a

GAO

United States General Accounting Office

Report to the Chairman, Committee on 

the Budget, U.S. Senate

August 2003 BUDGET ISSUES

Alternative 

Approaches to 

Finance Federal 

Capital

GAO-03-1011
Capital projects are fully funded when Congress provides budget authority 

for the full cost of an asset up front. Such up-front funding provides 

recognition for commitments that are embodied in budgetary decisions and 

maintains governmentwide fiscal control. However, providing budget 

authority for the large up-front costs of capital assets creates challenges in 

an era of resource constraints. Agencies have been authorized to use an 

array of approaches to obtain capital assets without full, up-front budget 

authority. Our work identified 10 alternative financing approaches used by 

one or more of 13 agencies. These approaches, which are described in our 

letter, are: 

• incremental funding, 

• operating leases, 

• retained fees, 

• real property swaps, 

• sale-leasebacks, 

• lease-leasebacks, 

• public private partnerships, 

• outleases, 

• share-in-savings contracts, and 

• debt issuance. 

From an agency’s perspective, meeting capital needs through alternative 

financing approaches (i.e., not full funding) can be very attractive because 

the agency can obtain the capital asset without first having to secure 

sufficient appropriations to cover the full cost of the asset. Depending on the 

financing approach, an agency may spread the asset cost over a number of 

years or may never even incur a monetary cost that is recognized in the 

budget. From a governmentwide perspective, however, as we have reported 

in the past, the costs associated with these financing approaches may be 

greater than with full, up-front budget authority. Regardless of the financing 

approach—up-front budget authority or any of the other approaches—

agencies would receive the same program benefits. 

This document summarizes how these approaches are typically structured as 

well as examples of projects financed through these approaches. It notes 

the claimed project benefits from an agency’s perspective and some 

questions associated with each.

In an era of limited resources and 

growing mission demands, many 

agencies have turned to 

approaches other than full up-front 

funding to finance capital. GAO 

was asked to inventory examples 

of alternative approaches that 

agencies have employed to finance 

the capital used in their operations. 

www.gao.gov/cgi-bin/getrpt?GAO-03-1011.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Susan J. Irving, 

(202) 512-9142, irvings@gao.gov. 

Highlights of GAO-03-1011, a report to 

Chairman, Committee on the Budget, 

U.S. Senate 

August 2003 

BUDGET ISSUES

Alternative Approaches to Finance 

Federal Capital 
Page i GAO-03-1011 Alternative Financing Approaches

Contents

Letter 1

Appendixes

Appendix I: Full Funding 9

Appendix II: Incremental Funding 11

Appendix III: Operating Leases 17

Appendix IV: Retained Fees 27

Appendix V: Real Property Swaps 32

Appendix VI: Sale-Leaseback 42

Appendix VII: Lease-Leaseback 45

Appendix VIII: Public Private Partnerships 47

Appendix IX: Outleases 54

Appendix X: Share-In-Savings Contracts 60

Appendix XI: Debt Issuance 66

Table Table 1: Alternative Financing Approaches 4

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Page 1 GAO-03-1011 Alternative Financing Approaches

United States General Accounting Office

Washington, D.C. 20548

A

August 21, 2003 Letr

The Honorable Don Nickles

Chairman

Committee on the Budget

United States Senate

Dear Mr. Chairman:

In your March 11, 2003 letter you asked us to report on approaches federal 

agencies have employed to finance capital projects. On June 25, 2003, we 

briefed Committee staff on the preliminary results of our work. As agreed 

with your office, this letter summarizes and transmits the information 

provided in that briefing.

For purposes of this work, capital projects include land, improvement 

projects, and buildings or equipment used in federal operations. It 

excludes investments in high technology assets, such as information 

technology, and assets owned by state and local governments, such as 

highways. We identified alternative financing approaches based on both 

prior GAO work and more current research. Specifically, we queried 

analysts throughout GAO about alternative approaches they had found 

during the course of their work. In addition, we did web-based research on 

publications issued by the Congressional Research Service (CRS), 

Congressional Budget Office (CBO), General Services Administration 

(GSA), and professional research organizations such as RAND. To a very 

limited extent, we obtained clarification on specific examples from 

knowledgeable federal officials. While this work was not intended to result 

in a comprehensive list of all capital financing approaches, we believe we 

identified the major approaches used. For each approach we identified, we 

provide a brief description, examples of how it has been used, and the 

project’s benefits from an agency’s perspective. We did not independently 

verify the accuracy of this information. Moreover, the nature of our review 

did not result in the identification of additional financing costs incurred by 

the government as a whole due to the use of an approach other than full, 

up-front budget authority. Indepth reviews of individual contracts would 

be necessary to identify such costs. Our work was done in Washington, 

D.C., from November 2002 through June 2003, in accordance with generally 

accepted government auditing standards.

Capital assets usually cost large amounts of money. In fiscal year 2002 

alone, the federal government invested close to $100 billion in major 
Page 2 GAO-03-1011 Alternative Financing Approaches

physical capital used in its operations.1 The high cost of capital assets 

creates challenges for budgeting in an era of resource constraints.

The requirement that an agency have adequate budget authority before it 

enters into a contract or other obligation for payment was established over 

100 years ago in the Adequacy of Appropriations Act, 41 U.S.C. § 11, and the 

Antideficiency Act, 31 U.S.C. § 1341. The financing approach known as full 

funding has broader requirements than those found in these two acts and is 

enforced by policy rather than statute.2

 We have advocated the financing 

approach known as full funding as the best way to ensure recognition of 

commitments embodied in budgetary decisions and to maintain 

governmentwide fiscal control. However, agencies have been authorized to 

use an array of approaches to obtain capital assets without full, up-front 

budget authority. In an era of limited resources and growing mission 

demands, many agencies have turned to these alternative approaches as a 

practical way to finance capital, even though over the long run they may 

result in a higher cost to the taxpayer.3

Summary We identified 10 capital financing approaches that have been used by one 

or more of 13 federal agencies (see table 1). From an agency’s perspective, 

meeting capital needs through alternative financing approaches (i.e., not 

full funding) can be very attractive because the agency can obtain the 

capital asset without first having to secure sufficient appropriations to 

cover the full cost of the asset. Depending on the financing approach, an 

agency may spread the asset cost over a number of years or may never even 

incur a monetary cost that is recognized in the budget. In other words, 

alternative financing approaches can make it easier for agencies to meet 

1

 This amount includes investments in such assets as buildings, equipment, and information 

technology. However, we did not include investments in information technology within the 

scope of this report.

2

 The difference between these two acts and full, up-front funding is that the acts apply to 

individual contracts while full, up-front funding applies to a useful segment or an entire 

project, which may involve several contracts. As described by CBO, full funding would 

require budget authority for the construction of a whole ship, even though the construction 

may involve several contracts, while the Adequacy of Appropriations and Antideficiency 

Acts would require budget authority for a single contract, for example, to construct the hull 

of the ship.

3

 Because the federal government’s financing costs are always less than the private sector’s, 

acquiring assets with private sector financing may result in a higher cost of capital to the 

taxpayer.
Page 3 GAO-03-1011 Alternative Financing Approaches

mission capital demands within the constraints of their appropriation. As 

we have reported in the past, however, from a governmentwide perspective 

the costs associated with these financing approaches may be greater than 

with full, up-front budget authority. Regardless of the financing approach 

used to obtain the capital, agencies would receive the same program 

benefits.

Table 1 below shows an array of approaches that agencies have used to 

finance capital.
Page 4 GAO-03-1011 Alternative Financing Approaches

Table 1: Alternative Financing Approaches

Agency

Incremental 

funding Operating lease Retained fees

Real property 

swaps

GSA PTO building;

DOT 

headquarters

Phillip Burton 

Conf. Center

Albuquerque, 

NM, federal 

building and 

parking;

L. Mendel 

Rivers Building

DOD CVN-21 Aircraft 

Carriers; Atlantic 

Intracoastal 

Waterway Bridge

USAF Mid-air 

Refueling 

Tankers; USAF 

Operational

Support Aircraft

Army Reserves 

facilities; 

LAAFB

VA

Interior Recreation fee 

demonstration 

program (NPS, 

FWS, BLM)

Georgetown - 

Foxhall 

(proposed)

USDA Recreation fee 

demonstration 

program 

(Forest

Service)

TVA

Coast Guard Deepwater 

Program; CGC 

Alex Haley

DOE

DOT Northern CA air 

traffic control 

system

USPS

State USAID Annex 

(Kampala,

Uganda)

Smithsonian Castle

Commerce
Page 5 GAO-03-1011 Alternative Financing Approaches

Note: Italics and bold type indicate where details of specific projects are included in this document.

Sale-leaseback Lease-leaseback

Public private 

partnerships Outlease Share-in-savings

Debt 

issuance

Charleston, WV 

Federal Building

Southeast Federal Center; 

El Paso border station; 

Ronald Reagan Building; 

Atlanta Food Court

Tariff Bldg.; McCormack 

PO Courthouse; 

Galveston 

customhouse; RRB 

bldg.; Metcalfe Building

Energy savings 

performance 

contracts ($100s of 

millions in total)

Family housing on bases; 

Portsmouth Shipyard 

Prison (Navy); Army 

utilities privatization

Ft. Sam Houston,

Ft. Leonard Wood, Brooks 

AFB; NAVSEA field 

activities

At least 27 enhanceduse leases

Ft. Mason Foundation; 

Thoreau Center/Presidio

Combustion 

turbines

Capital 

acquisitions

Maine lights, Coast 

Guard stations

Oak Ridge National 

Laboratory

New Brunswick, NJ Civic 

Square; Rincon Center; 

Grand Central Station

HVAC upgrade
Page 6 GAO-03-1011 Alternative Financing Approaches

The 10 alternative financing approaches we identified are briefly described 

below. In parentheses, we have included a measure of the magnitude of the 

use of each approach based on our research. These must be interpreted 

cautiously, however, since our methodology would not identify every 

instance where alternative financing approaches were used.

Incremental funding (about 1/3 of about $92 billion provided for civilian 

capital projects funded through fiscal year 2000) – Incrementally funded 

projects are those for which budget authority is provided for only part of 

the estimated costs of a capital acquisition or for part of a usable asset. 

Operating leases (about 5 percent of GSA’s leases are for 20 years or 

longer) – An operating lease gives the federal government the use of an 

asset for a specified period of time, but the ownership of the asset remains 

with the lessor. The Office of Management and Budget (OMB) identifies six 

criteria (presented in the enclosed briefing) that a lease must meet to be 

considered an operating lease.

