Federal Real Property: Improved Cost Reporting Would Help Decision Makers Weigh the Benefits of Enhanced Use Leasing
Published: 2012-12-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government owns underutilized properties that are costly to operate, yet challenges exist to closing and disposing of them. To obtain value from these properties, some agencies have used EULs, which are generally long-term agreements to lease property from the federal government in exchange for cash or non-cash consideration. However, agencies also incur costs for EUL programs. We have previously reported that agencies should include all costs associated with programs activities when assessing their values. This report addresses (1) the extent to which agencies attribute the full benefits and costs of their EULs in their assessments of their EUL programs and (2) the experiences of agencies in using their EUL authority.
GAO reviewed property data and documents from the largest civilian including four agencies that use federal real property agencies EULsVA, NASA, the Department of State, and the Department of Agricultureand applicable laws, and regulations and guidance. GAO visited nine sites where agencies were using EULs.
section_title: What GAO Found
paragraphs: Agency officials told us that enhanced use leases (EUL) help them utilize their underutilized property better; commonly cited benefits include enhanced mission activities, cash rent revenue, and value received through in-kind consideration. However, some agencies we reviewed do not include all costs associated with their EULs when they assess the performance of their EUL programs. Guidance from the Office of Management and Budget (OMB) does not specify what costs agencies should include in their EUL evaluations, resulting in variance among agencies. For example, the Department of Veterans Affairs (VA) and the Department of State do not consistently attribute EUL-related costs of consultant staff who administer the leases, and VA does not attribute various administrative costs that offset EUL benefits. Without fully accounting for all EUL costs, agencies may overstate the net benefits of their EUL programs.
Based on recent agency experiences, EULs may be a viable option for redeveloping underutilized federal real property when disposal is not possible or desirable, but two agencies raised issues pertaining to EUL use that affect their use or budgetary treatment. First, National Aeronautics and Space Administration (NASA) officials said that the limit on its authority to receive in-kind consideration as part of its EUL program has limited its ability to encourage the use of EULs for underutilized NASA property. Specifically, NASA officials said prospective lessees are reluctant to make costly capital improvements to a property that will have to be returned to the government at the end of the lease without other compensation, such as a reduction in cash rent. Second, VA and CBO disagree on the extent to which VA should account for the budget impacts for EULs that could include long-term government commitments. VA has made multi-year commitments with certain EULs without fully reporting them in its budget. Assessing and recognizing the budget impacts of EULs is complicated and may be interpreted differently by agencies with EUL authority. In particular, VA EULs can include long-term commitments that are recognized in the federal budget in different ways.
section_title: What GAO Recommends
paragraphs: To promote transparency about EULs, improve decision-making regarding EULs and ensure more accurate accounting of EUL benefits, GAO recommends that OMB coordinate with affected agencies to ensure that agencies consistently attribute all relevant costs associated with EULs to their EUL programs. Agencies generally agreed with our findings and recommendation.

section_title: Letter
paragraphs: The federal government owns many underutilized properties that are  costly to operate. However, closing or disposing of them can present  challenges, including covering the costs associated with federal real  property disposal, addressing legal requirements agencies must adhere  to, such as requirements for screening and environmental cleanup, and  negotiating competing stakeholder interests that can arise over the  disposal of property. We have designated federal real property  management as a high-risk area, in part because of the presence of  underutilized properties. As an alternative to increased agency use or  disposal, some agencies initiated enhanced use lease (EUL) programs.  EULs are typically long-term lease agreements that allow public or private  entities to use the property. Agency EUL programs have allowed entities  to develop or occupy federal properties such as power plants, housing  and healthcare facilities, office space, and parking facilities, and in return,  federal agencies receive cash or in-kind consideration. However,  agencies also incur costs for EUL programs. We have previously reported  that in any assessment of the cost/benefit of an agency’s activities, all  program costs should generally be included and any excluded costs  should be disclosed and explained. In 2011, we raised concerns about  how the Department of Defense monitored the costs of its EUL program.To help inform the discussion surrounding agencies’ recent use of EULs  to manage their federal real property portfolio, you asked us to examine  issues related to these leases. Specifically, we addressed the following  research questions:  1.  To what extent do agencies attribute the full benefits and costs of their  EULs in their assessments of their EUL programs?  2.  What have been the experiences of agencies using their EUL  authority?
