DEFENSE 

INFRASTRUCTURE

Army Has a Process 

to Manage Litigation 

Costs for the Military 

Housing Privatization 

Initiative

Report to Congressional Committees

April 2014

GAO-14-327

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-327, a report to 

congressional committees

April 2014

DEFENSE INFRASTRUCTURE

Army Has a Process to Manage Litigation Costs for 

the Military Housing Privatization Initiative

Why GAO Did This Study

In 1996, Congress enacted the MHPI, 

which provided the Department of 

Defense with a variety of authorities 

that may be used to obtain privatesector financing and management to 

repair, renovate, construct, and 

operate military family housing. The 

Army has invested $1.97 billion and 

the private sector has invested $12.6

billion in the initial development of 

MHPI projects at 44 installations. 

The Senate report accompanying a 

proposed version of the National

Defense Authorization Act for Fiscal 

Year 2014 mandated GAO to examine 

the Army’s litigation costs related to 

MHPI, specifically any litigation costs 

not accounted for during the MHPI’s

annual budget process. This report 

examines the extent to which the Army 

has implemented its process to 

manage funds for litigation not 

accounted for in the budget and

identifies any effects that the litigation 

and audit costs have had on managing 

the MHPI projects. 

To conduct its work, GAO examined 

the Army’s process for managing 

litigation, interviewed Army officials, 

and analyzed documents to determine 

whether litigation and audit costs have 

had any effects on managing the MHPI 

projects. 

GAO is not making recommendations 

in this report. DOD provided technical 

comments on a draft of this report, 

which were incorporated as 

appropriate.

What GAO Found

The Army has a standard process to manage litigation costs of its Military 

Housing Privatization Initiative (MHPI) projects that are not accounted for in the 

annual budget process. Army officials indicated that there is one case between 

four Army MHPI projects and Pinnacle Property Management (Pinnacle) that met 

the dollar threshold criteria and that would have been approved through this 

process. However, Army officials did not use the standard process because the 

Army determined that it needed to limit access to Pinnacle litigation information 

to avoid disclosing any information material to the litigation strategy. As a result, 

the Army used an alternative process to review and approve litigation costs for 

Pinnacle that is consistent with MHPI operating agreements. Had the standard 

process been followed, litigation and litigation cost information would have been 

shared with the MHPI projects construction company, Clark Realty Capital 

(Clark), and four different offices within the Army. Army and Clark officials 

decided to use the alternative process allowed by the MHPI’s operating 

agreements so that fewer personnel would be aware of ongoing litigation 

information involving Pinnacle. The alternative process allows the Army and 

Clark to directly approve specific actions on behalf of the MHPI project, such as 

approving litigation and audit expenses, and allows sharing information with only 

Clark and one Army office. 

According to Army officials and our analysis of these four MHPI projects’ 

accounts, Pinnacle litigation expenses have not prevented the projects from 

meeting their normal operating requirements, such as conducting maintenance or 

paying for utilities. Rents collected from these four MHPI projects funded the 

normal operating requirements for these projects as well as the Pinnacle litigation 

and audit expenses. Rents collected in excess of operating expenses normally 

are available for other purposes such as construction; capital, repair, and 

replacement of buildings; and future reinvestment. However, because litigation 

expenses were also paid from the rents collected at the four MHPI projects 

involved in the litigation, some funds have not been available for these purposes. 

Nevertheless, Army officials said that the Pinnacle litigation and audit costs have 

had no effects on the four projects’ ability to move forward with construction as 

planned so far or to meet any scheduled capital repair projects because these 

projects were developed within anticipated funding levels. 

The Army property-management agreements provide that the party that 

substantially prevails in a legal action may recoup their legal expenses. Army 

officials stated that they expect the MHPI projects to prevail in the litigation and 

recoup most, or even all, the costs of conducting the litigation.

