Public-Private Partnerships for Purposes of Federal Real Property Management
Released: 2014-12-31T00:00:00

While public-private partnerships (PPPs) have long been used to manage real property, congressional interest in PPPs has recently increased due to the large number of underutilized and excess buildings owned by federal agencies, as well as sequestration and other spending constraints. According to a report on federal real property holdings in FY2010, the government's portfolio included 71,000 underutilized buildings and 6,700 excess buildings, which cost a combined $1.66 billion to operate and maintain. Disposing of these buildings through the "standard" processes, described below, imposes its own costs—and can take years—as agencies must comply with various statutory mandates pertaining to environmental remediation, historic preservation, and "public benefit" conveyances. Moreover, these costs in operating, maintaining, or disposing of property are currently being incurred at a time when agencies generally have fewer appropriated funds at their disposal due to sequestration and tightening budgets. Annual appropriations for real property activities at the General Services Administration (GSA), for example, have decreased by more than half a billion dollars from FY2010 ($8.54 billion) to FY2012 ($8.02 billion). Taken together, these factors have prompted increased interest in PPPs, which generally rely upon nonfederal entities to finance redevelopment and, in some cases, disposal of federal real property.

There is no single, accepted definition of public-private partnership , and PPPs can be structured in many ways. However, for purposes of this report, a PPP is an agreement whereby a nonfederal entity acquires the right to use real property owned or controlled by a federal agency—typically through a long-term lease—in exchange for redeveloping or renovating that property (or other property). In many cases, the agency and the nonfederal entity share the net cash flow or savings that result from the agreement. The term real property is defined by the Federal Management Regulation as any interest in land, together with any fixtures thereon, under the control of a federal agency except: (1) the public domain; (2) lands reserved or dedicated for national forest or park purposes; (3) minerals in lands withdrawn or reserved from the public domain that are suitable for disposition under the public land mining and mineral leasing laws; (4) certain other lands withdrawn or reserved from the public domain; and (5) any crops designated for disposition by severance and removal from the land.

This report provides an overview of key policy and legal issues pertaining to PPPs for purposes of federal real property management. It begins by discussing the current processes whereby federal agencies maintain and dispose of real property, as these processes help explain the appeal of PPPs. The report then discusses how PPPs are commonly structured, agencies' authority to enter PPPs, and the legal requirements to which PPPs may be subject. It concludes with considerations for Congress, such as agencies' capabilities to enter into and oversee performance of these arguably complicated arrangements.

Other CRS reports address the use of PPPs in other contexts, including CRS Report R43410, Highway and Public Transportation Infrastructure Provision Using Public-Private Partnerships (P3s) , by [author name scrubbed]; CRS Report R43308, Infrastructure Banks and Debt Finance to Support Surface Transportation Investment , by [author name scrubbed] and [author name scrubbed]; and CRS Report R41880, Foreign Assistance: Public-Private Partnerships (PPPs) , by [author name scrubbed].

Background

Current interest in PPPs arises, in part, as a result of the "standard" processes agencies use to dispose of real property that they no longer need due to changes in their functions and missions. As a general rule, when agencies no longer need particular properties, they must dispose of these properties through statutorily prescribed processes, described below, that can be cumbersome and costly. Agencies frequently must spend appropriated funds to operate and maintain properties they no longer need, and pay costs associated with their disposal. PPPs potentially enable federal agencies to rely upon nonfederal entities to finance the operation and maintenance of such properties, or to exchange these properties for other real property or services.

Changes in Agency Missions, Changes in Property Portfolios

Federal agencies acquire and maintain a range of real property assets to help them fulfill specific functions and missions. The Department of Energy (DOE), for example, owns more than a dozen laboratories which support its mission of promoting scientific and technological innovation through research, and the Department of Veterans Affairs (VA) owns over a hundred hospitals which support its mission of providing health care to veterans and their families. Agencies also own thousands of properties they use for office space, barracks, family housing units, and warehouses. In total, the government owned more than 306,000 buildings at the end of FY2012.

Over time, agency portfolios change, sometimes significantly. Agencies may restructure their real property portfolios, for example, as their needs change. The Department of Defense (DOD) closed numerous bases over the past two decades as part of its effort to restructure America's military forces to meet national security threats in the post-Cold War environment. Agencies may also consolidate their real property holdings in order to achieve operational benefits. The Department of Homeland Security (DHS), for example, is currently in the process of consolidating personnel from several locations in the Washington, DC, area, into a new headquarters at the West Campus of St. Elizabeth's Hospital—a move which DHS believes will improve communication and coordination across its administrative components. Agencies may also transfer personnel from one location to another in order to reduce costs. The Bureau of Public Debt (BPD), for example, plans to relocate 450 employees from Hyattsville, MD, to Parkersburg, WV, potentially allowing BPD to realize an estimated $36 million in savings over five years.

When agency personnel are relocated, they leave behind empty space in the buildings their employees once occupied. In some cases, entire properties may no longer be needed by an agency, in which case those properties are designated as excess . In other cases, an agency may choose to retain property that it only partially occupies, in which case the property is considered underutilized . The frequent shifting of agency staff between buildings has left the government with a substantial amount of excess and underutilized space, which can be costly to maintain. As previously noted, according to a report on federal real property holdings in FY2010, the government's portfolio included 71,000 underutilized buildings and 6,700 excess buildings, which cost a combined $1.66 billion to operate and maintain. Moreover, the number of excess and underutilized buildings is not steadily declining, but fluctuates over time, sometimes increasing by hundreds of properties a year. For example, the government ended FY2008 with 43,360 underutilized and 10,140 excess buildings in its portfolio, but ended FY2009 with 45,190 underutilized and 10,327 excess buildings—a net increase of 2,017 unneeded properties. The ongoing cost of maintaining thousands of properties that are needed only in part, or not at all, is one of the primary reasons the Government Accountability Office (GAO) has included federal real property management on its "high-risk" list since 2003.