Retained fees (5 organizations) – In some cases, agencies have been 

authorized to finance capital projects and improvements with fees earned 

through business-type or market-oriented activities with the public. 

Real property swaps (7 agreements) – A real property swap is an 

exchange of property owned by the federal government for another 

property owned by either a private entity or a state or local government. 

Sale-leaseback (1 case) – Under a sale-leaseback agreement, a federal 

agency sells an asset and then leases back some or all of the asset from the 

purchaser. 

Lease-leaseback (1 case) – A lease-leaseback agreement between a 

government agency and a private entity may consist of three stages: the 

government agency purchases an asset; the agency then leases out the 

same asset to a private entity for a fixed time period in return for a lump 

sum payment; finally the agency leases back the use of the same asset. 

Public private partnerships (54 arrangements) – Public private 

partnerships tap the capital and expertise of the private sector to improve 

or redevelop federal real property assets. Ideally, the partnerships are 

designed so that each participant makes complementary contributions that 

offer benefits to all parties.
Page 7 GAO-03-1011 Alternative Financing Approaches

Outleases (36 cases) – Excess or underused properties are outleased to 

shift the cost of maintenance and restoration to the private sector lessee, 

thus relieving the federal government of these expenses. 

Share-in-savings contracts (hundreds of millions of dollars) – Some 

federal agencies work with contractors who purchase and install new 

energy systems in federal buildings. Agencies then pay back the 

contractors over time for the equipment plus a percentage of the energy 

costs saved as a result of the more efficient energy systems and relief of inhouse maintenance costs. 

Debt issuance (1 agency) –A few federal organizations, such as the 

Tennessee Valley Authority, have authority to borrow from the public. This 

authority can be used to finance capital acquisitions. 

Organization of Report The remainder of this report consists of sections on each of the above 

financing approaches. Each section begins with a brief description of the 

approach, followed by examples of specific projects financed by using the 

approach.

Additional Work To Be 

Done

As agreed with your staff, we will further examine examples of some of 

these alternative approaches. A report on this follow-on work will be sent 

to you.

We will send copies of this letter to the Ranking member of the Senate 

Committee on the Budget, the Chair and Ranking Member of the House 

Committee on the Budget, and other committees as appropriate. Copies 

will be made available to others on request. In addition, the report will be 

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

We appreciate the opportunity to be of assistance. If you or your staff have 

any questions regarding the briefing or this letter, please contact me at 

(202) 512-9142 (irvings@gao.gov) or Christine Bonham, Assistant Director, 

at (202) 512-9576 (bonhamc@gao.gov). Other key contributors to this 
Page 8 GAO-03-1011 Alternative Financing Approaches

briefing were Carol Henn, Maria Edelstein, David Eisenstadt, and Dewi 

Djunaidy.

Sincerely yours,

Susan J. Irving

Director, Federal Budget Analysis

Strategic Issues
Page 9 GAO-03-1011 Alternative Financing Approaches

Appendix I

Full Funding AAppenednxidexiIs

A fully-funded capital project receives budget authority up front, before a 

commitment is made, for the project’s full estimated cost or for a standalone stage if the project is divisible into stages and the result of that stage 

is a usable asset.1

 We and others have advocated full funding for capital 

asset acquisition as the best way to ensure recognition of commitments 

embodied in budgetary decisions and maintain governmentwide fiscal 

control. The requirement that an agency have adequate budget authority 

before it enters into a contract or other obligation for payment was 

established over 100 years ago in the Adequacy of Appropriations Act, 41 

U.S.C. § 11, and the Antideficiency Act, 31 U.S.C. § 1341. The financing 

approach known as full funding has broader requirements than those found 

in these two acts and is enforced by policy rather than statute.

Fully-funded projects can take the form of new construction, renovations, 

or purchases. New construction of federal buildings is generally done 

through the General Services Administration (GSA). Over the last 10 years, 

GSA’s new construction program has focused on courthouses and border 

stations. Purchases typically are not used for facilities.

There are two types of leases for which up-front funding is now required: 

lease-purchases and capital leases. A lease-purchase is a lease in which the 

federal government contracts to make annual lease payments to a 

developer and to take ownership of the building at the end of the lease 

period. During the 1980s, Congress authorized agencies to enter into leasepurchase agreements in which the annual lease payments were recorded in 

the budget over the lease period. Because this is generally more costly to 

the government than outright purchase and because the government is 

obligated to take ownership of the building, the House and Senate Budget 

Committees, the Office of Management and Budget (OMB), and the 

Congressional Budget Office (CBO), in connection with the Omnibus 

Budget Reconciliation Act of 1990, changed the budget scoring rules so 

lease-purchase budget authority and obligations are now scored up front 

rather than on an annual basis. 

Capital leases are those that do not meet the six criteria for an operating 

lease. (See operating leases.) Generally the present value of the minimum 

lease payments over the life of the lease exceeds 90 percent of the fair 

1

 For more information on this, see U.S. General Accounting Office, Budget Issues: 

Incremental Funding of Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 

26, 2001).
Appendix I

Full Funding 

Page 10 GAO-03-1011 Alternative Financing Approaches

market value of the asset at the beginning of the lease term. For capital 

leases, budget authority must be available for the net present value of the 

total cost of the lease before it can be signed. Agencies may be reluctant to 

use capital leases because of this scoring requirement.
Page 11 GAO-03-1011 Alternative Financing Approaches

Appendix II

Incremental Funding ApendxiI

Incrementally funded projects are those for which budget authority is 

provided for only part of the estimated cost of a capital acquisition or part 

of a usable asset. It erodes future fiscal flexibility for programs because 

funding is needed to complete procurements begun in previous years. In 

addition, it limits cost visibility and accountability. However, incremental 

funding can be attractive to agencies that request a particular acquisition in 

an era of tight budgets when the full amount of funding needed may be 

difficult to obtain. 

Distortions in the allocation of resources can result when the full costs of 

proposed commitments are not recognized at the time budget decisions are 

made. Incremental funding can be justified, however, for high technology 

capital projects because such projects are often closer in nature to 

research and development, where useful knowledge can be obtained even 

if no additional funding is provided. Space exploration equipment would 

be an example of such a project.

As we reported in February 2001, of the nearly $92 billion provided for 

civilian capital projects funded through fiscal year 2000, about $31 billion 

was incrementally funded.1

 At that point in time, at least $45 billion in 

additional funds would have been needed to complete these projects.

Following are a few examples of incrementally funded projects.

• Northern California Terminal Radar Approach Control facilities, 

• Alex Haley Conversion Project-Phase II,

• Deepwater, and 

• Navy CVN-21 Aircraft Carrier Program.

1 GAO-01-432R.
Appendix II

Incremental Funding

Page 12 GAO-03-1011 Alternative Financing Approaches

Northern California 

Terminal Radar 

Approach Control 

Facilities

Description of project Terminal air traffic in northern California increased 89 percent from 1982 to 

1998 and is projected to further increase another 42 percent from 1998 to 

2015. The infrastructure of the Federal Aviation Administration’s (FAA) air 

traffic control system—Terminal Radar Approach Control (TRACON)—in 

the northern California area requires modernization and expansion to meet 

the increased traffic demands. For example, the Bay, Sacramento, and 

Stockton TRACONs are in aging buildings without sufficient space to grow 

or transition to modern equipment. The Northern California TRACON 

program constructed a facility in Sacramento to consolidate and integrate 

the approach control functions of four northern California TRACONs and 

some Oakland airspace. 

Description of financing 

approach

From fiscal years 1996 through 2000, funds were appropriated for the 

consolidated facility. Specifically, funds were used for environmental and 

airspace impact studies, site adaptation, building design and construction, 

air traffic control equipment procurement and installation, and program 

management. However, an estimated $6.7 million was needed to complete 

installation and implementation activities, program management, new 

building services, ancillary maintenance equipment, and the 

telecommunications network required to consolidate the four TRACON 

facilities. 

Benefits claimed FAA projects that the full northern California TRACON consolidation will 

reduce operation and maintenance costs for consolidated facilities, reduce 

locality pay, and lower costs associated with employee turnover. Other 

potential benefits include fuel and time savings resulting from efficient 

airspace management and route design.

Source Federal Aviation Administration’s FY 2001 President’s Budget Submission.

Financing approach: Incremental funding

Capital project: Northern California Terminal Radar 

Approach Control facilities

Department/agency: Federal Aviation Administration
Appendix II

Incremental Funding

Page 13 GAO-03-1011 Alternative Financing Approaches

Alex Haley Conversion 

Project-Phase II

Description of project Coast Guard Cutter Alex Haley was recently converted to operate in the 

harsh Alaska/Bering Sea. Its primary mission is homeland security, search 

and rescue, and international domestic fisheries enforcement. Continuing 

improvements are being made for crew habitability, operation capability, 

and machinery and personal safety. For example, a helicopter hangar was 

installed to allow deployment of an HH-65 helicopter. 

Description of financing 

approach

Funding for project start-up was provided in fiscal year 1998, with 

completion estimated in fiscal year 2005. Although $23.2 million had been 

provided as of fiscal year 2001, estimates of the amount needed to 

complete the project had not been provided as of February 2001.

Benefits claimed The improvements provide a safer environment for the professional men 

and women that serve on the Alex Haley. In addition, the new helicopter 

hangar enables the cutter to launch and recover aircraft and better manage 

conditions in the Gulf of Alaska and the Bering Sea. 

Source U.S. General Accounting Office, Budget Issues: Incremental Funding of 

Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 26, 

2001).

Financing approach: Incremental funding

Capital project: Alex Haley Conversion Project-Phase II

Department/agency: U.S. Coast Guard
Appendix II

Incremental Funding

Page 14 GAO-03-1011 Alternative Financing Approaches

Deepwater Program

Description of project The Coast Guard is working to modernize its aging fleet of deepwater ships 

and aircraft. Rather than using the traditional approach of replacing an 

individual class of ships or aircraft, the Coast Guard adopted a “system-ofsystems” approach intended to integrate ships, aircraft, sensors, and 

communication links together as a system to accomplish mission 

objectives more effectively. 

