Military Housing Privatization: DOD Faces New Challenges Due to Significant Growth at Some Installations and Recent Turmoil in the Financial Markets
Published: 2009-05-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In response to challenges the Department of Defense (DOD) was facing to repair, renovate, and construct military family housing, Congress enacted the Military Housing Privatization Initiative in 1996. The initiative enables DOD to leverage private sector resources to construct or renovate family housing. As of March 2009, DOD had awarded 94 projects and attracted over $22 billion in private financing. DOD plans to privatize 98 percent of its domestic family housing through 2012. Since GAO's last housing privatization report in 2006, major force structure initiatives have placed new demands on DOD for housing. GAO was asked to assess (1) the progress of DOD's housing privatization program, (2) the occupancy rates of the housing projects, (3) the impact of various force structure initiatives and DOD's efforts to mitigate any challenges, and (4) the effect of financial market turmoil on some projects. To perform this work, GAO visited 13 installations with privatization projects; analyzed project performance data; and interviewed DOD officials, real estate consultants, and private developers.
section_title: What GAO Found
paragraphs: DOD has made significant progress since 1996 to remove inadequate family housing from DOD's inventory by transferring these homes to developers, but it will be several more years before all of these inadequate houses are either replaced or renovated. Developers had replaced or renovated about 67 percent of the inadequate privatized housing as of February 2009. While about 70 percent of military housing privatization projects are exceeding DOD's expected occupancy rate of 90 percent, each service has some projects below this rate. Some privatization projects with occupancy rates below 90 percent are challenged to generate enough revenue to fund construction, make debt payments, and set aside funds for recapitalization, which could negatively affect the condition and attractiveness of privatized homes and make it harder to compete with other homes in the community. Base realignment and closure actions, overseas rebasing, Army modularity, and grow-the-force initiatives are challenging DOD's ability to provide family housing at some installations, and the services are taking steps to mitigate the challenge. Among other measures, Army developed an approach where an already awarded project is retrofitted with a new or another already awarded project. Once retrofitted, Army's total investment in the developer carrying out the projects must stay below a certain percentage of the capital costs of both projects combined, not a percentage of each project separately. This practice often results in DOD investing additional funds towards retrofitted projects. The House Appropriations Committee directed DOD to report on the status of each privatization project underway on a semiannual basis. However, DOD's most recent semiannual report did not include information on the retrofitting model it is using for certain projects. Including information on the changed status of privatized projects in DOD's report would assist congressional oversight of the program. Several factors related to turmoil in the financial markets have reduced available funds for project construction, resulting in more renovations relative to new construction and reduced amenities at some newly awarded projects. First, higher interest rates in bond financing have increased the cost of some projects. Second, due to the diminished value of bond insurance, developers are having to set aside project funds to increase assurances the debt is repaid but that reduces available funds for construction. Third, financial turmoil has resulted in lower rates of return on invested funds. Consequently, as more homes are renovated given effects of today's financial markets, more recapitalization funds could be required. In H.R. Conf. Rep. No. 110-424, the conference committee expressed interest in monitoring developers' contributions to recapitalization accounts in DOD's semiannual report. However, information these effects have had on housing privatization projects was not included in DOD's most recent report. By including this information in its semiannual report, DOD could provide defense committees with a more current view of the financial market effects on these privatized projects.

section_title: Letter
paragraphs: In the mid-1990s, the Department of Defense (DOD) became concerned  that inadequate and poor quality housing was hurting quality of life and  readiness by contributing to servicemembers’ decisions to leave the  military. At that time DOD designated about 180,000 houses, or nearly   two-thirds of its domestic family housing inventory, as inadequate, needing  repair or complete replacement. DOD believed that it would need about  $20 billion in appropriated funds and would take up to 40 years to  eliminate poor quality military housing through new construction or  renovation using its traditional military construction approach. The cost  and time needed to eliminate poor quality housing prompted DOD to seek  a new way to remedy the problem of its inadequate housing more quickly.
In 1996, Congress enacted the Military Housing Privatization Initiative,  which provided DOD with a variety of authorities that may be used to  obtain private sector financing and management to repair, renovate,  construct, and operate military family housing. For example, the  legislation authorizes the secretary of a military department to make direct  loans to and invest limited amounts of appropriated funds in developers  carrying out projects for the construction or renovation of housing units  that are suitable for use as family housing to servicemembers and their  families.
In a typical privatized military housing project, a military department  leases land to a developer for a term of 50 years. The military department  generally conveys existing homes that are located on the leased land to the  developer for the duration of the lease. The developer is responsible for  constructing new homes or renovating the existing homes and then leasing  them, giving preference to military servicemembers and their families.  Further, in a typical privatized military housing project, a limited liability  company or partnership is formed for the purpose of carrying out a  specific housing project or projects, and for the purposes of this report,  constitutes the developer carrying out the project. If the secretary of a  military department has made an investment in the limited liability  company or partnership, the department may possess some decision- making authority for certain major decisions with regard to the project.  While the major decisions may differ from project to project, they often  include, for example, decisions to make changes in (1) the number of  houses in the project, (2) the number of new homes versus renovated  homes in the project, and (3) the project’s financing, such as increases or  decreases in the project’s debt. Among DOD’s housing privatization goals  is the intent to minimize its role in operating military family housing. As a  consequence, DOD will convey to developers houses that need to be  replaced through new construction or renovation as well as houses that  require little or no renovation.
DOD can also invest a limited amount of appropriated funds or other  assets into a developer who proposes to carry out a project or projects. In  turn, the developer uses these funds to help obtain private financing for  construction or renovation. Developers obtain their funds through bank  loans or military housing bonds obtained through private sector financial  markets. Developers also typically obtain funds from the military services  through either investments of cash or assets, such as land and homes, or  from loans provided by the military services. When these homes obtained  from DOD are ready for occupancy, the developer makes them available,  giving preference to military servicemembers and their families.  Servicemembers who choose to live in the developer’s housing then use  their basic allowance for housing to pay rent. Servicemembers are not  obligated to live in privatized houses at the installation and may opt  instead to lease housing or buy a home off the installation and use their  housing allowance for that purpose. If servicemembers choose to live in  the housing provided by the developer, the servicemembers then pay rent  to the developer, often through the establishment of an allotment. DOD’s  housing privatization program has, in effect, made privatized houses at an  installation part of the local competitive housing markets. Thus once  established, privatized housing at the installation operates similarly to any  other private rental property business, i.e., through competition with other  housing options in a given market.
As of March 2009, DOD had awarded 94 projects and turned over housing  to real estate developers, who in turn have generated over $22 billion in  private sector financing to construct new housing or renovate existing  housing on military installations. DOD plans to have privatized about   98 percent of its domestic housing (or nearly 219,000 houses) through  2012. The Office of the Secretary of Defense (OSD) reports its progress  under the housing privatization initiative to congressional defense  committees in its semiannual Military Housing Privatization Initiative  Program Evaluation Plan Executive Report. This report provides  information on deal structures, government costs, use of government  authorities, program performance, and tenant satisfaction, among other  information.
We last reported on the military housing privatization program in 2006. In  that report, we recommended several areas where DOD could better  manage the privatization program. We also raised concerns that lower- than-expected occupancy could cause financial stress and reduce funds  available for future reinvestment. DOD fully agreed with three of our  recommendations and partially agreed with two and stated that  shortcomings identified in our report would be addressed. Since that time,  DOD has awarded 42 additional projects to help achieve its goals of  eliminating its inventory of inadequate family housing and has turned over  operation of the housing to the developer.
