide variety

of development schemes for different combinations of buildings.
Appendix II

Department of the Interior, National Park Service

Page 34 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

preservation, and operation of a total of 12 buildings. Construction and

occupancy of Phase II were completed in the spring of 1998. According to

Park Service officials, each lease was preceded by a development

agreement that spelled out specific project design and financing

requirements and milestones that TCP had to achieve before the Park

Service would sign the ground leases.

According to Park Service officials, the major factor that motivated the

Park Service to enter into a public-private partnership in this project was

the agency’s need to preserve buildings that were in a deteriorated

condition while avoiding the considerable cost of making the repairs itself.

Since the buildings at the Letterman site were designed to serve as part of

a hospital complex, a considerable amount of modification was necessary

before they could be adapted for office use. Park Service officials also told

us that these buildings required extensive and costly electrical, plumbing,

and structural improvements as well as asbestos removal to bring them up

to code. GGNRA managers viewed a public-private partnership as a means

of achieving their goal of restoring and maintaining a portion of the

Letterman site without having to pay for it out of their limited funds.

Park Service officials mentioned several other factors that facilitated the

formation of a partnership in this case. According to Park Service officials,

one of these factors concerned the legal ability of the Park Service to enter

into a long-term lease with the private sector partner. Because the

legislation authorizing the lease of the Letterman Complex permitted the

government to enter into a long-term lease with a private sector partner,

TCP was able to take advantage of important tax benefits. For example,

according to a document published by the National Trust for Historic

Preservation, to qualify for historic rehabilitation tax credits on leased

properties, the term of the lease must be for at least as long a term as the

depreciation schedule for the building (approximately 40+ years).10 This

played an important role in the Park Service’s ability to lease the

Letterman buildings and fund their restoration.

Another major facilitating factor mentioned by Park Service officials was

the fact that GGNRA could retain the revenues from the lease of the

Letterman buildings. This provided the Park Service with the incentive to

commit the time and staff needed to develop and participate in such a

complex transaction. Finally, the “compelling vision” of the Presidio

 

10 “The Thoreau Center for Sustainability: A Model Public-Private Partnership.” Preservation

Information, National Trust for Historic Preservation, May 1997.

Major Facilitating or

Constraining Factors
Appendix II

Department of the Interior, National Park Service

Page 35 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

master plan and the attractiveness of the site were also identified by Park

Service staff as significant factors in facilitating the partnership.

Interviews conducted with Park Service officials revealed some

constraining factors that affected the formation of this public-private

partnership. Park Service staff told us that without an ownership interest,

potential private sector partners are often reluctant to enter into an

agreement with the public sector that entails substantial financial

commitment and other responsibilities. These officials also pointed out

that there are requirements for public disclosure when a government

agency is involved in a public-private partnership deal that are significantly

beyond those that are typically expected in a private sector transaction.

This would include concerns about potential public disclosure of financial

and business information that is typically considered proprietary. These

requirements can inhibit the private sector, which does not normally

encounter such conditions. Finally, private sector concerns about the

ability of the government to be a reliable partner and lessor over the life of

a long-term lease were factors that Park Service officials found may

discourage potential lessees and lenders from entering into these types of

transactions.

By entering a public-private partnership, the Park Service passed on the

cost of rehabilitating and maintaining the properties to the private sector

while simultaneously creating a source of revenue that can be used for

other needs within GGNRA. The privately managed and funded

rehabilitation, which combined historic preservation and sustainable

design principles, has received national acclaim, including a prestigious

award from the National Trust for Historic Preservation. Additionally, the

ground lease for the site currently generates more than $170,000 annually

in rent and fees for the Park Service. Under the terms of the lease, this

amount is to increase over the course of the lease based on both a fixed

schedule and market-based real estate reappraisals. Park Service officials

said they view the Thoreau Center project as a successful, replicable

partnership and a model for the entire park system. Other Park Service

staff members, along with real estate and design experts as well as U.S.

and foreign government officials, have toured the project in an effort to

learn from the Presidio’s example.

TCP also appears to have benefited from its partnership thus far. As of

September 1998, Park Service documents show that the Thoreau Center

had approximately 45 subtenants, including nonprofit organizations such

as the Energy Foundation and the Wilderness Society. Both Phase I and

Phase II of the project are fully leased. These documents also indicate that

Reported Results
Appendix II

Department of the Interior, National Park Service

Page 36 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

the bank and private loans are being repaid according to schedule

(approximately $1,040,000 annually), and the project’s first stabilized year

of occupancy and operations—1998—is expected to meet TCP’s

projections. According to Park Service officials, subtenant rents generate

sufficient money for TCP to repay the debt and equity that funded the

rehabilitation, provide for ongoing operations and maintenance of the

complex, and provide rental payments to the Park Service.