Description of financing 

approach

The Coast Guard chose a contracting approach that depends on a sustained 

funding stream of over $500 million each year (in 1998 dollars) for at least 

the next 20 years. Already, the funding provided for the project is less than 

the amount the Coast Guard had planned. The fiscal year 2002 and 2003 

appropriations for the project were about $28 million and about $90 million 

below the planned levels, respectively. Further, the President’s fiscal year 

2004 budget request for the Coast Guard is not consistent with the 

Deepwater funding plan. If the requested amount of $500 million for fiscal 

year 2004 is appropriated, it would represent another shortfall of $83 

million, making the cumulative shortfall about $202 million in the project’s 

first 3 years. If appropriations hold steady at $500 million (in nominal 

dollars) through fiscal year 2008, the Coast Guard estimates that the 

cumulative shortfall will reach $626 million.2

Benefits claimed By replacing its deepwater fleet through an integrated approach, the Coast 

Guard expects to improve the effectiveness of its operations and reduce 

operating costs. However, delays in the project, which have already 

occurred, could jeopardize the Coast Guard’s future ability to effectively 

and efficiently carry out its mission.

Financing approach: Incremental funding

Capital project: Deepwater Program

Department/agency: U.S. Coast Guard

2

 The $28 million shortfall is expressed in 2002 dollars, the $90 million shortfall in 2003 

dollars, and the $202 million shortfall in 2004 dollars. The $626 million shortfall is expressed 

in 2008 dollars.
Appendix II

Incremental Funding

Page 15 GAO-03-1011 Alternative Financing Approaches

Sources U.S. General Accounting Office, Coast Guard: Challenges during the 

Transition to the Department of Homeland Security, GAO-03-594T

(Washington, D.C.: Apr. 1, 2003). 

Coast Guard: Actions Needed to Mitigate Deepwater Project Risks, GAO01-659T (Washington, D.C.: May 3, 2001).
Appendix II

Incremental Funding

Page 16 GAO-03-1011 Alternative Financing Approaches

Navy CVN-21 Aircraft 

Carrier Program

Description of project The Navy plans to procure the CVN-21 aircraft carrier in fiscal year 2007 

and commission it into service in 2014. The CVN-21 is an evolved version 

of the Nimitz-class design that will replace the Enterprise (CVN-65), which 

will then be 53 years old.

Description of financing 

approach

For fiscal year 2004, the administration proposed continued advanced and 

incremental funding to procure and perform research and development 

work on the ship. The proposed funding for the CVN-21 would spread the 

appropriations over 8 fiscal years, presumably to ease the strain on any one 

year’s budget. 

Benefits claimed Compared to prior aircraft carriers, the CVN-21 would require significantly 

fewer sailors to operate and would feature an entirely new and less 

expensive nuclear reactor plant, a new electrical distribution system, and 

an electromagnetic (as opposed to steam-powered) aircraft catapult 

system. In addition, the CVN-21 is projected to have lower life-cycle 

operation and support costs.

Source Congressional Research Service, Navy CVN-21 (Formerly CVNX) Aircraft 

Carrier Program: Background and Issues for Congress, RS20643 

(Washington, D.C.: Mar. 21, 2003).

Financing approach: Incremental funding

Capital project: Navy CVN-21 Aircraft Carrier Program

Department/agency: Department of Defense/Navy
Page 17 GAO-03-1011 Alternative Financing Approaches

Appendix III

Operating Leases ApendxiI

An operating lease gives the federal government the use of an asset for a 

specified period of time, but the ownership of the asset does not change. 

The Office of Management and Budget (OMB) identifies six criteria that a 

lease must meet to be considered an operating lease. 

• Ownership of the asset remains with the lessor and is not transferred to 

the government at or shortly after the lease.

• Lease does not contain a bargain-price purchase option.

• The lease term does not exceed 75 percent of the estimated economic 

life of the asset.

• The asset is a general-purpose asset and is not built to unique 

specifications of the government lessee.

• There is a private sector market for the asset.

• The present value of the lease payments does not exceed 90 percent of 

the fair market value.

• A lease not meeting any one of the six criteria is considered a capital 

lease.

Operating leases are generally intended to be used for assets that are 

needed for a specified period of time. For self-insuring entities like GSA, an 

operating lease requires that only 1 year’s amount of budget authority be 

obtained annually to fund the lease. As the federal government’s real 

property manager, GSA provides leased space for most agencies. GSA and 

we agree that ownership is more cost-effective than leasing if (1) GSA has a 

justifiable need for a property over a 20-year term, (2) the space 

requirement is large enough, and (3) the property is located in an 

appropriate market. 

We have previously reported that the budget scoring rules have the effect of 

favoring operating leases and, given current budget constraints, there is a 

concern that capital assets are being obtained through operating leases 

rather than through the generally more cost-effective ownership option. In 

2001,we reported on 12 GSA lease projects in which the lease term was
Appendix III

Operating Leases

Page 18 GAO-03-1011 Alternative Financing Approaches

affected by budget scoring.1 While in the short run operating leases may 

appear less costly than ownership options such as construction or 

purchase, for long-term needs construction is generally less expensive than 

leasing. We have previously reported that one option to improve 

scorekeeping would be to treat operating leases that are used for long-term 

needs on the same basis as purchases or construction in the budget. This 

change would require an increase in available budget authority. 

Following are examples of operating leases used for long-term needs:

• Patent and Trademark Office building in Washington, D.C.,

• Department of Transportation headquarters in Washington, D.C. ,

• Air Force lease of 737 Operational Support Aircraft, and

• Air Force lease of Boeing 767 tankers.

1

 U.S. General Accounting Office, Budget Scoring: Budget Scoring Affects Some Lease 

Terms, but Full Extent Is Uncertain, GAO-01-929 (Washington, D.C.: Aug. 31, 2001).
Appendix III

Operating Leases

Page 19 GAO-03-1011 Alternative Financing Approaches

Patent and Trademark 

Office (PTO) Lease in 

Washington, D.C.

Description of project In 1989, the Patent and Trademark Office (PTO) began working with GSA 

on approaches to meet its long-term space requirements. In August 1995, 

OMB authorized GSA to seek congressional approval to consolidate PTO 

operations at a single location in new leased space. That same year, the 

appropriate Senate and House committees approved the prospectus for the 

lease. The committees authorized the competitive procurement of a 20-

year operating lease for about 2 million square feet for the purpose of 

consolidating PTO. 

On June 1, 2000, GSA signed a 20-year lease for approximately 2.2 million 

rentable square feet, which were to be built to suit GSA/PTO needs and to 

house 7,100 staff in Alexandria, Virginia. The lease was valued at $1.24 

billion over 20 years, plus operating expenses and taxes. PTO plans to 

begin moving into the new building in late 2003.

Description of financing 

approach

GSA entered into a 20-year operating lease that only required the annual 

payments to be scored in each year of the lease. Thus PTO’s yearly rent of 

$62 million would need to be appropriated for each of the 20 years as an 

operating lease. 

Benefits claimed GSA will be able to consolidate and collocate PTO staff that had previously 

been located in 18 different buildings under 33 different leases.

Budgetary observations Had the PTO lease been considered a capital lease, the net present value of 

the $1.2 billion in total lease costs would have needed to be appropriated to 

GSA in fiscal year 2003. The Federal Buildings Fund would not have been 

able to absorb the cost of this construction project without additional 

appropriations. We reported that while construction would have been an 

estimated $48 million less costly than leasing space for PTO, the award of 

the PTO lease as an operating lease was in accordance with OMB’s scoring 

criteria. We also reported that construction was not a viable alternative at 

the time GSA made the decision for the PTO facility because funds were 

Financing approach: Operating lease

Capital project: Patent and Trademark Office (PTO) lease in 

Washington, D.C. 

Department/agency: General Services Administration (GSA)
Appendix III

Operating Leases

Page 20 GAO-03-1011 Alternative Financing Approaches

not available to provide for government ownership. A PTO official stated 

that the administration and PTO’s appropriation committees agreed that a 

competitive lease was the only viable option because neither user fees nor 

taxpayer funding were available to construct or purchase a new PTO 

facility.

Source U.S. General Accounting Office, Acquisition of Leased Space for the U.S. 

Patent and Trademark Office, GAO-01-578R (Washington, D.C.: June 5, 

2001).
Appendix III

Operating Leases

Page 21 GAO-03-1011 Alternative Financing Approaches

Department of 

Transportation (DOT) 

Headquarters Building

Description of project In 2002, GSA reached a deal to sell 11 acres of land at the federally owned 

Southeast Federal Center in Washington, D.C. for $40 million to the JBG 

Companies partnership for the development of a new DOT complex. The 

complex may have multiple buildings and up to 1.35 million rentable square 

feet of office space that GSA will lease for 15 years for DOT headquarters 

operations. DOT is seeking to replace its current leased space for which the 

lease expired March 31, 2000, and to consolidate some of its field 

operations. The DOT locations to be consolidated are the Nassif Building 

(400 7th Street, SW) and the Transpoint Building (2100 2nd Street, SW). 

DOT currently occupies approximately 1.1 million occupiable square feet 

of office and related space at the Nassif Building and approximately 

450,000 occupiable square feet of office and related space at the Transpoint 

Building.

Description of financing 

approach

GSA entered into a 15-year operating lease for a new DOT headquarters 

complex to be built with up to 1.35 million rentable square feet of office 

space. GSA will convey 11 acres of federally owned land at the Southeast 

Federal Center to the private partnership building the new office complex.

Benefits claimed This lease will replace DOT’s current lease and allow it to consolidate some 

of its field offices at one location within current budget constraints.

Budgetary observations According to GSA officials, during the planning for the Department of 

Transportation lease, it was realized that due to the rental rates in 

Washington, D.C., a 20-year lease would probably not satisfy the 90 percent 

scoring criterion for being an operating lease. To address this issue, GSA 

reduced the lease term to 15 years. In addition, OMB encouraged GSA to 

consider financing above-standard items through the Federal Buildings 

Fund or DOT rather than through the lease to reduce the lease costs and 

thus help it meet the requirements for an operating lease. The President’s 

2003 and 2004 budgets included $25 million and $45 million respectively for 

the new DOT headquarters building. 

Financing approach: Operating lease

Capital project: Department of Transportation (DOT) 

Headquarters Building

Department/agency: General Services Administration (GSA)
Appendix III

Operating Leases

Page 22 GAO-03-1011 Alternative Financing Approaches

Sources U.S. General Accounting Office, Budget Scoring: Budget Scoring Affects 

Some Lease Terms, but Full Extent Is Uncertain, GAO-01-929

(Washington, D.C.: Aug. 31, 2001).

Washington Business Forward, April 2002.