"Standard" Disposal Process Can Be Cumbersome and Costly

One reason agencies hold so many unneeded properties is that the real property disposal process can be cumbersome and costly. The steps in the "standard" disposal process are prescribed by statute. Agencies must first offer to transfer properties they do not need (i.e., excess properties) to other federal agencies, which generally must pay market value for excess properties they wish to acquire. Excess properties that are not acquired by federal agencies (known as surplus properties ) must then be offered to state and local governments, and qualified nonprofits, for use in accomplishing "public purposes" specified in statute, such as creating public parks or providing services to the homeless. Agencies may convey surplus properties to state and local governments, and qualified nonprofits, for public benefit at less than fair market value—even at no cost. Surplus properties not conveyed for public benefit are then available for sale, or are demolished if the property cannot be sold due to its condition or location.

Agencies have consistently argued that these statutory requirements slow down the disposition process, compelling them to incur operating costs for months—sometimes years—while the properties are being screened for disposal. Real property officials at the VA have said the McKinney-Vento Act ( P.L. 100-77 )—which generally mandates that surplus property be screened for use by organizations that assist the homeless—can add as much as two years to the disposal process. Because public benefit conveyance requirements are prescribed by statute, agencies generally may not skip screening, even for surplus properties that could not be conveyed anyway. Statutes pertaining to environmental remediation and historic preservation can also add time to the process. It may take agencies years of study to assess the potential environmental consequences of a proposed disposal, and to develop and implement an abatement plan, as required by law. Similarly, the National Historic Preservation Act requires agencies to plan their disposal actions so as to minimize the harm they cause to historic properties, which may require additional procedures, such as consulting with historic preservation groups at the state, local, and federal levels. Agencies that wish to demolish vacant buildings face demolition and cleanup costs that, at times, exceed the cost of maintaining the property—at least in the short run—which may encourage real property managers to retain a property rather than dispose of it. Further, some agencies have found their disposal efforts complicated by the involvement of stakeholders with competing agendas. The Department of the Interior (DOI) has said that its efforts to dispose of some of its unneeded real property can be complicated by the competing concerns of local and state governments, and historic preservation offices, as well as by political factors.

PPPs as Alternative Means to Develop or Dispose of Property

In an effort to reduce the government's inventory of excess and underutilized properties, committees held hearings during the 113 th Congress on federal real property management and Members introduced several bills that would have reformed the disposal process. While many of these proposals had wide scope, there was also specific interest in expanding the use of PPPs. Proponents of PPPs have identified a number of potential benefits of such agreements, including that PPPs may enable agencies to finance real property activities—such as repairs and renovations—they do not have the funds to undertake. The risks and limitations associated with PPPs, in contrast, may be less well understood due, in part, to the various legal authorities that agencies rely upon in entering PPPs, and uncertainties regarding the legal requirements to which PPPs are subject.

Potential Benefits of PPPs

PPPs would appear to offer federal agencies numerous benefits, including reduced operating costs; repaired and modernized space; decreased maintenance and repair backlogs; and increased revenue. This is because, regardless of how specific PPPs are structured (see " PPP Structures ," below), the contributions of each partner are generally the same: the federal government provides real property—buildings, space within buildings, land, or structures —and the nonfederal partner provides capital for improvements to the property. The real property the government provides is typically underutilized or excess, and may include undeveloped land. These properties are often in suboptimal condition and in need of costly repairs. Their poor condition is due in part to their age—underutilized and excess properties are often among the oldest properties in an agency's portfolio. Many unneeded DOD buildings were originally constructed in the 1940s and 1950s, for example, in response to the military needs of World War II and the Cold War. Similarly, many unneeded facilities held by VA were built to treat soldiers who served in the military many decades ago, including buildings that date back to the Civil War. St. Elizabeth's Hospital, the "new" headquarters for the Department of Homeland Security (DHS), was built in 1855.

Underutilized and excess properties are also in poor condition because they have not been a priority for reinvestment. Agencies do not have sufficient funds in any given year to meet all of their real property needs, and when comparing the benefits of investing in expensive repairs of aging buildings (e.g., replacing obsolete electrical systems, or repairing roofs that leak), or acquiring new space that can help the agency better fulfill its mission, agencies generally prioritize the latter. With the acquisition of new space, agency personnel move out of older properties, rendering them even less valuable to the agency and less likely to receive needed repairs. As a result, the government holds thousands of properties it does not need and cannot afford to maintain, but which are in poor condition and therefore more difficult to dispose of. It has been estimated, for example, that VA would need to spend about $3 billion to repair the buildings in its portfolio rated in "poor" or "critical" condition—56% of which were vacant or underutilized, and therefore might be candidates for disposal. Not surprisingly, underutilized and vacant properties are often a net cost to the government. Operating expenses for unneeded buildings continue to accrue, even if there are no tenants—and hence no revenue. When there are tenants, aging, inefficient systems are costly to run. Energy costs in older buildings are higher, for example, because such buildings have heating and cooling systems that are several generations old.

Despite these factors, nonfederal partners may see an opportunity to generate a profit, and therefore be willing to invest in a PPP. While underutilized and excess properties are often in poor condition, they may be in desirable locations where rental rates are high. The nonfederal partner may renovate the property and be able to recoup its costs through subleasing the improved space. Similarly, the nonfederal partner may see opportunities in the market for a particular type of space which it could provide through construction or renovation. There might be a strong demand for hospital space in a local market, for example, and a nonfederal partner might conclude that it would be a relatively low-risk investment to construct a new medical facility on undeveloped federal land in that area. In other cases, a nonfederal partner might have expertise in a particular type of renovation, such as installing energy efficient wastewater systems, and enter into an agreement that pays for the costs of such renovations through the savings in operating costs. The nonfederal partner might also be able to renovate unneeded space in an older building and make it more mission-effective for the agency that holds it. For example, an agency may not have the funds to upgrade the electrical system in an underutilized building in order to take advantage of new technology. A nonfederal partner might upgrade the electrical system in the entire building as part of its renovation and retain the rights to sublease the unoccupied space, while sharing the revenue with the landholding agency. In short, nonfederal partners with access to capital and real property expertise are often able to find ways to monetize assets that the government cannot, particularly under current fiscal constraints.