In addition, DOD has begun several extensive force structure and  infrastructure initiatives—such as the permanent relocation of about  70,000 military personnel back to the United States from overseas bases;  the implementation of about 800 Base Realignment and Closure actions by  2011; the continued transformation of the Army’s force structure from an  organization based on divisions to more rapidly deployable, brigade-based  units; the planned increase in the end strength of the Army and the Marine  Corps by a combined 101,000 military members; and the planned  drawdown of troops from Iraq—all of which will place new demands on  DOD to provide affordable and adequate housing for servicemembers and  their families at several installations expecting significant growth in  military personnel numbers.
You asked us to review DOD’s military housing privatization program   and to determine the impact of the military’s force structure changes   and the recent turmoil in financial markets on DOD’s housing   privatization program. This report: (1) assesses the progress of DOD’s  military housing privatization program in eliminating inadequate family  housing; (2) evaluates recent occupancy rates of military privatized  housing; (3) identifies the impact of DOD’s major force structure and  infrastructure initiatives on the military housing privatization program   and actions the services have taken to mitigate any challenges; and   (4) assesses the effect of turmoil in financial markets on recently awarded  military housing privatization projects.
To address these objectives, we reviewed relevant documentation  including DOD and service guidance on the implementation of the military  housing privatization initiative, project progress and performance reports  developed by the services, and prior GAO reports. To assess progress of  the program and occupancy rates, we obtained performance data on each  of DOD’s privatization projects awarded as of the time of our work.   We visited 13 military installations with established privatized housing  projects. We selected these installations because they had established  privatization projects, represented each of the military services, or fit  certain criteria such as expecting increases in housing needs due to DOD’s  force structure initiatives. At these installations, we interviewed base  commanders, project managers, and developers’ representatives to discuss  any challenges experienced in managing their privatization projects, any  mitigation efforts planned or underway, and the impact of the economic  environment in 2008 and early 2009 on their projects. Our analysis of the  13 installation visits cannot be generalized to other military housing  privatization projects. We also interviewed officials from the Office of the  Secretary of Defense and the services’ offices responsible for the military  housing privatization program. Furthermore, we interviewed the Army and  Air Force’s real estate consultants on the impact of turmoil in the financial  markets on recently awarded housing privatization projects and the  overall program. Although we did not independently validate DOD’s  construction, renovation, or occupancy data, we compared these data to  data presented in the semiannual report to the congressional defense  committees. We also discussed with these officials steps they have taken  to ensure reasonable adequacy of the data. As such, we determined the  data to be sufficiently reliable for the purposes of this report.
We conducted this performance audit from April 2008 to April 2009 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: Congress established the Military Housing Privatization Initiative in 1996  to ensure adequate military family housing was available when needed by  renovating existing inadequate housing and constructing new homes on  and around military bases more rapidly than was possible using traditional  funding and military construction methods. Under the initiative, Congress  provided DOD with a variety of authorities that may be used to obtain  private sector financing and expertise to repair, renovate, and construct  military family housing, including :    Real estate tools: The secretary of a military department may convey or  lease existing DOD property or facilities to developers for the purpose  of using that property to provide housing suitable for military  servicemembers.
Investment tools: The secretary of a military department may invest  limited amounts of appropriated funds in a developer carrying out a  project or projects for the acquisition or construction of housing units  suitable for use as military family housing.
Financial tools: The secretary of a military department may make  direct loans to a developer or may guarantee a loan made to a  developer if the proceeds of the loans are used to acquire or construct  houses suitable for use as military family housing.
DOD may exercise one or any combination of military housing  privatization initiative authorities, which provides flexibility in the  structure and terms of the transactions with the private sector. This  flexibility has resulted in a number of different kinds of transaction  structures using different combinations of these authorities.
In a typical privatized military housing project, the developer is a limited  liability company or partnership which has been formed for the purpose of  acquiring debt, leasing land, and building and managing a specific project  or projects. The limited liability company is typically composed of one or  several private sector members, such as construction firms, real estate  managers, or other entities with expertise in housing construction and  renovation. In those cases where the secretary of a military department  has made an investment in the limited liability company, the department  may also be a member of the limited liability company. In a typical  privatized military housing project, a military department leases land to  a developer for a term of 50 years. The military department generally  conveys existing homes located on the leased land to the developer for the  duration of the lease. The developer is responsible for constructing new  homes or renovating existing houses and then leasing this housing, giving  preference to servicemembers and their families. Although the developers  enter into agreements to construct or renovate military housing, the  developer normally enters into various contracts with design builders and  subcontractors to carry out the actual construction and renovation.
subsections: section_title: Typical Financing of Military Family Housing Privatization Projects
paragraphs: In addition to any government or private sector investment in the  developer, the majority of the project financing is obtained from financial  institutions in the form of construction loans or military housing bonds.  The developers issue military housing bonds in the private financial  markets to fund new home construction or renovation of existing homes,  with the servicemembers’ basic allowance for housing serving as the  primary security for the funds obtained through bonds. Although the  servicemember’s housing allowance is subject to the defense budget,  which is supported through annual appropriations, we were told most  bond investors believe it to be a highly reliable revenue stream given the  history of stable congressional funding of servicemembers’ housing. In  addition, because developers issue military housing bonds in the financial  markets, several other financial entities are involved in the process of  obtaining bond financing of military family housing privatization projects,  as shown in figure 1.
In addition to the housing bond financing obtained through the financial  markets, the services can also provide some financing to the privatization  projects through other approaches. On one hand, the Army and Navy have  typically chosen to invest limited amounts of appropriated funds in  developers carrying out projects to renovate existing housing or construct  new housing for use by servicemembers and their families. On the other  hand, the Air Force has typically chosen to provide direct loans to  developers carrying out projects on Air Force installations. Generally, the  type of government financial involvement—whether it be an investment   or direct loan—determines the structure of the project’s ownership. For  example, because the Army and Navy typically make investments in  developers, they may have a membership interest in the developer.  Although the private sector company that is the managing member of the  developer maintains day-to-day operational decision making and manages  the project, the Army and Navy enter into an operating agreement with the  managing member that describes the governance, terms, and structure of  the developer. The operating agreement will typically specify certain  major decisions that must be made with the consent of the government.  While these major decisions may differ from project to project, they often  include, for example, certain changes to the project scope including  changes in the number of houses in the project, the number of new homes  versus renovated homes in the project, and the project’s financing such as  increases or decreases in the project’s debt. Conversely, because the Air  Force does not generally make investments in the developer carrying out  the privatization projects but instead provides direct loans, it does not  generally become a member or partner of the developer and is not part of  the project ownership.
