VA Real Property: Action Needed to Improve the Leasing of Outpatient Clinics
Released: 2014-06-03T00:00:00

Letter

Background

VA generally provides inpatient care at large VA medical facilities that are owned by the federal government and provides outpatient care at leased facilities. As of fiscal year 2013, VA had 1,889 leases, of which 1,192 were medical outpatient clinics and other medical facilities, varying in size and cost. Leased medical space generally consists of outpatient clinics, mental health clinics, readjustment-counseling centers, research, and other types of clinical leases. Non-medical space generally consists of administrative, warehouse, data center, parking, and regional office leases. According to VA, much of the non-medical space is integral to providing medical services in other locations. See table 1 for the numbers of VA leased properties from fiscal years 2004 through 2013.

VA has recognized the need to modernize its facilities and realign its real property portfolio to provide accessible, high-quality, and cost-effective services. However, much of VHA’s infrastructure was designed and built decades ago when there was a greater focus on hospital-centered, inpatient care. VA officials recognize that VHA’s infrastructure does not fully align with the health care needs of the current veteran population and that VHA faces challenges in updating its infrastructure, such as: providing medical services for returning veterans from Afghanistan and Iraq, who increasingly require specialized care for injuries such as the treatment of spinal cord and traumatic brain injuries; keeping pace with advancements in health care services and technologies that often dramatically change the physical infrastructure requirements of hospitals and clinics; and addressing changes in veteran demographics, including the differing treatments and care required for veterans of different generations and the shifts in veteran populations among different areas of the country that place continued demands on the capital-asset portfolio.

To plan for future infrastructure needs, VA established its Strategic Capital Investment Planning (SCIP) process for its fiscal year 2012 budget submission to Congress. As part of this planning effort, VA annually reviews its real property priorities and conducts a gap analysis to identify its need for medical facilities. The SCIP process includes major construction projects and leasing projects. Local plans are centrally validated, evaluated, and consolidated into a prioritized national project list. VA also uses this planning process to develop a 10-year long-range plan, which prioritizes a list of projects targeted to reduce service gaps. submit a prospectus to Congress for all major medical facility leases. VA submits a prospectus for new projects (property that it has never before leased) as well as succeeding or follow-up leases that have expired or will soon expire. VA’s annual budget submissions provide Congress with the prospectuses for all proposed new major-medical lease projects for which VA is seeking authorization for the next fiscal year, including life-cycle costs.However, according to VA officials, VA does not submit a prospectus when exercising pre-negotiated options to extend the lease within the stipulated maximum lease term.

In addition, VA provides estimates for future leasing needs.

VA’s process for procuring major leases is two-part: (1) CFM and VHA plan and prepare for a leasing project prior to entering into a lease agreement, and (2) CFM oversees the build out of the leasing project, not the administration of the lease. CFM has the overall responsibility for managing VA’s nationwide leasing program, including negotiating and executing development of the lease project. After completion of the facility, VHA activates it to provide medical care. See table 2 for information on VA’s two-part leasing process.

Project Delays and Cost Increases for Outpatient Leases Mostly Occurred Prior to Entering into the Lease Agreement

Project Delays

VA has experienced substantial delays in executing new outpatient clinic lease projects, nearly all of them occurred prior to entering into a lease agreement with the developer. We found that 39 of the 41 congressionally authorized outpatient clinic projects we reviewed experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years, while 2 projects experienced schedule time decreases. Our data analysis showed that 94 percent of these delays occurred prior to entering into the lease agreement. For all but one of the projects that experienced a delay, the delay occurred during the pre-lease agreement stage. We also compared the length of delays that occurred during the pre-lease agreement stage to the length of delays that occurred once a lease agreement was entered into with the development firm. We found that the average delay during the pre-lease agreement stages for all 41 projects totaled nearly 3.1 years.Conversely, the average project delay once a lease agreement was finalized totaled approximately 2.5 months, and 11 outpatient clinic projects actually experienced schedule decreases during this stage. VA officials at 6 of our 11 outpatient clinic projects selected for detailed review mentioned that the large majority of schedule delays occur during the period prior to entering into a lease agreement. See figure 1 for an overview of schedule changes experienced by the 41 outpatient clinic projects we reviewed during the pre-lease agreement stage. (See app. II for schedule information for individual clinic projects.)