Potential Risks and Limitations

Despite providing numerous potential benefits to federal agencies and their partners, PPPs are not without their risks and limitations. These risks and limitations are, however, typically less discussed than the potential benefits of PPPs, and can seem somewhat more abstract than the benefits. This is partly because, as discussed below, federal agencies currently rely upon various legal authorities in entering PPPs, and there can be some uncertainty as to whether particular PPPs are subject to specific legal requirements. Relatedly, there are fewer "real world" illustrations of these risks and limitations at the federal level, because federal agencies' use of PPPs for purposes of real property management has, to date, been fairly limited, particularly as compared to that of state and foreign governments. Thus, this report generally discusses the potential risks and limitations of PPPs below, in the context of either the " Legal Framework as to PPPs " or " Considerations for Congress ."

PPP Structures

PPPs can be structured in many ways, depending, in part, upon the legal authorities under which agencies enter and perform such agreements. However, despite this variability, PPPs—and particularly PPPs formed pursuant to agencies' authority to enter long-term leases of real property—generally share certain key elements. These elements, and examples of common PPP structures, are discussed below, as a way of illustrating the types of actions that agencies may wish to take in entering or performing a PPP and, thus, paving the way for a discussion of the " Legal Framework as to PPPs ."

Key Elements of a PPP

The process of forming a PPP typically begins when an agency identifies a property that could provide greater benefits to the government if redeveloped or renovated. The agency then works with a nonfederal partner to determine whether a redevelopment strategy would provide the agency with the benefits it seeks, and the nonfederal partner with financial returns sufficient to cover the risk of investing in the property. If an agreement is reached, the partners typically enter into a master ground lease, which formally establishes the terms of the partnership, including (1) the length of the master ground lease; (2) the redevelopment strategy; and (3) the method of financing the redevelopment. Taken together, these three elements constitute the structure of a PPP. Typically, the master ground lease is a long-term lease of 50 years or more. A long lease is preferable to nonfederal partners because it provides them with more time to recoup their investment and generate a profit. Generally, nonfederal partners seek a 15% return on their investment, sometimes referred to as the internal rate of return (IRR). If the market is not strong or the costs of the improvements are high—rendering a 15% IRR less likely—then the partner may want a lease that exceeds 50 years as one way to mitigate the increased risk.

The redevelopment strategy and the method of financing are closely linked. The former refers specifically to the work that the nonfederal partner agrees to undertake, while the latter is a combination of the revenue generated from the improved space and, in some cases, savings realized by reduced operating costs. A nonfederal partner might agree to renovate and modernize an aging VA medical center, for example, and, in return, obtain the right to construct and lease office space on the unused portion of the land. In this example, renovation and new construction are the redevelopment strategy; and the work is financed by revenue generated from leasing new office space on underutilized land.

Financial benefits to the government may also include a division of property cash flows. Under some PPPs, the nonfederal partner leases space from an agency, renovates that space, and subleases it at a rate higher than the rate it pays to the agency. The rental payments the nonfederal partner receives are referred to as operating income . In order for the nonfederal partner to make a profit, however, the sublease must generate sufficient income to exceed not only the cost of the lease, but also operating costs and payments on debt incurred to finance the renovation. The amount that remains after deducting lease payments, operating costs, and repayment of debt from operating income is defined as the property cash flow . Typically, the nonfederal partner takes a "preferred return" from the property cash flow, then divides the remaining revenue—known as the net cash flow —into two shares, one of which the nonfederal partner keeps, and the other of which it pays to the agency. The government has two revenue streams in this scenario: (1) lease payments, and (2) net cash flow. The amount that the government receives from net cash flows and the amount the nonfederal partner keeps are typically spelled out in the PPP agreement.

Examples of Common PPP Structures

There are many varieties of PPP structures, and the legal and policy ramifications of each are unique. However, several common redevelopment and financing structures can be identified.

A federal agency holds underutilized land that includes four nearly vacant warehouses. The property is in a market where there is a strong demand for federal office space. The agency enters a PPP under which a developer leases the property and constructs a new office building on the unused portion of the land. The developer subleases the warehouses and the new office space, which is partially occupied by the lessor (i.e., the federal agency) and partially leased by other federal agencies. A federal agency owns a historic building that is unoccupied and in disrepair. The property is in a desirable location, and public and private entities are expected to be interested in acquiring space. A developer leases the property and renovates it in accordance with historic preservation requirements. The first floor is subleased by retailers, and the city government subleases the office space on the floors above. A federal agency owns land with a deteriorating office building and a small parking lot. The property is in a market where there is moderate to strong demand for private sector office space. The developer demolishes the existing building and constructs a larger, modern office building in its place, which is partially occupied by the lessor (i.e., the federal agency) and backfilled by businesses. The developer also replaces the parking lot with a garage that has space for tenants and for public parking. A federal agency holds family housing units that are in need of repair. The agency wishes to retain all of the units due to a shortage of space. The developer repairs the existing housing units and is able to add new units on underutilized land owned by the same agency. A federal agency's utility costs are well above average due to antiquated heating and cooling systems. A business installs new, more energy efficient equipment. In return, the business is repaid for the cost of the equipment and installation, and receives 50% of the energy savings. A federal agency wants to add an annex to a multi-use facility it owns. A developer builds the annex in exchange for several acres of excess property. The value of the excess land is roughly equal to the cost of constructing the annex.