DOD contributions, either in the form of cash investments or direct loans,  are often made to close gaps in construction funding that materialize when  the developer is unable to obtain adequate financing necessary for the  project size. Funding gaps occur when the estimated cost of the project  exceeds the amount the project can support, meaning that the developer  cannot obtain all the financing needed to build the project for the defense  installation or installations. To maintain the needed project size, DOD can  either provide a direct loan or an investment to the developer to bridge the  gap between the estimated project cost and the amount of money the  developer is able to obtain through the private financial markets, although  this also increases the amount of appropriated funds provided to the  project. DOD does not provide funds to cover the private developer’s debt  payments associated with the project.
section_title: DOD’s Family Housing Policy and Basic Allowance for Housing
paragraphs: DOD’s policy is to rely on private sector housing in the local communities  near military installations as the primary source of family housing. As a  result, about two-thirds of all military families in the United States live in  local community housing and receive a cash housing allowance, known as  basic allowance for housing, to help defray the cost of renting or  purchasing a home. Each year, DOD sets the monthly basic allowance for  housing rates. This allowance is based on the median local monthly cost of  housing, including current market rents, utilities, and renter’s insurance.  The allowance can fluctuate from year to year as demand in some housing  markets varies over time. The housing allowance is generally based on  servicemembers’ pay grades and whether or not they have dependents.  Furthermore, while the housing allowance is calculated on the basis of the  housing rental market, servicemembers may choose to apply their  allowance toward purchasing a home, and are free to spend more or less  than their allowance on housing. Servicemembers are permitted to keep  any portion of their basic allowance for housing not spent on rent and  conversely will have to use other funds if their rents exceed their  allowance.
The basic allowance for housing rates has increased since 2000 as DOD  has implemented an initiative to reduce military servicemembers’ out-of- pocket housing costs. However, in certain areas, higher housing allowance  rates may make it more feasible for military servicemembers to consider  off-base rental housing if the homes are deemed more desirable in the  community or the amount of the housing allowance exceeds the cost of  the rent, permitting the servicemember to keep the difference. Similarly,  higher housing allowances may prompt some off-installation housing  developers to directly compete with privatized housing at the installation  by building more housing to compete for servicemembers as tenants.  Thus, increased housing allowances and increased housing choices can  provide servicemembers and their families with more housing options and  potentially lead to lower rates of occupancy for privatized housing at an  installation. We reported in April 2006 that increases in housing  allowances have made it possible for more servicemembers to afford  private housing in the local market, thus reducing the need for privatized  housing at installations.
When a servicemember chooses to live in a family housing privatization  project, the servicemember pays rent to the developer, often through the  establishment of an allotment. The rent is usually, but not always, equal to  the basic allowance for housing. In turn, the developer uses the rental  income to help pay for housing improvements, home maintenance and  property management expenses, and other costs such as utilities and the  developer’s management fees. In addition, while privatized housing is  meant to be an attractive alternative for military servicemembers looking  for a place to live, DOD does not require servicemembers, other than  certain key personnel, to live on the installation and thus in military  privatized housing.
section_title: DOD Conducts Oversight of the Housing Privatization Project
paragraphs: Within the Office of the Secretary of Defense, the Housing and  Competitive Sourcing Office, which reports to the Deputy Under Secretary  of Defense (Installations and Environment), provides policy and oversight  of the housing privatization program, although responsibility for  implementing the statutory authority granted under the Military Housing  Privatization Initiative is primarily with the military departments. To help  oversee the military housing privatization program and provide status  information on project performance, OSD prepares a report, known as the  Military Housing Privatization Initiative Program Evaluation Plan  Executive Report, and provides it to the four congressional defense  committees. This report, which is prepared semiannually for the periods  ending June 30 and December 31, compiles various financial and program  progress data submitted by the military services for each awarded  privatization project. It provides information on deal structures,  government costs, use of statutory authorities, program and financial  performance, home construction and renovation progress, occupancy  rates, and results of surveys on military servicemember’s satisfaction with  privatized housing. The congressional defense committees and OSD use  this information to monitor the program’s progress and conduct financial  and performance oversight.
Currently, the focus of the military housing privatization program and   OSD oversight is to ensure that all construction is completed on schedule  and within budget, projects are financially viable and address the changing  requirements of the military services, and servicemembers and their  families have access to adequate, affordable, well-maintained, and safe  housing. OSD credits housing privatization with greatly improving the  state of its housing for servicemembers and their families. Figures 2  through 4 show photographs of older and newly constructed privatized  housing at selected installations we visited.
section_title: DOD Has Made Progress in Transferring Inadequate Family Housing to Developers Although Actual Replacement Will Take Several Years
paragraphs: Since Congress authorized the Military Housing Privatization Initiative in  1996, DOD has made significant progress in transferring inadequate  military family housing from its inventory by privatizing these homes.  However, it will be several more years before developers are able to  replace or renovate all of the inadequate houses as expected because  developers cannot complete all needed construction and renovation at  once. Developers had replaced or renovated about 67 percent of the  inadequate privatized houses as of February 2009.
subsections: section_title: DOD Has Made Progress in Transferring Inadequate Family Housing to Developers through Privatization
paragraphs: DOD has made significant progress in transferring ownership of  inadequate family housing to developers who are to replace or renovate  them. Because DOD typically conveys the homes it owns on military  installations to the developer for the duration of the ground lease, such  homes are no longer accounted for on DOD’s property inventory. At the  start of the housing privatization program in fiscal year 1996, DOD  identified approximately 180,000 inadequate houses based on specific  criteria established by each service. Since then, DOD has used  privatization as its primary means of removing inadequate houses because  it allows for more rapid demolition, replacement, and renovation of homes  than DOD has stated it could do on its own. According to DOD, as of  February 2009, it had privatized almost 188,000 houses and most of its  inadequate family housing had been transferred out of its inventory.  During the years 2009 through the end of 2012, DOD plans to privatize  about 31,000 more homes, as shown in table 1.
In addition, by the end of fiscal year 2009, DOD’s data shows that it plans  to have privatized over 197,000 houses. At that point, according to DOD, it  will have transferred all of its inadequate family housing from its inventory  to developers.
section_title: Actual Replacement of Inadequate Houses by Developers Will Take Several More Years
paragraphs: Although DOD has transferred most of its inadequate housing to  developers for the duration of the ground leases through privatization,  actual replacement of these homes through new construction or  renovation will take several more years. The lag occurs because  developers can not complete all needed construction at the same time.  According to DOD’s best available data on construction progress, housing  developers had replaced or renovated about 67 percent of the inadequate  houses scheduled to be replaced or renovated. Importantly, since DOD  wants to transfer military family housing operations to the private sector  to the greatest extent possible, some privatization projects include the  transfer of houses that are adequate and need little or no renovation at the  time of transfer. At the time of our report, DOD’s data show that out of  187,904 total homes privatized as of February 2009, 47,502, or 25 percent,  were in adequate condition and did not need replacement or renovation. In  contrast, 140,402 homes, or 75 percent, were in inadequate condition and  in need of replacement or renovation. As figure 5 shows, of the 75 percent  of privatized homes in inadequate condition, private developers have  replaced 93,854 of these homes, or 67 percent, with new construction or  renovation.
section_title: Although a Majority of Privatization Projects Exceed DOD’s Generally Expected Occupancy Rate, Certain Projects Are Not Meeting This Rate
paragraphs: While the majority of DOD’s privatization projects are exceeding DOD’s  generally expected occupancy rate of 90 percent, each service has some  projects that are not meeting this rate. Our analysis of DOD’s data as of  September 2008 shows that about 70 percent of DOD’s privatization  projects had achieved the generally expected occupancy rate, while about  30 percent were below the generally expected rate. Although many of  these projects are only slightly below the 90 percent rate, occupancy is an  important factor in ensuring sufficient revenue generation since the  developers’ rental receipts are used to fund additional construction, make  debt payments, invest in reserve accounts for future maintenance, and  provide management fees. When a servicemember chooses to live in a  family housing privatization project, the servicemember pays rent to the  developer, often through the establishment of an allotment. The rent is  usually, but not always, equal to the basic allowance for housing. In turn,  the developer uses the rental income to help pay for housing  improvements, home maintenance and property management expenses,  and other costs such as utilities and the developer’s management fees.   The developer cannot raise or lower the dollar amount of the member’s  basic allowance for housing, as DOD sets this rate each year.