Figures II.2A and II.2C show conditions before and after the renovation of

the Thoreau Center in the Letterman Complex at the Presidio. Figure II.2B

is a map of the Presidio area identifying the location of the Thoreau

Center.
Appendix II

Department of the Interior, National Park Service

Page 37 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure II.2: Thoreau Center Project at the Presidio
Appendix III

Department of Veterans Affairs

Page 38 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

The primary responsibility of the Department of Veterans Affairs (VA) is to

provide care and services—e.g., medical, housing, insurance, education,

income, and burial—to eligible U.S. veterans. Its mission includes the use

of its facilities to educate and train a large portion of the nation’s medical

practitioners through affiliations with medical schools and supporting

research that benefits veterans’ health care and quality of life. In addition,

VA is responsible for providing medical services in a war or national

emergency.

To accomplish its mission, VA owns and operates 173 hospitals, over 450

ambulatory-care clinics, 133 nursing homes, 40 domiciliaries, 206

counseling centers, and various other facilities. Many of VA’s buildings are

aged, deteriorating, and in need of significant maintenance and

modernization.1

 According to VA officials, in the 1980s, funding pressures

became a catalyst for the agency to investigate ways to reduce expenses

and increase revenues. In August 1991, Congress passed legislation that

allowed VA to engage in public-private partnerships through an EnhancedUse Lease (EUL).2

 This legislation allows VA to manage underutilized

property through leasing arrangements with state or local governments or

private sector organizations and generate income. According to VA asset

managers, VA’s EUL program gives VA more discretion to manage its

properties than it would otherwise have under federal regulations—which

require that agencies acquire or dispose of all property through the

General Services Administration (GSA).

As of June 1998, VA had implemented 10 EULs with an estimated asset

value in excess of $50 million. According to VA officials, these EULs have

provided an estimated $25 million in savings for VA in terms of lower

construction, operation, and maintenance costs. We reviewed two VA EUL

projects-–the Houston regional office center project and the Cold Spring

Medical Facility in Indianapolis.

 

1

 See Independent Review of the Department of Veterans Affairs’ Office of Facilities Management, Final

Report, Price Waterhouse, June 17, 1998.

2

 Enhanced-use leasing is a VA asset management program that can include a variety of different

leasing arrangements (e.g., lease/develop/operate or build/develop/operate). See the glossary at the

end of this report for additional information on EULs and the type of leasing arrangements mentioned

above.

Overview of

Department of

Veterans Affairs

Projects
Appendix III

Department of Veterans Affairs

Page 39 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Public: Department of Veterans Affairs.

Private: Amelang Partners, Inc. (API), a private sector real estate

developer headquartered in Houston, Texas.

Under the terms of a 35-year EUL, API agreed to design, build, and

maintain the Houston VA regional office building, add 500 parking spaces,

and develop and maintain the remainder of the 20-acre VA-owned site with

commercial buildings. Following expiration of a lease/purchase agreement

with the developer, VA purchased the regional office building. VA does not

assume any risk or make any guarantees to finance API’s commercial

developments, and API assumes all financial obligations and risks

associated with private development. VA and the city of Houston are first

to approve all private development proposed for the site. In return for

providing API with commercial development rights on the VA property, VA

obtained long-term operation and maintenance services at reduced costs.

At the end of the 35-year lease, VA will own the commercial properties that

API developed and now leases.

The Houston VA regional office had been housed in a GSA-leased, privately

owned building in the southern part of Houston, approximately 10 miles

from the VA Medical Center (VAMC) campus. In 1992, VA’s 20-year lease

with GSA for this property was about to expire. According to VA officials,

the building was in serious disrepair, and VA officials felt that by relocating

the regional office to the grounds of the VAMC campus, which had

approximately 20 acres of available land, VA could reduce costs and

enhance services to veterans by placing the office in close geographical

proximity to other services on the campus. This proximity would enable

veterans to schedule visits to and receive services from both facilities

during a single visit.

In 1992, Congress provided VA with $17 million to build a new Houston

Regional Office on the VAMC campus. VA officials chose to use an EUL

instead of designing and building the facility themselves. After a public

hearing in September 1991 and congressional notification, as required by

the EUL legislation, VA sponsored a national competition to develop the

20-acre site on the VAMC campus for a regional office building, plus some

VA-approved commercial developments (e.g., dialysis center and a dental

The Houston Regional

Office Center Project

Participants

The Form of Public-Private

Cooperation

Background
Appendix III

Department of Veterans Affairs

Page 40 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

office). Eight developers submitted proposals to develop the site. In

January 1993, VA selected Amelang Partners, Inc. (API), a 32-year-old

Houston-based developer, to design, build, and operate the VA office

building as well as to develop the remainder of the property.

API owns and operates 29,000 square feet of commercial property,

consisting of retail and medically oriented offices that it leases to private

tenants and provides VA with a percentage of the rents. In addition, VA

agreed to lease-purchase the office building within a 1-year period after its

construction at savings of more than 30 percent of the amount that

Congress appropriated to build a new regional office.