In-Kind Benefits

While the benefits obtained by agencies in the above examples generally consist of lease payments from the developer and monetary savings through reduced utility costs and maintenance backlogs, agencies may also receive "in-kind" benefits. As a rule, agencies are required to obtain "fair consideration"—generally equivalent to fair market value—in exchange for selling or leasing real property. However, agencies may accept non-monetary benefits as consideration when expressly authorized by statute to do so. In-kind consideration can include the provision of goods and services to the agency, or its personnel or clients. Examples of in-kind consideration are illustrated below.

A federal agency wants new transitional housing for the clients it serves. A local government agrees to build the new housing units on vacant land the agency owns. The local government leases the land from the agency and uses part of the housing complex for its own homeless programs. As part of the agreement, the federal agency's clients get priority placement for housing. A federal agency needs renovated office space. A developer agrees to lease the building, renovate it, and sublease space back to the agency. As part of the agreement, agency personnel are allowed to use the child care center in the renovated building at reduced rates. A federal agency has unused space in a lightly utilized, deteriorating office building. It leases a majority of the space in the building and permits the lessee to offset its rent obligations by $1 million in exchange for building a water tower that could be used by all of the building's tenants.

Legal Framework as to PPPs

While many PPPs share the same key elements, discussed above (see " Key Elements of a PPP "), there is considerable variation in the legal authorities under which federal agencies enter and perform PPPs. This is largely because federal law is generally silent as to PPPs, per se , particularly PPPs for purposes of improving or disposing of federal real property. Absent a statute that generally authorizes the formation of PPPs, agencies seeking to enter such agreements rely upon their authority to take the specific actions necessary to form and perform the contemplated agreement (e.g., lease property for a specific period of time, receive consideration in-kind). However, because individual agencies have differing authority to take such actions, the nature of the PPPs they enter can vary. Relatedly, because agencies must rely on other authorities—such as their authority to enter certain long-term procurement contracts—in forming PPPs, it can sometimes be unclear whether particular legal requirements that generally pertain to agencies' exercise of these authorities apply to their PPPs.

Legal Authority to Enter PPPs

Unlike some state laws, federal law does not define the term public-private partnership , or, with certain narrow exceptions, authorize agencies to enter PPPs, per se . Instead, those agencies that have, to date, entered agreements that could be characterized as PPPs have done so under their authority (1) to lease, otherwise convey, or permit the use of federal real property; and (2) to enter procurement contracts.

A lease can be seen as a type of contract, whereby the owner of a particular property grants another party the right to use the property for a certain period of time. However, under federal law, a lease of real property is generally not a procurement contract. The Federal Acquisition Regulation (FAR) defines a contract as a "mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them"; and supplies , to mean "all property except land or interest[s] in land." Thus, contracts whereby the federal government acquires leasehold interests in real property do not constitute procurement contracts. Leases whereby the federal government disposes of interests in land are similarly excluded because they do not involve a "seller" furnishing supplies or services to the government.

Authority to Lease or Otherwise Convey Real Property

Because the opportunity to acquire or use federal real property, and enjoy certain proceeds therefrom, is typically what motivates prospective partners to enter PPPs with the government, federal agencies have historically relied upon their authority to lease or otherwise convey real property under their jurisdiction or control when entering PPPs. Many agencies have such authority, notwithstanding the fact that GSA is commonly described as the federal government's "landlord," and, as a rule, is responsible for the leasing and disposal of federal real property. Congress has enacted a number of statutes that authorize specific agencies, acting on their own and without the involvement of GSA, to lease certain real property for particular purposes. For example, DOD has authority to lease nonexcess real property under its control for five or more years in exchange for the maintenance, repair, or environmental restoration of the property or facilities. This and other examples are described in Table 1 . Commentators sometimes describe agencies that have statutory authority to enter such "long-term" leases as having enhanced use lease (EUL) authority. However, a number of statutes grant agencies authority that is tantamount to EUL authority (i.e., authority to lease federal real property to public or private entities for a number of years in exchange for cash or in-kind consideration), but do not use the term "enhanced use lease."

Relatedly, some agencies also have authority to convey federal real property by means other than leases, or to permit certain uses of such property, that they could potentially rely upon in entering public-private partnerships. For example, Section 111 of the National Historical Preservation Act (NHPA), as amended, authorizes federal agencies to

lease an historic property owned by the agency to any person or organization, or exchange any property owned by the agency with comparable historic property, if the agency head determines that the lease or exchange will adequately insure the preservation of the historic property.

Section 111 applies government-wide. However, some agencies have similar authority to exchange one real property for another, or give away certain interests in real property. Other agencies have authority to permit nonfederal entities to use their real property or facilities for a fee, or subject to certain conditions. The President, for example, may permit nonfederal entities to construct and operate international bridges, and require that these entities provide facilities or services to federal agencies for free as a condition of their permit.

Authority to Procure Goods or Services

Procurement contracts are generally not as well suited to the formation and performance of PPPs as leases, because procurement contracts typically have shorter durations than leases, and generally contemplate the agency paying the contractor for maintaining or operating federal real property. However, there are certain provisions of federal law which authorize "long-term" procurement contracts that provide for the contractor to finance performance and then share in any savings that the agency may realize as a result of the contractor's performance. Perhaps the best known of these is Section 801 of the National Energy Conservation Policy Act (NECPA) of 1978, as amended, which permits agencies to enter long-term contracts "solely for the purpose of achieving energy savings and benefits ancillary to that purpose." Such energy savings performance contracts (ESPCs) may, "notwithstanding any other provision of law, be for a period not to exceed 25 years," and

shall provide that the contractor shall incur costs of implementing energy savings measures, including at least the costs (if any) incurred in making energy audits, acquiring and installing equipment, and training personnel, in exchange for a share of any energy savings directly resulting from implementation of such measures during the term of the contract.