January 19, 2001, letter from OMB to GSA regarding DOT headquarters 

lease; and July 17, 2001, letter from GSA to OMB regarding DOT 

headquarters lease.

Related questions • How was the $40 million from the land purchase used?

• Was the $25 million used to buy down the lease so it qualified as an 

operating lease? 

• How will the $45 million in the President’s 2004 Budget be used if 

appropriated?
Appendix III

Operating Leases

Page 23 GAO-03-1011 Alternative Financing Approaches

Lease of 737 

Operational Support 

Aircraft

Description of project The Air Force plans to award a firm, fixed price, multiyear contract to 

Boeing for four leased C-40 aircraft (the military variant of the commercial 

737). Because the aircraft take 18 to 24 months to build, the Air Force plans 

to lease two used 737 aircraft to provide an interim capability. After two 

new C-40 aircraft are delivered, the used 737 aircraft would be returned to 

Boeing to be reconfigured to C-40s and then returned to the Air Force. 

Description of financing 

approach

Under this arrangement, the Air Force would lease three aircraft for 6 years 

and the fourth for 5 years. At the end of the lease period, the Air Force 

would have the option to purchase the aircraft for a specified negotiated 

price. It appears that the leases would be operating leases and thus the 

negotiated purchase price would have to reflect the value of the planes. If 

the lease contained a bargain purchase price, it would be a lease-purchase 

and budget authority for the entire cost of the lease and purchase would 

have to be provided up front.

Benefits claimed The Air Force estimated that it would save $3.9 million (net present value) 

from leasing these four Boeing 737 aircraft compared to the outright 

purchase of the aircraft. This is a savings of about 1 percent.

Budgetary observations The Air Force complied with the OMB criteria in making its case that 

leasing was more advantageous than purchasing. However, relatively small 

changes in assumptions can reduce claimed savings or make leasing more 

expensive. The Congressional Budget Office (CBO) questioned the 

estimated cost to purchase the aircraft, which is a key assumption in 

computing the cost of purchase. The Air Force did not negotiate a purchase 

price and CBO believes it could have negotiated a lower purchase price 

than it used in its analysis, just as it negotiated a lower lease price than the 

initial estimate. Using the Air Force’s lease data, CBO used a model to 

work backwards and determine a purchase price. CBO found that based 

on the lease agreement the purchase price could be $5 million less per 

aircraft than the purchase price used in the Air Force’s analysis. If the Air 

Force could negotiate a purchase price $5 million less than the estimate 

Financing approach: Operating lease

Capital project: Lease of 737 Operational Support Aircraft

Department/agency: DOD/Air Force
Appendix III

Operating Leases

Page 24 GAO-03-1011 Alternative Financing Approaches

used, the purchase would save about $15 million in net present value terms 

over the lease. CBO also questioned the assumptions for the residual value 

of the aircraft and the cost of self-insurance. Small changes in these 

assumptions could result in leasing being more costly. 

Sources U.S. General Accounting Office, Discussion points and August 1, 2002 

Congressional Relations memo related to the Air Force lease of 737 

operational support aircraft.

Congressional Budget Office review of report on leasing Boeing 737 

aircraft, July 23, 2002.

Related questions • Has this lease been signed?

• What is the negotiated purchase price at the end of the lease?
Appendix III

Operating Leases

Page 25 GAO-03-1011 Alternative Financing Approaches

Leasing of Boeing 767 

Tankers

Description of project The Air Force has determined that it needs to replace its KC-135 mid-air 

refueling tankers. The Air Force thought it might be able to accelerate its 

refueling tanker replacement efforts in the aftermath of September 11, 

2001, because commercial aircraft manufacturers were faced with the 

prospect of reduced or canceled orders. Congress included language in 

section 8159 of the fiscal year 2002 Defense Appropriations Act allowing 

the Air Force to establish a multiyear pilot program for leasing Boeing 767 

aircraft. The Air Force is considering leasing Boeing 767 aircraft and 

converting them to serve as tankers. At the end of the lease period, the Air 

Force would have the option to purchase the aircraft for a specified, 

negotiated price.

Description of financing 

approach

The Air Force plans to obtain refueling tankers through an operating lease 

in which budget authority will be scored in each year of the lease.

Benefits claimed KC-135 tankers will be replaced earlier than expected. GAO reported that 

although there is a long-term requirement to replace the aging fleet of KC135 tankers, the urgency of the need in the short term is unclear.

Budgetary observations If the aircraft were returned at the end of the 6-year lease period, the Air 

Force tanker fleet would be reduced and the Air Force would have to find 

some way to replace the lost capability even though lease payments would 

have paid almost the full cost of the aircraft. For this and other reasons, we 

have reported that returning the aircraft would probably make little sense 

and the Congress would almost certainly be asked to fund the purchase of 

the aircraft at their residual value when the leases expire. In a July 10, 

2003, report to the Senate Committee on Armed Services, the Air Force 

estimated that purchasing the aircraft would be about $150 million less 

than leasing, on a net present value basis.

Sources U.S. General Accounting Office, Military Aircraft: Considerations in 

Reviewing the Air Force Proposal to Lease Aerial Refueling Aircraft, 

GAO-03-1048T (Washington, D.C.: July 23, 2003).

Financing approach: Operating lease

Capital project: Leasing of Boeing 767 tankers

Department/agency: DOD/Air Force
Appendix III

Operating Leases

Page 26 GAO-03-1011 Alternative Financing Approaches

U.S. General Accounting Office, Air Force Aircraft: Preliminary 

Information on Air Force Tanker Leasing, GAO-02-724R (Washington, 

D.C.: May 15, 2002).

U.S. General Accounting Office, U.S. Combat Air Power: Aging Refueling 

Aircraft Are Costly to Maintain and Operate, GAO/NSIAD-96-160

(Washington, D.C.: August 8, 1996).
Page 27 GAO-03-1011 Alternative Financing Approaches

Appendix IV

Retained Fees ApendxiIV

Proceeds that result from business-type or market-oriented activities with 

the public, such as the sale or lease of property, are known as offsetting 

collections. The legislation authorizing these collections may earmark 

them for a specific purpose or require them to be appropriated in annual 

appropriation acts before they can be spent. In some cases, agencies have 

been authorized to retain earned fees to fund capital projects and 

improvements.

While retaining fees enables agencies to obtain the funding needed to make 

capital improvements, repairs, and maintenance, it also raises questions of 

equity. International experience with departments retaining asset sale 

proceeds has shown that those that were asset-rich continued as such and 

those that were asset-poor continued to run down their asset bases. Since 

the ability to retain fees results in a shift of control over the use of monies 

from Congress to the agencies, Congress would have limited ability to 

direct the collections to higher priority needs.

Following are examples of a few projects funded through retained fees. 

• Capital improvements, repairs, and maintenance by federal land 

management agencies and

• Phillip Burton Conference Center.
Appendix IV

Retained Fees

Page 28 GAO-03-1011 Alternative Financing Approaches

Capital Improvements, 

Repairs, and 

Maintenance

Description of project Since 1996, federal land management agencies1

 have collected over $900 

million in recreation fees from the public under an experimental initiative 

called the Recreational Fee Demonstration Program. Congress first 

authorized the program in 1996 for 3 years and has extended it four times. 

The authority to collect these fees expires at the end of fiscal year 2004. 

Description of financing 

approach

The Recreational Fee Demonstration Program permits four land 

management agencies to use new or increased fees collected from visitors 

to help address deteriorating conditions at many federal recreation areas, 

among other things. At least 80 percent of the revenues are to be spent at 

the site that collects the fees; the remaining 20 percent can be spent at 

other sites at the discretion of each agency. To ensure that fee revenues 

remain available for improvements after 2004, the administration has 

indicated it will propose legislation providing permanent fee authority.

Benefits claimed For many sites, the additional fee revenues increased their annual budgets 

by 20 percent or more. With this infusion of revenues, some units with 

maintenance backlogs could address their unmet needs in relatively few 

years. Other units with small or nonexistent backlogs could undertake 

further development and enhancement. 

Sources U.S. General Accounting Office, Recreation Fees: Information on Forest 

Service Management of Revenue from the Fee Demonstration Program,

GAO-03-470 (Washington, D.C.: Apr. 25, 2003).

Financing approach: Retained fees

Capital project: Capital improvements, repairs, and 

maintenance

Department/agency: Federal land management agencies

1

 The four land management agencies include the National Park Service, Fish and Wildlife 

Service, Bureau of Land Management, and Forest Service. Together, the Park Service and 

Forest Service collect over 90 percent of the fees under the Recreational Fee Demonstration 

Program. In fiscal year 2001, the Park Service collected $126 million and the Forest Service 

collected $35 million.
Appendix IV

Retained Fees

Page 29 GAO-03-1011 Alternative Financing Approaches

U.S. General Accounting Office, Recreation Fees: Demonstration Fee 

Program Successful in Raising Revenues but Could Be Improved,

GAO/RCED-99-7 (Washington, D.C.: Nov. 20, 1998).

Related question • What is the effect of inequities between relatively high revenue 

producing National Parks and those that earn relatively less?
Appendix IV

Retained Fees

Page 30 GAO-03-1011 Alternative Financing Approaches

Phillip Burton 

Conference Center

Description of project To increase the use of underused space in the Phillip Burton Federal 

Building and U.S. Courthouse in San Francisco,2

 GSA established a 

Government Conference and Training Center to operate as a self-sustaining 

center. Facilities are available to both the federal community and the 

public. 

Benefits claimed The income received from the conference center has been used to further 

enhance the conference center and the tenant agencies in the building. 

Underused space was converted into space that could more effectively be 

used by the federal government and the community.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., February 1999, 10 - 11.

Related questions • How was the original construction financed? 

• Do the fees charged cover those costs or just operating costs?

• Under what authority may fees be retained?

• Can all the fees be retained or just a portion—what constraints are on 

this?

• Did any tenants need to be relocated as a result of the construction?

• Is there any connection between the construction of the conference 

center and the funding of the plaza in front of the building (plaza work 

done in 1996 through 1999)?

Financing approach: Retained fees

Capital project: Phillip Burton Conference Center

Department/agency: General Services Administration (GSA)

2

 The Phillip Burton Federal Building was built in 1962. GSA owns and manages the 

building, which houses several agencies. 
Appendix IV

Retained Fees

Page 31 GAO-03-1011 Alternative Financing Approaches

• Were original financing costs repaid?
Page 32 GAO-03-1011 Alternative Financing Approaches

Appendix V

Real Property Swaps ApendxiV

A real property swap is an exchange of property owned by the federal 

government with either a private entity or a state or local government for 

another property. In many cases, the property exchanged by the federal 

government has been underused because it is deteriorating. Despite a 

federal property’s poor condition, a private entity may consider the same 

property valuable for future development and enter into a property swap 

with the federal government. Under such an arrangement, the federal 

government receives another existing property, or the private entity 

constructs a new facility for the federal government equal in value to the 

land received in exchange.

