Overseas Real Property: State Department Needs to Improve Guidance and Records Management
Published: 2014-09-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of State (State) holds or leases about 70-million square feet of real estate in about 275 posts worldwide and has the authority to construct, acquire, manage, and dispose of real property abroad.
GAO was asked to review State's management of overseas real property. This report examines: (1) what is known about State's overseas real property inventory, and (2) what factors State considers in managing its overseas real property portfolio and to what extent it documents its decision-making process pertaining to real property.
GAO requested 202 files for all acquisitions, disposals, and major leases pertaining to State's management of its real property abroad for the period from 2008-2013. In addition, GAO interviewed State officials in headquarters and at four posts abroad, selected because they had (1) ongoing or recently completed embassy construction or renovation projects without property disposals, (2) properties reported as identified for disposal for multiple years without being disposed, and (3) both owned and leased properties. The results of the four case studies cannot be generalized for the purpose of this review.
section_title: What GAO Found
paragraphs: GAO's analysis of the overseas real property portfolio of the Department of State (State) indicates that the overall inventory has increased in recent years. State reported that its leased properties, which make up about 75 percent of its inventory, increased from approximately 12,000 to 14,000 between 2008 and 2013. State's numbers of federally owned properties increased, but comparing the total number of owned properties from year to year can be misleading because State's method of counting these properties has been evolving over the past several years. Specifically, according to State officials, they have been revising their method for counting properties to produce more precise counts and to meet reporting guidance from the Office of Management and Budget (OMB), among others. For example, State began counting separately structural assets previously included as part of another building's assets, such as guard booths or perimeter walls, and consequently reported approximately 650 additional structural assets in fiscal year 2012 than in 2011, and approximately 900 more structures in 2013.
State officials told GAO that they consider many factors in managing real property; however, GAO found State's available data and documentation on management decisions were limited. State officials said that they work with overseas posts to identify and dispose of unneeded properties, primarily using factors in State's Foreign Affairs Manual ( FAM ) guidance. Such factors include identifying properties deemed obsolete or with excessive maintenance costs. State collects data on costs associated with unneeded properties identified for disposal, relying on posts to charge all such costs to a specific accounting code. The four posts GAO visited did not use this code consistently. For example, officials at one post charged some disposal costs to a routine maintenance account. Officials at the other posts with properties for sale used the code to charge all related disposal costs. GAO also found that other posts with unneeded properties identified for disposal in fiscal year 2013 had not charged expenses to this account. The guidance provided in the FAM for using this code does not detail the types of costs that can be charged. This omission raises questions about the extent to which posts use the code as State intends and the extent to which State receives accurate and comprehensive cost information about its unneeded properties. State, without accurate data on unneeded property, may not have the information it needs to make a decision about property offers when attempting to maximize revenue for property sales. Also, posts may not have sufficient funding for routine property maintenance if they use funds designated for this type of maintenance on unneeded property. GAO requested to review 202 files between fiscal year 2008 through 2013 on acquisitions (72), disposals (94), and leases (36), but was provided 90, as State told GAO that these files were not centrally located and too time consuming to find and provide during the time frame of our review. State provided most of what it considers “core” documents for the acquisition and disposal files, but these documents do not constitute all of the documentation listed in the FAM and OMB guidance. In addition, although State provided all 36 of the requested lease files, some documentation that State agreed to provide was missing for 30 of the 36 files. Without the missing files and documentation, it is unclear how efficiently and effectively State is managing its overseas real property.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Secretary of State (1) clarify accounting code guidance for tracking expenses related to disposal of unneeded properties, and (2) take steps to collect and retain documents related to real property purchases, disposals, and leases in accordance with the FAM and OMB's guidance. State concurred with GAO's recommendations.

section_title: Letter
paragraphs: The U.S. government, through the U.S. Department of State (State),  owns or leases approximately 70-million square feet of real estate in  approximately 275 posts worldwide. These properties include embassies,  consulates, office space, warehouses, and housing for U.S. diplomatic  staff. In addition, State currently has $7.5 billion in projects to design and  construct new facilities. This new construction will gradually replace  vulnerable embassy facilities around the world. It may also result in  potential revenue from the disposal of property vacated as personnel  move into newly constructed facilities and savings as leases expire or  State terminates unneeded leases. State is authorized to retain and  reinvest the proceeds from foreign property disposals into United States  government property acquisitions or other authorized purposes.
In our previous reports on State’s real property, we have found problems  such as inaccuracies with its real-property inventory database, problems  that hindered State’s ability to identify and dispose of properties that were  unneeded or expensive to maintain, and that could produce millions of  dollars in revenue for the U.S. government. By implementing  recommendations made in our 2002 report, State identified and sold  unneeded properties resulting in nearly $756 million in proceeds.  Furthermore, we have identified real property as high risk government- wide, and since State has an expansive construction program, it is  important that it manage its real property in ways to ensure efficient use  of resources. Given this importance, you asked us to review State’s  management of real property. Specifically, in this report we examine: 1)  what is known about State’s overseas real-property inventory, and 2)  what factors State considers in managing its overseas real-property  portfolio and to what extent it documents its decision-making process.