In other words, Section 801 of NECPA contemplates third parties financing the costs of modifications to the infrastructure of federal buildings in exchange for a share in any savings in operating costs that may result from these modifications. Previously, federal agencies had similar authority to enter into "share-in-savings" contracts for information technology, which provided for the contractor to share in any savings acquired through "solutions" that it provided for improving the agency's mission-related or administrative processes, or accelerating the achievement of agency missions. However, share-in-savings authority expired in 2005.

Legal Requirements as to PPPs

Federal agencies' general practice of relying on various leasing authorities when forming PPPs can lead to questions regarding the legal requirements to which such partnerships may be subject. Some have wondered, for example, whether agencies must issue solicitations for proposed PPPs and whether partners are competitively selected; as well as whether workers on partnership projects must be paid locally prevailing wages and fringe benefits under the Davis-Bacon and related Acts. In some cases, the statute that authorizes the lease also answers some of these questions by imposing specific requirements upon agencies' use of its leasing or other authorities (e.g., competitive selection of vendors). As previously discussed, the FAR —which people generally look to for the requirements pertaining to federal contracts—does not apply to leases of real property, because the FAR governs procurement contracts, and leases of real property are not procurement contracts. However, some agencies have adopted regulations which impose requirements analogous to those of the FAR upon their own acquisition (if not disposal) of leasehold interests in real property. Also, some federal statutes implemented, in part, through the FAR could potentially be found to apply to PPPs on the grounds that a lease is a contract, or on similar grounds. In yet other cases, federal law does not appear to provide any guidance on certain questions likely to arise in the context of PPPs (e.g., selection of projects), or on the use of specific terms that potential partners are likely to seek in any partnership agreement (e.g., non-compete provisions). Some states, in contrast, have comprehensive guidance that addresses these and other requirements as to the PPPs of state agencies or local governments.

This section discusses various legal requirements that can apply to PPPs, including requirements deriving from (1) the specific statutes authorizing leases of federal real property or other actions that agencies rely upon in forming PPPs; (2) agency regulations that could be similar to the FAR; and (3) generally applicable statutory provisions pertaining to "contracts" or "public works." The section also discusses situations where federal law appears to be silent on particular issues relevant to the formation of PPPs (e.g., selection of projects, non-compete agreements). It similarly surveys the range of requirements addressed in certain—arguably comprehensive—state laws regarding PPPs to illustrate the various provisions that could potentially be made regarding agencies' formation and performance of PPPs.

Statutes Authorizing Leases or Other Agency Actions

As previously noted, agencies frequently rely upon specific statutes authorizing them to lease or otherwise convey real property, enter energy savings performance contracts, or take other actions when entering and performing PPPs. There are a number of such statutes. Few of these statutes apply government-wide, and those that do often apply only to specific properties, or for specific purposes. For example, as previously noted, agencies may rely on the authority of Section 111 of the NHPA, to lease historic property only in order to insure its preservation. Similarly, agencies may enter long-term contracts under the authority of Section 801 of the NECPA, "solely for the purpose of achieving energy savings and benefits ancillary to that purpose." Further, NECPA defines energy savings specifically to mean reductions in the cost of energy, water, or wastewater treatment in existing federally owned buildings or facilities as the result of specified actions (e.g., improvement, lease or purchase of operating equipment), among other things.

More commonly leasing and other authorities pertain to individual agencies and, often, to specific properties and purposes, as the examples in Table 1 illustrate. Such agency-specific statutes may regulate certain aspects of any PPPs entered by the agency, most commonly (1) the duration of the agreement; (2) the type and amount of consideration received by the agency; (3) the terms under which conveyances may be made to different types of partners (e.g., state and local governments as opposed to commercial entities); and (4) the retention and use of any funds received by the agency as a result of the agreement. Other guidance sometimes appears in statutes—such as guidance regarding the selection of projects and partners, the terms and conditions of agreements, and whether agencies must notify Congress or the public of proposed or finalized agreements —but with less frequency. Conversely, in some cases, statutes expressly authorize agencies to take certain actions vis-à-vis real property "notwithstanding any other provision of law," or on such terms and conditions as the agency may determine.

FAR Generally Inapplicable, but Regulations Could Impose FAR-Like Terms

The FAR is arguably the best known feature of federal contracting. Even those who know little else about federal contracting are generally aware that the FAR exists, imposes specific requirements on agencies, and prescribes "standard" terms for inclusion in certain contracts. The FAR provides specific—often detailed—guidance on a range of topics, from planning acquisitions and conducting market research for purposes of identifying potential suppliers, to tendering and acceptance of performance, to contract payments and close-out. For example, the FAR requires agencies to make information about proposed contract actions available on FedBizOpps ( https://www.fbo.gov/ ), and imposes limits upon agencies' ability to award contracts noncompetitively based on unsolicited proposals (which are particularly likely in the context of public-private partnerships). The FAR also establishes the framework whereby agencies comply with the statutory requirement to "Buy American" when procuring supplies and construction services, and prescribes the use of specific contract terms granting the government the right to terminate contracts for default or the government's convenience. However, as previously discussed, because the FAR only governs the acquisition of supplies and services and defines supplies to exclude interests in real property, its applicability to many federal agency PPPs is limited. Only where an agency relies on its authority to enter a procurement contract—such as an ESPC—in forming a PPP will the FAR typically apply.