The 1991 legislation authorizing EULs was the major facilitating factor for

this project because it provided a legal basis for VA to keep lease payments

from EUL projects and use them to fund appropriate VA activities. VA’s

EUL program eliminated or streamlined many processes that are typically

required in government acquisitions. For example, VA officials told us that

the use of an EUL provided VA with the flexibility to quickly select the best

qualified development team on the basis of past experience, building and

site design concepts, and proposed cost savings rather than using the

traditional and often very slow federal contracting procedures. According

to VA asset managers involved in the project, Houston’s local zoning laws

also functioned as a facilitating factor because they permitted a degree of

freedom and flexibility that made the project more attractive to the parties

involved.

Interviews with senior VA officials at the Houston regional office and

senior executives at API made no mention of major constraining factors in

this project. Perhaps there were no constraining factors because of the

combination of API’s considerable experience and familiarity with federal

contracts and the fact that VA had already received sufficient funding from

Congress to build the regional office.

The Houston VA Regional Office building and parking facility was

completed in March 1995. According to VA officials, this building was

constructed in 11 months. As of September 1998, all of the commercial

development was completed, and all businesses were open.

According to VA officials, the Houston project is one of VA’s newest, stateof-the-art regional office centers and represents VA’s efforts to co-locate

benefits and medical service in the Houston area. In addition, VA contends

that some of the commercial development in the project should further

benefit its clients. For example, two of the businesses in the commercial

Major Facilitating or

Constraining Factors

Reported Results
Appendix III

Department of Veterans Affairs

Page 41 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

development are a kidney dialysis facility and a dental office. Through an

arrangement with VAMC, the dialysis center provides services to VA

clients as well as the surrounding community and the neighboring

University of Texas Medical School.

Overall, VA officials reported that the use of an EUL reduced the time

needed to structure and execute this development and resulted in

significant cost savings over VA’s design and development of the property

by itself. According to VA officials, VA purchased the office building for

approximately $11 million ($6 million less than the $17 million

appropriated by Congress for a new regional office). In addition, a VA

report presented to Congress stated that VA should save an additional $10

million in operation and maintenance costs over the 35-year term of the

EUL. According to the EUL, API currently pays VA about $75,000 annually

from revenues of the commercial development. This amount is in addition

to a one-time $75,000 rental payment made by the developer at the

execution of the lease.3

In May 1995, this project earned a “Hammer” award from Vice President

Gore’s National Performance Review for its contributions to VA’s efforts to

improve business practices and provide better services to veterans. The

Hammer award is given to a person or team whose efforts dramatically

improve the way government does business.

Figure III.1A shows the new Houston VA Regional Office building

against the backdrop of the city’s skyline. Figure III.1B provides an aerial

view of a portion of the VAMC campus, illustrating areas of new and

future development.

 

3

 API and VA are currently negotiating a proposal to develop a biomedical research and development

facility and a hotel on remaining enhanced-use property.
Appendix III

Department of Veterans Affairs

Page 42 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure III.1: The Houston Regional Office Project
Appendix III

Department of Veterans Affairs

Page 43 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Public: Department of Veterans Affairs.

Private: State of Indiana.4

Officials from VA and the state of Indiana signed an EUL that provided for

a 35-year lease of the Cold Spring Medical Facility to the state in return for

a one-time direct payment of $200,000 to VA as well as a payment of $9.8

million that was placed in a VA EUL trust. Under the trust agreement, VA is

to use these funds to provide benefits for veterans residing in Indiana.

However, the Secretary of Veterans Affairs, at his discretion, may

designate the provision of veterans’ benefits without regard to residency.

In 1932, the federal government built the Cold Spring VA Medical Center in

the northwest section of Indianapolis. This facility is located on 30 acres,

the majority of which contain hospital facilities. In 1950, VA built a new

hospital facility approximately 1.5 miles from Cold Spring and converted

the old medical center into a veterans’ psychiatric facility. In 1995, VA

decided to close Cold Spring, given that the number of patients it served

was declining because of a trend toward outpatient rather than inpatient

care. Outpatients and any patients requiring hospitalization could be

accommodated at the new facility. An Indianapolis VAMC business plan

strongly supported consolidating the operations of both facilities. This

decision was made on the basis that consolidation on the site of the new

facility would eliminate surplus space and inpatient costs, resulting in

impressive cost savings from improved program/plant management.

However, according to VA asset management officials, under traditional

federal property management and disposal procedures, VA faced the

prospect of either maintaining the facilities at Cold Spring for limited VA

uses at costs that would adversely affect patient care or undertaking a

lengthy disposal process through the General Services Administration

(GSA), which they said could take 3 to 4 years to complete.

 

4

 This partnership arrangement was a public-public partnership where VA entered into a long-term

lease with the state of Indiana instead of a private sector entity. As discussed in appendix I, we chose

this large-scale project because it was often mentioned by experts we surveyed, and it met all of our

other selection criteria.