subsections: section_title: About a Third of Privatization Projects Are Not Maintaining Generally Expected Occupancy Rates
paragraphs: While the majority of DOD’s privatization projects are exceeding DOD’s  generally expected occupancy rate of 90 percent, each service has some  projects that are not meeting this rate. As of September 2008, about   70 percent of DOD’s privatization projects were maintaining the expected  occupancy, while about 30 percent of the projects were below the 90  percent occupancy rate. Specifically, occupancy was below the 90 percent  rate in 12 of the Air Force’s 29 projects; 7 of the Army’s 30 projects; and   3 of the Navy and Marine Corps’ 15 projects. This represents a decrease  in the percentage of projects with low occupancy rates we found at the  time of our 2006 report, at which time 36 percent of privatization projects  (16 out of 44) were below 90 percent. Table 2 lists the privatization  projects with occupancy rates under 90 percent as September 2008.
Although many of these projects are only slightly below DOD’s generally  expected occupancy rate, service officials told us they are still watching  the financial aspects of these projects closely since even slightly lower- than-expected occupancy rates can lead to insufficient revenue generation  to meet necessary project expenses. In such cases, DOD officials told us  that they would look more closely at other indicators of the project’s  financial health such as operating income, home construction progress,  and the ability of the developer to continue to make debt payments and  pay operation and maintenance expenses.
Many factors can contribute to each specific privatization project’s  occupancy rate and these factors may vary from one location to another  and may be specific to the location. For example, off-installation housing  options in the surrounding community can influence whether military  servicemembers desire to live in the military privatized housing at their  base or elsewhere in the community. Specifically, the quality and  affordability of both off-base rentals and for-sale housing and the nature of  the off-installation communities where available housing exists are some  factors that can influence a servicemember’s decision where to live while  stationed at a particular installation. In addition, other factors such as the  quality of the military privatized housing in comparison to the competing  housing options, the availability of certain amenities such as community  centers and swimming pools on the installation or in the off-installation  community, the location and quality of elementary and secondary schools,  commuting distances, and the quality of property management service  provided by the privatization project owner may influence a  servicemember’s decision where to live. Some examples of the reasons for  below 90 percent occupancy at selected bases as of September 2008  follow:    At the Navy’s New Orleans Complex, Louisiana, occupancy was 86  percent. According to the Navy, the primary reason for this occupancy  rate was military members moving away from Naval Air Station Joint  Reserve Base New Orleans as a result of base realignment and closure  actions.
At Fort Hamilton, New York, occupancy was 85 percent. Army officials  attribute this to last year’s higher-than-anticipated 22 percent increase  in the basic allowance for housing, which according to the Army, has  made off-installation housing options more affordable for  servicemembers and their families.
At Fort Benning, Georgia, occupancy was 82 percent. According to  Army officials, extended deployments prompted some family members  left behind to vacate their on-installation privatized houses and move  to be closer to other family members.
At Fort Jackson, South Carolina, occupancy was 51 percent. This  project was awarded in August 2008 and much of the existing  inventory of houses transferred to the private developer was older and  had not yet been renovated, making the houses relatively less  attractive and marketable, according to Army officials. The Army  expects occupancy rates to increase considerably as the developer  replaces the older housing with newly constructed or renovated  homes.
section_title: Lower-than-Expected Occupancy Can Cause Financial Distress for Some Projects
paragraphs: Due to lower-than-expected occupancy, some privatization projects are  generating insufficient revenue to meet income projections which, in some  cases, is affecting the developers’ ability to fund construction, make debt  payments, and provide funds for future maintenance and recapitalization.  Developers generate revenue from the privatization project by renting out  privatized housing at the installation to tenants, giving preference to  servicemembers and their families. The member’s basic allowance for  housing goes directly to the developers as rent, and the developer, in turn,  uses the allowance to help pay for housing improvements, home  maintenance and property management expenses, and other costs such as  utilities. The developer cannot raise or lower the member’s basic  allowance for housing, given that DOD sets the basic allowance rates each  year. DOD determines these allowance rates based on the median local  monthly cost of housing, including current market rents, utilities, and  renter’s insurance. The allowance can fluctuate from year to year as  demand in some housing markets varies over time. The relationship of  maintaining sufficient occupancy to generate needed revenue to maintain  the project’s financial health is shown in figure 6.
If project occupancy is lower than the 90 percent generally expected rate,  then rents for the homes may not generate enough revenue to permit  completion of all planned construction. For example, lower-than-projected  occupancy (76 percent) at Scott Air Force Base, Illinois, was contributing  to an unexpected funding shortfall. The project only generated $14 million  of the projected $24.7 million in net operating income as of September  2008, resulting in an almost $11 million shortfall in funds needed to  complete home construction. According to the Air Force, the supply of  newly constructed homes and the growing number of available competing  rental properties in the community around Scott Air Force Base has  provided effective competition by providing military servicemembers and  their families with numerous off-installation housing alternatives. Thus,  the Scott Air Force privatization project was generating insufficient  revenue to cover its expenses at the time of our report.
Lower-than-expected occupancy can affect a developer’s ability to  generate adequate revenue to meet income projections if rental receipts  are insufficient to meet the developer’s obligations, which can undermine  the developer’s ability to make required debt payments to repay the  construction bond. This situation can also undermine the developer’s  ability to adequately maintain or modernize the homes when needed,  potentially leading to future deterioration of the homes and an increasing  inability to compete with off-base alternatives. For example, due to low  occupancy (87 percent) at the Wright-Patterson Air Force Base project in  Ohio, revenue was insufficient at the time of our review to fund project  obligations such as debt service and management fees, thus the Air Force  and developer agreed to pay these obligations with other project funds.  According to the Air Force, without continued increased occupancy, the  project is not expected to have sufficient funds to invest in and maintain  the quality of the housing inventory over the life of the 50-year lease.
To help minimize the negative financial impact of low occupancy and  maintain project revenue and financial viability, some developers have  begun renting houses to parties other than military families, such as  unaccompanied servicemembers, active National Guard and Reserve  personnel, military retirees, federal government civilians, and in some  projects, private civilians. For example, the occupancy rate for military  families has been considerably lower than expected for the last 5 years at  the Army Presidio of Monterey/Naval Post Graduate School Monterey  project in California. As a result, the project has been renting to personnel  other than active-duty military servicemembers with families. About   22 percent of the tenants at the project were not active-duty  servicemembers with families as of August 2008. According to Army  officials, factors contributing to low occupancy for active-duty  servicemembers with families for this project included the poor condition  of existing housing that had not yet been renovated and significantly  higher-than-expected housing allowances, which have made it financially  possible for more military families to afford housing in the surrounding  community. These two factors have made it difficult for the project to  maintain an occupancy rate sufficient to generate enough revenue to cover  expenses. However, our analysis of DOD’s June 2008 data shows that  programwide, 4.1 percent or nearly 5,950 privatized homes are rented by  parties other than active-duty servicemembers with families. About half of  these homes are rented by unaccompanied active-duty servicemembers  and active National Guard and Reserves members, while the other half are  rented by military retirees, federal government civilians, and civilians.
section_title: Several Defense Initiatives Are Adding to the Challenge in Providing Affordable and Adequate Housing and the Services Are Taking Steps to Mitigate That Challenge
paragraphs: Several ongoing defense force structure and infrastructure initiatives, such  as implementing base realignment and closure recommendations,  returning some military forces based overseas to defense installations in  the United States, converting Army units to modular brigade combat teams  under the Army modularity initiative, and increasing the size of the Army  and Marine Corps force structure, are collectively compounding the  challenge DOD faces in ensuring military servicemembers and their  families have affordable and adequate family housing. However, the  services have taken several steps to mitigate that challenge.
subsections: section_title: DOD’s Force Structure and Infrastructure Initiatives Are Increasing Family Housing Needs at Some Installations
paragraphs: DOD’s force structures and infrastructure initiatives are leading to  increasing family housing needs due to the relocation of servicemembers  and their families under:    Grow-the-Force: In January 2007, the President announced and  Congress approved a permanent increase in the Army end strength by  more than 74,000 soldiers and the Marine Corps’ end strength by   27,000 Marines through the Grow-the-Force initiative over the next  several years.