Property swaps can relieve the federal government of maintenance and/or 

renovation costs and result in a real asset that may be used immediately 

with no additional appropriations required. However, determining fair 

value for the properties exchanged is not always a clear-cut process and 

congressional oversight of these exchanges is limited.

While Congress may receive notification of pending swaps, these 

transactions are not reflected in the budget since there are no federal 

government cash flows involved. Congressional budget decisionmakers 

therefore do not have an opportunity to consider whether the value of the 

exchanged property should be reallocated to other competing resource 

needs.

Examples of real property swaps include:

• Los Angeles Air Force Base,

• Albuquerque, NM, federal building and parking,

• Army Reserves fire station,

• Army Reserves Fort Snelling, MN, and

• L. Mendel Rivers Building, Charleston, SC.
Appendix V

Real Property Swaps

Page 33 GAO-03-1011 Alternative Financing Approaches

Los Angeles Air Force 

Base Systems 

Acquisition 

Management Support 

Project

Description of project The Air Force traded government-owned land on the Los Angeles Air Force 

Base to a private developer in exchange for the design and construction of 

a new 560,000 square foot facility on the base for the Space and Missile 

Systems Center. The new office space will replace the use of buildings 

constructed in 1957 and 1966 that are outdated and vulnerable to 

earthquakes.

Description of financing 

approach

The National Defense Authorization Act of 2001 (Pub. L. 106-398) 

authorized the Secretary of the Air Force to sell or lease all or part of the 

real property at Los Angeles Air Force Base (LAAFB). The statute also 

provided that the only consideration that the Air Force could receive for 

the property was “the design and construction on [unconveyed] 

property...of one or more facilities to consolidate the Space and Missile 

Systems Center mission and support functions.” Furthermore, the Act 

provided that if the value of the new facility received by the Air Force 

exceeded the value of the property it conveyed, then the Air Force should 

“lease back” the new facility from the developer for a period up to 10 years, 

with the Air Force taking title to the facility at the end of the lease period. 

As of October, 2002, the Air Force still was negotiating the final terms of the 

contract, which includes a property swap and the probability of a leasepurchase agreement to make up the difference in value between the new 

facility and the property conveyed by the Air Force.

Benefits claimed The Air Force gains a new office complex at a fraction of the cost of 

independently contracting for a new office complex while the Los Angeles 

area communities gain land for potential development. The Air Force is 

able to dispose of up to 865,000 square feet of substandard buildings and 

eliminate requirements for $130 million to $150 million in military 

construction projects. Furthermore, reduction of the base size lowers 

ongoing operations and maintenance costs by more than $3 million per 

year.

Financing method: Real property swap

Capital project: Los Angeles Air Force Base Systems 

Acquisition Management Support project

Department/agency: Department of Defense/Air Force
Appendix V

Real Property Swaps

Page 34 GAO-03-1011 Alternative Financing Approaches

Sources Comptroller General decisions in the matter of SAMS El Segundo, LLC, 

B-291620 and B-291620.2, February 3, 2003.
Appendix V

Real Property Swaps

Page 35 GAO-03-1011 Alternative Financing Approaches

Albuquerque, NM, 

Federal Building and 

Parking 

Description of project and 

financing approach

The General Services Administration acquired a large city parking garage 

near federal buildings in exchange for two smaller parking areas and a 

partially vacant historic building that was in need of repair. GSA had been 

operating the historic federal building, which was 30 to 40 percent vacant, 

at an annual loss of $200,000 and had faced building modernization costs of 

$3 million. Because the exchanges are non-cash, it cannot be known 

whether the exchanged property could have been sold competitively for a 

different value than the properties received in exchange.

Benefits claimed GSA reports that it improved its real estate portfolio performance. GSA 

will meet a projected federal tenant demand for 450 additional parking 

spaces. The agency relieved itself of a money-losing property and millions 

of dollars in building renovation costs. Money that would have been lost or 

spent on repairs for this building can be reinvested in property retained in 

GSA’s portfolio.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 2000, 25-26.

Related questions • Do existing federal buildings have enough space to absorb the 

employees that will move from the historic building? If not, where will 

the employees move and at what cost?

• Was this transaction compared to costs of GSA restoring the building 

either by itself or through some other kind of partnership and 

maintaining existing office space? Were competing offers considered?

• How much could the building have sold for independent of this 

arrangement?

Financing method: Real property swap

Capital project: Albuquerque, NM, federal building and 

parking 

Department/agency: General Services Administration (GSA)
Appendix V

Real Property Swaps

Page 36 GAO-03-1011 Alternative Financing Approaches

• What were the parking arrangements for federal employees prior to 

obtaining the large garage? How do parking costs now compare to the 

prior situation?

• Were the $3 million in repairs already budgeted for in GSA’s accounts?

• Was any statutory authority required to make this transaction (e.g., 

Historic Building Preservation Act)?
Appendix V

Real Property Swaps

Page 37 GAO-03-1011 Alternative Financing Approaches

Parks Reserve Forces 

Training Area Fire 

Station

Description of project The Army Reserves entered into a real property exchange agreement with a 

private land developer. The Army Reserves conveyed about 11 acres of 

training area land to the developer in exchange for construction of a new 

fire station.

Description of financing 

approach

The developer receives land appraised at $1.8 million to construct an 

access road into its new housing development. The Army Reserves 

receives a new fire station valued at $3.9 million. The appraisal process is 

meant to determine the fair market value of the property to be conveyed by 

the Army Reserves. The property received in exchange must be at least of 

equal value and must meet minimal requirements that have changed since 

the old facility was constructed. In order to meet this second requirement, 

the value of the property received may be higher than the appraised value 

of the property conveyed by the Army Reserves. Nonetheless the size of 

the discrepancy raises questions about the appraisal process. The initial 

appraisal of the Army Reserves’ 11-acres was $75,500 because the land’s 

current condition was assessed rather than the most valuable use of the 

property by a developer.

Benefits claimed The Army Reserves receives a new fire station without paying out any 

money up front in military construction costs to replace an older, less 

modern station.

Source U.S. General Accounting Office, Defense Infrastructure: Changes in 

Funding Priorities and Management Processes Needed to Improve 

Condition and Reduce Costs of Guard and Reserve Facilities, GAO-03-516

(Washington, D.C.: May 15, 2003).

Related questions • What are the locations of the old and new fire stations?

• How does the Army Reserves explain the size of the discrepancy in the 

exchanged values?

Financing method: Real property swap

Capital project: Parks Reserve Forces Training Area fire 

station

Department/agency: Department of Defense/Army Reserves
Appendix V

Real Property Swaps

Page 38 GAO-03-1011 Alternative Financing Approaches

• What is the appraisal process used to determine the value of the 

property exchanged?
Appendix V

Real Property Swaps

Page 39 GAO-03-1011 Alternative Financing Approaches

Army Reserves 

Facilities at Fort 

Snelling, MN

Description of project The Army Reserves entered into two real property exchange agreements: 

first with the Metropolitan Airport Commission in August 2002; and then 

with the Minnesota Department of Transportation and the Metropolitan 

Council in November 2002. In the first agreement, the Army Reserves 

conveyed 11 acres of property that will be used to expand the runway at the 

Minneapolis-St. Paul International Airport. In return, the Army Reserves 

received a newly constructed maintenance facility in St. Joseph, 

Minnesota. In the second agreement, the Army Reserves conveyed seven 

acres of property in exchange for a 38,000 square foot addition to its 

permanent facility. 

Description of financing 

approach

In the August 2002 agreement, the Army Reserves conveyed property 

appraised at $1.4 million in exchange for a new maintenance facility valued 

at $1.7 million. In the November 2002 agreement, the Army Reserves 

conveyed property appraised at $2 million in exchange for a building 

addition worth about $5.1 million. Because the exchanges are non-cash, it 

cannot be known whether the exchanged property could have been sold for 

a different value than the properties received in exchange.

Benefits claimed The Army Reserves receives new building space without having to draw on 

the Defense Department’s military construction budget and at a greater 

appraised value than the property given up.

Source U.S. General Accounting Office, Defense Infrastructure: Changes in 

Funding Priorities and Management Processes Needed to Improve 

Condition and Reduce Costs of Guard and Reserve Facilities, GAO-03-516

(Washington, D.C.: May 15, 2003).

Related questions • How does the Army Reserves explain the size of the discrepancy in the 

exchanged values?

Financing method: Real property swap

Capital project: Army Reserves facilities at Fort Snelling, 

MN

Department/agency: Department of Defense/Army Reserves
Appendix V

Real Property Swaps

Page 40 GAO-03-1011 Alternative Financing Approaches

• What is the appraisal process used to determine the value of the 

property exchanged?
Appendix V

Real Property Swaps

Page 41 GAO-03-1011 Alternative Financing Approaches

L. Mendel Rivers 

Building, Charleston, 

SC

Description of project The seven-story L. Mendel Rivers building was constructed in 1965 with 

almost 100,000 rentable square feet of space. It has a surface parking lot 

and sits on over two acres of land. Since Hurricane Floyd damaged the 

building in October 1999, it has been totally vacant and its tenants have 

relocated to leased space. The building is contaminated with asbestos and 

GSA has determined that it would be too costly to rehabilitate or replace 

the building. While the Rivers building is vacant, GSA still incurs expenses 

for its basic maintenance and utilities. In fiscal years 2002 and 2003, GSA 

spent about $28,000 to operate and maintain the building. Occasionally, 

GSA rents out the parking lot and uses the rental income to help offset 

some of the building expenses.

Description of financing 

approach

For a number of years, GSA has been engaged in discussions with the City 

of Charleston to exchange the L. Mendel Rivers site for a new building. 

Under the proposed agreement, the city would construct a new building 

with about 27,000 useable square feet next to the federal court complex 

and a parking garage in which GSA would have 60 parking spaces in 

exchange for the L. Mendel Rivers site. While the building to be constructed 

is much smaller than the L. Mendel Rivers building, the new building is in 

the historic downtown business area where land values are higher; 

appraisals show that the exchange sites are of equal value. According to a 

GSA official, the mayor of Charleston has signed a memorandum of 

understanding with GSA that sets forth the terms and conditions for the 

exchange and the GSA Administrator is expected to sign the memorandum 

in early July. The exchange will not occur until independent appraisals 

show the value of the properties to be exchanged are equal in value. 