View GAO-14-327. For more information, 

contact Brian Lepore at (202) 512-4523 or 

leporeb@gao.gov.
Page i GAO-14-327 Defense Infrastructure

Letter 1 

Background 3

The Army Followed a Process to Manage MHPI Litigation Funds 

Not Accounted for in the Budget That Limits Access to Litigation 

Information 6

Army MHPI Project Costs for the Pinnacle Litigation Have Not 

Prevented Housing Projects from Meeting Normal Operating 

Requirements 8

Agency Comments 11

Appendix I GAO Contact and Staff Acknowledgments 13

Table

Table 1: Budgeted Operating Expenses, by Military Housing 

Privatization Initiative (MHPI) Project, Calendar Years 

2009 through 2013 9

Figure

Figure 1: Example of the Flow of Funds for Army MHPI Projects 8

Abbreviations

Clark Clark Realty Capital

DOD Department of Defense 

MHPI Military Housing Privatization Initiative 

Pinnacle Pinnacle Property Management

Contents

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Page 1 GAO-14-327 Defense Infrastructure

441 G St. N.W.

Washington, DC 20548

April 3, 2014

Congressional Committees

The Department of the Army uses private-sector partners to help manage 

military family housing at 44 installations in the United States, including 

management of accounts paying for construction, repairs, renovations, 

and any litigation costs. In 1996, Congress enacted the Military Housing 

Privatization Initiative (MHPI),1 which provided the Department of Defense 

(DOD) with a variety of authorities that may be used to obtain privatesector financing and management to repair, renovate, construct, and 

operate military family housing. The Army’s goal for the MHPI is to 

significantly improve the quality of housing offered to military members 

and their families so the Army can continue to attract and retain military 

personnel. Section 2803 of the National Defense Authorization Act for 

Fiscal Year 2013 was intended to strengthen the oversight of the MHPI by 

implementing a series of measures for financial integrity and 

accountability, and requires the Secretary of Defense to submit expanded 

reports to Congress on expenditures and receipts related to the MHPI. 

Furthermore, section 2806 of the National Defense Authorization Act for 

Fiscal Year 2014 added a requirement that these expanded reports 

specifically include any unique variances associated with litigation costs. 

The Senate report accompanying a proposed version of the National 

Defense Authorization Act for Fiscal Year 20142 mandated GAO to 

examine the Army’s litigation costs related to the MHPI, specifically any 

litigation costs not accounted for during the MHPI’s annual budget 

process.3 In this report, we (1) examine the extent to which the Army has 

implemented its process to manage funds for litigation not accounted for 

during the MHPI projects annual budget process, and (2) identify any 

effects that the litigation and audit costs have had on managing the MHPI 

projects.

 

1

National Defense Authorization Act for Fiscal Year 1996, Pub. L. No. 104-106, §§ 2801-

2841 (1996), codified as amended at 10 U.S.C. §§ 2871-2885. 

2

S. Rep. No. 113-44, at 223-224 (2013).

3

Army officials interpret this to mean any litigation costs that exceed the lesser of 5 to 10 

percent of the operating budget for an MHPI project or $250,000 over budget.
 

Page 2 GAO-14-327 Defense Infrastructure

To examine the extent to which the Army has implemented its process to 

manage and document the use of MHPI projects’ funds for litigation not 

accounted for during the MHPI’s annual budget process, we obtained and 

reviewed Army guidance used to manage MHPI projects’ funds for 

litigation expenses and documentation the Army has received from its 

partners to justify litigation and audit expenses. We also interviewed Army 

officials from the Office of the Deputy Assistant Secretary of the Army 

(Installations, Housing & Partnerships), the Office of the Assistant Chief of 

Staff for Installation Management, the Office of the Army General 

Counsel, and MHPI project asset managers who have knowledge of 

MHPI guidance and practices used in managing MHPI projects’ funds 

spent on litigation.