The Cold Spring

Medical Facility

Project

Participants

The Form of Public-Public

Cooperation

Background
Appendix III

Department of Veterans Affairs

Page 44 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Through discussions with officials from the state of Indiana, VAMC was

able to market the potential re-use of Cold Spring by the state as a

replacement facility for a state psychiatric hospital that was located

adjacent to VAMC’s new facility. Using EUL authority, VA entered into

negotiations with Indiana officials in January 1996. On September 12, 1996,

these negotiations were concluded, and VA executed an EUL with the state

of Indiana, which leased 22.29 acres of the 30-acre Cold Spring facility. The

leased property includes the core hospital facilities, related facilities,

parking and associated fixtures, and equipment within such facilities.

VA’s ability to use an EUL, which allows the agency to keep lease revenues

for appropriate VA uses, was a critical factor facilitating the creation of a

federal-state partnership in this project. Local VA officials told us that they

believed that the decision to create a partnership was also facilitated by

the fact that VA’s organizational culture strongly favors keeping, rather

than selling, existing properties. They said that this cultural bias against

the sale of VA properties was reinforced by the strong position of veterans

service organizations against selling VA properties. Finally, the partnership

between VA and Indiana was facilitated by the economic and physical

condition of Indiana’s existing mental hospital. According to the

superintendent of the Indiana facility, the state badly needed an updated

facility but did not have sufficient money to refurbish the old hospital or

build a new one. The partnership presented a cost-effective alternative for

the state of Indiana and thus an eager partner.

VA medical center managers told us that they encountered resistance

toward the partnership from several places. These officials told us that

they initially met with concerns from their own regional and headquarters

officials, mainly because partnerships differ from the traditional way in

which the federal government manages and disposes of excess property.

Additional constraints to the partnership came from the fears and

apprehensions of personnel working at the medical center. Both the

Director and the Facility Planner of the regional office told us that they

faced strong opposition from employees who did not want to move out of

the underutilized Cold Spring facility.

Another, less serious constraint mentioned by senior managers in VA’s

regional office concerned the timetable for congressional review. Under

EUL legislation, no final action can be taken on a proposed partnership for

a period of 60 days, during which Congress must be in session. This

notification is intended to allow Congress sufficient time to review and

comment on the proposal. According to VA staff, EUL private sector

partners sometimes grow impatient with this requirement because it can

Major Facilitating or

Constraining Factors
Appendix III

Department of Veterans Affairs

Page 45 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

slow down the approval process. Depending on the congressional

calendar, this 60 day time period can actually stretch into several months.

As fair consideration for the EUL of the Cold Spring Medical Facility,

Indiana provided VA with both monetary and “in-kind” consideration

with an estimated total value of $15.64 million. Of this amount, VA

received an up-front rental payment of $200,000. An additional $9.8

million was placed by the state into a trust to fund the acquisition of

construction, facilities, space, and other services for veterans in the

state of Indiana as determined by VA. The remainder represented

services the state would provide to VAMC, including parking,

maintenance of grounds, use of facilities, and utility payments.

VA officials said they also expected to realize substantial operational

savings from reduced overhead and maintenance costs. For example,

according to business planning documents developed by Indianapolis’

VAMC facility planner, VA expects to realize annual savings of $5 million

by avoiding recurring maintenance and operating costs. VA also

anticipates saving more than $11.7 million in unspent capital funds. Under

the terms of the EUL, VA is no longer responsible for construction at Cold

Spring that it would otherwise have had to undertake if the property had

not been leased to the state.

Indiana reported it received the benefit of the facility and saved between

$10 and $15 million in either significant renovation or construction of a

new addition to the facility where the psychiatric patients would have been

otherwise located. This project also received a Hammer Award from the

Vice President’s National Performance Review.

Figure III.2 provides an aerial view of the 30-acre Cold Spring Medical

Facility in Indianapolis.

Reported Results
Appendix III

Department of Veterans Affairs

Page 46 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure III.2: The Cold Spring Medical Facility Project
Appendix IV

United States Postal Service

Page 47 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Before the mid-1970s, large postal mail processing facilities were often

built as close as possible to the center of urban areas and on rail lines that

were used to transport much of the mail. As mail transportation shifted to

airplanes and trucks, distribution centers were gradually transferred to

suburban areas, leaving the urban facilities underutilized. Beginning in the

late 1970s, the United States Postal Service began to consider how to

handle its excess and often obsolete real property assets, including these

distribution centers. Its first efforts were aimed at lowering real estate

operating expenses through the sale of excess properties.

In 1982, the Postal Service began to seriously explore the degree to which

its excess property could be made to generate income and formed a real

property asset development division, which was responsible for disposing

of surplus real estate in the best interest of the Postal Service. Postal

Service officials came to believe that partnering with the private sector

was essential to develop and manage projects that would generate income

from excess Postal Service property. Postal Service facility officials said

their knowledge of real estate development and management was limited

to satisfying Postal Service requirements. They also said that they lacked

the expertise to plan for buildings that would house private sector

occupants, raise private funds for development, and manage space to

private sector standards and requirements.