To answer these questions, we reviewed prior GAO reports on enhanced-  use leasing and capital financing and identified agencies as candidates  for a detailed review of EUL use. To identify candidate agencies, we  used Federal Real Property Profile data; the General Services  Administration’s (GSA) 2008 document Real Property Authorities for  Federal Agencies; a prior GAO report on enhanced use leasing; and  interviews with officials at the four agencies that indicated they use  EULs—the the Department of Veterans Affairs (VA), the National  Aeronautics and Space Administration (NASA), the Department of State  (State), and the Department of Agriculture (USDA). We reviewed relevant  documentation related to these agencies’ enhanced use leasing,  including laws providing agencies with EUL authority, and agencies’ EUL  guidance. We also interviewed agency officials involved with developing  and managing EULs. We chose a sample of 16 EULs from among the  four agencies to review as case studies. We selected this sample to  represent a variety of (1) lease purposes (e.g., leasing vacant land for  development and leasing unused office space); (2) estimated financial  benefits (e.g., cash benefits and in-kind consideration); and (3)  geographic locations. We conducted site visits at nine of the 16 case  study locations to observe the properties.NASA’s Ames Research Center in Moffett Field, California; VA sites in  Maryland, New Jersey, and Washington; and a USDA agricultural  research center in Beltsville, Maryland. We interviewed agency officials  and lessees about their experiences with EULs at these locations. In  addition, we interviewed State officials about that department’s EULs for  properties located in Istanbul, Turkey; Paris, France; and Singapore. See  appendix II for a list of case studies and descriptions of the properties and  lessee uses. We reviewed the agreements between VA and its lessees  and the past work of the Congressional Budget Office (CBO) and the  VA’s Office of Inspector General on VA’s EULs in Chicago, Illinois; North  Chicago, Illinois; and Mountain Home, Tennessee. We conducted  interviews with officials from the Office of Management and Budget  (OMB), CBO, and GSA to better understand government-wide views,  guidance, and practices concerning EULs. See appendix I for more  detailed information on our scope and methodology.
We conducted this performance audit from October 2011 to December  2012 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.
subsections: section_title: Background
paragraphs: EULs are typically long-term leases of federal land or buildings to public  sector or private sector companies. Some agencies with EUL authority  are authorized to accept in-kind consideration, such as improvements to  agency properties or construction of new facilities in place of cash rent.  There is no government-wide definition of an enhanced use lease and  agencies’ EUL authorities and guidance vary, as these examples  illustrate:
VA was authorized to enter into EULs for up to 75 years with public  and private entities for leases that contributed to VA’s mission and  would enhance the use of the property for cash or in-kind  consideration; however, this authority expired on December 31, 2011.  Prior to the expiration of VA’s EUL authority, VA entered into 92 EULs  that remain active. In August 2012, VA’s EUL authority was  reauthorized through December 2023, but the current authority allows  VA to enter into EULs up to 75 years only for the provision of  supportive housing for veterans or their families that are at risk of  homelessness or are homeless. VA may accept cash consideration,  or it may enter into an EUL without receiving consideration, and it is  prohibited from entering into leasebacks. VA may not enter into an  EUL without advanced written certification from OMB that the lease  complies with the statutory requirements. VA reports annually on the  details, benefits, and costs of its EUL program. The annual report  states that it gives a transparent view of the measureable outcomes of  the cost-effective benefits to veterans that the EUL program provides.
NASA is authorized to enter into EULs of agency properties for cash  consideration or, if the EULs involve the development of renewable  energy production facilities, in-kind consideration. NASA may not  enter into leasebacks. NASA policy requires that EULs relate to and  support the agency’s mission of research, education, and exploration.  The agency’s longest EUL term is 95 years. NASA’s EUL authority  expires in December 2017. NASA reports annually to Congress on its  EUL program’s status, proceeds, expenditures, and effectiveness.