We took several steps to address these objectives. Specifically, to  understand what is known about State’s real property portfolio and how  State reports real property data, we obtained and reviewed State’s  Federal Real Property Profile (FRPP) data from fiscal years 2008 through  2013, which State reports to the General Services Administration yearly.  Additionally, we reviewed State’s real property reports to Congress and  compared these reports with State’s annual FRPP submissions to  determine differences in reported real property between these reports.  We determined that FRPP data were sufficiently reliable for the purpose  of reporting approximate numbers of properties in State’s portfolio, by  interviewing knowledgeable Bureau of Overseas Buildings Operations  (OBO) and post officials about data quality-assurance procedures and  reviewing related documentation, including previous State Inspector  General (IG) reports, our prior work, data dictionaries and user manuals,  and data verification practices. We also reviewed State’s internal report  on costs associated with properties identified for disposal to determine  costs for unneeded properties that State is selling and found that the data  had limitations, which we discuss later in this report.
To determine the extent to which State documents its decision-making  process, we requested documentation from State’s real property  disposals, acquisitions, and leases from fiscal years 2008 through 2013.  Specifically, we requested files on 202 properties. This request included  all 94 property disposals reported to Congress during this period, of which  State provided 20. We requested files on all 72 property acquisitions that  State reported to Congress during this period, of which State provided  34. We also requested, and were provided, all 36 major leases with  $500,000 or more in annual rent, as defined in State’s Foreign Affairs  Manual (FAM) that were active from fiscal years 2008 through 2013 and  still were listed as active in FRPP at the end of fiscal year 2013. We  compared State’s documentation of the disposals, acquisitions, and  leases to the documentation specifications in FAM and Office of  Management and Budget (OMB) circulars. Also, we obtained information  on how State reinvested revenue generated from property disposals  between fiscal years 2008 through 2013. We reviewed this information  and determined that it was sufficiently reliable for our purposes by  interviewing knowledgeable officials and corroborating the data with  information reported to Congress.
To gather information on factors State considers in managing its real  property portfolio, we interviewed State Department officials at OBO and  at four selected posts (Belgrade, Serbia; Helsinki, Finland; London,  United Kingdom; and Sarajevo, Bosnia and Herzegovina). We selected  these posts because they had (1) ongoing or recently completed  embassy construction or renovation projects without disposing of  properties, (2) properties reported as identified for disposal for multiple  years without being disposed of, and (3) a mix of owned and leased  properties. We based our site-visit selection on these factors in order to  observe posts with (1) higher numbers of property disposals than other  posts due to recently completed or ongoing construction of new  embassies, (2) persistent challenges in selling unneeded properties, and  (3) experience managing both owned and leased properties. The results  of the case studies provide insight into State’s management and decision- making practices but cannot be generalized for the purposes of this  review.
We conducted this performance audit from June 2013 to September 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. Further details on our scope  and methodology can be found in appendix I.
subsections: section_title: Background
paragraphs: State has authority to acquire, manage, and dispose of real property  abroad. Specifically, the Foreign Buildings Act (Act) of 1926, as amended,  authorizes the Secretary of State to acquire by purchase, construction,  exchange, or lease sites and buildings in foreign cities for use by  diplomatic and consular establishments of the United States. The Act  allows State to alter, repair, furnish, and dispose of these properties, and  to provide residential and office space and necessary related facilities to  federal agencies abroad. It also authorizes the Secretary to apply  disposal proceeds toward real property needs or to deposit proceeds into  the Foreign Service Buildings Fund and use the proceeds for authorized  purposes.
OBO manages State’s real property abroad to support U.S. government  presence at embassies and consulates, which are also known as  missions or posts. This office is responsible for managing U.S.  government-owned and government-leased real property, which includes  land, structures, and buildings such as embassies, warehouses, offices,  and residences. OBO coordinates directly with officials at posts tasked  with managing the post’s real property. Posts are responsible for  implementing OBO policies related to the management, acquisition,  disposal, and reporting of real property, outlined in State’s FAM. Table 1  below provides an overview of OBO’s and the posts’ roles and  responsibilities for real property management.
In 2004, the administration added managing federal real property to the  President’s Management Agenda and the President issued an executive  order directing executive agencies to submit real property information  annually for inclusion in a single, comprehensive database, which is now  known as the Federal Real Property Profile (FRPP) that provides an  annual report on the government’s real property holdings.