For the 41 lease projects we reviewed, we found that several factors contributed to delays: VHA’s Late or Changing Requirements. According to data we analyzed and VA officials we interviewed, late or changing requirements were the most common reasons for delays. Requirements can pertain to facility size, types of treatment rooms, types of medical equipment, electrical voltage needs, and other details. We found that in many instances, CFM either did not receive VHA’s requirements on time, or VHA changed its requirements during the solicitation of offers, necessitating a re-design that affected the schedule. In evaluating VA data, we found that 23 of the 41 leasing projects (56 percent) experienced delays because VHA was late in submitting space requirements to CFM, or VHA changed space requirements and thus the scope of the project. For example, the size of the Jacksonville outpatient clinic had increased by 29 percent, and the Austin outpatient clinic site we visited had increased by 36 percent from the time the prospectuses for these projects were submitted to Congress. Furthermore, officials at the Austin outpatient clinic said delays or changes to VHA’s requirements necessitated the project’s re-design, which, in turn, caused a delay of 19 months. Specifically, the initial authorization request for the Austin project was for 85,000 square feet and 400 parking spaces. VHA revised the space plan to 135,322 square feet to accommodate projected increases in patient visits, and subsequently approved a second revised space plan of 185,822 square feet and 1,200 parking spaces. VA did notify Congress of its intent to increase the size of clinic by more than 10 percent. The completed solicitation for offers was not finalized until July 2009, though several amendments were issued in October 2009 due to revised specifications. Consequently, VA had to extend the due date for the offers to provide bids.

Site Selection Challenges. In analyzing VA data, we found that 20 of the 41 outpatient clinic projects we reviewed (49 percent) experienced delays due to difficulties in locating or securing a suitable site. For example, an increase in scope to the Jacksonville project resulted in a larger building design that then required more land. To accommodate these changes, the landowner worked to acquire additional properties around the already selected site. Although the developer was ultimately successful in obtaining additional land for the project, this process led to delays. According to VA officials, prior to entering into the lease agreement, there were delays associated with difficult negotiations with the developer. In addition, there were significant environmental clean-up requirements at the site, which needed to occur before construction began. The original site’s location was obtained in December 2002, but the larger site was not obtained until December 2009, a delay of 7 years. VA officials said that without these negotiations, it is likely that the project would have been significantly more expensive. Site selection challenges were also noted by VA officials in Las Vegas. According to those officials, the site VA selected for a new outpatient clinic was located under the Nellis Air Force Base fly-over space, and VA discovered contamination issues on the property. These problems forced VA to alter the location of the outpatient clinic on the property, contributing to delays.

Outdated Guidance. We found that outdated policy and guidelines resulted in challenges for VA staff in completing leasing projects on time at the sites we reviewed. For example, officials from the four Las Vegas outpatient sites we visited stated that VA’s policies for managing leases seem to change for each project, creating uncertainty regarding CFM job responsibilities. An official from the Ft. Wayne outpatient clinic also stated that VA’s leasing process is confusing and seems to frequently change. A contracting official from one of the Las Vegas clinics said she had to call various VA headquarters officials while involved in the planning phase to obtain the latest management procedures, because some of VA’s guidance had not been updated since 1998. VA is now drafting its leasing Handbook Guidance 7815, which VA officials said they plan to finalize by the end of fiscal year 2014. As we will discuss in more detail later in the report, this handbook covers the authorities, roles and responsibilities, policies, procedures, administration, and management of VA’s real property leasing program.

In commenting on our draft, VA noted that many lease delays resulted from external influences to VA’s leasing process and out of VA’s control. VA also noted that other factors could cause delays including site selection issues involving the National Environmental Policy Act requirements, stakeholder concerns, procurement and lessor issues, solicitation/award protects, and post-award contracting issues. Furthermore, these comments stated that some projects required updates to space requirements to accommodate improved delivery of care for veterans. VA noted that as delays to a lease occur, VHA re-evaluates and updates the design and space program to ensure the contemplated lease project will meet VA’s latest requirements and optimally serve veterans.