To determine whether Army litigation and audit costs have had any 

effects on managing the MHPI projects, we discussed with Army officials 

any litigation and audit expenses not accounted for during the MHPI 

annual budget process to determine whether these costs had adversely 

affected any of the accounts used to manage the MHPI projects involved 

in litigation. We also obtained and analyzed MHPI project-management 

account documentation to determine whether litigation and audit costs 

had any effects on MHPI project accounts. Specifically, we obtained and 

analyzed the MHPI projects’ budgeted operating expenses from calendar 

years 2009 through 2013 to determine whether the projects had to reduce 

their operating expenses due to litigation. To assess the reliability of 

these cost data for Army MHPI projects involved in litigation not 

accounted for during the MHPI annual budget process, we met with Army 

officials to discuss these data and the processes and controls that were 

used to maintain the data. We determined that these cost data are 

sufficiently reliable for our purpose of reporting budgeted operating 

expenses for calendar years 2009 through 2013.

We conducted this performance audit from July 2013 to April 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
 

Page 3 GAO-14-327 Defense Infrastructure

Congress established the MHPI in 1996 to provide an alternative funding 

mechanism to ensure adequate military family housing was available 

when needed by renovating existing inadequate housing and constructing 

new homes on and around military bases. The Department of the Army 

currently has 34 MHPI projects at 44 installations in the United States. 

Since these projects began, the Army has invested $1.97 billion and the 

private sector has invested $12.6 billion in the initial development of the 

military housing projects.4 In a typical privatized military housing project, 

the developer5 is a limited liability company or partnership that has been 

formed for the purpose of acquiring debt, leasing land, and building and 

managing a specific project or projects. The limited liability company is 

typically composed of one or several private-sector members, such as 

construction firms, real-estate managers, or other entities with expertise 

in housing construction and renovation. In those cases where a military 

department has made an investment in the limited liability company, the 

department may also be a member of the limited liability company.6 In a 

typical privatized military housing project, a military department leases 

land to a developer for a term of 50 years. The military department 

generally conveys existing homes on the leased land to the developer for 

the duration of the lease.7 The developer is responsible for constructing 

new homes or renovating existing houses and then leasing this housing, 

giving preference to service members and their families. Although the 

 

4

Dollar figures throughout this report have not been adjusted for inflation.

5

Section 2875 of Title 10, U.S. Code, authorizes the military departments to invest limited 

amounts of appropriated funds or property in an “eligible entity.” In this report, we use the 

term “developer” and “eligible entity” synonymously to describe the special-purpose limited 

liability company or partnership that carries out a privatization project or projects. A limited 

liability company is a company in which the liability of each shareholder or member is 

limited to the amount individually invested. A limited partnership is a partnership 

composed of one or more persons who control the business and are personally liable for 

the partnership’s debts (called general partners), and one or more persons who contribute 

capital and share profits but who cannot manage the business and are liable only for the 

amount of their contribution. 

6

The secretary of a military department may decide the department will invest cash or 

housing, or in some cases, lease land to the developer. 

7

Typically, title to the houses that are conveyed and any improvements made to these 

houses during the duration of the lease automatically revert to the military department 

upon expiration or termination of the ground lease. 

Background

Military Housing 

Privatization Initiative
 

Page 4 GAO-14-327 Defense Infrastructure

developers enter into these agreements to construct or renovate military 

housing, the developer normally enters into various contracts with design 

builders and subcontractors to carry out the actual construction and 

renovation. The developer also typically hires a property-management 

firm to oversee the day-to-day operations of the MHPI project, such as 

ensuring that maintenance is provided to houses in accordance with the 

approved budget.

According to Army officials, the only litigation that has caused the 

expenditure of funds not accounted for during the MHPI’s annual budget 

process for operating costs to-date is litigation involving Clark Realty 

Capital (Clark) and Pinnacle Property Management (Pinnacle).8 Clark 

Pinnacle Family Communities oversees some of the highest-profile 

installations in the Army’s MHPI program. The company is a joint venture 

between Clark, based in the Washington, D.C., area, and Pinnacle, based 

in Seattle. Starting in 2002, in collaboration with the Army, Clark Pinnacle 

led the development of four projects in six locations totaling more than 

11,000 homes at a value of about $2 billion. The four projects are

• Presidio of Monterey, and Naval Post Graduate School, California;

• Fort Irwin, Moffett Federal Airfield, and Parks Reserve Forces Training 

Area, California;

• Fort Benning, Georgia; and

• Fort Belvoir, Virginia.