State is currently undertaking a multiyear, multibillion-dollar capital- security construction program to replace 214 of its facilities abroad due to  security concerns. State is taking these steps due to continuing threats  and incidences such as the terrorist bombings in 1998 of embassies in  Dar es Salaam, Tanzania, and Nairobi, Kenya, that killed more than 220  people and injured 4,000 others. The program incorporates the  requirements of the Secure Embassy Counterterrorism Act of 1999 and  instructs State to replace facilities at vulnerable posts and to require that  all new diplomatic facilities be sufficiently sized to ensure that all U.S.  government personnel at the post work onsite. Construction projects are  prioritized by State’s annual risk matrix that ranks facilities based on their  vulnerability across a wide range of security threats. In 2004, to aid in the  construction of new embassies, a related program, the Capital Security  Cost Sharing (CSCS) program was authorized, which required agencies  with personnel overseas to provide funding for the construction of new,  secure, and safe diplomatic facilities for U.S. government personnel  overseas. State expects funding of $2.2 billion per year over a 5 year  period through fiscal year 2018 to carry out new construction projects.
section_title: State’s Overseas Real Property Inventory Has Increased, but Data Do not Allow for Comparisons across Years
paragraphs: Our analysis of State’s real property portfolio indicated that the overall  inventory has increased. State reported its leased properties, which make  up approximately 75 percent of the inventory, increased from  approximately 12,000 to 14,000 between 2008 and 2013. However,  comparing the total number of owned properties between years can be  misleading because State’s method of counting these properties has  been evolving over the past several years. OBO officials explained that in  response to changes in OMB’s and FRPP’s reporting guidance, they have  made efforts to count properties more precisely. For example, OBO has  focused on separately capturing structural assets previously recorded as  part of another building asset, such as perimeter walls, guard booths, and  other ancillary structures. As a result of this effort, State recorded  approximately 650 additional structural assets in its fiscal year 2012  FRPP report and approximately 900 more structures the following year in  its fiscal year 2013 FRPP report, according to OBO officials. Additionally,  OBO officials told us that former Department of Defense (DOD) properties  in Iraq and Afghanistan were transferred to State; the largest of these  transfers occurred in 2012 when State assumed responsibility from DOD  for approximately 400 properties in Iraq. State reported additional  changes in its real property portfolio, which are described below.
Acquisitions: State reported spending more than $600 million to acquire  nearly 300 properties from fiscal year 2008 through 2013 (see fig.1).  State uses two sources of funding to acquire real property. It acquires  land for building new embassy compounds (NEC) with funding from the  CSCS program. It acquires residences, offices, and other functional  facilities with proceeds from the disposal of unneeded property. In fiscal  years 2008 through 2013, State reported spending approximately $400  million of these disposal proceeds to acquire approximately 230  properties.
Disposals: From fiscal years 2008 through 2013, State reported selling  approximately 170 properties. In doing so, it received approximately $695  million in proceeds (see fig.1). According to State, property vacated when  personnel move into newly constructed facilities is the largest source of  property that can be disposed of. When State completes construction of a  NEC, personnel previously working in different facilities at multiple  locations are then collocated into the same NEC, a move that provides  State an opportunity to dispose of its former facilities. Further information  on State’s acquisitions and disposals from fiscal year 2008 through 2013,  can be found in figures 1 and 2 below.
Leases: The majority of State’s leased properties are residences. State  reported spending approximately $500 million on leases in 2013 and  projects a potential increase to approximately $550 million by 2016 as  growing populations in urban centers around the world push rental costs  higher and the U.S. government’s overseas presence increases.
OBO provides guidance to posts for disposing of unneeded properties as  the post prepares to move into a NEC. In Belgrade, OBO is working with  the post to sell an old embassy that is no longer needed following the  completion of Belgrade’s NEC. Post officials told us that relocating to the  NEC in April 2013 allowed them to market their old embassy and  terminate multiple leases. In London, State sold its existing embassy  building in August 2013 to fund the construction of a NEC. State is  leasing the existing building until construction of the NEC is completed,  which is expected in 2017.
NEC construction has also provided State the opportunity to sell  residential properties that are not located near the new embassies under  construction. For example, according to post officials in London,  transitioning to the NEC in London allowed State to make cost effective  changes in its residential property portfolio by selling valuable older  properties near the current embassy and purchasing newer lower cost  residences near the NEC.
State reports these types of real property transactions to Congress  quarterly. Also, as required, State submits annual reports to Congress  listing surplus overseas properties that have been identified for sale. For  example, our analysis found that State listed 39 properties that it  identified for disposal in its fiscal year 2013 annual report to Congress.  Some properties identified as unneeded in State’s fiscal year 2013 FRPP  report were not included in the 2013 annual report to Congress, such as a  former embassy in Tashkent, Uzbekistan; land in New Delhi, India, and  Manila, Philippines; and various properties in Beijing, China. According to  OBO officials, the annual reports to Congress do not include unneeded  properties they expect to retain or have determined they cannot sell for  various reasons, such as host government restrictions related to  diplomatic or political differences. For example, according to a State IG  report, after State refused to pay what it considered an illegal tax to  support the Brazilian social security system in 1996, the government of  Brazil blocked the disposal of all U.S. diplomatic properties in the  country. OBO officials told us that they do not report unneeded  properties that cannot be sold because the Congressional reporting  requirement is to list surplus properties that have been identified for sale.