Base Realignment and Closure: Several Army installations will  experience growth due to implementation of the 2005 base realignment  and closure round. Under the 2005 round, DOD is implementing 182  recommendations which must be completed by the statutory deadline  of September 15, 2011. These recommendations encompass a large  number of realignments, prompting significant personnel movements  among installations.
Global Defense Posture Realignment: DOD plans to realign its  overseas basing structure and reduce its overseas presence by  transferring about 70,000 servicemembers and civilian personnel from  overseas bases to bases in the United States by 2011.
Army Modularity: The Army is undergoing a major force restructuring  as it implements its force modularity, which entails converting units to  brigade combat teams. Many Army installations with housing  privatization projects either have received or are slated to receive one  or more of these brigade combat teams.
Collectively, DOD’s initiatives are affecting Army installations to a greater  degree than those of the other services and are generating increased  family housing requirements for certain installations that may be met with  privatized housing. For example, the privatized housing requirement at  Fort Bliss, Texas, has increased by about 600 houses from 6,332 houses to  6,946 houses. Fort Bliss officials are also working with El Paso city  officials to increase off-base residential housing in the local community to  meet the expected growth of military families stationed at Fort Bliss.  According to Army officials, because the Army’s growth plans are  exceeding the pace at which military family housing will be made  available, it will be difficult to completely meet this need by the time  additional servicemembers and their families arrive.
section_title: Services Have Taken Steps to Address the Impact of Various Defense Initiatives on Their Ability to Provide Adequate and Affordable Family Housing
paragraphs: The services have taken or plan to take certain steps to ensure that  adequate family housing exists for military servicemembers and their  families. The Army plans to invest more appropriated funds into some  privatized family housing projects at several installations expecting growth  in the numbers of military personnel. Specifically, the Army has provided  almost $600 million more to developers carrying out five projects to  provide additional project funding to meet the need for more homes. Army  officials told us that the additional funding will make it easier for these  developers to obtain additional financing as well. Table 3 displays the  installations at which Army is providing additional funds to developers  and the amount of the funds.
Despite the additional funding to increase the availability of family  housing at certain installations, Army’s growth plans may still exceed the  pace at which military family housing will be made available at some  installations. This, in turn, is prompting the Army to choose to invest more  appropriated funds into some privatization projects. Recently, the Army  has “retrofitted” a few military housing privatization projects after  financial closing and actual housing turnover to the developer. Section  2875 of Title 10, U.S. Code requires the secretary of a military department  to limit the investment in an “eligible entity” to not more than 33 percent  cash, or 45 percent if land or facilities are all or part of the investment, of  the capital cost of the project or projects that the “eligible entity” proposes  to carry out. DOD officials explained that when an already awarded  project that is being carried out by one developer is retrofitted with either  a new project or another already awarded project, the Army’s total  investment in the developer carrying out the combined retrofitted projects  must stay below a certain percentage of the capital cost of both projects  combined, not a percentage of each project separately. However, had  those projects not been retrofitted, the amount of funds allocated towards  any one pre-retrofitted project may have exceeded the statutory  investment cap.
Army officials told us that this model has been used several times to  retrofit projects, and that they plan to continue to use this model in the  future. For example, the Army retrofitted a project located at Fort Sill,  Oklahoma, with an ongoing project located at Fort Meade, Maryland. As a  result of retrofitting these projects, the Army’s total cumulative investment  in the developer carrying out the retrofitted Fort Sill/Fort Meade projects  was 28.8 percent, well below the 45 percent statutory cap. However, the  Army’s total investment towards the Fort Sill phase alone is 55.8 percent  of the capital costs of that phase, which would have exceeded the  allowable statutory investment cap had it not been retrofitted with the  Fort Meade project. Army officials stated that they intend to continue to  use this retrofitting model for future projects. For example, at Fort Bliss,  Texas, and White Sands Missile Range, New Mexico, the Army cannot  invest any more appropriated funds for the project after its fiscal year 2008  and 2009 investments of nearly $163 million because it will have reached  the statutory investment cap. Nonetheless, according to Army officials, the  $163 million will not be enough to ensure that adequate and affordable  housing is available given the planned growth in military personnel at  these two installations. Fort Bliss is expected to experience a gain of  about 38,000 military families from 2005 to 2012. Thus, the Army is  considering retrofitting the already awarded projects at Fort Bliss/White  Sands Missile Range with one at West Point, New York, as a way to invest  more into the Fort Bliss project and still be in compliance with the  statutory investment cap. By retrofitting these two projects, the Army’s  total cumulative investment in the retrofitted projects would remain below  the statutory investment cap. Army officials told us that the total  investment in the Fort Bliss phase may increase by about $77 million,  which if the projects were not retrofitted, this amount would exceed the  statutory investment cap. Thus, the service’s overall percentage of  appropriated funds invested in carrying out the retrofitted projects  declines, while the actual amount of appropriated funds contributed  increases. Army officials stated they developed this approach as a way to  comply with the statutory investment caps while trying to ensure that  adequate and affordable military family housing is available when needed.  OSD stated that it had no reason to believe that Congress intended the  investment limitation to be more restrictive on projects retrofitted after  award than on projects combined prior to award. Accordingly, OSD  officials told us that the use of the retrofitting model represents the Army’s  rational use of statutory authority to invest in projects structured to  optimize the use of private and public resources. The Army’s retrofitting  practice, as described by Army and OSD officials, appears to be consistent  with Section 2875 of Title 10, U.S. Code.
In many cases, a developer is awarded a project that involves multiple  installations. Of the 94 projects awarded under the military housing  privatization initiative as of March 2009, approximately a third of these  projects have combined privatization efforts at multiple installations under  the ownership of one developer. The military services’ investments in  developers owning combined projects have been within statutory  limitations, though the developer’ allocations of funds to individual  installations may have exceeded 33 or 45 percent. Further, OSD officials  told us that in a handful of cases, the services have invested in developers  that were currently operating housing privatization projects and which  have retrofitted a new set of installations into their existing ownership  structures. However, they stated that the methodology for calculating the  investment limitation in such a retrofitted model is the same as that for  calculating the investment for projects that combine work at multiple  installations before award. Although DOD provides notification and  justification of its cash investments, and Army officials told us that they  have briefed some congressional staff members on Army’s new practice of  retrofitting projects, DOD has not provided detailed information to  Congress about its use of the retrofitting model in its semiannual report.  We recognize the difficulty of the challenge DOD is facing and the  importance of providing adequate housing under compressed time and  investment constraints. Nevertheless, for Congress to maintain oversight  of the housing privatization program, the House Report accompanying the  Military Quality of Life and Veterans Affairs, and Related Agencies  Appropriations Bill of 2006 directed DOD to report on the status of each  privatization project underway, on a no less than semiannual basis.  DOD’s most recent semiannual report to the congressional defense  committees did not include information on the retrofitting model.  Although several retrofitting efforts are currently underway, and DOD  officials have told us that they plan to retrofit additional projects in the  future, it is unclear whether DOD plans to include such information in  future semiannual reports. Including information about the changed status  of projects that have been retrofitted, as the congressional defense  committees have requested, would assist congressional oversight of the  program.
