VA Real Property: Leasing Can Provide Flexibility to Meet Needs but VA Should Demonstrate the Benefits
Published: 2016-06-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: VA operates the largest health care network in the United States, with over 2,700 health care sites, including hospitals and outpatient facilities. However, many facilities are outdated, and VA estimates that its capital needs will require up to $63 billion over the next 10 years. In recent years, VA has increasingly leased its facilities, including major medical facilities. These facilities can exceed 200,000 square feet; provide services to veterans such as mental health and other clinical care; are generally built by private developers to meet VA and federal design requirements; and have average annual rent rates in excess of $1 million. VA must submit proposals to Congress and receive authorizations for major medical facility leases.
GAO was asked to review VA's leasing program. This report examines: (1) the factors that account for VA's decisions to lease major medical facilities; (2) the extent to which VA's cost-estimating process for leasing these facilities reflects best practices; and (3) steps VA has taken to align its lease process to GSA requirements for delegated leasing authority. GAO analyzed agency documents, VA data on major medical facility leases and lease delegation requests to GSA, compared VA's cost-estimating procedures to best practices in GAO's Cost Guide , and interviewed VA and GSA officials.
section_title: What GAO Found
paragraphs: The Department of Veterans Affairs (VA) leases major medical facilities to benefit from shorter time frames to open a facility and to attain flexibility to relocate. These factors may help VA to meet its needs, such as improving facility compliance with standards and increasing veterans' access to care and services. Unlike owned facilities that can be difficult to dispose of, VA must vacate leased facilities at the end of the lease term, which can allow VA to relocate to space better aligned with its needs. Leases executed under a delegation of authority from the General Services Administration (GSA) can be obligated on an annual basis, whereas owned facilities require full upfront funding that can be difficult to obtain. VA cited flexibility to move as a justification in all 51 of its proposals for these leases since 2015. VA does not, however, assess and provide information to decision makers on how it has benefited from this flexibility. Without transparency on these benefits, VA and congressional decision makers may lack information to understand the need for these leases. GAO and the Office of Management and Budget have reported on the importance of assessing the results of capital decisions in making future decisions.
VA's cost-estimating procedures for major medical facility leases generally align with GAO's 12 cost-estimating best practice steps and recent changes in VA's approach may improve the quality of VA's estimates. GAO's review of cost data for these leases since 2006 found that actual costs often varied more than 15 percent above or below the estimates included in their proposals, often due to project design changes. In 2016, VA introduced a design guide for leased medical facilities that delineates VA and federal requirements, such as security and sustainability standards, that may reduce the risk of project, and thus cost, changes from those included in proposals. VA also initiated a lessons-learned effort to evaluate the factors that contribute to differences between actual lease costs and those included in proposals. The success of these steps will depend on how quickly and effectively VA implements them.
VA has made progress meeting GSA's requirements to obtain needed delegations of authority to pursue VA leases by expanding training, implementing a management review process, and working more closely with GSA. According to GSA, VA's requests for delegation of authority now regularly include required documentation, such as justifications for paying above market lease rates. As a result, VA has received delegations of authority in about 21 days, down from 58 days when VA first started to apply for delegations in July 2014. However, it is too early to assess the effectiveness of these steps with VA's prospectus-level leases, executed under GSA's delegated authority, that exceed $2.85 million in average annual rent. These leases require authorization from GSA's authorizing committees and can be more difficult to align with GSA's requirements.
section_title: What GAO Recommends
paragraphs: GAO recommends that VA assess the benefits of major medical facility leasing and use the information in VA's annual capital plans. VA concurred with GAO's recommendation, and GAO incorporated VA's technical comments as appropriate.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) operates the largest health care  network in the United States through the Veterans Health Administration  (VHA), with over 2,700 health care sites, including hospitals and  outpatient facilities. However, much of VHA’s infrastructure was designed  and built decades ago under an older concept of health care delivery  focused on hospital-centered, inpatient care, and VA has estimated that  up to $63 billion is needed over the next 10 years to address its capital  needs. To help meet the changing needs of the veteran population,  particularly greater demand for outpatient care, VA has increasingly  leased space for its medical facilities. From 2005 to 2015, the number of  VA’s leased medical facilities grew by 80 percent to 1,246 facilities and  included 57 major medical facility leases—i.e., a leased, new medical  facility with an average annual rent in excess of $1 million. These  facilities operate as large, outpatient facilities generally built by the lessor  to VA’s specifications. Congress passed the Veterans Access, Choice,  and Accountability Act of 2014 (Choice Act) that authorized 27 additional  major medical facilities. Since 2014, VA has pursued delegations of  leasing authority on a lease-by-lease basis from the General Services  Administration (GSA), which requires VA to complete additional steps to  execute its leases.