section_title: State Officials Said That They Consider Many Factors in Managing Their Overseas Real Property, but Data and Documentation Are Limited
paragraphs: State’s officials said that they consider many factors in managing their  real property portfolio, specifically in terms of identifying and disposing of  unneeded property, as well as in purchasing and leasing property. The  officials also described challenges associated with each of those aspects  of managing the real property portfolio. State collects data on costs  associated with properties identified for disposal to track costs, but we  found that posts did not use the required code to track these costs  consistently. As a result, this raises questions about the extent to which  posts worldwide are using the code as State intends, and the extent to  which State is receiving accurate and comprehensive cost information  about its properties. We requested to review 202 files from fiscal year  2008 through 2013 on acquisitions, disposals, and leases, but were only  provided 90 files since, according to State officials, the files were not  centrally located and too time consuming to find and provide within the  time frame of our review. State was able to provide most of the “core”  documents agreed to, although some of the documentation was missing  for the 90 files provided. For example, State provided all 36 of the  requested lease files, but some documentation that FAM and OMB  directs State to retain, and that State agreed to provide, was missing for  30 of the 36 lease files provided.
subsections: section_title: State Considers Various Factors in Identifying Unneeded Property, but Faces Challenges in Disposing of Properties
paragraphs: OBO officials told us that they work with posts to identify and dispose of  unneeded properties primarily using factors outlined in FAM, along with  other strategies. FAM lists 18 factors that OBO and posts might consider  when identifying and disposing of property (see table 2), such as whether  (1) the property has excessive operating costs, (2) State used the  property only irregularly, or (3) the property is uneconomical to retain.  Officials at two of the four posts we visited told us that they were aware of  and use the guidelines to identify unneeded property. Officials at a third  post that owned property was unaware of the guidelines, but told us they  used excessive maintenance costs to identify properties for disposal.  Excessive maintenance cost is one of the 18 listed factors in FAM. OBO  also uses other strategies to help identify unneeded property, such as: (1)  reviewing the Department’s internal property database to identify  properties newly classified by posts as unneeded, (2) monitoring new  construction to identify property vacated as personnel move to new  facilities, (3) reviewing reports of State’s (IG) for recommendations on  disposals, and (4) evaluating changing political conditions and evolving  post conditions to help right-size a post’s real estate portfolio.
Once posts identify and OBO approves a property as unneeded, OBO  takes the lead in disposing of the property. For example, OBO sold  residences in London in fiscal year 2012 and an embassy in fiscal year  2013 (see fig.3), and the Department received approximately $497 million  in proceeds that State is using to design and build the new London  embassy and to obtain replacement residences closer to the new  embassy (see fig.4). OBO also sold a residence in Helsinki in fiscal year  2011 and received approximately $657,000 that was deposited back into  its asset management account for other real property needs worldwide.
OBO officials acknowledged challenges with disposing of unneeded  properties. These challenges included: the condition and location of  facilities, changing missions in countries, and diplomatic reasons or  political situations that require State to retain property previously marked  as unneeded. For example, unneeded residential units can be in poor  condition, which makes selling them challenging. Also, officials told us  that the State’s primary mission of diplomacy overrides property disposal.  In countries such as Mexico, Brazil, and India, policy changes with the  diplomatic mission have led to retaining property previously marked as  unneeded. For example, in Ciudad Juarez, Mexico, a new consulate was  built; however, State retained property to accommodate and expand their  mission.
Officials at the posts we visited also described some past and recurring  challenges to disposing of unneeded real property:    Officials at the Helsinki and Sarajevo posts told us that differing opinions  between OBO and posts about whether to dispose or retain unneeded  property presented challenges. For example, officials in Helsinki told us  they wanted to dispose of two unneeded residential properties in 2014  because of excessive maintenance costs and a longer commuting time  due to the need to take mass transit because parking space was  eliminated at the renovated embassy (see fig. 5). However, OBO officials  told the post to retain and assign staff to the two properties for an  additional 3 years. OBO believed that marketing the two properties,  located next to two additional unneeded properties they had been  attempting to sell since 2011, would possibly depress the disposal price if  all the properties were marketed at the same time. However, post officials  believe it will cost the post and State more in maintenance costs to bring  the properties to a state of good repair, and believe selling the properties  now would be more financially beneficial than retaining the properties for  an additional 3 years as the costs to maintain the property would  outweigh the potential for increased proceeds.
OBO officials told us that they conduct an internal review to determine the  financial benefit of whether to retain or sell properties in these situations  as the agency attempts to maximize the disposal value of property.  Officials at the Sarajevo post told us that they have had ongoing  discussions with OBO about retaining their old embassy and converting it  to a new Ambassador’s residence. Post officials told us that OBO  originally wanted the post to dispose of its interest in the embassy—which  State has been leasing for only $1 per year since 1994 with the option to  continue the lease at this rate for 150 years. OBO officials told us that, at  this below-market lease rate of $1 per year, they anticipated that the  disposal of this leasehold interest could generate proceeds for State.  However, OBO and post officials told us that the host government denied  the Department’s request to transfer the lease to a third party. Given the  Department’s inability to transfer or sell its interest in the property, OBO  and the post reached an agreement to retain the embassy and convert it  into an Ambassador’s residence. When the conversion is complete the  post will terminate the lease for its current Ambassador’s residence,  which has an annual lease cost of $144,000.