On the other hand, there could potentially be cases where the FAR itself does not apply, but the agency has imposed certain requirements like those provided for in the FAR upon itself through the promulgation of regulations, or as terms of its contracts. Perhaps the most notable example of this involves the regulations governing GSA's own acquisition of leasehold interests in real property. These regulations could potentially come into play in certain PPP arrangements, and frequently require GSA to comply with the FAR, absent exceptional circumstances. For example, these regulations require GSA to include "provisions or clauses that are substantially the same as the FAR provisions and clauses" regarding contract disputes in its leases. The regulations similarly require that GSA generally obtain "full and open competition" through the use of "competitive procedures" when awarding contracts to obtain leasehold interests in real property, and that GSA contracting officers comply with the FAR when requiring oral presentations for acquisitions of leasehold interests. It is important to note, however, that GSA's regulations regarding the acquisition of leasehold interests in real property do not parallel the FAR in all ways, and other agencies may not have similar regulations regarding the acquisition or conveyance of leasehold interests in real property under their own governing statutes.

Applicability of Requirements Pertaining to "Contracts" or "Public Works"

In some cases, other statutes—beyond those that authorize the lease, conveyance, or other action that the federal agency took in entering the PPP—could impose certain requirements upon agencies' partnership activities. Often, these are statutes which are implemented, in part, through the FAR, but which could be construed as applicable outside the procurement context because they refer to "contracts" or "public works." How particular PPP projects are structured can also help determine the applicability of such requirements.

For example, insofar as leases of real property are deemed to be contracts, they could potentially be subject to a range of statutory requirements that pertain to contracts, as illustrated by the GAO's 2012 decision in The Argos Group . In this case, GAO relied upon Supreme Court and other precedents holding that leases are contracts for purposes of the Anti-Deficiency Act and the CDA in finding that GSA is required to accord "price evaluation preferences" to Historically Underutilized Business Zone (HUBZone) small businesses when acquiring leasehold interests in real property. GSA had argued that such preferences are required only in procurements of supplies and services (i.e., procurements subject to the FAR), and a lease of real property is not a procurement contract. However, GAO rejected this argument on the grounds that the relevant provisions of the Small Business Act—which requires price evaluation and other preferences for HUBZone small businesses—"do[] not limit the type of contract to which they apply." Rather, according to GAO, the Small Business Act "broadly applies to all federal contracts that involve full and open competition."

Similar logic could potentially cause public-private partnerships to be found to be subject to certain statutory requirements pertaining to "public buildings" and "public works," as illustrated by recent litigation regarding the CityCenterDC project. Although the most recent decision in this case found that CityCenterDC is not a public work, the U.S. Department of Labor (DOL) has appealed this decision and sought to reaffirm its earlier determination that CityCenterDC is a public work and, thus, subject to the Davis-Bacon Act's requirements as to the payment of prevailing wages and fringe benefits on public buildings and works. The Davis-Bacon Act applies, in part, to the "construction, alteration, and/or repair ... of public buildings and public works of the [federal] Government [and] the District of Columbia."

In the CityCenterDC case, both the project developer and the District of Columbia have consistently asserted that the project—which calls for the construction of several types of buildings on land that had been variously conveyed by the city to the developer pursuant to special warranty deeds, 99-year ground leases, and 20-year licenses—is not a public building or work. In making this argument, the developer and the city have noted, among other things, that the developer, not the city, contracted with the builders on this project; "no public funds" will be used to pay for construction; none of the buildings will be constructed for use or occupancy by the city; and the benefits the city would realize from the project are the same as those it realizes from purely private developments (e.g., employment opportunities for residents, increased tax base). However, DOL has taken the opposite view, in part, because it considers the work to have been carried on under the city's authority, given that "the terms of the ground leases, the development agreements, and the Master Plan collectively provide the District with authority over what will be built and how it will be maintained during the lease terms." DOL has similarly noted that the work entails "substantial and continuing economic gains to the District," and that certain buildings will become the District's property at the expiration of the lease, or at an earlier date, if the developer fails to meet specified conditions.

Regardless of the eventual outcome of this litigation, CityCenterDC illustrates how a public-private partnership could potentially be seen to involve a "public building" or "public work" because of how the partnership is structured. DOL's particular focus upon the "public entanglement" in various aspects of the development suggests that DOL, at least, might have taken a different view had the PPP been structured in such a way that the District did not have the same authority over what is built and how it is maintained during the course of the lease, or if the economic gains to the city had been less "substantial" or "continuing."

The structure of the particular PPP in question played a similar role in a 2007 federal district court decision finding that housing units and other infrastructure constructed and maintained on Marine Corps land by a private developer are not subject to local taxation. Here, the government had conveyed the housing units, along with the "income stream from military personnel renting those ... units" to the developer under a 50-year ground lease. Two local governments asserted that this was tantamount to a sale, and thus transferred title to the developer and subjected the project to local taxation. The court found otherwise, noting that the "level of control retained" by the United States under the project indicated that "the [federal] government still holds the land subject to its 'primary jurisdiction and control.'" However, the court expressly indicated that the outcome could have been different had the government sectioned off a portion of the land, effectively severing it from the military installation, and the developer then put the property to non-military uses.

No Relevant Provisions in Federal Law

In other cases, neither the statute that the agency relied upon in entering the PPP, nor other provisions of law, provide guidance on certain topics, including topics that are likely to be particularly relevant in the formation and performance of PPPs. One such topic is the selection of projects. The primary constraints upon agencies' determinations as to which supplies or services to procure, and which properties to acquire leasehold interests in, are arguably based in appropriations law. Agencies generally cannot obligate funds in excess or advance of an appropriation; and appropriations may only be used for their designated purposes to meet bona fide agency needs. Because the totality of agencies' needs typically exceed their appropriations, their ultimate decisions as to what to procure or acquire by lease typically depend upon their conceptions of their missions and the public interest. The same logic would not necessarily apply in the case of PPPs, at least insofar as these projects rely solely upon private financing. Because of this potential disconnect between agency missions and the interests of potential private partners, some states have enacted legislation that requires agencies to consider potential PPPs within the context of their broader priorities, and prohibits them from giving special consideration to forming and performing partnerships just because they have private financing. There do not appear to be any comparable provisions in federal law.