We and others have raised concerns about VA’s leasing and construction  activities. In January 2011, we found that VA’s capital-planning process  lacked transparency about its long-term costs, and VA has implemented  our recommendation to provide that information annually to Congress. In  April 2013, we found that schedules were delayed and costs increased for  several major VA construction projects, and VA implemented our  recommendation to improve guidance related to its construction process.  In March 2014, the VA’s Office of Inspector General raised concerns  about VA’s decision to lease a major medical facility in Butler,  Pennsylvania, rather than construct a federally-owned facility. In April  2014, we reported that schedules were delayed and that costs increased  for the majority of VA’s major medical facility lease projects that we  reviewed. To address the factors contributing to this situation and help VA  better manage its leasing projects, we recommended that VA update its  leasing guidance. In 2015, management of federal real property  remained on our high-risk list, in part due to concerns that some federal  agencies rely on leasing when ownership may be more cost effective over  the long term, due to various reasons such as lack of funding for  ownership.
Because of VA’s increasing reliance on leasing to provide health care  services, you asked us to review how VA plans its lease projects. This  report examines: (1) the factors that account for VA’s decisions to lease  major medical facilities; (2) the extent to which VA’s cost-estimating  process for leasing these facilities reflects best practices; and (3) any  steps VA has taken to align its leasing process to the conditions and  requirements of GSA’s delegated leasing authority.
To examine the factors that account for VA’s decisions to lease major  medical facilities, we reviewed VA guidance and other documentation on  VA’s Strategic Capital Investment Planning (SCIP) process, including  descriptions of the process provided in budget submissions, as well as  prospectuses for the 51 major medical facilities submitted to Congress  since fiscal year 2015. In addition, we reviewed prior GAO reports, Office  of Management and Budget guidance pertaining to capital planning, and  relevant legislation pertaining to VA’s leasing activities. We interviewed  VA officials from VHA, the Office of Management, and the Office of  Construction and Facilities Management.
To evaluate the extent to which VA’s cost-estimating process for leasing  these facilities reflects best practices, we analyzed documentation about  the cost-estimating process, including the SCIP process and other tasks  related to cost estimating as well as the internal tools used to facilitate the  process, and interviewed VA officials about the process. We also  analyzed data on VA’s 23 major medical facility leases authorized from  fiscal year 2006 through fiscal year 2015 and completed by the end of  fiscal year 2015 to find the extent to which actual lease costs varied from  estimated budget prospectus costs and why. We evaluated the reliability  of these lease data by comparing them to source data included in lease  contracts, budget prospectuses, and other documentation provided by VA  that was related to these leases, and determined they were reliable for  our purposes. In addition, we reviewed the extent to which market  appraisals for these properties influenced lease rates by reviewing the  market appraisals and interviewing VA officials on the processes for  incorporating market surveys and appraisals into the lease cost- estimating and cost-determination processes.
To describe the steps VA has taken to align its leasing process to the  conditions and requirements of GSA’s delegated leasing authority, we  reviewed GSA and VA documentation related to the lease delegation  process, including GSA guidance for agencies seeking delegation of  leasing authority and a March 2015 VA-GSA memorandum of  understanding describing the roles and responsibilities of GSA and VA in  the lease delegation process. Further, we reviewed summary data from  GSA and VA showing the status of VA requests for delegations of  authority since July 2014, when VA started seeking delegations of leasing  authority from GSA on a lease-by-lease basis. We assessed VA  documentation on how this data was gathered and interviewed VA  officials about how the data was maintained, and concluded that the data  were reliable for our purposes. We also interviewed GSA and VA officials  about the challenges VA has experienced meeting GSA’s conditions of  delegated leasing authority and any steps VA has taken to address those  challenges.
We conducted this performance audit from June 2015 to June 2016 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: VA generally provides inpatient care at large VA medical facilities owned  by the federal government and outpatient care in both federally-owned  and leased facilities. Outpatient facilities vary in size, from under 20,000  square feet to more than 200,000 square feet, and include minor leases  that cost under $1 million in annual rent and major leases that cost over  $1 million in annual rent. VA generally uses build-to-suit lease  agreements for its major leases, whereby a developer constructs a facility  to VA’s design specifications and leases it to VA, generally for a 20-year  term. VA’s use of GSA’s delegated leasing authority requires that VA’s  lease terms not exceed 20 years.