Officials at the Helsinki and Belgrade posts told us that OBO’s  process for appraising and marketing properties for sale was a  challenge in disposing properties in a timely manner. Specifically, the  post officials thought OBO’s real estate firm’s appraisals were too high  and made the properties unsellable. OBO acknowledged that  ensuring an accurate appraisal price presents challenges and  therefore, it also reviews appraisals internally. Also, post officials in  Helsinki and Belgrade told us that the global real estate firms OBO  hired to market their properties did not have local offices, and thus  may have not fully understood the local real estate market. For  example, Belgrade post officials told us that an affiliate office in  Hungary was marketing their old embassy, and that a Hungarian  phone number was the primary number used to market the property,  which they believe made selling the property more challenging (see  fig. 6). OBO officials told us that they believe the global firms they  contract with are more experienced than many local firms.
Officials at the Belgrade post told us about zoning challenges with the  host government that have delayed the disposal of their old embassy.  They told us OBO notified the post that it would sell the old embassy  once the new embassy had been built. However, post officials told us  they have had to resolve zoning issues with the host government  before the embassy could be sold. OBO officials told us that the old  embassy was zoned for diplomatic use and that the process to  change the zoning to mixed-use is under way. OBO and post officials  have worked with the host government, and post officials believe the  decision to zone the property for commercial and residential use will  increase the disposal price of the property.
section_title: State Uses Data on Property Disposal Costs in Managing Real Property, but Data May Be Incomplete
paragraphs: OBO collects data on costs associated with unneeded properties  identified for disposal to track costs associated with properties before  their disposal, but the data do not specify costs associated with individual  properties. Once OBO approves a property as unneeded, each post  should charge a specific internal accounting code designated for property  acquisition and disposal costs. OBO officials told us that each post is  required to charge costs for property to this code so OBO can track the  costs to maintain the property before the property is disposed by State.  For example, these types of costs would include utilities, legal fees, and  security services. Posts charged approximately $11.1 million to this code  from fiscal year 2008 through 2013, according to the data provided by  OBO.
We found that the four posts we visited did not use this code consistently.  State’s Foreign Affairs Handbook instructs posts to use the code to record  costs related to the disposal of unneeded real property, but does not  describe in detail the types of costs that can be charged to this account.  Specifically, the Foreign Affairs Handbook includes the following  information on this accounting code: “7541 Real Estate-Program Costs:  Costs in support of the acquisition and disposal of State real property.”  OBO officials told us costs for unneeded properties that should be  charged to this code include disposal costs for government-owned  buildings, such as guard, maintenance, utility, and other building  operating costs of vacant/unneeded property until sold. Although State  relies on this account to monitor costs associated with disposal of  unneeded properties, on our site visits we found that officials at one post  did not know they could use this account for costs related to properties  identified for disposal, such as utility bills and condominium fees while  marketing the property. This post charged these costs to its routine  maintenance account not intended for unneeded properties. Post officials  thought the code for unneeded properties was used to process the  disposal, and not for ongoing costs related to the property while the  property was being marketed for disposal. Officials at the other two posts  we visited that had unneeded property for disposal used the code to  charge all of their related costs while they marketed the property for  disposal. We found posts in other countries with unneeded properties  identified for disposal in fiscal year 2013 had not charged expenses to  this account during that fiscal year such as posts in Jamaica, Ukraine,  Tunisia, and Namibia.
OMB’s capital-planning guidance states that reliable data are critical to  managing assets effectively. According to this guidance, only valid,  complete, relevant, reliable, and timely data can help the agency make  informed decisions regarding the allocation of resources. Additionally,  government-wide internal control standards state that pertinent financial  and operating information should be recorded and communicated to  management and others within a time frame that enables them to carry  out their internal control and other responsibilities. State will be unable  to capture and maintain complete and accurate information on the  operating costs for properties identified for disposal if posts do not  consistently charge costs related to these properties to the designated  account. This raises questions about the extent to which posts worldwide  are using the code as State intends and the extent to which State is  receiving accurate and comprehensive cost information about its  properties. For example, State may not have the information it needs to  make a decision to accept or decline an offer for a property when  attempting to maximize revenue for a property disposal. In addition, posts  may not have sufficient funding for routine property maintenance because  they are using their designated routine maintenance funds on unneeded  properties, which could reduce the amount of funding they have available  for maintenance of other properties. This could impact the upkeep of  posts’ current real-property portfolio and increase the amount for deferred  maintenance. We have previously reported that deferring maintenance  and repair can reduce the overall life of federal facilities, lead to higher  cost in the long term, and pose risks to safety and agencies’ missions.
section_title: State Is Attempting to Reduce Its Reliance on Leased Space and Related Costs but Faces Challenges
paragraphs: OBO officials said that they would like to reduce the number of leased  properties in State’s portfolio and increase federally owned property. OBO  officials told us that owning more housing will save on aspects of lease  costs, such as exchange-rate fluctuations, rapid inflation, and rising  property rents. The officials added that currently 15 percent of State’s  residential properties are federally owned, but officials would like to  eventually increase this number to 40 percent. They told us that based on  the average cost of a property’s acquisition, along with expected  reinvestment of disposal proceeds on a yearly basis; it will take about 50  years to reach this ownership target. Officials believe it is not cost  effective or feasible to own 100 percent of properties due to the inability to  own properties in some countries, high maintenance costs of owning  properties in some countries, and the lack of flexibility in dealing with  staffing changes. OBO officials told us that they consider the unique facts  and circumstances of each country when deciding whether to lease or  acquire properties. We have previously reported on the federal  government’s over-reliance on leasing, which could be more expensive in  the long term than the cost to acquire property.