Project Cost Increases

In addition to substantial delays, VA also experienced cost increases to its outpatient clinic projects when compared to the costs in the projects’ prospectuses. VA provided cost data for its outpatient clinic lease projects in January 2014. Table 3 includes a description of the key cost data elements we reviewed.

When compared to the prospectus costs for the 31 projects with complete cost data,million to $172.2 million, an increase of nearly $19 million (12 percent). For the 31 projects, the total prospectus’ first year rent was estimated at $58.2 million, but the total awarded first-year rent for these projects equaled $92.7 million as of January 2014, an increase of $34.5 million (59 percent). Such increases in rent have long term implications for VA, because the Department must pay the higher rent over the lifetime of the lease agreement. For example, all 31 VA lease projects included in this cost analysis have lease terms of 20 years, and the increase in rent must be paid for the duration of the contract. we found that total first-year costs increased from $153.4 The causes of the total cost increase can be attributed primarily to increases in the projects’ awarded first-year rent due to the schedule delays and changes to the design or scope of a project that we discussed previously. Schedule delays can increase costs because of changes in the local leasing market during the period of the delay. Therefore, when VA estimates costs as part of the prospectuses submitted to Congress in the annual budget request, an automatic annual escalation is applied to each project to account for rising costs and market forces that make construction and leased space more expensive over time. VA officials said the escalation ensures that the authorized cost of the project is in line with the realities of the real estate and construction markets. As discussed earlier, the average schedule delay for the 41 outpatient clinics we reviewed was approximately 3.3-years per project. Because VA annually adjusts a project’s cost by an increase of 4 percent for each year the project is delayed, project delays directly result in cost increases. Additionally, we found that projects we reviewed increased in total size by 203,000 square feet. Changes in a project’s size expand the scope of the project, requiring design changes, which can result in schedule delays, further adding to costs. More specifically, the VA outpatient clinic in Austin, Texas, discussed above, increased in size by 36 percent and first year rent and build-out costs increased from $6.2 million to $19.8 million, a total increase of $13.6 million, or 219 percent.

Although first year rents increased for the 31 projects—increasing overall total costs—VA’s total build-out costs were lower than reported in the projects’ prospectuses. As described in table 3, build-out costs are one- time, lump-sum payments VA makes to developers for special purpose, medically related improvements to buildings when VA accepts the projects as completed. For example, once a building is constructed to provide standard office space, changes to transform the building to a medical clinic, such as providing a nurses’ station, would be considered a build-out cost. In the prospectuses, VA estimated that build-out costs for the 31 projects would total $95.2 million, but the total awarded build-out costs totaled $79.5 million as of January 2014, a decrease of $15.7 million (16.5 percent). VA officials said the decrease in build-out costs from those originally estimated in the prospectuses was due to the national downturn in the commercial real estate market starting in 2008. According to VA officials, this created more competition among developers and helped VA realize more competitive pricing on its medical build-out requirements than was anticipated in the prospectuses. Figure 2 provides an overview of first year rent and build-out costs for VA’s 31 outpatient clinics with complete cost data. (See app. III for cost information for individual clinic projects.)

VA Has Taken Some Actions to Improve Its Leasing-Management Practices for Outpatient Clinics; However, Its Guidance Could Be Improved

VA has made some progress in addressing issues with its major medical- facilities leasing program. In 2012, VA formed a high level council, the Construction Review Council, to oversee its capital asset program, including leasing. Based on the findings of the council and our work, VA is planning the following improvements to the major medical facilities leasing program: requiring detailed design requirements earlier in the design process to help avoid the delays, scope changes, and cost increases, and providing Congress with more complete information on the cost of proposed future lease projects.

However, we also found that while VA has updated and refined some guidance for specific aspects of lease projects—including design guidance for the construction of outpatient clinics—to better support VA’s leasing staff and prevent project delays; it has not updated its overall guidance for staff involved in leasing projects.