Benefits claimed GSA would be relieved of a money-losing property and in return it would 

obtain new office space without needing an appropriation.

Sources GSA’s Asset Business Plan and interviews with GSA officials.

Financing method: Real property swap

Capital project: L. Mendel Rivers Building, Charleston, SC

Department/agency: General Services Administration (GSA)
Page 42 GAO-03-1011 Alternative Financing Approaches

Appendix VI

Sale-Leaseback ApendxiVI

Under a sale-leaseback agreement, a federal agency sells an asset and then 

leases back some or all of the asset from the purchaser. Agencies might 

consider such an arrangement when the property they are using needs 

renovation or when they need only a fraction of the total building space. 

When building renovations are necessary, sale-leaseback agreements may 

transfer renovation costs to the purchaser of the property. The government 

may then lease back after improvements have been made. 

Federal agencies generally are not permitted to retain the proceeds from 

the sale of assets unless specific legislation states otherwise. In at least 

one instance, Congress has authorized GSA to credit the Federal Buildings 

Fund with proceeds from the sale of a federal building. GSA then leased 

back a portion of the sold building.

The potential drawback of sale-leaseback agreements is that over the long 

term they may be more expensive, particularly in cases when the federal 

government occupies the entire building. Renovations financed by the 

private sector will always cost more than those financed by Treasury 

borrowing. As a result, the share of the building to be used by the federal 

government can be an important determinant of the value.

We identified one example of a sale-leaseback arrangement in a transaction 

involving a federal building in Charleston, West Virginia.
Appendix VI

Sale-Leaseback

Page 43 GAO-03-1011 Alternative Financing Approaches

Charleston, WV, 

Federal Building

Description of project The construction of the Robert C. Byrd U.S. Courthouse in Charleston, WV 

enabled tenants of the federal building at 500 Quarrier Street to relocate. 

Originally, GSA had planned to excess the Quarrier Street building after the 

move but the Social Security Administration (SSA) contacted GSA with a 

space request to consolidate their functions with West Virginia’s Disability 

Determination Agency. GSA entered into an agreement to sell the 130,000 

square foot Quarrier Street building to a developer and lease back about 

82,000 square feet in the same building so that SSA could collocate with the 

state government agency.

Congress included language in the appropriation bill1 for the Byrd 

Courthouse that approved the sale and leaseback of the federal building 

and allowed GSA to retain funds from the sale of the building for the 

Federal Buildings Fund.

Description of financing 

approach

In September 1998, GSA sold the federal building on Quarrier Street to a 

developer for $3.5 million. The developer committed to investing 

$11 million to upgrade the facility from Class C to Class A. In exchange, 

GSA committed to lease back a portion of the facility for 20 years.

Benefits claimed SSA and GSA both claim benefits from this arrangement. SSA maintains a 

presence in Charleston’s central business district and can increase 

productivity by consolidating functions and collocating with West Virginia’s 

social service agency. GSA retains funds from the building sale and does 

not directly incur the estimated $11 million cost of upgrading the building. 

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 7.

Financing method: Sale-leaseback

Capital project: Charleston, WV, Federal Building

Department/agency: General Services Administration (GSA)

1

 101st Congress, HR 5241, 1991 Treasury, Postal Service and General Government 

appropriations bill.
Appendix VI

Sale-Leaseback

Page 44 GAO-03-1011 Alternative Financing Approaches

Related questions • What kind of cost benefit analysis did GSA do to compare costs of 

leasing two-thirds of the building vs. doing the repairs itself and 

outleasing the remaining 48,000 square feet to the private sector?

• Where were the SSA employees working before? 

• How long does SSA believe it will require the leased space? What are 

the terms of the lease?

• What efficiencies are gained from the new space that is shared with the 

state agency?

• Are there other cases of GSA receiving permission to retain sale 

proceeds?
Page 45 GAO-03-1011 Alternative Financing Approaches

Appendix VII

Lease-Leaseback ApendxiVI

A lease-leaseback agreement between a government agency and a private 

entity may consist of three stages: the government agency purchases an 

asset; the agency then leases out the same asset to a private entity for a 

fixed time period in return for a lump sum payment; finally, the agency 

leases back the use of the same asset over the same time period via 

incremental payments. For this type of arrangement, the net result is 

similar to the agency entering into a lease-purchase contract since the asset 

is privately financed and paid for incrementally. The agency maintains 

ownership and control of the asset and thus retains both the economic 

benefits and risks related to asset ownership. 

We identified three Tennessee Valley Authority (TVA) lease-leaseback 

contracts for combustion turbine units. TVA signed the respective 

contracts in fiscal years 2000, 2002, and 2003.
Appendix VII

Lease-Leaseback

Page 46 GAO-03-1011 Alternative Financing Approaches

Combustion Turbines

Description of project and 

financing approach

TVA, a wholly-owned government corporation, entered into contracts in 

fiscal years 2000, 2002, and 2003 to outlease combustion turbine units to 

private investors in exchange for a lump-sum payment. At the same time 

TVA agreed to lease back the same assets by making regular incremental 

payments over the term of the contract. TVA maintains ownership of the 

generators but it can relinquish the property to the private sector at the end 

of the term. Thus, according to TVA, the private sector bears the “residual 

value” risk of the asset.

Benefits claimed According to TVA, entering into the fiscal year 2000 and 2002 leaseleaseback arrangements could, over time, save the agency approximately 

$50 million. Lease-leasebacks provide financial flexibility to TVA because 

of early buyout and termination options in the contract. TVA may 

terminate its lease if the economic conditions of operating the combustion 

turbine units change at some point during the term of the lease. For 

example, the turbine units may become obsolete, or TVA may decide to sell 

the units because they no longer meet TVA’s load requirements. 

Furthermore, TVA can relinquish the property to the private entity at the 

end of the lease term, so that the private entity bears the “residual value” 

risk of the asset.

The $50 million benefit claimed by TVA does not necessarily mean that the 

lease-leaseback was the best financial deal for the government as a whole. 

For example, tax preferences used by the private entity represent a cost to 

the government but not to TVA.

Source U.S. General Accounting Office, Tennessee Valley Authority: Information 

on Lease-Leaseback and Other Financing Arrangements, GAO-03-784

(Washington, D.C.: June 30, 2003).

Financing method: Lease-leaseback

Capital project: Combustion turbines

Department/agency: Tennessee Valley Authority (TVA)
Page 47 GAO-03-1011 Alternative Financing Approaches

Appendix VIII

Public Private Partnerships ApendxiVI

Given today’s budget constraints, evolving private sector markets and the 

expansion of creative real property development alternatives, several 

agencies have established public private partnerships as a means of 

leveraging the intrinsic equity value of real property. Ideally, the 

partnerships are designed such that each participant makes 

complementary contributions that offer benefits to all parties. Public 

private partnerships tap the capital and expertise of the private sector to 

improve or redevelop federal real property assets.1 They are considered 

most appropriate where excess capacity exists within the asset and where 

existing government facilities do not adequately satisfy the current or 

potential future needs. 

OMB Circular A-76 describes the federal government’s longstanding policy 

to rely on the private sector for needed commercial services. Public 

private partnerships are consistent with this policy so long as the product 

or service provided by the private partner cannot be procured more 

economically by the federal government. Partnerships raise questions 

about what functions are most appropriately performed by the federal 

government.

Proponents of public private partnerships argue that this approach 

provides a realistic, less costly alternative to leasing when planning and 

budgeting for real property needs. Proponents also note that federal 

partners benefit from improved, modernized, and/or new facilities plus a 

minority share of the income stream generated by the partnership or use of 

the asset at a lower cost than a commercial lease. 

Critics of public private partnerships caution that these ventures are not 

the least expensive means of meeting capital needs, although they may 

appear to be in the short-term. They remind decisionmakers that up-front 

payment of appropriated funds is the least expensive way to obtain assets. 

Although partnerships may be more costly, it is possible that they could 

make sense from a mission perspective. However, the full costs should be 

transparent to decisionmakers through inclusion in primary budget data.

1

 Public private partnerships take a variety of forms. In addition to some of the partnerships 

described in this section, other types of partnerships might include outleases of real 

property and share-in-savings contracts. These partnerships are described in greater detail 

in other sections.
Appendix VIII

Public Private Partnerships

Page 48 GAO-03-1011 Alternative Financing Approaches

Following are examples of a few public private partnerships.

• Civic Square II Project,

• Houston Regional Office Collocation,

• Veterans Affairs Office Collocation and Parking Garage, Chicago, and 

• Oak Ridge National Laboratory.
Appendix VIII

Public Private Partnerships

Page 49 GAO-03-1011 Alternative Financing Approaches

Civic Square II Project

Description of project The main post office in the city of New Brunswick, NJ, which was 

constructed in 1936, had been underused and had accumulated an 

increasing amount of deferred maintenance. Accordingly, the Postal 

Service negotiated a public private partnership that resulted in a newly 

restored Post Office and a facility housing the Middlesex County 

Prosecutor’s Office, the New Brunswick Police Department, and an 

underground parking garage. The Post Office leased its land to the local 

government, which contracted for the restoration of the Post Office and 

construction of additional facilities for its own use. 

Benefits claimed The Postal Service now has a restored Post Office along with significant 

revenue from the ground lease. All federal, city, and county offices have 

benefited from the building through improved operations, higher customer 

satisfaction, and greater employee morale.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 20.

Related questions • Who fronted the construction funds?

• Who makes lease payments to whom?

• How long is the life of lease arrangement?

• Was a comparison made between the cost of the federal government 

doing it all and forming the partnership?

Financing approach: Public private partnership

Capital project: Civic Square II project

Department/agency: U.S. Postal Service
Appendix VIII

Public Private Partnerships

Page 50 GAO-03-1011 Alternative Financing Approaches

Houston Regional 

Office Collocation

Description of project The Veterans Benefits Administration (VBA) needed to relocate its regional 

office in order to better serve veterans and their beneficiaries throughout 

southern Texas. The Department of Veterans Affairs (VA) negotiated an 

enhanced-use lease of underused VA medical center land to a local 

developer, which constructed a 140,000 square foot state-of-the-art regional 

office. As part of this arrangement, VA signed short-term operating leases 

to obtain use of the newly developed space. The developer also financed, 

built, owns, and operates businesses on the balance of the site. 