State relies on its Opportunity Purchase Program to fund real property  acquisitions, and to reduce its need to lease space. The Opportunity  Purchase Program reinvests proceeds from property disposals to acquire  real properties other than new embassy construction. According to OBO  officials, the program allows State to acquire properties in order to avoid  costs because State officials conduct a lease-versus-purchase analysis to  measure savings from owning rather than leasing over an expected time  frame they plan to retain a property. OBO officials told us that over the  last several years the program has generated investment returns from its  acquisitions that typically range from 7 percent to 10 percent. As funding  from disposals becomes available, OBO reviews attractive purchasing  markets and security needs at the approximately 275 posts and narrows  down purchasing opportunities to 12 to 15 posts. OBO officials told us  they notify the post that they have been selected for the program, and the  post provides acquisition opportunities for OBO to review. OBO officials  told us that disposals are unpredictable to forecast on an annual basis,  making planning and funding for these acquisitions difficult. The Belgrade  post is an example of where State has employed the Opportunity  Purchase Program. State acquired four residential units in Belgrade for  approximately $2.1 million in fiscal year 2013 (see fig. 7). According to  OBO, from fiscal year 2006 through 2013, the Opportunity Purchase  Program has produced approximately $16 million annually in lease cost  avoidance and will provide another projected $6 million in lease cost  avoidance once all pending acquisitions are completed.
Post and OBO officials we interviewed echoed similar views on the  preference of owning versus leasing based on the real estate market in  each post’s location. Post and OBO officials told us that the conditions of  a specific location, such as the local real estate market and the mission of  the post influence the decision to own or lease. For example, post officials  in Helsinki told us that properties are costly to acquire and expensive to  maintain in the area. They said leasing is a better option because it  provides flexibility when staffing changes occur, and the property owners  in the area are reliable and responsive. Post officials in Sarajevo told us  that because of the instability of the real estate market and possible future  changes in embassy staffing, it is more practical to lease residential  housing. On the other hand, post officials in Belgrade told us that they  would like to own more residential units because of the difficulty in finding  quality housing to lease. OBO officials told us they prefer a mix of owned  and leased housing to provide a stable housing pool, manage rental  costs, and provide flexibility as mission requirements change, and officials  seek to acquire housing in markets where they can acquire quality  housing and where it is cost effective to own rather than lease.
In addition to acquisitions, OBO and post officials described several steps  they have taken to reduce costs associated with leasing:
OBO reviews its highest cost expiring leases annually to determine if  State is obtaining a market rate for these properties and if leases  should be renewed or replaced. Officials told us that this review  includes 100 of the most costly leases worldwide and is used to assist  posts that take the lead in monitoring and securing lease renewals.  OBO officials told us that in fiscal year 2014 after this review, they  determined that 30 percent of leases were prospects for exploring  whether rents can be reduced. Under FAM, appraisals or other  documentation such as a market study or a design review for the  acquisition and renewal of major leases are used for each  transaction.  OBO meets this guidance by providing fair-market  rental estimates, market studies, surveys, and legal direction for  posts.
OBO is attempting to maximize the cost effectiveness of its leased  portfolio. OBO officials told us they implemented a rental benchmark  program in 2007 to help ensure the U.S. government pays the  prevailing market rate, and does not overpay for leased housing.  Officials told us that 25 posts were involved with the program when it  began in 2007 and that it covered 171 posts in 2013. OBO works  with posts and contracts with real estate experts to provide rental  ceilings for leased residential properties at each post. OBO uses  these ceilings to set a cap on the amount a post can spend on leased  residential property, and if a post exceeds that cap, OBO must  approve a waiver. OBO officials told us that they conduct a quarterly  review of the posts to see that they are in compliance and that the  program incentivizes posts to stay within their rental ceilings to secure  cost-effective leases. Belgrade post officials spoke highly of the  program as it has reduced the post’s administrative burden in seeking  waivers, by providing a more realistic ceiling, which has allowed the  post to secure housing in a timelier manner. Also, OBO officials told  us that the program has resulted in savings by slowing down the  growth of leasing costs.