We looked at two public-private partnerships entered into by the Postal

Service involving the Grand Central Station Post Office in New York City

and Rincon Center in San Francisco. The former Postal Service Asset

Manager responsible for these projects told us that although the Postal

Service used requests for proposals (RFP) to identify a private sector

partner, it soon became obvious that the most important factor in the

developers’ submissions was not the original proposal. Instead, during the

selection process the Postal Service asset managers placed a large amount

of emphasis on the qualifications of the developer—his or her track record

for making sound, low-risk, business deals. Consequently, the Postal

Service’s solicitation process evolved; and, according to this asset

manager, the Postal Service generally issues a request for qualifications

(RFQ) rather than a RFP for public-private partnerships. In the RFQ, the

Postal Service describes the properties and the needs of the Postal Service

and invites interested parties to submit information on their prior

experience and qualifications for developing such a property.

According to the Postal Service, most of its partnership projects have used

ground leases as the contracting arrangement (where the Postal Service is

the lessor and the developer is the ground lessee). The leases are

Overview of United

States Postal Service

Projects
Appendix IV

United States Postal Service

Page 48 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

structured so that the private partner benefits only if the deal benefits the

Postal Service. The Postal Service’s contribution is the underutilized land

and buildings, and the private sector’s contribution is financing and

business know-how.

Public: The United States Postal Service, an independent establishment of

the executive branch of the United States government.

Private: The 450 Lexington Venture (Hines), a joint venture consisting of

Hines Interests, Sterling Equities, Royal Dutch Shell Pension Fund, and

Prudential Insurance Company that built, financed, and operates the

project.

The partnership between the Postal Service and Hines was a

lease/develop/operate arrangement. According to Postal Service officials,

the property was developed under a lease of the air rights from the Postal

Service that enabled Hines to build a 32-story tower above the existing 5-

or 6-story post office. Under the terms of the lease, Hines agreed to obtain

final zoning approvals and build and operate the tower. The lease holds

Hines responsible for maintaining both the tower and the exterior of the

original post office building. The lease also requires that Hines ensure the

compatibility of the new building with its neighbors in terms of form, bulk,

use, design, facade, treatment, and fenestration. At the end of the 99-year

lease term, the building reverts to Postal Service control.

According to Postal Service officials, the ground lease supersedes any

other debt, so there is little risk to the Postal Service associated with the

financing. If all the tenants move out and the loan is defaulted, the lender

could foreclose but would be obligated to pay the ground rent. They said if

the lender did not pay the ground rent, the Postal Service would take the

building and either re-lease it or use it.

The Grand Central Station Postal Facility, originally built and owned by

the New York Central Railroad (NYCRR), was constructed in 1906 over

NYCRR tracks. In 1936, NYCRR sold the structure to the U.S. government,

and the government later transferred it to the Postal Service. The location

of this property, 450 Lexington Avenue, is in the heart of New York City’s

midtown “high-rent” commercial district. According to Postal Service

officials, the facility was once the largest post office in the country in

The Grand Central

Station Project

Participants

The Form of Public-Private

Cooperation

Background
Appendix IV

United States Postal Service

Page 49 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

terms of revenue and deliveries. However, by the 1980s, it had become

functionally obsolete and was significantly larger than necessary for a

modern mechanized postal operation.

In considering how to dispose of this facility, the Postal Service considered

several options. These options included renovating the existing space and

renting a portion of it, conducting an outright sale, or renovating the

existing space and entering into a long-term lease of the air rights above

the building. According to the former Postal Service asset manager for this

project, the Postal Service needed less than 170,000 square feet of the

approximately 370,000-square-foot facility. Ultimately, Postal Service

officials concluded that the most profitable course of action was to partner

with a private sector asset management company to redevelop the Postal

Service property to maximize its revenue potential.

In 1984, the Postal Service issued an RFP and received nine responses

from qualified developers. The Postal Service selected Hines from this field

and subsequently entered into a 99-year ground lease with Hines for the

redevelopment of the property. Following 2 years of planning, design, and

the temporary relocation of postal operations from the building, Hines

demolished and rebuilt the core of the original building and added an

880,000-square-foot, 32-story office tower. Hines has sole responsibility for

financing the project and for leasing the office space to a variety of

commercial tenants.

Several factors facilitated the formation of a public-private partnership in

this case. Perhaps the most fundamental of these is the Postal

Reorganization Act of 1970. This act generally directs the Postal Service to

operate in a businesslike manner and authorizes the Postal Service to

manage its properties using businesslike arrangements. By vastly reducing

the amount received by the Postal Service in the annual federal

appropriations process, the act made the Postal Service’s ability to

generate its own revenues critical to its survival.