Another example involves "noncompete agreements," or provisions which bar the government from taking certain actions that could interfere with its partner's ability to obtain the contemplated return on its investment during the term of the partnership. Such agreements are not standard features of federal procurement contracts or leases of real property, although certain requirements contracts could potentially be found to have been breached if the agency were to hire another vendor to perform these requirements (or perform the requirements itself). However, a number of commentators have called for the inclusion of non-compete agreements in at least some PPPs, particularly those where a developer builds a facility and then operates it, relying on the revenue generated from the facility's operations to pay off the costs of construction. In such situations, developers are likely to want an agreement whereby the agency promises not to develop or operate other facilities whose existence could cut into the revenue that the developer receives from operating its facilities, and commentators sometimes point to PPPs that have "failed" because they lacked such agreements.

In such situations, federal agencies are currently generally left to their own devices in determining whether to take particular actions (e.g., undertake particular PPPs, consent to non-compete agreements). They are also responsible for drafting any contractual terms on their own, without the benefit of "standard" contract clauses, such as those provided in the FAR. As a result, there could potentially be wide variation between agencies in terms of their willingness to enter PPPs, and the terms of any partnerships that they might perform. This variability could potentially limit parties' willingness to commit to PPPs, as well as public acceptance of PPPs, as discussed below. See " Legal Uncertainties Could Deter Use of PPPs ."

Comparison to State Law

Federal law's general lack of guidance regarding the legal requirements governing agencies' PPPs is in marked contrast to state law. As of June 2014, at least 29 states had statutes which not only define public-private partnership or expressly authorize state agencies or local governments to form PPPs, but also provide guidance regarding specific aspects of their use. In some of these states, as Table 2 illustrates, the guidance can arguably be characterized as "comprehensive," in that it (1) addresses the powers of the state agency and its partner in such agreements; (2) generally requires the completion of feasibility studies before a partnership is undertaken; (3) prescribes procedures for the competitive selection of partners; (4) provides certain protections for offerors (including those whose proposals are not selected); (5) calls for the inclusion of specific terms in any partnership agreements; (6) establishes a framework for setting any user-fees; and (7) provides for the termination or expiration of the agreement. In other states, the guidance is more limited, and addresses only some of these topics.

Considerations for Congress

In considering whether to expand federal agencies' ability to enter PPPs, or overseeing the use of existing PPP authorities, Congress may want to pay particular attention to certain topics, such as (1) the limited information currently available regarding agencies' PPP authorities and their use thereof; (2) the degree to which legal uncertainties may deter agency use, or public acceptance, of PPPs; (3) agencies' capabilities to enter and perform PPPs; (4) whether agencies should be required to develop business plans for their partnership activities; (5) whether agencies should be required to notify Congress, or obtain its approval, when entering into PPPs; (6) agencies' ability to retain and use net proceeds from PPP agreements; and (7) the interplay between PPPs and the current disposal process. Other issues could potentially arise in specific contexts, depending upon the nature of the partnership and the authorities under which it is entered and performed. However, the foregoing seven issues would appear to be common regardless of the context.

Limited Information about PPP Authorities and Their Use

Currently, there does not appear to be any comprehensive source of information about the various PPP authorities of different landholding agencies. GAO has issued reports on particular types of real property authorities that may permit agencies to enter PPPs (e.g., enhanced use lease (EUL) authority), and it has conducted in-depth analyses of PPP activities at particular agencies. However, GAO does not appear to have conducted a comprehensive analysis of all agencies' PPP authorities and practices.

Absent a more comprehensive picture of agencies' PPP authorities, it is difficult to compare various agencies' authorities, or evaluate how particular authorities have been applied, and what effect they may have on reducing excess and underutilized space. Information about existing PPP authorities could be particularly useful if paired with feedback from real property managers at landholding agencies. GAO's report on EUL agreements, for example, included comments from agency officials regarding the benefits and limitations of particular authorities, as well as opinions on what types of authorities they would like to have and how the ability to exercise such authorities would improve real property management. One agency told GAO auditors, for example, that "budget scorekeeping rules under OMB Circular A-11 limit [its] ability to maximize usage of its EUL authority." Further information of this type could help Congress draft legislation which meets specific real property needs—as identified by practitioners—and whose application is not limited by unanticipated factors, such as budget scoring rules.

Legal Uncertainties Could Deter Use of PPPs

The lack of detailed legal requirements can have certain benefits, particularly where PPPs are concerned. Some have noted that such partnerships differ from "standard" procurement contracts in that they require the parties to work together much more closely to achieve shared goals. Thus, it has been suggested, flexibility as to the terms and conditions of such agreements is optimal because the agency and its partner(s) can devise an instrument that is best tailored to meet their needs.

On the other hand, an argument could be made that, insofar as lack of detailed legal requirements results in uncertainty about what requirements apply to particular projects, it may limit parties' willingness to commit to PPPs, as well as public acceptance of PPPs. Both government agencies and prospective partners may be less likely to enter PPP agreements if they perceive there to be significant uncertainties about their rights and responsibilities under these agreements. Similarly, the public could remain skeptical of PPPs if the agreements are seen as being entered into or performed in ways that contradict public expectations about how government activities are to be conducted. For example, there is a widespread expectation that the government selects its business partners competitively and impartially, after publicly advertising its needs. This expectation could potentially be thwarted if an agency enters a PPP based on an unsolicited proposal with an entity that happens to be politically well connected.

Questions about Agency Capabilities to Enter and Perform PPPs

PPPs can be complicated arrangements, requiring knowledge of a range of disciplines: real property, architecture, civil engineering, procurement, and law, to name a few. An agency that lacks a staff with expertise in these disciplines may be at risk of entering into an agreement that does not represent the best value for the government, and of making costly mistakes when implementing the agreement. According to GAO, agency expertise is one of the five key factors in the successful implementation of PPPs. Specifically, GAO reported that the "agencies we reviewed also told us that they established organizational structures and acquired the necessary expertise to interact with private-sector partners to ensure effective partnership."