Benefits claimed VA states that this project saved taxpayers over $6 million in construction 

costs and generated an additional $10 million savings in operating costs. 

VA also receives a small share of the developer’s profits.

Source VA’s briefing packet on enhanced-use leasing.

Related questions • How many years does the lease cover?

• Does VA maintain the master ground lease?

• What happens to the developer-owned businesses at the end of the lease 

life?

Financing approach: Public private partnership

Capital project: Houston Regional Office Collocation

Department/agency: Veterans Benefits Administration
Appendix VIII

Public Private Partnerships

Page 51 GAO-03-1011 Alternative Financing Approaches

Veterans Affairs Office 

Collocation and 

Parking Garage, 

Chicago

Description of project The Veterans Benefits Administration sought to avoid high-cost leased 

office space and improve service delivery and accessibility to veterans. 

Moreover, VA Medical Center Westside needed relief from the lack of 

available parking. Accordingly, VA negotiated a long-term outlease of six 

acres of flat parking space to a developer that then built and managed a 

95,000 square foot office building and a 1,565 car parking garage. VA then 

established short-term operating leases to obtain use of the newly 

developed space.

Benefits claimed The average annual cost to VA for the new office space and parking is 

expected to be 50 percent less than comparable market rates.

Source VA’s briefing packet on enhanced-use leasing.

Related questions • What happened to the space that employees used to be in?

• How much is what they are paying compared to what they were paying?

• How long is the term of the outlease?

Financing approach: Public private partnership

Capital project: Veterans Affairs Office Collocation and 

Parking Garage, Chicago

Department/agency: Veterans Benefits Administration
Appendix VIII

Public Private Partnerships

Page 52 GAO-03-1011 Alternative Financing Approaches

Oak Ridge National 

Laboratory

Description of project The Department of Energy (DOE) needed to replace deteriorating buildings 

constructed during World War II with modern facilities at the Oak Ridge 

National Laboratory (ORNL). However, it lacked adequate funding to do 

this. 

Description of financing 

approach

DOE designated federal land next to ORNL as excess and conveyed it to a 

developer who would process the construction phase requirements from 

bid solicitation through construction completion, on the land conveyed by 

DOE. Although the land in its current state is excess to the needs of DOE, 

the resulting building space to be constructed is needed to accomplish 

DOE’s missions. The private developer would finance construction and 

then lease the new buildings to DOE’s prime contractor for DOE missions. 

At the end of the 30-year “payback plus profit” term, the quitclaim deed2

conveying the land requires that the private party offer no-cost repurchase 

or reacquisition rights to the federal government for the land and facilities. 

Ultimately, the government must reimburse lease payments to DOE’s prime 

contractor. The quitclaim deed also contains restrictive language that 

specifies use of the property so as not to compromise the integrity of ORNL 

by the possible bankruptcy of the private developer or by DOE’s possible 

cancellation of the lease. 

Benefits claimed DOE was able to obtain the needed space for its contractors without having 

to obtain up-front funding or special legislation.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., Fall 2002, 6.

Financing approach: Public private partnership

Capital project: Oak Ridge National Laboratory

Department/agency: Department of Energy

2

 A legal instrument used to release one party's right, title, or interest to another without 

providing a guarantee or warranty of title. 
Appendix VIII

Public Private Partnerships

Page 53 GAO-03-1011 Alternative Financing Approaches

Related questions • Are DOE’s lease reimbursement payments included as part of the 

negotiated payments to the “prime” contractor?

• Why would DOE not claim the property back after the 30-year period is 

completed?
Page 54 GAO-03-1011 Alternative Financing Approaches

Appendix IX

Outleases ApendxiIX

Federal asset managers are confronted with numerous challenges in 

managing their multibillion dollar real estate portfolio, such as a large 

backlog of deferred maintenance and obsolete, underused properties. In 

response, some agencies have outleased excess or underused properties to 

shift the cost of maintenance and restoration to their private sector 

partners, thus relieving the federal government of these expenses. 

Historic but run-down properties are prime candidates for outleasing. This 

is because the National Historic Preservation Act authorizes agencies to 

use the lease proceeds of these historic properties to defray the costs of 

maintaining and repairing other historic properties they own.

Outleasing historic properties promotes the restoration, repair, and 

maintenance of important national buildings. However, it is unclear 

whether the outright sale of such properties is possible and whether selling 

would accomplish the same purpose with greater economic benefit to the 

taxpayer.

Following are examples of a few outleased projects.

• Cooperative Use Outlease for Food Court;

• Galveston, Texas Customhouse;

• Maine Lights Program;

• U.S. Tariff Building; and 

• McCormack Post Office-U.S. Courthouse.
Appendix IX

Outleases

Page 55 GAO-03-1011 Alternative Financing Approaches

Cooperative Use 

Outlease for Food 

Court

Description of project Under the National Historic Preservation Act and the Public Buildings 

Cooperative Use Act,1

 GSA outleased 17,600 square feet of underused 

space for a restaurant and retail center in the Railroad Retirement Board 

(RRB) building located in Chicago, Illinois. The lease had a fixed term of 

15 years, with three 5-year renewal options. GSA, RRB, the City of Chicago, 

and the developer also will upgrade the sidewalks surrounding the building 

(new pavers, planters, trees, and lamp posts) under GSA’s Good Neighbor 

policy. A similar outlease was negotiated at Chicago’s Metcalfe Federal 

Building. 

Description of financing 

approach

Construction costs of about $10 million were paid by the project developer, 

who is also responsible for the utility, maintenance, permits, taxes, and 

insurance costs for the project. The developer’s revenue is derived solely 

from sublease proceeds.

Benefits claimed The outlease generates a substantial revenue stream to the Federal 

Buildings Fund —about $10 million over the term of the lease.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 18.

Financing approach: Outlease

Capital project: Cooperative use outlease for food court

Department/agency: General Services Administration (GSA)

1

 The National Historic Preservation Act authorizes agencies to lease or exchange federal 

historic properties and retain the proceeds to defray the costs of maintaining other federal 

historic properties. The Public Buildings Cooperative Use Act encourages the government 

to develop the highest and best use of pedestrian access areas to federal facilities.
Appendix IX

Outleases

Page 56 GAO-03-1011 Alternative Financing Approaches

Galveston, Texas 

Customhouse

Description of project The Galveston Customhouse is one of the oldest federal buildings west of 

the Mississippi River. While the exterior of the building was in good 

condition, the interior had fallen in disrepair and housed only six people. 

However, it was decided that because of its historic significance, the 

customhouse was not a good candidate for disposal. Instead, the building 

was outleased to the Galveston Historical Foundation (GHF) for 60 years. 

The GHF will preserve and restore the customhouse to ensure its historic 

integrity. Once repairs are made, the customhouse will house both the 

GHF headquarters and a visitor center for the historic Strand District of 

Galveston.

Benefits claimed The 60-year lease removes GSA’s estimated $162,000 per year cost of 

operating an underused asset. The customhouse also benefits from $1 

million that the GHF has invested in restoration and repair work. Finally, 

the city and Historic Strand District also benefit by the continued use and 

preservation of one of its most significant buildings.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 17.

Related questions • Was any cost analysis done to consider having GSA renovate the 

building and then move federal employees currently leasing elsewhere 

into the building?

• Has any thought been given to what will happen when the lease expires 

at the end of the 60-year period?

• What happened to the six employees that had been working in the 

customhouse?

Financing approach: Outlease

Capital project: Galveston, Texas Customhouse

Department/agency: General Services Administration
Appendix IX

Outleases

Page 57 GAO-03-1011 Alternative Financing Approaches

Maine Lights Program

Description of project With the development of technological aids to navigate merchant and 

sailing vessels, the need for lighthouses has greatly diminished. The Coast 

Guard owns many lighthouses that deteriorate without day-to-day upkeep. 

Moreover, the Coast Guard has become unable to maintain the properties 

at the standards of the state historic preservation guidelines given the level 

of funding for repairs and alterations. The Maine Lights Program outleased 

and divested 28 historic lighthouses to organizations that will ensure the 

maintenance, repair, and care of these historically significant properties.

Description of financing 

approach

Under the National Historic Preservation Act, the proceeds of these leases 

may be used to offset expenses associated with other historic properties 

owned by the Coast Guard.

Benefits claimed This program ensures the lighthouses will maintain their historic integrity 

while allowing the Coast Guard to avoid between $3 to $5 million in annual 

repair and maintenance costs. Moreover, lease payments defray the costs 

of other historic preservation efforts.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 5.

Financing approach: Outlease

Capital project: Maine Lights Program

Department/agency: Coast Guard
Appendix IX

Outleases

Page 58 GAO-03-1011 Alternative Financing Approaches

U.S. Tariff Building

Description of project GSA leased the U.S. Tariff Building, which had been vacant for a number of 

years, to the Kimpton Hotel and Restaurant Group, Inc. (Kimpton Group) 

for 60 years. The Kimpton Group restored the building, converting it into a 

luxury hotel that includes restaurants, retail space, and meeting rooms. 

GSA retains ownership of the 1839-built structure under the National 

Historic Preservation Act, which encourages adaptive reuse of public 

buildings that are no longer needed by federal agencies. 

Description of financing 

approach

GSA contributed $5 million to clean the historic building’s exterior, repair 

windows, and install a handicapped accessible elevator. The Kimpton 

Group paid $32 million to renovate the interior of the building, using the 20 

percent federal historic rehabilitation tax credit to finance a portion of the 

rehabilitation costs.

Benefits claimed Rents paid to GSA under the lease support the preservation of other 

historic properties in GSA’s inventory. In addition, GSA is relieved of the 

burden of maintaining an unproductive property. Finally, the restoration 

contributes to the revitalization of the surrounding neighborhood.

Sources GSA press releases. U.S. General Services Administration Signs Lease 

with Kimpton Group on Tariff Building (Nov. 23, 1999) and GSA 

Celebration for Opening of Hotel Monoco (July 2002).

Paper issued by the Heritage Consulting Group, 2002; Preservation Online, 

Hotel Opens in Historic D.C. Building, June 13, 2002.

Financing approach: Outlease

Capital project: U.S. Tariff Building

Department/agency: General Services Administration (GSA)
Appendix IX

Outleases

Page 59 GAO-03-1011 Alternative Financing Approaches

McCormack Post 

Office-U.S. Courthouse

Description of project In the fall of 1998, the federal courts in Boston relocated from the John W. 