In 2015, VA had 1,951 leases, of which 1,246 were leased medical  space, including 57 major medical facilities. Leased medical space  generally consists of outpatient facilities, but also includes mental health  clinics, readjustment-counseling centers, research, and other types of  clinical spaces. See table 1 for the numbers of VA’s operational leased  facilities, including major medical leases, by year from fiscal years 2005  through 2015.
VA established its Strategic Capital Investment Planning (SCIP) process  for assessing and identifying capital needs, starting with those included in  its fiscal year 2012 budget submission. Figure 1 describes the steps in  this process, which starts each fiscal year with VA’s assessment of its  needs, based on gaps in areas such as providing care to veteran  populations and existing facility conditions, and concludes with the  identification of capital projects to propose to Congress in VA’s annual  budget submission and a long-range capital plan that identifies VA’s  capital needs over a 10-year horizon. As of fiscal year 2017, VA  estimated that $52 billion to $63 billion would be required over the next 10  years to close gaps identified in VA’s long-range capital plan.
VA submits a proposal, known as a prospectus, to certain congressional  committees for major medical facility leases. A prospectus should include  information on a project’s size and location, and a detailed estimate of the  total costs of the medical facility to be leased. Alternatively, as part of its  leasing process, VA decides whether to obtain a delegation of authority  from the General Services Administration (GSA) in order to award and  execute certain leases. According to VA officials, VA does not have  authority to enter into multi-year leases or to obligate funds on a year-to- year basis. Consequently, according to VA officials, currently VA applies  to GSA for delegations of leasing authority to execute all its leases,  which, if approved, enable VA to enter into leases consistent with GSA  conditions and obligate funding on a year-to-year basis. Leases  executed under GSA’s leasing authority that exceed the prospectus  threshold of $2.85 million require GSA to obtain approval from GSA’s  authorizing committees.
Both GSA’s lease delegation process and VA’s use of it have changed in  recent years. In September 2007, we found that GSA’s lease delegation  process lacked basic management controls, such as current written  policies and procedures, and made recommendations to address these  deficiencies that GSA concurred with. In November 2007, GSA issued  new guidance to clarify the responsibilities of agencies seeking  delegations of authority. In 2013, GSA started using a new system—the  GSA Real Estate Exchange (G-REX) system—to review and process  applications for delegations of leasing authority, and in 2014, VA started  applying for delegation of leasing authority through this system on a  lease-by-lease basis. GSA’s review process includes oversight of  agencies’ compliance or adherence with conditions and requirements set  forth in federal regulations or guidance, such as adherence to guidance  from the Office of Management and Budget (OMB) on scoring of capital  and operating leases. According to GSA officials, GSA has only granted  delegations of leasing authority to VA for operating leases. In 2015,  according to GSA, VA applied for 449 delegations of authority, second  only to the U.S. Department of Agriculture.
In 2009, we issued the GAO’s Cost Estimating and Assessment Guide  (Cost Guide), to assist federal agencies in developing reliable cost  estimates and also as a tool for evaluating existing cost-estimating  procedures. To develop the Cost Guide, GAO cost experts assessed  measures applied by cost-estimating organizations throughout the federal  government and industry, and considered best practices for the  development of reliable cost estimates. While the Cost Guide has a focus  on developing cost estimates in the context of government acquisition  programs, it outlines best practice steps that are generally applicable to  cost estimation in a variety of circumstances. For example, an agency’s  cost-estimating procedures can be assessed to determine whether they  are likely to produce reliable cost estimates. The Cost Guide identifies 12  best practice steps that, when performed correctly, should produce  reliable cost estimates and can be used to determine whether an  agency’s procedures meet the four characteristics of a reliable cost  estimate. (See appendix I for more information on the 12 cost-estimating  best practice steps and how they support the four characteristics).  According to the Cost Guide’s four characteristics, a reliable cost estimate  is:  comprehensive when it accounts for all possible costs associated with  a project, is structured in sufficient detail to ensure that costs are  neither omitted nor double-counted, and the estimating teams’  composition is commensurate with the assignment; well-documented when supporting documentation is accompanied by  a narrative explaining the process, sources, and methods used to  create the estimate, and contains the underlying data used to develop  the estimate; accurate when it is not overly conservative or too optimistic and is  based on an assessment of the costs most likely to be incurred; and  credible when it has been cross-checked with independent cost  estimates, the level of confidence associated with the point estimate— the best guess at the cost estimate given the underlying data—has  been identified, and a sensitivity analysis has been conducted—that  is, the project has examined the effect of changing one assumption  related to each project activity while holding all other variables  constant in order to identify which variable most affects the cost  estimate.