Although the agreements at the projects vary, generally Clark is the 

managing partner of the MHPI entities9 and handled the construction and 

development. Pinnacle was the property-management firm actually 

conducting day-to-day property-management activities (e.g., 

maintenance) at the projects once they were completed. According to 

Army officials, Clark, through a series of internal audits, determined in 

2010 that Pinnacle allegedly was involved in substantial and systemic 

fraud in the management of the privatized housing at Fort Benning, and 

 

8

According to Army officials, as of August 2013 there have been two other potential large 

lawsuits that met the dollar threshold criteria to be approved; however, in one case, the 

Army did not approve the projects to pay for the litigation costs, and the other case was 

undertaken by a law firm on a contingency fee basis (at no cost to the projects). 

9

The MHPI entities refer to the four projects (Presidio of Monterey, Fort Irwin, Fort 

Benning, and Fort Belvoir) as owned by the Army and Clark Pinnacle and managed by 

Clark. 

Army MHPI ProjectLitigation Costs Involving 

Pinnacle Were Not 

Accounted for during 

MHPI Annual Budget 

Process
 

Page 5 GAO-14-327 Defense Infrastructure

ultimately found similar alleged fraud in the management of the privatized 

housing at Fort Belvoir. As a result, Clark initiated audits of the two 

California MHPI projects managed by Pinnacle and began to uncover 

alleged circumstances similar to those at Fort Benning and Fort Belvoir.

In 2010, Clark asked the Army for permission to remove Pinnacle as 

property manager at Fort Benning and Fort Belvoir because of alleged 

willful misconduct by Pinnacle employees, and for approval to initiate 

related litigation on behalf of the MHPI entities against Pinnacle; the Army 

agreed. Subsequent to the initiation of the Fort Belvoir and Fort Benning 

litigation, Pinnacle attempted to unilaterally amend the terms of the 

California property-management agreements to make it harder to remove 

them as property manager. In response, the California MHPI entities then 

brought suit in California court against Pinnacle seeking a declaratory 

judgment that the agreements had not been effectively amended by 

Pinnacle. Pinnacle then filed a cross-suit seeking to uphold the 

amendments. According to Army officials, the Army wanted Pinnacle 

removed as the MHPI projects’ property manager due to the alleged fraud 

and mismanagement. Additionally, Army officials stated that they have 

been motivated by concerns for resident safety because it has been 

alleged that Pinnacle engaged in falsifying records regarding 

maintenance and repairs that Pinnacle employees were responsible for 

performing at all four project locations.

An Army official stated that Pinnacle has attempted to obtain information 

on the amount of funds the MHPI projects have spent on litigation and 

other litigation strategy-type information, such as documents provided to 

the Army by Clark, both through discovery and through a Freedom of 

Information Act request, which the Army (with Department of Justice 

assistance) successfully denied. According to Army officials, the relevant 

property-management agreements include a provision that a party who 

sues under the agreement and substantially prevails is entitled to recoup 

their legal fees from the losing party. Further, our review found that the 

MHPI projects’ property-management agreements include a provision 

allowing the substantially prevailing party in litigation brought to enforce or 

interpret the agreements to be repaid for all court costs and for the 

reasonable fees and expenses of attorneys and certified public 

accountants. Because legal fees are potentially recoverable, they are 

material both to the litigation and to any potential settlement negotiations.

In June 2010, Pinnacle was removed as property manager at Fort 

Benning, and in December 2012 Pinnacle was removed from 

Litigation against Pinnacle
 

Page 6 GAO-14-327 Defense Infrastructure

management at Fort Belvoir. Pinnacle remains property manager at the 

two California projects pending resolution of the litigation described 

above.