State is authorized to enter into EULs for its properties acquired in  foreign countries for diplomatic and consular establishments.longest EUL term is 99 years and expires in 2090. According to State  officials, the agency does not have a formal EUL program. It has only   State’s  utilized EULs in three instances. State uses EULs on a case by case  basis when directed by Congress to retain properties or when it does  not consider disposal a desirable option due to the strategic or historic  value of an asset. For example, State was required to retain the  Palazzo Corpi building in Istanbul, Turkey.its property inventory and monitors the transactions and the cash  flows but does not report externally on its EUL program.
State carries the EULs in
USDA is authorized to demonstrate whether enhanced use leasing of  agency real property at its Beltsville Agricultural Research Center and  the National Agricultural Library for cash consideration will enhance  the use of the leased property. The authority requires that EULs be  consistent with the USDA’s mission and have terms no longer than 30  years. USDA’s EUL authority expires in June 2013. USDA reported to  Congress on the management and performance measures associated  with its EUL demonstration program and is required to report on the  success of the program upon completion in 2013.
Table 1 shows how the four agencies we reviewed used EULs.
OMB coordinates and provides guidance on federal real property  management government-wide in its role as Chair of the Federal Real  Property Council, which is composed of federal real property-holding  agencies. For example, OMB Circular A-11 provides general guidance on  evaluating the performance of federal programs and on the budgetary  treatment of federal leases, including EULs and leaseback  arrangements. OMB’s guidance does not provide specific information  about the treatment of EULs, but does require EULs with leasebacks  above certain threshold amounts be submitted to OMB for their  budgetary-scoring impact. OMB’s instructions also outline how budget  authority for the cost of leasing an asset is to be recorded in the budget,  depending on how risk is shared between the government and the lessee,  for three types of leases: operating leases, capital leases, and lease  purchases.
section_title: Agencies Attributed Benefits of EULs to Their EUL Programs, but Did Not Always Do the Same with All Costs
subsections: section_title: Agencies Cited Various EUL Benefits
paragraphs: Agency officials told us that EULs provide a variety of benefits to the  government in addition to better utilization of underutilized federal  property. The commonly cited benefits include enhanced mission  activities, cash rent revenue, and value received through in-kind  consideration.
Officials from the four agencies we reviewed said that EULs contribute to  their ability to conduct mission-related activities; for example:
VA officials said that EULs provide the agency mission-related  benefits such as veterans’ priority placement for housing. For  example, according to VA, its EUL with Vancouver Housing Authority  in Washington to develop a previously vacant site at a VA medical  center campus supports the agency’s strategic goals of (a) eliminating  homelessness among veterans by providing housing and (b) reducing  its inventory of vacant and underutilized capital assets.
NASA officials said that EULs provide the agency mission-related  benefits, such as research and development of aerospace  technologies. For example, according to a NASA official, NASA’s EUL  with a company that researches and develops battery systems for  electric vehicles advances the agency’s mission of developing new  power and propulsion systems for vehicles used in space launches.
State officials said that EULs provide mission-related benefits by  allowing the department to maintain properties symbolic of U.S.  history and diplomacy. For example, State declared the historically  significant Talleyrand building in Paris excess (see fig. 1) but chose  not to dispose of it because the building had served as the  administrative headquarters for the Marshall Plan, the postwar  American reconstruction plan for Western Europe. According to State  Department officials, State’s EUL lessee supports the agency’s  mission by maintaining the building and retaining space inside of it for  the George C. Marshall Center including a permanent exhibit  commemorating the Marshall Plan.
USDA officials said that the agency’s EUL program allows it to better  utilize property while also collaborating with researchers on mission- related goals. For example, USDA officials told us that its EUL of  greenhouse space at its Beltsville Agricultural Research Center has  allowed the agency to advance its mission of developing more  efficient crops because the lessee conducts research at the EUL site  directly linked to this goal. According to USDA officials, each EUL  lessee is required to have a formal collaborative research agreement  with the agency.