Creating a Review Council

In April 2012, the Secretary of Veterans Affairs established a Construction Review Council (CRC) to serve as the single point of oversight and performance accountability for the planning, budgeting, execution, and delivery of the VA’s real property capital-asset program, including the leasing program. The council issued an internal report in November 2012 that contained findings and recommendations resulting from meetings it held from April 2012 to July 2012. The CRC also held a meeting specifically focused on VA’s leasing program in June 2012.The objectives for that meeting were to create an efficient and effective leasing process that would help make projects available to the veteran community more quickly and improve collaboration between leasing- program stakeholders (such as CFM and VHA officials and contractors), thus reducing the risk of projects’ experiencing the previously described cost increases and delays. The CRC report, along with GAO’s past work on VA leasing,below.

Requiring More Detailed Design Requirements Earlier in the Process

In part based on CRC findings, VA recognizes that firm design requirements need to be established earlier to help major lease projects avoid delays and cost increases. As part of the review of the leasing program, the CRC reviewed three leasing-project case studies where it found that VA was taking too long to initiate leasing projects after VA had submitted the required prospectus to Congress, and that VA’s multiple changes to requirements before or during the acquisition and construction process contributed to delays. As noted earlier in the report, we also found that delays occurred prior to entering into a lease agreement, due in part to changing requirements. To limit the need for making changes to design requirements, VA is moving forward with plans to provide detailed requirements prior to submitting a prospectus to Congress for major construction and lease projects for congressional authorization. During our review in January 2014, VA issued a guidance memorandum directing that beginning with fiscal year 2016, VA would develop more detailed space requirements before a prospectus is submitted to Congress for major construction and major leased projects.to VA officials, the more detailed requirements should be prepared as part of a business case for each major construction and lease project during the SCIP planning process that occurs before a prospectus is prepared. The business case will be required to include a detailed Space and Equipment Planning System plan documenting space requirements to a more detailed level than previously required. Officials stated that this process should help ensure that the prospectus is supported by more detailed space planning and thus provides more accurate scope and cost information to Congress. We did not evaluate the effectiveness of this new process because it has not been fully implemented.

Developing a Process for Handling Scope Changes

VA has also taken steps to better manage scope changes to project leases. The CRC’s review of the three leasing projects noted that certain changes in requirements, such as to facility size or layout, required additional approvals and notifications, which consequently delayed the signing of the lease. During our review, on August 30, 2013, the Secretary of Veterans Affairs approved a new concept—the Capital Program Requirements Management Process—to better address scope changes to both major-construction and “prospectus-level” lease projects that have been approved through the SCIP process. According to VA officials, this process will help ensure review and approval of any proposed scope changes by the appropriate department officials and will require a systematic review of projects at pre-defined stage-gates, as well as reviews of the effects of any changes to scope, schedule, and cost. We did not evaluate the effectiveness of this new process because it has not been fully implemented.

Providing Congress with More Complete Information on Costs for Proposed Projects

VA provided incomplete information to Congress on the estimate of total costs for proposed future projects as a part of the SCIP Long Range Capital Plan program. VA’s 2014 budget submission includes an estimate of total costs for proposed future lease projects for the next 10 years; however, this estimate only provides the first year’s annual rent and build-out costs, and not the complete lifecycle costs for these leases. Thus, in the budget submission, VA reported that future leasing costs for more than 221 leasing projects were $779 million—less than the estimated total lifecycle cost of the Myrtle Beach outpatient clinic alone.

Because many of VA’s leases are 20 year leases, reporting only one year’s rent underestimates the cost considerably. VA officials stated that the lifecycle costs cannot be accurately determined until the leases are closer to being entered into because of potential changes in market conditions and demographic demand that could affect terms of the lease. However, at the time of our review, it was not clear what was included and excluded from the estimate of total costs for proposed future lease projects presented to Congress. In January 2014, VA officials told us they plan to clarify information presented on these leases beginning in the fiscal year 2015 budget submission. VA’s 2015 budget submission stated that estimated costs presented are first year annual rent and build-out costs, and do not include future annual rent payments.

Refining and Updating Leasing Guidance

The CRC report recognized the need to improve the guidance for planning and implementing major construction projects. In addition, our past work has documented that insufficient guidance can cause confusion VA decided to apply this lesson among VA officials and contractors.learned to its leasing program and is taking steps to update and refine some of its guidance.