Collectively, although these measures mean more appropriated funds will  be spent to meet family housing needs than originally anticipated when  military housing privatization projects were awarded, these funds are still  far less than anticipated when Congress authorized the Military Housing  Privatization Initiative. For example, at the inception of the program, DOD  expected that the ratio of private funds to DOD funds invested in the  initiative would be a minimum of 3 to 1—meaning for every $3 of private  funds invested into these privatization deals, DOD would invest $1.  However, at the time of our review, the overall ratio was actually 9 to 1— meaning for every $9 of private funds invested, DOD had invested $1.  According to Army officials, even with the Army’s approach of retrofitting  projects in order to invest more appropriated funds to meet new military  personnel growth demands at certain installations, the current 9 to 1  investment ratio is not expected to change substantially.
DOD has also taken other measures to better ensure military  servicemembers and their families have adequate and affordable housing,  given increases in family housing requirements at certain growth  installations. For example, the Army is renovating some of its Section 801  Build-to-Lease housing even though the 20-year leases on these homes  are expiring. Officials at Fort Drum, New York, told us that although the  Army’s remaining Section 801 leases are expected to expire in 2010, they  are nonetheless repairing some of their remaining Section 801 housing to  improve the condition of these homes for current and incoming junior  enlisted servicemembers to meet the current shortage of adequate housing  in the community surrounding Fort Drum. Further, in the President’s  budget presentation to Congress, Army explained its intent to temporarily  use the domestic leasing program, if necessary, at five Army installations  that are expecting to grow in military end strength and have housing  privatization projects—Fort Carson, Colorado; Fort Wainwright, Alaska;  Fort Drum, New York; Fort Bliss, Texas; and Fort Riley, Kansas. According  to the Army, the planned use of domestic leases at these installations will  continue until local housing markets, including privatized housing, are  adequate to keep pace with the Army’s planned growth. The domestic  lease program is already being implemented at Fort Drum, New York.  Finally, at some locations the Army is extending the use of the temporary  lodging expense allowance. Specifically, Fort Drum officials told us they  received permission to extend temporary lodging expenses up to 60 days,  as opposed to the normal 30 days, to provide temporary housing at local  hotels for incoming military members while they search and make  arrangements for family housing.
section_title: Current Turmoil in Financial Markets Has Reduced Available Construction Funding for Some Privatization Projects
paragraphs: Several factors related to the current turmoil in the financial markets have  reduced available funds for home construction, resulting in a larger  proportion of renovations relative to new construction and reduced scope  and amenities at some military family housing privatization projects. First,  obtaining financing has become more expensive. Second, more funds now  need to be set aside to help ensure debt repayment. Third, lower return  rates are now occurring on invested funds.
subsections: section_title: Newly Awarded Projects Have Less Funds Available for Construction Because Obtaining Financing Has Become More Expensive
paragraphs: Higher interest rates have increased the costs that some developers had to  pay at the time of our review to obtain financing from newly obtained  bonds, thus reducing the funds available for construction. In such  circumstances the services have had to reduce the number of new homes  to be constructed in favor of doing more renovations, which are generally  less costly. For example, a representative with the Hunt Development  Group, which is developing the Army’s Fort Lee project in Virginia, told us  that when the project went to financial closing, the amount of principal the  developer was eligible to borrow was reduced by $10 million because of  increased interest costs to obtain bond financing. As a result, the Army  authorized the developer to build 97 fewer new homes. The developer told  us that it probably could have borrowed an additional $10 million, but the  Army would not allow it to do so due to the potential long-term financial  strain it could put on the project. In doing so, the Army stated that they,  the underwriter, and the developer applied standard conservative  underwriting principles to the Fort Lee project financing to help ensure  long-term success of the project.
Although higher interest rates have added to the cost of certain projects, in  one case the respective service was able to find additional sources of  income to offset increased interest costs in order to maintain the original  number of new homes. Specifically, according to Air Force officials, when  the developer of the Air Mobility Command West project (consisting of  Fairchild Air Force Base, Washington; Tinker Air Force Base, Oklahoma;  and Travis Air Force Base, California) went to financial closing in July  2008, the amount of principal the developer was eligible to borrow was  reduced by about $18.5 million because of an unanticipated increase in  interest costs. However, the Air Force did not reduce the number of new  homes to be built because, according to Air Force officials, they and the  developer were able to offset higher interest costs by reducing expenses  through the negotiation of tax relief from the local jurisdictions and by the  Air Force demolishing some houses using its own operation and  maintenance funds, although the demolition had the effect of increasing  the use of appropriated funds to complete the project.
section_title: Newly Awarded Projects Have Less Funds Available for Construction Because Funds Now Need to be Set Aside to Help Ensure Debt Repayment
paragraphs: Due to the credit rating downgrades of firms that insure bonds,  alternatives to cash funding are no longer available to satisfy debt service  reserve requirements which are causing developers to have to set aside  cash in reserves to help provide assurances that the project’s debt will be  repaid in the event the developer cannot make debt payments. This in turn  is reducing the amount of funds available for construction, according to  defense officials. Traditionally, the services and housing privatization  developers have used bond insurance to obtain lower interest rates and to  make the bonds more marketable because of the added protection of  repayment the insurance provides. For a fee, bond insurers such as  American International Group (AIG), Municipal Bond Investors Assurance  (MBIA), or American Municipal Bond Assurance Corporation (AMBAC)  guarantee the timely payment of principal and interest on the bonds if the  privatization project cannot make debt payments. Central to the business  strategy of the bond insurers is the companies’ triple-A credit ratings,  which help give the bonds they insure higher ratings. For privatization  projects, higher ratings on bonds reduce borrowing costs due to investors  offering lower interest rates, making the bonds more marketable because  principal and interest payments are guaranteed. However, because many  of the bond insurers have financial investments that have fallen in value,  with some tied to troubled subprime mortgages, credit rating agencies  have currently downgraded the credit ratings of these firms. As a result,  for some projects it is no longer cost effective to carry bond insurance  because it either does not result in lower interest rates or rates low  enough to cover the costs associated with the insurance. However, if a  developer does not purchase bond insurance for its project, then investors  normally require it to maintain cash in reserve for debt payments—usually  enough to cover 6 to 12 months of debt payments—making less money  available for construction. For example, both higher interest rates to  borrow funds and the requirement to cash fund the debt service reserve  due to the diminished value of bond insurance have impacted the Army’s  Fort Jackson, South Carolina, privatization project. In this case, the Army  agreed to allow the developer to reduce the number of planned  renovations resulting in these homes receiving no work.