The Army has a standard process to manage MHPI projects’ funds for the 

costs of litigation not accounted for in the MHPI projects’ annual budget 

process, but instead used an alternative process designed to limit access 

to information about the Pinnacle litigation. The alternative process is 

consistent with the relevant MHPI projects’ operating agreements. The 

standard process has thresholds governing potential withdrawals or 

expenditures for Army MHPI project litigation expenses. In the standard 

process, Army officials generally make major decisions10 related to MHPI 

projects, including litigation costs, by following guidance in the Residential 

Communities Initiative Portfolio and Asset Management Handbook. For 

example, the Army treats litigation not accounted for in the budget 

process as a major decision requiring higher-level approval within the 

Army when costs exceed either 5 to 10 percent of the annual budget or 

$250,000 over budget. In the standard process, Army officials generally 

seek approval of such major decisions from either the Office of the 

Assistant Chief of Staff for Installation Management or the Office of the 

Assistant Secretary of the Army (Installations, Energy and Environment). 

The process involves sharing litigation information and estimated costs 

between the developer and four offices within the Army (MHPI Project 

Office, Garrison Commander, Office of the Assistant Chief of Staff for 

Installation Management, and the Office of the Assistant Secretary of the 

Army [Installations, Energy and Environment]). However, according to 

Army officials, the standard process has not yet been used to approve 

any major decisions regarding litigation expenses, because the Pinnacle 

cases are the only cases that met the major-decision threshold criteria 

whose litigation expenses have been approved and would have gone 

through this process had decisions not been made to restrict access to 

information pertaining to this litigation.

Although the Pinnacle cases met the major-decision threshold criteria, 

according to Army officials, Army officials decided to use an alternative 

management process to review and approve litigation costs so they could 

 

10A major decision refers to any decision that requires the review and approval of the 

Army. For example, the acquisition or disposal of real property or loans from project funds 

are considered major decisions.

The Army Followed a 

Process to Manage 

MHPI Litigation 

Funds Not Accounted 

for in the Budget That 

Limits Access to 

Litigation Information
 

Page 7 GAO-14-327 Defense Infrastructure

restrict information and confine decision making to a higher organizational 

level. This process is consistent with the MHPI projects’ operating 

agreements for managing these projects and allows for Clark and only 

one Army office to review associated cost information. Specifically, these 

agreements do not specify any internal deliberative process within the 

Army, but rather only require that Army agreement is obtained for certain 

major decisions. As a result, the Deputy Assistant Secretary of the Army 

(Installations, Housing & Partnerships), acting on behalf of the Army, can 

directly approve specific actions proposed by Clark senior leadership on 

behalf of the MHPI project, such as approving the litigation and audit 

budget and expenses. Additionally, Army officials stated that while the 

standard process was not followed, the alternative process did allow for 

information regarding the Pinnacle litigation to be periodically coordinated 

with high-level officials within the Office of the Assistant Chief of Staff for 

Installation Management. Army officials stated that they wanted to restrict 

access to the litigation and audit cost estimates because legal fees are 

potentially recoverable and as a result are material both to the litigation 

and to any potential settlement negotiations.

According to Army officials, throughout the litigation process, Army and 

Clark officials have regularly shared litigation documents and met to 

discuss the Pinnacle litigation. After the approval of the MHPI project’s 

annual operating budgets, the Deputy Assistant Secretary of the Army 

(Installations, Housing & Partnerships) and counsel in the Office of the 

Army General Counsel reviewed Clark’s proposed budget for Pinnacle 

litigation and audit expenses for that year. Further, the Army and Clark 

met approximately quarterly with counsel representing the four MHPI 

projects in the Pinnacle litigation to discuss any significant developments 

in the cases, specific plans for the next quarter, and general plans for the 

rest of the year—including any anticipated changes in the legal and audit 

expenses previously budgeted for. Army officials stated that they also 

plan to conduct a full review of the costs at the end of the litigation to 

ensure that all charges by outside counsel were fair and reasonable.
 