section_title: VA Justifies Leasing to Open Facilities More Quickly and to Obtain Flexibility to Relocate, but Does Not Demonstrate the Benefits of This Flexibility
paragraphs: For each new major project proposed to address SCIP gaps, VA requires  an alternatives analysis for contracting out to non-VA providers, new  lease, renovation, and new construction options, but VA’s preferred  option is often to lease new major medical facilities due to generally  shorter project timeframes and flexibility to relocate. VA scores and  prioritizes all proposed projects using six major-decision criteria (see table  2). These criteria focus on addressing needs that can demand quick  solutions, such as the need to replace an expiring lease that cannot be  renewed, and that often change, such as demands for veteran access to  care options. As such, according to VA officials, leasing is often VA’s  preferred alternative for major medical facilities because it can have  shorter project implementation times than if VA were to construct a  government-owned facility and can provide flexibility to relocate in the  future to meet changes in VA’s needs.
We found that VA cited a shorter project timeframe and flexibility to  relocate in all 51 of its prospectuses for major medical facility leases  submitted to Congress since fiscal year 2015, and that these leases may  help address changing and near-term needs. For example, in its fiscal  year 2014 submission, VA proposed a new lease to replace an expiring  lease in Chattanooga, Tennessee, that would address gaps in federal  seismic and accessibility standards, and provide additional space to  address projected growth in veteran demand in the area. According to  VA, new construction was not preferred because land acquisition would  be required, which would extend the project’s implementation timeframe  and would not provide flexibility to move in the future should VA’s needs  change again. In the fiscal year 2015 submission, VA proposed a new  lease in Johnson County, Kansas, to support its finding of growing  demand and overcrowding at the Kansas City Veterans Medical Center,  and reduce the drive time for a high concentration of veterans in the area  to within VA’s 30-minute drive time target. For this proposed lease, VA  similarly cited flexibility to relocate in the future and shorter  implementation timeframes for preferring a lease to new construction.
We also found that VA generally identified leasing as the lowest-cost  alternative, but in some cases preferred leasing when other options may  have been less costly in order to attain flexibility to relocate in the future  and benefit from potentially shorter project timeframes. While VA  considers costs when deciding among alternatives, project cost has lower  weight among VA’s decision criteria than other criteria, such as increasing  veteran access. For example, in fiscal year 2015, VA proposed a new  lease in Lafayette, Louisiana, to replace a facility that it had determined  was too small and estimated a leased space would have a total life-cycle  cost of approximately $259 million, compared to $201 million for  construction of a new government-owned facility. According to VA, a  federally-owned facility would require a longer timeframe to open than a  leased facility and limit VA’s flexibility to adapt to potential changes in the  veterans population, demand for services, new technologies, or health  care delivery.
Leasing may offer VA greater efficiencies and flexibilities with major  medical facility projects compared to construction. Specifically, as  previously discussed, VA’s use of GSA delegated leasing authority  requires that VA’s lease terms not exceed 20 years, and thus VA must  vacate a space acquired with this authority at the end of a lease term.  This can allow VA to relocate to facilities more aligned with changes in  VA’s needs. Construction of federally-owned facilities may not offer this  flexibility given the challenges that we have previously identified with  renovating and disposing of some federal, including VA, properties due to  issues such as competing stakeholder interests. In December 2012, we  reported that VA faced challenges renovating its aging properties due to  structural limitations, such as floor-to-floor heights and column spacing.  Further, construction of a federally-owned facility requires a full upfront  funding commitment that can be difficult to attain in the current budgetary  environment. In March 2014, we reported federal agencies, including VA,  experienced challenges receiving the full upfront project funding for  federal real property projects. VA officials added that although VA’s  major medical facility lease projects also generally require a lessor to  construct a new facility to VA’s specifications, leasing tends to have a  shorter project timeframe because it does not require VA to acquire the  land on which the facility will be constructed, which can require additional  time and resources. In April 2013, we also identified problems, including  delays and cost overruns, in VA’s construction of major medical  facilities.