VA is updating its solicitation for offers, which describes the requirements for the leases. during the planning phase. According to CFM officials, these efforts are scheduled to conclude in 2014.

Subsequently, VA reviews the offers, accepts an offer, and then enters into a lease agreement. including providing leasing officials with new checklists, having VA officials provide peer reviews, and having leadership clear project documents before awarding leases.

VA has created standardized project schedules to ensure uniformity in reporting, tracking, and managing projects, in an effort to provide realistic timelines across all leased facilities.

VHA efforts have primarily focused on updating guidance on specific aspects of the leasing process, such as design and offer solicitation, rather than the overall guidance that is used by all headquarters and field staff involved in leasing projects. Although VA has taken steps to improve guidance on specific aspects of the leasing program, it has not made changes to its handbook for planning outpatient clinics. We reviewed VHA’s 2004 Handbook on Planning and Activating Community Based Outpatient Clinics, which is VHA’s overall guidance for leasing outpatient clinics. The Handbook is intended to establish consistent planning criteria and standardized expectations. The handbook is widely used by VA officials and provides important guidance, in particular, clarifying the differing responsibilities of officials and departments and the legal authorities of the leasing process. However, this guidance is so out of date that it no longer adequately reflects the roles and responsibilities of the various VA organizations involved in major medical facilities leasing projects. According to VA officials, the close collaboration of these offices is necessary for a successful lease project. The lack of updated guidance can affect coordination among stakeholders, which could contribute to schedule delays and cost increases. Using outdated guidance can lead to miscommunications and errors in the planning and implementing of veterans’ leased clinics. Furthermore, the policy, planning criteria, and business plan format were developed based on an old planning methodology that VA no longer uses, thus the guidance does not reflect VA’s current process.

As of November 2013, VHA’s leasing program has a long-term liability of $5.5 billion and growing, but its guidance on outpatient clinics is a decade old and no longer relevant. Standards for Internal Control in the Federal Government calls for federal agencies to develop and maintain internal control activities, which include policies and procedures, to enforce management’s directives and help ensure that actions are taken to address risks. Such activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results.

Conclusions

Similar to VA’s largest medical-center construction projects, we found that its major leasing projects have experienced substantial delays as well as cost increases. In looking closer at the leasing program, we found that VA is taking steps toward improving its management of the program; steps that may help address these issues. Most notably, VA’s Construction Review Council should improve management of both the construction and leasing program. Furthermore, the improvements VA is planning based on the findings of the council and our work—1) requiring more detailed design requirements, 2) improving the process for handling scope changes, and 3) providing Congress with more complete information— represent a good start. However, these efforts are still in the early stages, and some were undertaken during the course of our review. Thus, the success of those efforts will depend on how quickly and effectively VA implements them. Furthermore, the guidance used by all staff involved in planning and implementing leasing projects is outdated and does not reflect recent organizational changes affecting the way leasing projects are managed. Without current guidance, stakeholders may have difficulty knowing with whom to coordinate, and projects could continue to experience delays and cost increases resulting from late-stage design changes.

Recommendation for Executive Action

To improve the management of VA’s leased outpatient-clinic projects, we recommend that the Secretary of Veterans Affairs update VHA’s guidance for leasing outpatient clinics to better reflect the roles and responsibilities of all VA staff involved in leasing projects.

Agency Comments and Our Evaluation

We provided a draft of this report to VA for review and comment. In its written comments, VA concurred with our recommendation and discussed actions under way to implement it. However, VA cited concerns that the report did not fully reflect the reasons for lease delays. VA noted that many lease delays resulted from influences external to VA’s leasing process and out of VA’s control. For example, other factors that could cause delays include site selection issues involving the National Environmental Policy Act’s requirements, stakeholders’ concerns, procurement and lessor issues, solicitation/award protects, and post- award contracting issues. Furthermore, these comments stated that some projects required updates to the space requirements to accommodate improved delivery of care for veterans. VA also noted that as delays to a lease occur, VHA re-evaluates and updates the design and space program to ensure the contemplated lease project will meet VA’s latest requirements and optimally serve veterans. We added this information in the section of the report that discussed contributing factors to delays at VA projects. VA suggested a number of technical corrections, which we incorporated as appropriate. VA’s letter is reprinted in appendix IV.