Page 8 GAO-14-327 Defense Infrastructure

According to Army officials and our analysis of the project-management 

accounts for the four locations involved in the Pinnacle litigation, the 

expenditure of funds to pay litigation and audit expenses have not 

prevented the projects from meeting normal operating requirements, such 

as conducting maintenance or paying for utilities, from the time the 

litigation began in 2010. Within each MHPI project, the Army receives 

revenue and distributes the cash flow in a specified order to accounts, 

such as the revenue account; operating-expenses account; capital, 

repair, and replacement account; debt-service account; and construction 

and reinvestment accounts. Figure 1 shows the flow of funding within the 

Army MHPI projects.

Figure 1: Example of the Flow of Funds for Army MHPI Projects

Revenue account: The revenue account is funded by servicemember

rent, which is typically based on the Basic Allowance for Housing 

allotments received. This funding is typically disbursed on a monthly basis 

to pay the budgeted amounts for the operating expense account; capital, 

repair, and replacement account; and debt-service account. According to 

Army officials, Pinnacle litigation and audit expenses were also paid from 

revenues that flowed into the MHPI projects.

Operating-expenses account: Each Army MHPI project has an account 

to pay for all operating expenses including maintenance, utilities, and 

other administrative costs. According to Army officials, they assist in the 

Army MHPI Project 

Costs for the Pinnacle 

Litigation Have Not 

Prevented Housing 

Projects from Meeting 

Normal Operating 

Requirements
 

Page 9 GAO-14-327 Defense Infrastructure

development of and approve each MHPI project’s annual budget for 

operating expenses. MHPI project asset managers for the four projects 

connected to Pinnacle litigation stated that their projects have not had to 

reduce their operating expenses during the Pinnacle litigation. 

Furthermore, MHPI project asset managers stated that any increases or 

decreases in budgeted operating expenses from year to year were due to 

fluctuations in housing occupancy and changes in utility and maintenance 

costs and not litigation expenses. Table 1 provides a summary of the four 

MHPI projects’ budgeted operating expenses from calendar years 2009 

through 2013. Although Pinnacle litigation and audit expenses were not 

incurred until 2010, this table shows budgeted operating expenses for 

2009 to provide a comparison of expenses prior to the start of litigation.

Table 1: Budgeted Operating Expenses, by Military Housing Privatization Initiative 

(MHPI) Project, Calendar Years 2009 through 2013

Dollars in millions

Year Fort Belvoir Fort Benning Fort Irwin Presidio of Monterey

2009 $15.7 $22.5 $19.5 $17.9

2010 15.8 21.2 18.5 a 17.9 b

2011 17.2 21.9 19.6 17.1 c

2012 15.9 19.9 d 19.3 e 18.1

2013 17.5 21.4 f 18.8 g 18.1

Source: GAO analysis of Army data.

Notes: Dollars are in nominal terms.

a

Fort Benning experienced a decrease in budgeted operating expenses from 2009 to 2010 due to 

decreases in its water, sewer, and gas utilities costs.

b

Fort Irwin experienced a decrease in budgeted operating expenses from 2009 to 2010 due to 

decreases in its gas utilities costs.

c

Fort Irwin experienced an increase in budgeted operating expenses from 2010 to 2011 due to 

increases in its water and sewer utilities costs.

d

Fort Belvoir experienced a decrease in budgeted operating expenses from 2011 to 2012 by 

implementing several cost-saving measures in the areas of trash-removal services, 

extermination/pest control, and pool service.

e

Fort Benning experienced a decrease in budgeted operating expenses from 2011 to 2012 due to 

decreases in its electricity, water, sewer, and gas utilities costs.

f

Fort Belvoir experienced an increase in budgeted operating expenses from 2012 to 2013 due to 

increases in marketing and repair and maintenance expenses.

g

Fort Benning experienced an increase in budgeted operating expenses from 2012 to 2013 due to 

increases in insurance, contract services, cleaning and decorating, and repair and maintenance 

expenses.