Although VA justifies leasing its major medical facilities to its department  leadership and congressional decision makers based on the flexibility that  leasing offers compared to other alternatives, VA does not provide these  stakeholders with information on the extent to which it has benefited from  that flexibility, nor does VA regularly assess information that would help it  do so. In particular, we found that while VA regularly cited future  “flexibility,” such as ability to move when needs change, as a justification  for the leases included in its annual capital plans, the benefits that VA has  experienced from this flexibility with major medical facility leases are not  presented to VA stakeholders responsible for selecting projects to present  to Congress or to congressional decision makers. VA officials told us that  VA’s data systems do not provide VA staff responsible for planning new  leases with information on the use of flexibilities with existing major  medical facility leases, such as how far VA has moved and why it has  moved to new leased locations. In September 2015, a private consulting  firm also found that VA did not sufficiently track leases requiring renewal  or replacement, potentially requiring costly lease extensions. We and  OMB have previously identified the importance of assessing the results of  capital decisions and incorporating lessons learned from those  assessments into capital decisions. Without transparency on the actual  benefits VA has experienced from leasing its major medical facilities, VA  and congressional decision makers may lack information to make  informed decisions about the need for VA’s major medical facility leases.
Further, greater transparency could help decision makers and taxpayers  understand the value of leasing in cases in which VA proposes leasing  major medical facilities when other alternatives may have a lower cost. As  of March 2016, according to VA, 24 major medical facility leases  proposed since fiscal year 2015 were yet to be authorized.
section_title: VA’s Cost-Estimating Process for Major Medical Facility Leases Aligns with Most of Our Best Practice Steps, and Recent Changes May Improve VA’s Estimates for These Leases
paragraphs: VA’s cost-estimating procedures for major medical facility leases  generally align with 9 of our 12 cost-estimating best practice steps and  recent changes may improve the quality of VA’s cost-estimating process  for these leases. For a cost-estimating process to support the creation of  reliable cost estimates, it should substantially or fully meet each of the  four characteristics in GAO’s Cost Guide—comprehensive, well- documented, accurate, and credible—based on the extent to which the  procedures incorporate the underlying best practice steps for each  characteristic. VA’s overall process incorporates some best practice steps  for each of the four characteristics. Specifically, we found that VA’s major  medical lease cost-estimating procedures fully met the comprehensive  characteristic, substantially met the well-documented characteristic, and  partially met the accurate and credible characteristics. (See figure 2.)  Because VA’s cost-estimating procedures do not fully incorporate  relevant best practices for developing comprehensive, well-documented,  accurate, and credible estimates, the cost estimates it produces may be  unreliable. Appendix I summarizes our detailed assessment of VA’s  procedures.
Our conclusion that VA’s cost-estimating process partially met the  characteristics for producing reliable cost estimates is based on the  following observations from our analysis of VA documentation and  interviews with VA officials:
Comprehensive: VA’s cost-estimating process fully met the  comprehensive characteristic because the procedures incorporate the  elements of the two associated best practice steps. The procedures  include the best practice step of developing an estimating plan. For  example, VA’s procedures outline the timeline for developing,  submitting, and reviewing the estimate, as well as who has  responsibility for the various aspects of estimate development. VA’s  procedures also include the best practice step of determining the  estimating structure. For example, the estimate’s inputs are clearly  defined, and VA provides detailed guidance to staff on the steps  required to estimate those inputs.
Well-documented: VA’s cost-estimating process substantially met  the well-documented characteristic because the procedures  incorporate a large number of related best practice steps. Although  VA’s procedures fully include tasks related to the underlying best  practice steps of defining the estimate’s purpose, defining the  program’s characteristics, documenting the estimate, and presenting  the estimate for approval, the procedures substantially met the tasks  related to obtaining the data and identifying ground rules and  assumptions. For example, the need to fill previously identified gaps in  service to veterans defines the purpose of an estimate. The program  characteristics are defined during the development of an action plan  to design a facility to address those identified needs. The  organization-wide system used to develop business plans for major  medical facility leases requires documentation of the sources for lease  estimates. Last, the same system used to develop business plans for  major medical facility leases is the system through which  management accesses all the data on these potential leases for  review. However, while staff obtain required data internally from VA  and external trusted proprietary sources, the data are not uniformly  normalized, which can lead to unintended errors in the estimate. For  example, five leases’ awarded data was recorded at the fully serviced  instead of unserviced rent rates. This could lead to unintended errors  in the estimate. In April 2014 we found that changes to the underlying  design assumptions for major medical facility lease projects  commonly cause variation in VA’s actual first-year lease costs from  estimated, prospectus first-year lease costs. We have previously  found that better development of assumptions and ground rules can  improve cost-estimating procedures.