All four agencies we reviewed reported cash benefits from EULs.  Individual EULs can generate millions of dollars for the federal  government, but most EULs generate small amounts of cash revenue.  For example, the average VA EUL generated about $25,000 in cash  revenue in fiscal year 2011.the four agencies in our review received in fiscal year 2011.
section_title: Agencies’ Experiences in Using EULs Provide Illustrative Examples about EUL Use
paragraphs: Based on recent agency experiences, EULs may be a viable option for  redeveloping underutilized federal real property when disposal is not  possible or desirable, but agencies raised issues pertaining to EULs that  affect their use or budgetary treatment. First, NASA has reported that the  limitation on its authority to accept in-kind consideration has limited its  ability to encourage use of EULs and investments in underutilized NASA  property. Second, recognizing potential budget impacts associated with  EUL leasebacks and other long-term commitments has proved  challenging for VA. Although the results of our review cannot be  generalized to all agencies, these challenges provide illustrative  examples of the types of issues that can affect a federal agency’s  decision or ability to use EULs.
subsections: section_title: In-Kind Consideration
paragraphs: According to NASA officials, in-kind consideration is critical for  encouraging lessees to invest in agency properties. NASA’s ability to  accept in-kind consideration expired at the end of 2008; it was restored  on a limited basis in 2011 exclusively for renewable energy projects.  NASA officials said that this limitation in the agency’s ability to accept in- kind consideration has hindered its ability to enter into EULs that could  improve the property. In particular, according to the NASA officials,  prospective lessees are reluctant to make capital improvements that will  have to be conveyed to the government at the end of the lease without  receiving other compensation, such as a reduction in cash rent. For  example, a lessee, as previously discussed, agreed to invest $11 million  in infrastructure projects that would benefit the company during the lease  but benefit the government during and after the lease in return for a  reduction in the lessee’s cash rent payments. Representatives from  NASA and the lessee told us that this provision was critical to  successfully negotiating the EUL.
section_title: Budget Impacts of EULs
paragraphs: VA officials said that assessing and recognizing the budget impacts of  EULs is complicated and maybe interpreted differently by agencies with  EUL authority. In particular, VA EULs can include long-term commitments  that are recognized in the federal budget in different ways. OMB’s  Circular No. A-11 guidance specifies that lease obligations be recorded  when the contract is signed; sufficient budget authority must be available  at that time to cover the obligation. However, the obligated amount that is  to be recorded differs by type of lease. For capital leases and lease  purchases, OMB Circular A-11 states that the amount obligated should  equal the net present value of these lease payments over the full term of  the lease. For operating leases, OMB Circular A-11 states that agencies  should record an amount equal to the total payments under the full term  of the lease or the first year’s lease payments plus cancellation costs.VA views EUL leasebacks as operating leases and consequently does  not obligate the total amount of these commitments upfront in its budget.  VA’s leaseback costs are nearly $16 million annually (see table 3), but VA  and CBO disagree on the extent to which VA should account for the  budget impacts for EULs that could include long-term government  commitments. For example, VA’s leaseback costs for its Chicago West  Side EUL were about $3.5 million in fiscal year 2011. VA regards its  underlying office and parking purchase agreements as 2-year operating  leases, as opposed to capital leases or lease purchases. VA officials said  that the department is properly treating the office and parking purchase  agreements as operating leases, because VA can cancel the office and  parking leasebacks at the end of each 2-year agreement. However, in a  2003 report to Congress on the budgetary treatment of leases, CBO  found that VA used this enhanced use lease to obtain a $60 million  regional headquarters building and parking facility. The CBO report stated  that VA entered into a 35-year enhanced use lease for a four-acre site  with an owner trust, with VA as the sole named beneficiary. VA  subsequently leased back space in the building and the parking facility  that the lessee constructed on the site.
The CBO report also stated that:
VA’s lease payments played a crucial role in allowing the lessee to  borrow funds. VA is committed to a two-year lease of 95 percent of  the space in the building and 95 percent of the parking facility; almost  all of the lessee’s revenue will initially come from VA.