Another factor cited by Postal Service officials as significant in bringing

about the partnership concerned the arrival of new leadership in the Postal

Service’s asset management office. This change of leadership facilitated

the exploration of partnerships and other innovative approaches to the

organization’s asset management. A third facilitating factor mentioned by

Postal Service officials was the use of extremely detailed business plans

and leasing arrangements by the Postal Service and Hines. Finally, the fact

that Hines was able to adapt private sector practices to accommodate

federal contracts and procedures was also mentioned by Postal Service

Major Facilitating or

Constraining Factors
Appendix IV

United States Postal Service

Page 50 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

and Hines officials as playing a facilitating role in the formation of their

partnership with the Postal Service.

In our interviews with senior Postal Service asset management officials

and representatives of Hines, there was no mention of significant

constraining factors that hindered the formation of a public-private

partnership in this case.

According to the lease, for the first 13 years (until June 2002), the ground

rent is about $6 million per year for the Postal Service. In June 2002 ground

rent for the building jumps to $10.4 million for the next 5 years, with

additional increases built into the lease over the remaining life of the lease.

In addition to receiving rent for the air rights above the Grand Central Post

Office, the Postal Service receives approximately $6 million a year from

Hines in what is known as Tax Equivalency Rent. This charge reflects the

amount that Hines would have had to pay to the City of New York if the

site did not have a federal exemption from taxation. The Postal Service has

the potential of realizing even larger rents from the site because the lease

contains a “percentage rent” provision. Under this provision, additional

rent is due to the Postal Service if the net operating income generated by

the site reaches a certain threshold. In addition, the Postal Service remains

in possession of a 170,000-square-foot facility on the site; and, according to

Postal Service officials, the historical characteristics of the building have

been preserved.

For its part, Hines reports that the building is currently 100-percent

occupied. Hines leases office space in the building to about 25 tenants,

including law firms, financial service companies, and international trading

corporations. According to a senior Hines official, although the business

leasing market in New York City has been in flux over the last 8 years, it

has been particularly strong over the last 2 years.

Figure IV.1 shows the Grand Central Post Office building and tower in New

York City as it looks today. The lower right bracket identifies the original

1906 building, and the upper bracket identifies the 32-story addition built

in 1992.

Reported Results
Appendix IV

United States Postal Service

Page 51 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure IV.1: The Grand Central Station

Post Office Project
Appendix IV

United States Postal Service

Page 52 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Public: The United States Postal Service, an independent establishment of

the executive branch of the United States government.

Private: Rincon Center Associates (RCA), a general partnership between

Pacific Gateway Properties (about 22 percent interest) and Perini

Corporation (about 78 percent interest), which is the managing general

partner.

The partnership between the Postal Service and RCA was a

lease/develop/operate arrangement. According to Postal Service officials,

the property was developed by RCA subject to a ground lease of the air

rights from the Postal Service for a period of 65 years. Under the terms of

the lease, RCA agreed to build a variety of structures above and around the

original Rincon Annex building. These included 240,000 square feet of

commercial space on the parking lot adjacent to the Rincon Annex

building and two towers containing 260,000 square feet of residential space

constructed over this commercial base. In addition, RCA agreed to

renovate the existing Rincon Annex building into office and retail space

and build a 72,000-square-foot rooftop addition to the annex.

Under the terms of the agreement, RCA was required to preserve both the

exterior of the original Rincon Annex as well as the historic murals found

within. RCA was also responsible for operating and maintaining all the

properties on the site as well as setting aside a portion of the housing units

for use by low- to moderate-income families. At the end of the 65-year

lease term the building reverts to Postal Service ownership.

In 1940, the federal government completed a postal facility, the Rincon

Annex, in the “South of Market” area of San Francisco. Market Street has

long been the boundary in downtown San Francisco between premium

developments and medium to lower level real estate. Occupying almost

half of a city block, this large facility was built on 3,800 wooden pilings

sunk in the mud of San Francisco Bay and is situated on a 3.5-acre site.

In 1979, the Postal Service announced that it planned to vacate and sell

most of the facility, as the operation had become inefficient. In 1979, the

National Park Service placed the building and the murals located in its

lobby on the National Register of Historic Places, thereby protecting the

The Rincon Center

Project

Participants

The Form of Public-Private

Partnership

Background
Appendix IV

United States Postal Service

Page 53 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

building from destruction. After this happened, the Postal Service changed

its plan and considered developing the site instead. In 1985, the Postal

Service issued an RFP for renovation of the existing building plus

construction of new space, which was to be leased out to commercial and

residential tenants. The Postal Service required that all competitors submit

bids that included the following core elements: a central atrium or

shopping core, the division of the new construction into two buildings or

towers, compliance with historic preservation requirements, and provision

of affordable housing. The Postal Service received seven proposals and

selected RCA as the developer in 1985.

The Postal Reorganization Act of 1970 was one of the major factors leading

to the public-private partnership between the Postal Service and RCA.

Because the act allows the Postal Service to operate in a businesslike

manner and authorizes the Postal Service to manage its properties using

businesslike arrangements, a partnership was possible.