Accurate: VA’s cost-estimating process partially met the accurate  characteristic because the procedures incorporate some elements of  the two associated best practice steps. The procedures include the  best practice step of developing the point estimate and comparing it to  an independent estimate, which is based on the market rental rate  determined by the market survey conducted during the SCIP process  and the cost of specific improvements required for VA’s intended  medical purposes. VA applies several standard and variable  adjustments to the derived market rate to determine the rental portion  of the estimated first-year lease cost to include in its prospectus to  Congress. Table 3 below describes the adjustments that VA makes to  the market rates it identifies. Although we did not assess these  adjustments and how they compare to the private sector, a 2015  independent assessment of VA’s capital planning process found that  unique design requirements and limited locations for where VA wants  to lease a facility likely contribute to VA’s lease rates exceeding those  of private sector medical facilities.
This best practice step normally includes comparing the estimate to an  independent cost estimate, which VA does not obtain. Because of the  standardized nature of the adjustments to the rent rate and pricing for  improvements for major medical facility lease cost estimates, obtaining  an independent cost estimate for these inputs would likely yield little new  information; the rating for this best practice step is substantially met. The  procedures also include updating the estimate, another best practice step  supporting this characteristic, but VA does not update it with actual costs  as the best practice step requires. Estimates are updated during the  development process to calculate whether actual costs are likely to rise  more than 10 percent above the prospectus estimated cost. If so, VA  must notify certain congressional committees and provide an explanation  for the increase in authorized costs. Leases executed under a GSA  delegation must follow certain requirements for GSA leases.
After leases are executed VA does not go back and update the estimate  with actual costs. Updating the estimate with actual costs is an identified  best practice step because it enables a “lessons learned” analysis, which  can strengthen estimates going forward. According to VA officials, the  agency plans to conduct a “lessons learned” study, as discussed later, to  further understand how actual lease costs compare to estimated costs,  which could improve the accuracy of its cost estimates.
Credible: VA’s cost-estimating process partially met the credible  characteristic because the procedures incorporate some elements of  the three associated best practice steps. The best practice steps of  conducting sensitivity and risk analyses on the estimate are not  directly included in the procedures, but some procedures do address  uncertainty and risk. A sensitivity analysis reveals how to assess the  potential variability in the estimate by calculating how the estimate is  affected by a change in any single underlying assumption. These  calculations identify the cost elements that represent the most risk to  an estimate. Instead, VA officials said that VA applies an annual  escalation rate to adjust for increases in market rental rate and  inflationary increases in the cost for tenant improvements over time,  two key assumptions supporting the estimate that could cause actual  first-year lease costs to fluctuate from the prospectus estimated costs.  We found that VA’s use of an escalation rate often did not fully  account for variation in lease costs. Specifically, our review of cost  data provided by VA for 18 of the 23 most recently completed major  medical facility leases activated by the end of fiscal year 2015 shows  that actual costs for 15 of the 18 leases varied substantially from  adjusted prospectus costs, including 7 leases that were more than 15  percent above VA’s adjusted estimates and 8 that were more than 15  percent below its adjusted estimates. For example, actual first-year  lease costs increased about 26 percent over the adjusted estimate for  VA’s San Francisco, California, medical facility lease and decreased  about 44 percent for its Montgomery, Alabama, facility. Regarding risk  analysis, VA does not perform risk analysis on variables affecting the  first-year lease cost estimate. The current cost-estimating process  does, however, account for some previously determined risks during  the action plan development phase. Conducting risk analyses is a  best practice because it reveals the effects particular risks can have  on the cost estimate.