Additionally, because many developers for ongoing privatization projects  use bond insurance, the diminished value of bond insurance could cause  financial stress for these projects if investors require developers to set  aside cash reserves to provide greater assurance of repayment of the debt.  Although the services told us they believe bond investors will not require  ongoing projects to set aside cash for debt repayment of the current phase  of the project, Navy officials did say that investors could potentially use  this requirement as leverage when developers try to obtain financing for  additional phases of a project. That is, investors may require the developer  to set aside cash for debt repayment for projects already started or  completed as a condition for receiving funding for additional project  phases.
section_title: Newly Awarded Projects Have Less Funds Available for Construction Because of Lower Return Rates on Invested Funds
paragraphs: The turmoil in the financial markets also has resulted in lower rates of  return on invested funds, leading to less earned interest on invested  project funds. Since developers use interest earnings to help finance  project construction (in addition to money borrowed in private capital  financial markets and military service-provided money), lower rates of  return on investment mean that the developers will have less funds  available to pay project expenses. As a consequence, the services have in  turn modified their construction plans for certain projects. In many cases,  developers invested project funds in long-term investments with financial  service firms and bond insurers that were considered relatively safe at the  time. Subsequently, however, these firms have suffered financial  difficulties and credit rating downgrades due to their investments in  subprime mortgages. Although we were told that investment agreements  between the projects and these firms usually have protection clauses  giving the project developer the right to withdraw funds due to rating  downgrades of the financial services firms, sometimes the funds have had  to be reinvested in other investment accounts with firms that are offering  lower rates of return, resulting in reduced investment income to the  developer. According to service officials, for some projects this is not an  issue because the investment agreement has a “make whole” provision,  meaning the financial services firm in which the funds were invested is not  only obligated to return the invested funds to the project but also to pay  the project for the difference in potential interest earnings. However,  service officials said that some project investment agreements do not have  “make whole” provisions— meaning the financial services firm in which  the funds were invested is only obligated to return the invested funds and  does not have to pay for the difference in potential interest earnings. As a  result, such projects receive less interest earnings.
Since interest earnings is one of the sources of revenue that provide  income to the project to pay for operations, construction, and future  recapitalization, lower-than-anticipated interest earnings can affect the  financial health of a project, and in some projects, amenities such as  community centers could be eliminated. For example, the Air Force is  projecting a revenue shortfall for its Tri-Group family housing privatization  project comprised of Los Angeles Air Force Base, California; Peterson Air  Force Base, Colorado; and Schriever Air Force Base, Colorado, due to the  difference in return rates on invested funds. As a result, the Air Force is  negotiating with the developer a number of changes such as eliminating  two community centers and some new housing to offset the lower-than- anticipated investment earnings. Similarly, Navy officials told us that their  family housing privatization project in Hawaii could potentially have a   $25 million to $30 million revenue shortfall due to reduced rates of return  on investments; however, Navy does not anticipate reducing the amount of  new construction or amenities in the project. According to the Navy,  although project funds are now placed in more conservative but lower  yielding investments, decreases in interest earnings have thus far been  offset by project savings. Such changes in the size, mix of new  construction and renovations, or content of privatized military housing  projects could have an impact on the financial health of projects since  renovated homes might require increased maintenance and earlier  replacement as compared to newly constructed homes. Moreover, in some  circumstances, renovated homes, combined with fewer project amenities,  could make the houses less marketable if off-base housing from a  competing developer is seen as more desirable by servicemembers and  their families.
Collectively, a decline in available construction funds caused by higher  interest rates, increased debt repayment reserve requirements, and lower  rates of return on invested funds could have an adverse impact on the  condition and amenities of military housing privatization projects, which  could in turn reduce occupancy, and ultimately threaten the financial  viability of those projects. Over the past few years several congressional  committees have indicated interest in the military housing privatization  program. Further, a House Conference Report directed DOD to include  data on developers’ contributions to the recapitalization accounts of each  ongoing family housing privatization project in each semiannual report on  the privatization program, and the House Appropriations Committee has  directed DOD to provide a semiannual report summarizing the results of  DOD’s military housing privatization initiative monitoring tool and giving  status reports on each privatization project underway. As more homes  are renovated rather than constructed anew, privatization projects with a  large number of renovations will require more recapitalization funds than  would otherwise have been the case given the effects of the current  turmoil in financial markets. However, information about the impact that  the recent turmoil in the financial markets is having on some projects and  the resulting effects on available funds for new construction as well as on  future recapitalization funds was not included in DOD’s most recent  semiannual status report to the congressional defense committees in  January 2009. By including this information on housing privatization  projects in its semiannual report, DOD could provide Congress with a  more current view of the effects of the current financial market and  enhance congressional defense committees’ ability to monitor the services’  efforts to provide servicemember with quality housing over the life of each  project.
section_title: Conclusions
paragraphs: DOD is implementing or is planning to implement several significant  initiatives, such as increasing the services’ force structure by tens of  thousands of personnel, that will increase the number of military  servicemembers and their families who will need adequate and affordable  family housing. Although DOD is taking several measures to ensure  adequate housing exists at its installations, it still faces challenges that  could result in insufficient housing at some installations expecting  significant increases in military families over the next several years.  Including information about the changed status of retrofitted projects  would assist congressional oversight of the program.
By enacting the Military Housing Privatization Initiative, Congress  provided DOD with a variety of authorities to obtain private sector  financing as a way to eliminate its inventory of inadequate and poor  quality family housing. This initiative brings private sector financing,  business practices, and certain flexibility to help ensure that DOD can  provide housing to military families when needed. However, privatization  is essentially a business venture, and like any business, it carries inherent  risk. If the increase in renovated houses over new construction due to  turmoil in the financial markets continues to increase the demand for  recapitalization funds over the life of the project, developers may not be  able to sustain projects in a way that ensures adequate quality of life for  military servicemembers and their families. According to DOD, decent and  affordable housing is one of the most important factors in its ability to  retain a professional force and maintain readiness. Informing Congress  about the long-term financial health of recapitalization accounts for family  housing privatization projects will give it a more current view of the  services’ efforts to provide servicemembers with quality housing over the  life of each project. Timely information on the effects of the current  financial markets on housing privatization projects—such as in DOD’s  semiannual status report on housing privatization program—could, if  necessary, help congressional decision makers prevent a return to the  poor military housing conditions that led DOD to request congressional  authority to pursue the Military Housing Privatization Initiative over a  decade ago.
section_title: Recommendations for Executive Action
paragraphs: For Congress to maintain oversight of the Military Housing Privatization  Initiative program, we recommend that the Secretary of Defense direct the  Under Secretary of Defense (Acquisition, Technology and Logistics) to  include, for each project that is retrofitted, an explanation of this practice  and information on DOD’s total investment in the retrofitted project in its  semiannual status report to the congressional defense committees.
To better inform Congress about the financial market factors that could  affect the privatized military family housing program’s financial health and  to enhance congressional oversight, we recommend that the Secretary of  Defense direct the Under Secretary of Defense (Acquisition, Technology  and Logistics) to include information in its semiannual report to the  congressional defense committees on the effects current conditions in the  financial markets are having on housing privatization projects.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, DOD concurred with our  recommendations saying that including information on both the practice  of “retrofitting’ or “integrating” projects and the effects current conditions  in the financial markets are having on privatization projects in the  Department’s semiannual Program Evaluation Plan Report to Congress  would enhance Congressional oversight of the privatization program.  DOD’s comments are reprinted in appendix II. DOD further provided  technical comments, which we incorporated as appropriate into this  report.