The initial two-year lease is automatically renewed unless the VA  takes specific steps at the end of the lease period to halt it. In  addition, as long as VA chooses to occupy any portion of the facility it  must make payments that are sufficient to cover amortization and  interest on the lessee’s debt.
VA also has the right to purchase the building from the lessee at any  time for a price that would cover payments on the lessee’s debt.
Thus, VA has a long-term commitment to cover the lessee’s capital  costs even if it reduces its occupancy in the building, and this,  together with an implicit right to renew the lease, would appear to  make the arrangement either a lease-purchase or, if the trust is not  viewed as a separate entity from VA, a government purchase  financed by federal borrowing.
As such, CBO concluded in its report that the intent of the West Side EUL  project was to provide VA with capital assets (an office building and  parking facilities for VA staff) without recording the cost of the purchase  upfront in the budget. In general, we have also consistently stated that  the full costs of the government’s commitments should be reflected  upfront in the budget.officials said the agency made changes in subsequent EULs to address  and in their view eliminate CBO’s early concerns related to EULs with  leasebacks.
section_title: Conclusions
paragraphs: Agencies have shown that EULs have the potential to produce mission- related and financial benefits for otherwise underutilized federal real  property, but the costs and benefits of these programs are not fully  understood, given different agency practices in accounting for EUL costs.  Some EULs bring in large amounts of cash rent, such as the State  Department’s $20.6 million Istanbul EUL and NASA’s $147.7 million EUL,  but most EULs have much more modest benefits to the government  where the costs could more easily outweigh the benefits. For example,  the average VA EUL earned about $25,000 in cash revenue last year— financial benefits that could be outweighed by consultant, termination,  and leaseback costs, which agencies have not consistently attributed to  their EUL programs. Lacking clear guidance and failing to incorporate all  of the costs related to agencies’ EUL programs could cause agencies to  overstate the net benefits of these programs when reporting the  performance of their EUL programs or making decisions about future  EULs.
section_title: Recommendation
paragraphs: To promote transparency about EULs, improve decision-making  regarding EULs, and ensure more accurate accounting of EUL net  benefits, we recommend that OMB work with VA, NASA, State, and  USDA, and any other agencies with EUL authority, to ensure that  agencies consistently attribute all costs associated with EULs (such as  consulting, termination, and leaseback costs) to their EUL programs, as  appropriate.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Deputy Director for Management  of OMB and the Secretaries of Veterans Affairs, State, and Agriculture  and the Administrator of NASA for review and comment. In commenting  on a draft of this report, OMB generally agreed with GAO’s observations  and recommendation. OMB emphasized that Circular No. A-11 provides  guidance on budget scoring and is not intended to address the costs and  benefits of EULs. We amended our recommendation to reflect that there  are a variety of ways to ensure that the costs of EULs are consistently  tracked and reported. Veterans Affairs, State, Agriculture, and NASA  generally agreed with our conclusions and the agencies provided  technical comments, which we incorporated as appropriate. See appendix  III for VA’s comments along with our responses to the technical  comments.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Deputy Director for  Management of OMB and the Secretaries of Veterans Affairs, State, and  Agriculture, and the Administrator of NASA. Additional copies will be sent  to interested congressional committees. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)  512-2834 or wised@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs maybe found on the last page  of this report. Major contributors to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine:  (1) To what extent do agencies attribute the full benefits and costs of their  EULs in their assessments of their EUL programs?  (2) What have been the experiences of agencies in using their EUL  authority?