Post and OBO officials told us that they proactively renegotiate leases  to reduce costs. Officials at all four posts we visited told us that their  locally employed staff had established strong working relationships  with property owners from years of real estate experience. Post  officials told us that the locally employed staff were instrumental in  negotiating reduced lease costs. For example, one post official told us  that the post secured office space for 30 percent below market value,  and officials from another post told us that they were in the process of  securing a new leased warehouse space that would save $50,000 to  $80,000 per year due to the expertise of the local staff working at the  post. In addition, posts and OBO have successfully renegotiated  leases since fiscal year 2011 in St. Petersburg, Russia; Paris, France;  La Paz, Bolivia; Budapest, Hungary; and Tokyo, Japan that have  produced approximately $3.5 million in savings. Also, OBO officials  told us that in their estimation, the lease waiver program avoided $43  million in lease costs by working with overseas posts to locate less  costly property, renegotiating lease terms, and by rejecting approval  of proposed rent increases or higher cost replacement properties.
section_title: State Was Unable to Provide All Documentation on Real Property Transactions
paragraphs: OBO could not provide us all the real property files we requested for  acquisitions and disposals between fiscal year 2008 through 2013, except  for the files pertaining to leases. Specifically, we requested 202 files  which included property disposals, acquisitions, and leases, but OBO  stated it was only able to provide 90 of the files because these files were  not centrally located and too time consuming to find and provide within  the timeframe of our review. OBO agreed to provide us “core” documents  for acquisition and disposal files; however some of the documentation  was missing in the files we reviewed. In addition, although OBO was able  to provide all the lease files requested we found the lease files to be  incomplete based on FAM and OMB guidance (see Table 3). Without the  missing files and documentation, it is unclear how efficiently and  effectively State is managing its overseas real property.
Acquisitions and Disposals: Under FAM, OBO and posts should create  and preserve records containing adequate and proper documentation of  the decisions, procedures, and transactions or operations of the  Department and posts. Further, Standards for Internal Control in the  federal government states that an agency should establish control  activities to ensure that the agency completely and accurately records all  transactions. These standards explain that control activities include  activities such as the creation and maintenance of related records that  provide evidence of execution of these activities as well as appropriate  documentation. OBO told us that they were unable to provide all of the  information for acquisitions and disposals as requested because files  were not centrally located, maintained by different groups within State,  and too time consuming to find and provide within the time frame of our  review. Thus, OBO officials agreed to provide what they considered  “core” documents, which were a subset of the documentation we  requested based on our analysis of FAM and OMB guidance. State was  able to provide most of the “core” documents agreed to, although some of  the documentation was missing. For example, we found instances of  acquisition files missing deeds and disposal files missing deposit slips,  which were both core documents State agreed to provide. Furthermore,  since we received only core documents, we could not determine whether  the work to meet additional FAM and OMB guidance was conducted and  the records were missing, or if this work was not conducted at all. Without  this information, it is unclear whether State is consistently following its  internal FAM and external OMB guidance, and how State officials made  real property decisions. These findings are similar to those of State’s IG  which found significant vulnerabilities due to inadequate file  documentation that could potentially expose the Department to  substantial financial losses.
Leases: State was able to provide all 36 of the requested lease files, but  some documentation listed in FAM and OMB guidance was not in 30 of  the 36 of the files we reviewed. For example, State guidance directs OBO  to complete documentation for leases such as: a lease agreement and  documentation of OBO’s approval. Additionally, OMB directs executive  branch agencies, such as State, to conduct a lease-versus-purchase  analysis when deciding to lease or acquire properties to ensure all leases  are justified as preferable to direct U.S. government purchase and  ownership.All 36 files contained a lease agreement. However, only 6 of  the 36 files contained all of the information that FAM directs State to  retain and that State agreed to provide. These findings are similar to  those of State’s IG which found that the Department’s process to monitor  lease information provided by posts was not always effective. The IG  found numerous recorded lease terms that did not agree with supporting  documentation. We found that 30 of 36 files lacked either  documentation of OBO’s approval or a lease-versus-purchase analysis,  or both. OBO officials told us they do not conduct a lease versus  purchase analysis when purchasing is not an option, such as in cases  where there is a lack of sufficient funding or the property is in a country  that does not allow non-domestic ownership. According to OBO, 6 of the  36 leases in our review were for space in a country that did not allow non- domestic ownership; however, the files did not include documentation that  this was the case. We have previously found that without a lease-versus- purchase analysis, decision makers lack financial information on the long- term decisions to lease rather than own. Also, we have previously found  that when this analysis has been conducted in the federal government  that such analysis has identified savings from owning versus leasing.
section_title: Conclusions
paragraphs: State manages a multibillion dollar portfolio of buildings, land, and  structures at approximately 275 posts throughout the world and has $7.5  billion in projects currently under design and construction. The  Department has taken a number of measures to improve management of  these properties. These measures include actively identifying unneeded  properties, providing posts with rental cost parameters, and other cost- saving initiatives. Despite these steps in managing the real property  portfolio, State cannot identify the cost associated with properties  identified for disposal, which may compromise State’s ability to make fully  informed decisions because of unclear guidance. Furthermore, State  could not provide some key documents we requested for our review  pertaining to acquisitions, disposals, and leases of its properties  worldwide. As a result, the Department may not be able to ensure that it  is making cost-effective decisions about properties. Improvements in  these areas will become more important as State constructs additional  NECs and disposes properties no longer needed when personnel  relocate to new facilities.