In formulating their partnership, officials from both RCA and the Postal

Service had to overcome several constraints, including local requirements

to provide low- and moderate-income housing, and the need to fulfill the

city’s architectural requirements while preserving its historic character.

These requirements constrained the construction options open to both

RCA and the Postal Service and complicated the process of agreeing on

the partnership.

The rental of the Rincon property has proven to be lucrative for the Postal

Service. According to Postal Service officials, the ground rent is currently

about $4.5 million per year, an amount that has increased about 60 percent

since the start of the lease in 1985. As part of the partnership arrangement,

the Postal Service also retains a 14,000-square-foot facility on the site for a

post office. Despite the considerable amount of development that has

taken place, the historical characteristics of both the original Rincon

Annex post office and the murals have been preserved.

According to the general manager responsible for the leasing and

management of Rincon Center, the property was 100-percent leased in

September 1998. In addition to its 320 residential apartments and 38 retail

and service businesses, Rincon Center has 8 corporate tenants, which

include an international insurance company, a large utility company, and

law firms. According to this manager, the leasing market in San Francisco

has been the best it has been in 15 years. However, due to cost overruns

incurred during the construction of the project and a soft real estate

 Major Facilitating or

Constraining Factors

Reported Results
Appendix IV

United States Postal Service

Page 54 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

leasing market during Rincon Center’s first several years of operation, RCA

officials said the property has been only moderately successful.

In December 1998, Postal Service officials from the Office of Facilities and

the Office of the General Counsel told us that the Postal Service is in the

process of selling the bulk of the Rincon Project to the private sector

developer. These officials said that this transaction is likely to close in the

first quarter of 1999.

Figure IV.2A provides a view of downtown San Francisco with the

redeveloped Rincon Center set off by white brackets. Figure IV.2B shows

the interior of the Rincon Center.
Appendix IV

United States Postal Service

Page 55 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Figure IV.2: The Rincon Center Project
Appendix V

Major Contributors to This Report

Page 56 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

Donald L. Bumgardner, Project Manager, (202) 512-8676

Peter J. Del Toro, Evaluator

Anthony J. Wysocki, Evaluator

Anthony Assia, Ruth Kassinger, and Kiki Theodoropoulos, GGD, provided

assistance in reviewing report drafts and in communicating this report’s

message. Kim Wheeler, GGD, provided graphics support. Alan Belkin,

Office of General Counsel, reviewed and provided assistance on the

glossary terms used in this report.

General Government

Division

Staff Acknowledgements
Glossary

Page 57 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

A public partner (federal, state, or local government agency or authority)

contracts with a private partner to provide and/or maintain a specific

service. Examples of the type of service provided include lab testing,

auditing, and the collecting of fines and penalties. Under the private

operation and maintenance option, the public partner retains ownership

and overall management of the public facility or system.

A public partner (federal, state, or local government agency or authority)

contracts with a private partner to operate, maintain, and manage a facility

or system providing a service. Under this contract option, the public

partner retains ownership of the public facility or system, but the private

party may invest its own capital in the facility or system. Any private

investment is carefully calculated in relation to its contributions to

operational efficiencies and savings over the term of the contract.

Generally, the longer the contract term, the greater the opportunity for

increased private investment because there is more time available in which

to recoup any investment and earn a reasonable return. Many local

governments use this contractual partnership to provide wastewater

treatment services.

In a DBO project, a single contract is awarded for the design, construction,

and operation of a capital improvement. Title to the facility remains with

the public sector unless the project is a design/build/operate/transfer or

design/build/own/operate project. The DBO method of contracting is

contrary to the separated and sequential approach ordinarily used in the

United States by both the public and private sectors. This approach

involves one contract for design with an architect or engineer, followed by

a different contract with a builder for project construction, followed by the

owner’s taking over the project and operating it. A simple design-build

approach creates a single point of responsibility for design and

construction and can speed project completion by facilitating the overlap

of the design and construction phases of the project. On a public project,

the operations phase is normally handled by the public sector or awarded

to the private sector under a separate operations and maintenance

agreement. Combining all three phases into a DBO approach maintains the

Types of Public-Private

Partnerships

Discussed in This

Report

Contract Services

Operations and Maintenance

Operations, Maintenance, and

Management

Design/Build/Operate (DBO)
Glossary

Page 58 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

continuity of private sector involvement and can facilitate private sector

financing of public projects supported by user fees generated during the

operations phase.

An EUL is an “asset management” program in the Department of Veterans

Affairs (VA) that can include a variety of different leasing arrangements

(e.g., lease/develop/operate, build/develop/operate). EULs enable VA to

long-term lease VA-controlled property to the private sector or other

public entities for non-VA uses in return for receiving fair consideration

(monetary or in-kind) that enhances VA’s mission or programs. (See 38

U.S.C. § 8161, et seq.)