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If you or your staff have any questions regarding this report, please contact me at (202) 512-2834 or stjamesl@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 V.

Appendix I: Scope and Methodology

To determine the extent to which costs and schedules changed for selected Department of Veterans Affairs’ (VA) outpatient clinic lease projects, we obtained and analyzed data that VA provided on VA’s 41 authorized major outpatient-clinic projects as of January 2014.included a short project description, project location, the original and current total estimated cost of the project, and the original and current completion date. We analyzed the current cost and completion dates to determine any increases in costs and the extent to which projects may have exceeded original schedules and summarized the results. We also collected VA information on reasons for cost increases and schedule changes to VA’s outpatient-clinic leased projects. We assessed the reliability of the data through interviews with knowledgeable VA officials and a review for completeness and any unexpected values. We determined that the data were sufficiently reliable for the purpose of this report.

In Las Vegas, Nevada, we visited four clinics that were accepted by VA between September 2011 and January 2012 and interviewed officials from each site. (2) project costs; (3) scope and cost changes; and (4) schedule delays.We conducted site visits to the projects in Las Vegas (four projects), Baltimore, and Austin based on the status, size, and costs for these projects. For these projects, we talked to officials either on site or by phone discussing the reasons for changes in costs and schedules and possible improvements for VA’s leasing program. We obtained specific information for VA’s ongoing major outpatient- clinic lease projects as of January 2014. The information from our site visits is illustrative of issues affecting particular sites and should not be used to make generalizations about VA sites agency-wide.

To identify any actions VA has taken to improve its leasing management, and any opportunities that exist for VA to further improve its management of leased projects, we reviewed VA’s management practices of leased projects at the 11 locations we selected. We interviewed VA headquarters’ officials from the Veterans Health Administration, Office of Construction and Facilities Management, Office of General Counsel, as well as contract specialists and senior resident engineers at the leased sites we visited. We reviewed and analyzed leasing documents, directives, agency policy and guidance, previous VA reports, and interviewed representatives from a project development firm and general contractor construction firm. We also reviewed the Office of Management and Budget’s (OMB) Capital Programming Guide, Supplement to Office of Management and Budget Circular A-11, VA’s Strategic Plan, VA Office of Inspector General (OIG), Congressional Budget Office, and GAO’s past reports related to federal leasing issues.

We conducted this performance audit from May 2013 to April 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Changes in Schedule for Department of Veterans Affairs’ Major Medical Facility Leases

In January 2014, VA provided us with data for its 41 ongoing major outpatient-clinic lease projects. We calculated the “total years changed” column by counting years from the prospectus acceptance date, which was the date first submitted to Congress, to the actual or anticipated acceptance date, as reported by VA. There are no reported data for VA outpatient clinic projects submitted as part of VA’s fiscal year 2014 budget submission because these projects have yet to be authorized. Of the outpatient clinic projects reviewed, 39 of 41 (95 percent) experienced schedule delays. Table 4 provides a summary of schedule data for each of VA’s 41 major medical facility lease projects.

Appendix III: Changes in Cost for Department of Veterans Affairs’ Major Medical Facility Leases

In January 2014, VA provided us with data for its 41 ongoing major outpatient-clinic lease projects. Of these 41 projects, 31 projects contained complete cost data. We compared the prospectus cost submitted to Congress for authorization to the total current estimated first year cost for the 31 projects with complete cost data. We found that the costs for these projects increased from $153.4 million to $172.2 million, an increase of nearly $19 million (12 percent). Table 5 provides a summary of cost data for the 31 projects.

Appendix IV: Comments from the Department of Veterans Affairs

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov.

Staff Acknowledgments

In addition to the contact named above, Ed Laughlin, Assistant Director; Nelsie Alcoser; George Depaoli; Raymond Griffith; Amy Rosewarne; and Crystal Wesco made key contributions to this report.