To address these both of these objectives we reviewed prior GAO reports  on enhanced use leasing and capital financing, and contacted the Office  of Management and Budget (OMB), Congressional Budget Office (CBO)  and 11 agencies: (1) Veterans Affairs (VA), (2) National Aeronautics and  Space Administration (NASA), (3) Department of State (State), (4)  Department of Agriculture (USDA), (5) General Services Administration  (GSA), (6) Department of Energy (Energy), (7) Department of Interior  (Interior), (8) Department of Justice (DOJ), (9) United States Postal  Service (USPS), (10) St. Lawrence Seaway Development Corporation  (SLSDC), and (11) Tennessee Valley Authority (TVA) based on size or  evidence of EUL authority. We identified the 11 agencies based on our  review of property data and documents from: (1) The 7 largest civilian real  property holding agencies, by total square footage, as of fiscal year 2010,  as listed in the Federal Real Property Profile, (2) GSA’s Real Property  Authorities for Federal Agencies (2008), (3) Agencies’ Authorities  Regarding EULs and Real Property Sales from GAO-09-283R, and (4)  interviews with officials from agencies identified in the above 3 sources to  determine if they used EULs and if they knew of any other agencies that  used EULs. Using information from the 11 agencies we contacted, we  selected the 4 agencies (VA, NASA, State and USDA) that have used  their EUL authority to enter into EULs. We selected 16 case study EULs  from the four agencies that have EULs based on a range of lease  purposes (e.g., leasing of vacant land for development and leasing  unused office space); estimated financial benefits (e.g., cash benefits and  in-kind consideration); and varying geographic locations. The case  studies were located in Chicago, IL; North Chicago, IL; Mountain Home,  TN; Vancouver, WA; Somerville, NJ; Moffett Field, CA; Beltsville, MD;  Fort Howard, MD; Paris, France; Istanbul, Turkey, and Singapore.  Because the 16 case studies were selected based on a non-probability  sample, observations made based on our review of the 16 case study  locations do not support generalizations about other EUL sites. Rather,  the observations made provided specific, detailed examples of issues that  were described by agency officials and lessees. We also interviewed  agency officials at the local level and headquarters locations, and  reviewed relevant laws describing agencies’ EUL authorities and agency  documentation, including agencies’ regulations and guidance on  enhanced use leasing. We visited the 9 case studies located in the U.S.  to observe the properties firsthand, interviewed agency officials and  lessees about their experience with EULs at these locations, and  reviewed documentation regarding these properties. The case study  EULs were located at NASA’s Ames Research Center in Moffett Field,  California, VA sites in Maryland, New Jersey and Washington state, and a  USDA agricultural research center in Beltsville, Maryland. For the three  State case studies we did not visit, we interviewed headquarters officials  and reviewed relevant documentation including site-visit reports. For the  four VA sites we did not visit in Chicago, Illinois, Chicago (West Side),  Illinois; North Chicago, Illinois; and Mountain Home, Tennessee, we  reviewed the agreements between VA and its lessees and the past work  of the Congressional Budget Office and the VA’s Office of Inspector  General. We also interviewed OMB, CBO, and GSA officials to better  understand government-wide views, guidance, and practices on  enhanced use leasing.
We conducted this performance audit from October 2011 to December  2012 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: 16 Case Study Enhanced Use Leases by Location, Property Type, and Tenant Use
paragraphs: As shown in table 3, we reviewed 16 case study EULs. We reviewed 8  VA EULs, 4 from NASA, 3 from State, and 1 from USDA.
section_title: Appendix III: Comments from the Department of Veterans Affairs
subsections: section_title: GAO Comments
paragraphs: 1.  VA suggested changing this paragraph related to its energy programs.
We edited the paragraph to align with the related text in the body of  the report to which we added context on the different types of EULs  that can include long-term government commitments, including those  types described in VA’s comment.  2.  We made the changes suggested by VA.  3.  VA indicated that it already reports its consultant costs associated  with its EULs as part of its overall management costs. We continue to  believe that VA should report all EUL costs as part of its EUL program  specifically, including consultant costs.  4.  VA indicated that it attributed termination costs to its overall  program—but not its EUL program.  We continue to believe that VA  should report all EUL costs as part of its EUL program, including  termination costs.     5.  VA indicated that its leaseback of the second bay at Somerville was  not identified at the time of lease execution, but this contention is not  supported by the lease agreements.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Keith Cunningham, Assistant  Director; Amy Abramowitz; Melissa Bodeau; Carol Henn; Hannah Laufe;  James Leonard; Sara Ann Moessbauer; Lisa G. Shibata; and Crystal  Wesco made key contributions to his report.