section_title: Recommendations for Executive Action
paragraphs: To improve State’s management of real property overseas and enhance  State’s accountability and ability to track real-property management  decisions, the Secretary of State should take the following four actions:  1.  Clarify accounting-code guidance to the posts for tracking expenses  related to disposal of unneeded properties.  2.  Take steps to ensure that documents related to real property  acquisitions are prepared and retained in accordance with FAM and  OMB guidance.  3.  Take steps to ensure that documents related to real property  disposals are prepared and retained in accordance with FAM and  OMB guidance.  4.  Take steps to ensure that documents related to real property leases  are prepared and retained in accordance with FAM and OMB  guidance.
section_title: Agency Comments
paragraphs: We provided a draft of this product to the Department of State (State) for  review and comment. In written comments, reproduced in appendix II,  State concurred with the report’s recommendations. State provided  technical clarifications that were incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees and the Secretary of State. In addition, the report is available  at no charge on the GAO website at www.gao.gov.
If you or your staff have any questions about this report, please contact  either of us at (202) 512-2834 or wised@gao.gov or (202)-512-8980 or  courtsm@gao.gov. Contact points for our Office 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  III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine what is known about the Department of State’s (State) real  property inventory, we reviewed State’s Federal Real Property Profile  (FRPP) data for fiscal years 2008 through 2013—the time period of our  review. Additionally, we reviewed State’s real property reports to  Congress and compared these with State’s annual FRPP reports to the  General Services Administration. We determined that FRPP data were  sufficiently reliable for the purpose of reporting approximate numbers of  properties in State’s portfolio by interviewing knowledgeable Bureau of  Overseas Buildings Operations (OBO) and post officials about data  quality assurance procedures and reviewing related documentation,  including previous GAO and State Inspector General (IG) reports, data  dictionaries and user manuals, and data verification practices. We also  reviewed State’s internal report on costs associated with properties  identified for disposal to determine costs for unneeded properties that  State is selling. To evaluate the reliability of State’s real property  database we interviewed OBO and post officials and locally employed  staff responsible for entering real property data at the four posts we  visited. We also examined OBO’s policies and processes for entering  information into its real property database and issues affecting quality  control over this information. Although we identified data reliability issues  for some facilities in State’s real property database, as those issues  generally involved the classification or description of facilities, we  determined that the data were sufficiently reliable to describe the  approximate number of U.S. properties overseas.
To determine what factors State considers in managing its real property  portfolio and the extent to which it documents its decision-making  process, we reviewed sections of the Foreign Affairs Manual (FAM)  applicable to property management overseas and documents prepared by  State officials in response to our questions. We reviewed State’s data on  costs associated with unneeded properties identified for disposal for fiscal  years 2008 through 2013. We found the data had limitations, which we  discuss in the report. We reviewed documentation that State provided for  its real property disposals, acquisitions, and leases from fiscal years 2008  through 2013. We requested files on all 94 property disposals and 72  property acquisitions reported during this period. State provided 20 of the  94 disposal files we requested and 34 of the 72 acquisition files, which  included all of the 2013 files. We also requested, and were provided with,  all 36 major leases with $500,000 or more in annual rent, as defined in the  FAM, that were active from fiscal years 2008 through 2013 and still were  listed as active in FRPP at the end of fiscal year 2013. To evaluate the  completeness of these files we compared State’s documentation of real  property disposals, acquisitions, and leases to the documentation directives  listed in FAM and relevant Office of Management and Budget (OMB)  Circulars. We also obtained information on how State reinvested revenue  generated from property disposals between fiscal years 2008 through  2013. While our review of these disposals, acquisitions, and leases  provides key insights and illustrates recent products of State’s real property  policies and guidance, the results of our review should not be used to make  generalizations about all State disposals, acquisitions, and leases.
We interviewed State Department officials at OBO and at four selected  posts (Belgrade, Serbia; Helsinki, Finland; London, United Kingdom; and  Sarajevo, Bosnia, and Herzegovina) to gather information on unneeded  properties, disposals, acquisitions, and leases. We selected these posts  because they had (1) ongoing or recently completed embassy  construction or renovation projects without disposing of properties, (2)  properties reported as identified for disposal for multiple years without  being disposed of, and (3) a mix of owned and leased properties. We  based our site visit selection on these factors in order to observe posts  with (1) higher numbers of property disposals than other posts due to  recently completed or ongoing construction of new embassies, (2)  persistent challenges in selling unneeded properties, and (3) experience  managing both owned and leased properties. The results of the case  studies provide insight into State’s management and decision-making  practices but cannot be generalized for the purposes of this review.
We conducted this performance audit from June 2013 to September 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.
section_title: Appendix II: Comments from the Department of State
section_title: Appendix III: Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Amelia Shachoy and Hynek  Kalkus, Assistant Directors; Joshua Akery, George Depaoli, Colin Fallon,  Hannah Laufe, Grace Lui, Josh Ormond, Nitin Rao, Kelly Rubin, Ozzy  Trevino, and Crystal Wesco made key contributions to this report.