McCormack Post Office-U.S. Courthouse to the new U.S. Courthouse, 

leaving a large amount (228,000 square feet) of courtroom and courtrelated space vacant. The Massachusetts State Trials Courts agreed to a 5-

year lease of this space, in “as is” condition, so that it could renovate its 

own courthouse. With the common functions of the federal and state 

courts, little build out of space was required.

Description of financing 

approach

This outlease of space was done under Section 111 of the National Historic 

Preservation Act, which allow funds from outleasing to be used to preserve 

historical properties in the GSA inventory. 

Benefits claimed This outlease maintains the viability of a historic asset and ensures a safe 

and productive work environment for the State Court of Massachusetts.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 5.

Related questions • Since the 5 years are just about up, what plans does GSA have for this 

space next? (GSA received $76 million in fiscal year 2002 and 

$73 million in fiscal year 2003 for major renovations of this building.)

• What specifically were the funds used for (i.e., what “preservation” work 

was performed other than routine maintenance?)

• Is the post office still located in the building?

Financing approach: Outlease

Capital project: McCormack Post Office-U.S. Courthouse

Department/agency: General Services Administration (GSA)
Page 60 GAO-03-1011 Alternative Financing Approaches

Appendix X

Share-In-Savings Contracts ApendxiX

Energy savings performance contracts, a type of share-in-savings contract, 

finance energy-saving capital improvements for federal facilities without an 

up-front cost to the government. First authorized in 1986, these share-insavings contracts have been used to finance hundreds of millions of dollars 

of energy system upgrades and installations. Federal agencies may enter 

into contracts for as long as 25 years with contractors who purchase and 

install new energy systems in federal buildings. Agencies then pay back the 

contractors for the equipment plus a percentage of the energy costs saved 

as a result of the more efficient energy systems and relief of in-house 

maintenance costs. Agencies have some flexibility in determining when 

they take ownership of the energy systems. When a contract expires, the 

federal government owns the equipment and retains all of the future 

savings. 

Agencies other than the Department of Defense1 may retain 50 percent of 

the energy savings realized from energy savings performance contracts 

(after paying the contractor). The remaining 50 percent saved is 

transferred to the Treasury. Savings retained by the agency are available 

for specified energy and water conservation projects until expended. 

However, according to one Department of Commerce official, only about 1 

per cent of the total energy savings has been split between the agencies and 

the Treasury thus far. This is because agencies devote most savings to 

paying off the cost of equipment as soon as possible to reduce financing 

costs. 

Without share-in-savings contracts, Congress would have to appropriate 

hundreds of millions of dollars today to meet currently required energy 

consumption standards.2

 Direct purchase of more efficient energy systems 

would allow all future savings to accrue to the government, rather than 

paying out a percentage of the savings to private contractors. Also, 

because a private contractor—which will have a higher cost of capital than 

the federal government—finances the capital improvements, share-insavings contracts are likely to be more expensive over the long term than 

direct federal purchase. There could be an additional cost to the 

1

 The Department of Defense is authorized to retain two-thirds of the amount of savings 

realized from contracted services for energy or water conservation. DOD contracts do not 

tie the amount of payment to the contractor to the amount of savings realized as a result of 

the contract activity.

2

 Consumption standards were defined in the Energy Policy Act of 1992 and then updated in 

Executive Orders 12902 and 13123.
Appendix X

Share-In-Savings Contracts

Page 61 GAO-03-1011 Alternative Financing Approaches

government of reduced tax revenues when contractors maintain ownership 

of energy equipment that may be amortized. However, such an 

arrangement usually results in lower interest rates for the cost of 

equipment, according to a Commerce Department official. 

Examples of Energy Savings Performance Contracts include:

• Eisenhower Center;

• Tucson, AZ, Courthouse; and 

• Department of Commerce HVAC system upgrade.
Appendix X

Share-In-Savings Contracts

Page 62 GAO-03-1011 Alternative Financing Approaches

Eisenhower Center

Description of project and 

financing approach

The Eisenhower Center is comprised of the Eisenhower family home, 

Dwight D. Eisenhower Presidential Library, and the Dwight D. Eisenhower 

Museum. A contractor installed $300,000 of new equipment to provide 

more efficient management of energy and special lighting with ultra violet 

lens shielding for archive records protection. The contractor will be 

reimbursed for the equipment and its financing costs and also receive 50 

percent of the energy savings.

Benefits claimed With no up-front costs to the government, the Eisenhower Center gets a 

modern energy management and lighting system that will better preserve 

documents.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 8.

Related questions • When does ownership of the energy equipment transfer to the 

government?

• How long does the contract run? Is there a plan for maintenance and 

repairs when this contract expires?

• How was the contract’s value to the government determined? How does 

this play out in the agency’s budget?

• What would it have cost the government to purchase and install the new 

systems?

Financing approach: Share-in-savings contract

Capital project: Eisenhower Center

Department/agency: General Services Administration, 

Department of Energy, and National 

Archives and Records Administration
Appendix X

Share-In-Savings Contracts

Page 63 GAO-03-1011 Alternative Financing Approaches

Tucson, AZ, 

Courthouse

Description of project The General Services Administration awarded an energy savings 

performance contract for the new Courthouse in Tucson, Arizona before 

the building was constructed. This is one of the first times that GSA used 

an energy savings performance contract in the construction of a new 

facility. The original courthouse plans would have cost more to implement 

than Congress had appropriated. Thus, GSA was faced with either 

reducing the size (and functionality) of the building by 1 or 2 floors or 

finding a way to finance an integral part of the structure outside of the 

appropriations process. 

The winning bidder of the 25-year energy maintenance contract purchased 

and installed a heating and cooling system that was more efficient than the 

system in the original building plans. Energy savings were determined 

according to the kilowatts per hour used by the installed system compared 

to the energy system that was initially planned for. GSA took ownership of 

the energy systems along with the rest of the building. Out of the money 

saved on energy costs, GSA is repaying the contractor for the energy 

systems and then sharing the money saved on energy costs with the 

contractor. 

Benefits claimed The energy savings performance contract reduced the initial funds needed 

to construct the new courthouse.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., December 1999, 9.

Related questions • When does ownership of the energy equipment transfer to the 

government?

• How long does the contract run? Is there a plan for maintenance and 

repairs when this contract expires?

Financing approach: Share-in-savings contract

Capital project: Tucson, AZ, Courthouse

Department/agency: General Services Administration (GSA)
Appendix X

Share-In-Savings Contracts

Page 64 GAO-03-1011 Alternative Financing Approaches

• How was the contract’s value to the government determined? How does 

this play out in the agency’s budget?

• What would it have cost the government to purchase and install the new 

systems?
Appendix X

Share-In-Savings Contracts

Page 65 GAO-03-1011 Alternative Financing Approaches

Heating, Ventilation, 

and Air Conditioning 

System Upgrade

Description of project and 

financing approach

The Department of Commerce entered into an agreement with the Potomac 

Electric Power Company (PEPCO) to improve the heating, ventilation, and 

air conditioning system, install energy motors, and retrofit chilled water 

pumps. The project costs will be repaid from future energy savings.

Benefits claimed Commerce gains a more energy-efficient system without any initial costs to 

the government.

Source General Services Administration, Real Property Policysite, Office of 

Governmentwide Policy, Best Practices: News and Views on Real Property 

Policy, Special Edition, Washington, D.C., 1997, 4.

Related questions • When does ownership of the energy equipment transfer to the 

government?

• How long does the contract run? Is there a plan for maintenance and 

repairs when this contract expires?

• How was the contract’s value to the government determined? How does 

this play out in the agency’s budget?

• What would it have cost the government to purchase and install the new 

systems?

Financing approach: Share-in-savings contract

Capital project: Heating, ventilation, and air conditioning 

system upgrade

Department/agency: Department of Commerce
Page 66 GAO-03-1011 Alternative Financing Approaches

Appendix XI

Debt Issuance ApendxiXI

The federal government funds its operations in part by borrowing through 

the issuance of securities to the public. Several federal organizations, such 

as the Tennessee Valley Authority (TVA), Federal Housing Administration, 

and Farm Credit System Financial Assistance Corporation issue their own 

agency debt. 

The reasons for issuing debt differ considerably from one agency to 

another. The predominant issuer of agency debt is TVA. As of the end of 

2002, TVA had issued 94 percent of the total debt issued by agencies. TVA 

uses the borrowings primarily to finance capital expenditures. As a 

government corporation, TVA operated according to a different set of rules 

than most federal agencies.
Appendix XI

Debt Issuance

Page 67 GAO-03-1011 Alternative Financing Approaches

Debt Issuance

Description of project TVA is a wholly-owned U.S. government corporation and the nation’s 

largest public power system. It was created to develop the resources of the 

Tennessee Valley region in order to strengthen the regional and national 

economy and national defense by providing (1) an ample supply of power 

within the region, (2) navigable channels and flood control for the 

Tennessee River System, and (3) agricultural and industrial development 

and improved forestry in the region. TVA’s operations have typically been 

divided into the power and nonpower programs. Substantially all TVA 

revenues and assets are attributable to the power program. TVA is 

authorized to issue debt and has primarily financed its capital construction 

by selling bonds and notes to the public. TVA’s power program is required 

to be self-supporting from power revenues and the issuance of debt. 

Description of financing 

approach

During the Korean War and the late 1950s, Congress cut back on public 

funding for TVA, and in 1959 Congress authorized TVA to sell bonds on the 

public markets so that it could finance its own power operations. TVA has 

been working to reduce its debt by buying back its bonds. TVA has reduced 

its debt balance from $27.7 billion in 1997 to about $25 billion in 2002 

through the exchange of lower interest bonds for outstanding higher 

interest bonds and redeeming other outstanding bonds. TVA continues to 

buy back its bonds. TVA’s borrowing authority is limited to $30 billion.

Benefits claimed The ability to issue bonds allowed TVA’s power system to operate as a 

business, made it responsible for its own financial operations, and freed the 

power operations from dependence on congressional appropriations. TVA 

bonds are backed solely by the revenues of the TVA power system; they are 

not obligations of the U.S. government, nor are they guaranteed by the 

government. 

Sources Office of Management and Budget, Analytical Perspectives, Budget of the 

United States Government, Fiscal Year 2004.

TVA’s Fiscal Year 2002 Annual Report.

Financing Approach: Debt issuance

Department/Agency: Tennessee Valley Authority

(450172)
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