Under these partnership arrangements, the private party leases or buys an

existing facility from a public agency; invests its own capital to renovate,

modernize, and/or expand the facility; and then operates it under a

contract with the public agency. A number of different types of municipal

transit facilities have been leased and developed under LDO and BDO

arrangements.

A lease/purchase is an installment-purchase contract. Under this model,

the private sector finances and builds a new facility, which it then leases to

a public agency. The public agency makes scheduled lease payments to the

private party. The public agency accrues equity in the facility with each

payment. At the end of the lease term, the public agency owns the facility

or purchases it at the cost of any remaining unpaid balance in the lease.

Under this arrangement, the facility may be operated by either the public

agency or the private developer during the term of the lease.

Lease/purchase arrangements have been used by the General Services

Administration for building federal office buildings and by a number of

states to build prisons and other correctional facilities.

Air rights provide the right to use, control, or occupy the space above a

designated property. Air rights can be leased, sold, or donated to another

party.

An anchor tenant is the major tenant that attracts or generates traffic

within a commercial operation. Anchor tenants are strategically placed to

Enhanced-Use Leasing (EUL)

Lease/Develop/Operate (LDO) or

Build/Develop/Operate (BDO)

Lease/Purchase

Other Terms Related to

Public-Private

Partnerships

Air Rights

Anchor Tenant
Glossary

Page 59 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

maximize business for all tenants. The type of anchor tenant depends on

the type of commercial activity.

An asset sale is the transfer of ownership of government assets to the

private sector. Usually legislation or an Executive Order defines the

transfer price distribution and recoupment priorities needed to meet the

disposition requirements of federal administrative grant requirements. In

general, the government has no role in the financial support, management,

or oversight of the asset after it is sold. However, if the asset is sold to a

company in an industry with monopolistic characteristics, the government

may regulate certain aspects of the business, such as utility rates.

A cooperative agreement as set forth in 31 U.S.C. 6305 is the legal

instrument an executive agency uses to reflect a relationship between the

United States Government and a state, a local government, or other

recipient when (1) the principal purpose of the relationship is to transfer a

thing of value to the state, local government, or other recipient to carry out

a public purpose of support or stimulation authorized by law of the United

States and (2) substantial involvement is expected between the executive

agency and the state, local government, or other recipient in carrying out

the activity contemplated in the agreement.

Equity is the difference between the fair market value of the property and

the amount still owed on its mortgage.

A fee simple is an absolute and unqualified estate providing the owner with

all incidence of ownership, including the unconditional power of

disposition.

Under the franchising of external services, the government grants a

concession or privilege to a private sector entity to conduct business in a

particular market or geographical area—for example, operating

concession stands, hotels, and other services provided in certain national

parks. The government may regulate the service level or price, but users of

the service pay the provider directly.

A ground lease is a lease for the use and occupancy of land only, usually

for a long period of time. It is also called a land lease.

A lease is a written agreement between the property owner and a tenant

that stipulates the conditions under which the tenant may possess the real

estate for a specified period of time and rent.

Asset Sale

Cooperative Agreements

Equity

Fee Simple

Franchising

Ground Lease

Lease
Glossary

Page 60 GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships

An operating lease is a type of lease, normally involving equipment,

whereby the contract is written for considerably less than the life of the

equipment and the lessor handles all maintenance and servicing. Also

called service leases, operating leases are the opposite of capital leases,

whereby the lessee acquires essentially all the economic benefits and risks

of ownership.

A partnership is a legal relationship existing between two or more entities

contractually associated as joint principals in a business.

Under a public-private partnership, sometimes referred to as a publicprivate venture, a contractual arrangement is formed between public and

private sector partners. These arrangements typically involve a

government agency contracting with a private partner to renovate,

construct, operate, maintain, and/or manage a facility or system in part, or

in whole, that provides a public service. Under these arrangements, the

agency may retain ownership of the public facility or system, but the

private party generally invests its own capital to design and develop the

properties. Typically, each partner shares in income resulting from the

partnership. Such a venture, although a contractual arrangement, differs

from typical service contracting in that the private sector partner usually

makes a substantial cash, at-risk, equity investment in the project, and the

public sector gains access to new revenue or service delivery capacity

without having to pay the private sector partner.

An RFP is an announcement, often by a government agency, of a

willingness to consider proposals for the performance of a specified

project or program component. A request for proposals is often issued

when proposals for a specific research project are being sought.

An RFQ is a procurement tool routinely used by state and local

governments and the private sector to select partners in major systems

acquisitions, mainly those involving real estate development transactions.

This approach differs from the traditional request for proposals approach

in that it places a lot of emphasis on the actual qualifications of the

potential contractor—his or her track record—rather than how well the

potential contractor responds to detailed project specifications and

requirements.

A sublease is an arrangement whereby a lessee leases the property to a

different end user while the lessor maintains ownership. Under such an

agreement the lessee retains all of its obligations under the lease.

Operating Lease

Partnership

Public-Private Partnership

Request for Proposals (RFP)

Request for Qualifications (RFQ)

Sublease
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