VA recently made a change intended to increase the reliability of its  prospectus estimates for major medical facilities and plans to conduct a  “lessons learned” study that could further improve how VA estimates its  costs. First, VA issued a new standard design guide in January 2016  covering the different types of outpatient clinic facilities and providing  guidance on VA activities such as site selection, and delineates minimum  federal facility requirements for security, sustainability, and seismic  standards. VA officials told us that the new guide was developed to  reduce the risk of facility changes and consequent cost changes for lease  projects, and that moving forward all authorized major medical facility  leases would use this guide. Reducing the potential for design changes  after prospectus submission may enable VA to better estimate facility  costs because, again, we have found that facility design is a main driver  of facility costs. VA officials said that annually VA staff update underlying  assumptions in the various major medical facility project cost estimating  tools and disseminate updates to field staff to use when developing action  plans. This includes basic parameters for lease cost estimating, such as  build-out cost per net usable square foot and annual lease rate. Second,  VA plans to implement a change to its cost-estimating procedures to  improve the process over time. In particular, VA officials told us that the  department is planning a “lessons learned” review that would involve  updating data used for planning major medical facility leases with actual  cost data after the facility is accepted. The intention, the officials added, is  to compare actual data with assumptions and estimates to improve the  cost-estimation procedures over time. This type of review can improve the  cost-estimating process over time by exposing the precise reasons why  actual costs differed from the estimate, such as faulty project ground rules  and assumptions, and previously unrecognized risks. Both of these steps  are in the early stages, and their success will depend on how quickly and  successfully VA implements them.
section_title: VA Has Made Progress Meeting GSA’s Requirements for Delegated- Leasing Authority
paragraphs: In July 2014, VA started requesting delegations of leasing authority on a  lease-by-lease basis from GSA to pursue its major medical facility and  other leases, and initially experienced challenges meeting GSA’s  conditions in order to receive these delegations of authority. VA has taken  steps to address these challenges, including developing a management  review process for all applications to GSA for delegations of leasing  authority, but it is too early to assess the effectiveness of these steps in  helping VA to pursue all types of major medical facility leases. In  particular, GSA’s process for providing delegations of authority to VA  requires that leases be planned according to OMB criteria in order to be  considered “operating” leases, which, among other things, requires that  the net present value of the proposed lease not exceed 90 percent of the  fair market value of the planned facility. This can be challenging with  VA’s more costly major medical facility leases given that they must both  meet VA’s needs and future needs of the lessor after VA’s lease term  ends, as discussed later.
Although GSA’s system for processing these applications, known as G- REX, does not maintain records of how many applications did not initially  meet GSA’s requirements or why, GSA and VA officials told us that prior  to its current practices, VA’s applications in G-REX frequently lacked  required information, such as floodplain maps or a justification for why VA  would be paying above market rates. Consequently, according to VA,  these applications often required multiple corrections and took on  average 58 days before GSA approved them and provided delegations of  authority. VA officials told us that 58 days was too long and added  unacceptable delays to their desired timetables for opening leased  facilities. In response, VA took the following three main steps, partly in  coordination with GSA, to better align its application process with GSA’s  requirements.  1.  VA expanded training of its contracting officers to ensure that they  were informed about GSA’s requirements for completing requests for  delegations of authority. As part of this effort, VA disseminated new  guidance to its contracting officers for completing these requests and  held training sessions, sometimes with GSA officials.  2.  VA implemented an internal management review process, whereby  VA officials would review draft applications for delegation of authority  prior to submitting them to GSA. As part of this effort, VA developed a  lease delegation tracking system for contracting officers to send lease  delegation applications to VA management for review and to track the  status of the applications once they have been submitted to GSA.  According to VA officials, this tracking and reporting system assists in  the management of the lease delegation process to ensure  compliance to OMB, VA, and GSA requirements from planning  through execution.  3.  VA increased coordination with GSA, including a weekly GSA-VA  meeting to discuss the status of, including any issues with, pending  applications.
In addition to these steps, in March 2015, VA and GSA entered into a  memorandum of understanding governing the request and approval of  delegations of leasing authority to VA. As part of the memorandum, GSA  agreed that if VA’s applications met GSA requirements, GSA would aim  to provide delegations of leasing authority to VA within 30 days for  applications not requiring the signature of the GSA administrator  (generally those below prospectus level) and within 45 days for those  requiring administrator approval. According to VA officials, VA uses its  lease delegation tracking system to help monitor progress toward  achieving those 30-day and 45-day goals. According to VA’s summary  data on lease delegation status, the average processing time for VA’s  delegation requests fell from 58 days between July 2014 and February  2015 to 21 days between February 2015 and February 2016. According  to GSA officials, VA’s applications have not had any significant problems  meeting GSA’s submission requirements since VA implemented the steps  above, and regularly include required documentation, such as  justifications for paying above market lease rates. GSA officials noted that  other agencies that apply for GSA delegated authority may have fewer  challenges meeting GSA’s requirements if they took similar steps as  those taken by VA.