Capital, repair, and replacement account: This account includes funds 

for repair and replacement of older components of homes and community 

facilities. The Army requested an audit of the projects’ financial data from 
 

Page 10 GAO-14-327 Defense Infrastructure

January 2009 through June 2012 and the audit results showed that no 

maintenance was deferred during this period.

Debt-service account: This account is used to pay the outstanding debt 

for the MHPI project. Based on our review of MHPI project account data, 

we found that all four MHPI projects have little or no balance in this 

account because debt is paid off throughout the year.

Construction account and Reinvestment account:

Construction Account—Before the start of an MHPI project, a plan is 

developed for construction, and needed funding levels are determined. 

This plan is reviewed annually based on actual and estimated costs to 

determine if any changes are needed to the development scope of the 

project. This account is used to pay for the initial development and 

construction of the MHPI project, which according to Army officials 

generally lasts during the first 7 to 10 years of project operations. As 

discussed earlier, the revenue account funds the budgeted amounts for 

the operating expense account; the capital, repair, and replacement 

account; and the debt-service account, and any funding not needed for 

these purposes flows to the construction account. However, because 

litigation expenses were also paid from the revenue account, officials 

stated that additional funding has not transferred into the construction 

account as otherwise would likely have occurred. Nevertheless, Army 

officials said that the Pinnacle litigation and audit costs have had no 

effects on the projects’ ability to move forward with construction as 

planned because these projects were developed within anticipated 

funding levels. According to Army officials, currently all four of the projects 

are nearing the end or have recently completed the initial development 

period, and after the development and approval of a 5-year future plan, 

the construction account will be closed.

Reinvestment Account—According to Army officials, any funds remaining 

in the construction accounts when the projects reach the end of their 

initial development and construction phase are moved to the reinvestment 

account. This account is also used to hold the MHPI projects’ excess 

cash flow that is not required after payment of the operating expenses, 

debt service, and other payments. Funds start to accumulate in the 

reinvestment account for future use in renovation or replacement of 

homes after the initial development and construction of the project ends. 

Since all four of the projects are still in or have recently completed this 

initial development phase—and based on our review of MHPI project 

account data—no funds have accumulated in the reinvestment accounts 
 

Page 11 GAO-14-327 Defense Infrastructure

as of February 2014. Due to the MHPI projects’ incurring litigation and 

audit expenses, less funding will ultimately be available to transition from 

the MHPI projects’ construction account to the reinvestment account 

unless litigation concludes prior to the transition, and funds are recouped 

assuming the projects prevail in the litigation with Pinnacle.

The MHPI projects’ property-management agreements provide that the 

party that substantially prevails in a legal action may recoup their legal 

expenses. Army officials stated that they expect the MHPI projects to 

prevail in the litigation and recoup most, or even all, the costs of 

conducting the litigation.

This report does not include any recommendations. We provided a draft 

of this report to DOD for comment. However, DOD did not provide written 

comments and provided technical comments, which we incorporated in 

our report as appropriate. 

We are sending copies of this report to the appropriate congressional 

committees; the Secretary of Defense; the Secretary of the Army; and the 

Director, Office of Management and Budget. In addition, the report is 

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

If you or your staff have any questions about this report, please contact 

me at (202) 512-4523 or LeporeB@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix I.

Brian J. Lepore

Director

Defense Capabilities and Management

Agency Comments
 

Page 12 GAO-14-327 Defense Infrastructure

List of Committees

The Honorable Carl Levin

Chairman

The Honorable James M. Inhofe

Ranking Member

Committee on Armed Services

United States Senate

The Honorable Howard P. McKeon

Chairman

The Honorable Adam Smith

Ranking Member

Committee on Armed Services

House of Representatives
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 13 GAO-14-327 Defense Infrastructure

Brian J. Lepore, (202) 512-4523 or LeporeB@gao.gov

In addition to the contact named above, Laura Durland (Assistant 

Director), Chaneé Gaskin, Stephanie Moriarty, Carol Petersen, Richard 

Powelson, Amie Steele, John Van Schaik, and Michael Willems made key 

contributions to this report.

Appendix I: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(351843)
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