We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the secretaries of the Army, Navy,  and Air Force; and the Commandant of the Marine Corps. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff has any questions concerning this report, please  contact me on (202) 512-4523 or by e-mail at leporeb@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs are on  the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: We performed our work at the Office of the Secretary of Defense and the  offices of the Army, Navy, Marine Corps, and Air Force responsible for  implementing the housing privatization program. We reviewed relevant  documentation including the Department of Defense (DOD) and service  guidance on the implementation of the Military Housing Privatization  Initiative, project progress and performance reports developed by the  services, and prior GAO reports. We also interviewed officials at the Air  Force’s Center for Engineering and the Environment in San Antonio,  Texas, which is designated as the Air Force’s military family housing  privatization center of excellence. In each instance, we met with officials  cognizant of the program and reviewed applicable policies, procedures,  and documents. Further, we visited 13 selected military installations with  housing privatization projects to review project management at the local  level, examine project performance, and determine from installation  officials and private sector developers the challenges they face in  managing their military housing privatization projects. Table 4 lists the  installations we visited.
Together the installations contained 12 separate military housing  privatization projects, since Fort Bliss and White Sands Missile Range are  included in the same project. At each installation we spoke with service  officials managing the family housing privatization project. We also spoke  with representatives from the private sector developers in charge of  constructing and managing these projects. We chose these installations  because they contained already awarded projects, represented each of the  military services, and provided a balance of projects with and without  challenges. Additionally, we choose Fort Bliss, White Sands, and Camp  Pendleton as installations to visit because they are expected to experience  a significant influx of military servicemembers and their families due to  the planned implementation of DOD’s Grow-the-Force initiative. Joint  Base McGuire-Dix-Lakehurst and Joint Base Lewis-McChord were selected  primarily because they are 2 of 12 joint bases established by the 2005 Base  Realignment and Closure round with Joint Base McGuire-Dix-Lakehurst  being managed by the Air Force and Joint Base Lewis-McChord being  managed by the Army. Our analysis of the 13 installations we visited  cannot be generalized to other military housing privatization projects.
To assess the progress of DOD’s housing privatization efforts we obtained  and analyzed performance data on each of DOD’s privatization projects.  Specifically, to determine the number of units privatized we obtained data  on the number of projects awarded from OSD’s Web site and received  estimated data on the number of units expected to be privatized from the  services. We obtained construction and renovation data from OSD and the  services through February 2009. Although we did not independently  validate the construction or renovation data supplied by OSD and the  services, we did however compare this data to the data in OSD’s  semiannual report to Congress and the services’ program performance  reports. We also discussed with officials steps they have taken to ensure  reasonable adequacy of the data. As such, we determined the data to be  sufficiently reliable for the purposes of this report.
To assess occupancy rates, we interviewed DOD and service officials to  discuss project occupancy expectations, the factors that contribute to  lower-than-expected occupancy rates, the financial and other impacts that  result from lower-than-expected occupancy rates, and the responses  normally taken when occupancy is below expectations. We obtained,  reviewed, and analyzed project occupancy rates and trends for all  privatization projects awarded as of September 30, 2008, the last quarter  for which occupancy data from all three military departments were readily  available, and compared these data to occupancy expectations. We did not  collect data for two recently awarded Army projects—Fort Sill, Oklahoma,  and Joint Base Lewis-McChord, Washington—because data were not yet  available. Also, for the 12 projects at the installations we visited, we  reviewed project justification and budget documents to determine each  project’s occupancy expectations and compared actual occupancy rates  with the expectations. When occupancy rates were below expectations,  we reviewed project performance reports and interviewed local officials to  determine the causes, consequences, and any actions taken or planned in  response.
To identify challenges to the military housing privatization program  stemming from DOD’s recent force structure and infrastructure initiatives,  we conducted numerous interviews with OSD, the services, and  installation commanders. In these discussions we identified the challenges  officials said these initiatives were creating for them in providing sufficient  and affordable privatized housing and noted some measures they had  taken to mitigate those challenges. In addition, we collected and analyzed  the most recent housing market analyses for privatization projects on  installations expected to experience significant growth to determine the  extent to which family housing requirements were expected to increase.  Finally, we collected and analyzed relevant guidance and documentation  regarding the measures taken by the services to incorporate increased  requirements into their housing privatization projects, specifically the  retrofitting of already awarded projects by the Army. As such, we obtained  the legal views of the Office of the Secretary of Defense, Department of  the Army, and Department of the Navy regarding the implementation of  section 2875 of Title 10, U.S. Code.
To assess the effect the turmoil in the financial markets is having on  DOD’s housing privatization portfolio, we interviewed officials from each  service and collected and analyzed internal service quarterly portfolio  summary reports and analyses. In addition, we interviewed representatives  from the Army and Air Force’s real estate development consultants to  further understand the dynamics of the financial markets and how those  dynamics are affecting housing privatization projects. Service officials  identified some newly awarded projects that were more affected by  market turmoil than others. For those projects, we interviewed service  officials and consultant representatives to determine the causes,  consequences, and any actions taken or planned in response. We also  reviewed service and OSD project performance reports, such as the  semiannual program evaluation plan, to determine the extent to which  DOD is reporting impacts of the financial markets on its housing  privatization projects to Congress. Further, we attended a bond industry  conference on the financing of military housing privatization to learn the  views of the investment community regarding the impacts of the financial  market turmoil on housing privatization projects and obtained and  reviewed private sector financial analyses and reports regarding military  housing bonds and the current state of the financial markets.
We conducted this performance audit from April 2008 to April 2009 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 based  on our audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above, Laura Talbott (Assistant  Director), Shawn Arbogast, Steven Banovac, Susan Ditto, George Duncan,  Laurie Ellington, Katherine Lenane, Charles Perdue, Mathew Scire, and  Steven Westley made key contributions to this report.
section_title: Related GAO Products
paragraphs: Military Housing: Management Issues Require Attention as the  Privatization Program Matures. GAO-06-438. Washington, D.C.: April 28,  2006.
Military Housing: Further Improvements Needed in Requirements  Determination and Program Review. GAO-04-556. Washington, D.C.:   May 19, 2004.
Military Housing: Better Reporting Needed on the Status of the  Privatization Program and the Costs of Its Consultants. GAO-04-111.  Washington, D.C.: October 9, 2003.
Military Housing: Management Improvements Needed as the Pace of  Privatization Quickens. GAO-02-624. Washington, D.C.: June 21, 2002.
Military Housing: DOD Needs to Address Long-Standing Requirements  Determination Problems. GAO-01-889. Washington, D.C.: August 3, 2001.
Military Housing: Continued Concerns in Implementing the  Privatization Initiative. GAO/NSIAD-00-71. Washington, D.C.: March 30,  2000.
Military Housing: Privatization Off to a Slow Start and Continued  Management Attention Needed. GAO/NSIAD-98-178. Washington, D.C.:  July 17, 1998.
subsections: section_title: Financial Markets
paragraphs: Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:  January 30, 2009.
High Risk Series Update. GAO-09-271. Washington, D.C.: January 2009.
Financial Regulation: A Framework for Crafting and Assessing  Proposals to Modernize the Outdated U.S. Financial Regulatory System.  GAO-09-216. Washington, D.C.: January 8, 2009.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-266T.  Washington, D.C.: December 10, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-161.  Washington, D.C.: December 2, 2008.