While VA has made progress meeting GSA’s requirements to receive  delegations of leasing authority, only 6 of VA’s 572 applications for  delegation of leasing authority between July 2014 and January 2016 were  above GSA’s current prospectus threshold of $2.85 million in average  annual rent. According to VA officials, GSA’s prospectus-level projects  can be more difficult to plan as operating leases given their cost and  complexity. For example, a lessor has to be willing to lease the facility,  often constructed to meet certain VA specifications, to VA for, at most, 90  percent of the fair market value of the facility. Further, while a facility must  be configured to meet VA’s needs during the lease term, it must also  have a potential use for the lessor beyond VA’s lease term. VA officials  added that they had worked with OMB and GSA to develop a  methodology for ensuring that these leases would meet those  requirements. According to GSA, this new methodology includes a  revision of VA’s methods for calculating fair market value and scoring  proposed leases to conform to GSA’s methods for leases above GSA’s  prospectus level. In January 2016, VA also issued new guidance for  leased medical facilities emphasizing that these facilities should only  meet minimum VA and federal requirements given that the government  cannot own the leased space at the end of the lease term. GSA  approved delegations of leasing authority for VA to pursue 5 of the 6  GSA-prospectus-level leases as operating leases. GSA officials added  that GSA was awaiting receipt of complete applications for up to 17  additional GSA-prospectus-level leases from VA. As more of these types  of leases are reviewed by GSA and executed by VA, a better  understanding of VA’s progress meeting GSA’s requirements for them will  be possible.
section_title: Conclusion
paragraphs: VA has made changes to improve its leasing program, including issuing  new guidance to introduce more discipline into its cost-estimating process  for major medical facility leases and efforts to further understand the  factors contributing to actual lease costs compared to those VA identified  in its prospectuses. In particular, VA’s new design guidance for major  medical facility leases could mitigate design, and thus cost, changes from  those included in proposals to Congress. Further, VA’s decision to  conduct a “lessons learned” study of actual lease costs compared to  estimated costs shows promise for VA to understand the factors that  impact cost variance from proposal estimates. Some of these efforts were  implemented during our review, and a comprehensive evaluation is not  yet possible. While we found that leasing can offer flexibility to address a  variety of the department’s and veterans’ needs and help avoid potential  challenges with owned properties such as difficulties disposing of them,  VA does not assess information to demonstrate to stakeholders how it  has benefited from this flexibility. Thus, VA and congressional decision  makers may not fully understand the value of leasing these facilities, such  as in cases when VA has recommended leasing even when it has  determined that other alternatives may be less costly. Although there may  be challenges to providing this information given the setup of VA’s data  systems, doing so would provide greater transparency to decision makers  and taxpayers regarding the need and how best to pay for major medical  facilities.
section_title: Recommendation for Executive Action
paragraphs: To enhance transparency and allow for more informed decision making  related to VA’s major medical facility leases, we recommend that the  Secretary of Veterans Affairs annually assess how VA has benefited from  flexibilities afforded by leasing its major medical facilities and use  information from these assessments in its annual capital plans.
section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to VA and  GSA. VA concurred with our recommendation and provided technical  clarifications, which we incorporated as appropriate. GSA provided no  comments. VA’s comments are reprinted in Appendix II.
As agreed with your offices, 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 appropriate  congressional committees, the Secretary of the Department of Veterans  Affairs, and the Administrator of the General Services Administration. In  addition, the report will be 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) 512-2834 or shear@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 III.
section_title: Appendix I: Summary of GAO’s Assessment of VA’s Cost-Estimating Process for Major Medical Facility Leases
paragraphs: The Cost Guide can be used to assess cost-estimating procedures to  determine whether they meet the four characteristics—comprehensive,  well-documented, accurate, and credible—for being reliable. Table 1  presents our assessment of VA’s overall cost-estimating process against  the four characteristics and related best practices.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Heather MacLeod, Assistant  Director; Jennifer Echard; Elke Kolodinski; James Leonard; Josh Ormond;  Sarah Sheehan; Delwen Jones; and Crystal Wesco made key  contributions to this report.