The monetary consequences of arguably inadequately trained staff entering into real property contracts were illustrated in 2010 when the Securities and Exchange Commission (SEC) entered into a $556 million lease for 900,000 square feet of office space in Washington, DC—600,000 square feet more than the amount of space the agency needed. Among the factors that contributed to this "misguided leasing decision" was the fact that the SEC had only established a leasing office in 2009, and did not put leasing policies into place until 2010. As this example illustrates, the lack of a solid real property organization within an agency can lead to poor decision making and costly mistakes. Congress may wish to evaluate the internal structure of landholding agencies, to ensure that they have the requisite expertise, before providing them with PPP authority.

Potential Requirements to Develop Business Plans for PPPs

The likelihood of developing a PPP that results in maximum benefits to both partners may be enhanced by the use of business plans. The U.S. Postal Service (USPS) has developed and executed business plans as part of its PPP management process for years. The business plans include information about the "division of risks and responsibilities between the Postal Service and its private-sector partner." According to USPS officials, business plans are critical to the successful implementation of PPPs, in part due to the fact that they are drafted jointly with the private partner. Based on USPS's experience, other agencies might benefit from being required to develop business plans prior to entering a PPP. At a minimum, the development of a business plan should help ensure that the agency and its nonfederal partner(s) engage in ongoing discussions about how to structure the agreement to the benefit of both partners. The process of developing business plans may also facilitate the sharing of market information and thereby improve decision-making as the agreement is being negotiated. In addition, business plans provide a road map for PPP implementation, which may help the partners meet milestones and, if made public or shared with Congress, could potentially facilitate oversight.

Potential Requirements as to Congressional Notice or Approval

One of the ways Congress maintains oversight of real property decisions that are made by GSA—which is one of the government's largest landholding agencies—is through the prospectus approval process. Congress has enacted legislation that purports to prohibit appropriations from being made for certain property management purposes unless the House Committee on Transportation and Infrastructure (T&I) and the Senate Committee on Environment and Public Works (EPW) have "adopted resolutions approving the purpose for which the appropriation is made." GSA is further required, in order "[t]o secure consideration for [this] approval," to transmit to Congress a prospectus of the proposed facility that includes a brief description of the building to be constructed, altered, or acquired, or the space to be leased, among other things. In addition, GSA's annual appropriations acts have frequently provided that "funds available to [GSA] shall not be available for expenses for any ... acquisition project for which a prospectus, if required by the Public Buildings Act of 1959, has not been approved."

While these "requirements" are probably not legally binding, GSA has historically complied with them on the grounds that "[t]he relationship between GSA and its authorizing committees is paramount." Similar provisions could potentially also lead to compliance, as a matter of comity, in other contexts, and requiring agencies to seek authorization before entering into PPPs could provide Congress with an opportunity to monitor agency PPP activity and evaluate the soundness of proposed partnerships. Alternatively, agencies could be required to provide Congress with, at a minimum, advance notice of proposed PPPs, as some states require.

Agencies' Authority to Retain and Use Net Proceeds

Real property disposals, such as leasing federal space to nonfederal partners, often generate sufficient revenue that agencies may realize positive net cash flow. Should Congress consider expanding PPP authorities, one issue that may arise is whether agencies should be permitted to retain net proceeds, and, if so, with what limitations. Federal agencies generally say that the authority to retain net proceeds from the disposal of real property—and to use those proceeds as they see fit—is a strong incentive to lease or sell unneeded space.

While permitting agencies to retain net proceeds may result in an increased willingness to use PPPs, some stakeholders believe that congressional oversight may suffer if agencies have too much latitude. Congress has many options for addressing these concerns. PPP legislation could require agencies to deposit net proceeds in the general fund of the Treasury as miscellaneous receipts, or to reduce the debt. This would establish complete congressional control over net proceeds, but could remove the primary incentive some agencies have for entering into PPPs. Alternatively, legislation could require agencies to deposit net proceeds into a fund designated for agency real property activity, and specify whether withdrawals require congressional approval through an appropriation law. Requiring re-appropriation of net proceeds would add an additional layer of oversight, but might deter some agencies from pursuing PPPs since they would have limited control over the funds. Yet another option would be authorize agencies to use net proceeds for any real property activity they deem appropriate, without requiring congressional approval—an option which would provide agencies with considerable autonomy—or permit them to expend net proceeds for any function that the agency is authorized to perform. As this last option provides the least direct oversight, Congress could potentially also require agencies to report on how they spend their net proceeds.

Clarifying Interplay between PPPs and Current Disposal Process

As discussed earlier in this report, the real property disposal process is prescribed by statute. Once a property has been declared as "excess," it enters the disposal process and the agency that controls the property must follow the required steps unless the agency has specific statutory authority to bypass them. Congress may consider whether underutilized and vacant properties should be evaluated as candidates for PPPs prior to being declared excess. Doing so would essentially establish a screening process whereby unneeded space was first considered for a PPP, and only if deemed unsuitable would it enter the statutory disposal process. This might result in a larger number of underutilized and vacant properties being redeveloped, but it would also reduce the number of such properties that could be offered to other federal agencies, conveyed to serve a public purpose, or sold outright. PPP legislation may also provide agencies with specific authority to bypass statutory disposal requirements. Doing so may increase the amount of interest nonfederal entities take in PPP options, because such entities know that agencies can keep a property out of the disposal process, where it might be tied up for months. It may also be the case that systematically screening properties for PPP suitability and offering them for redevelopment and renovation might take just as long as the "standard" disposal process. In the absence of data on the length of time it takes to finalize a PPP and the financial benefits that accrue to the government as a result, it is not clear whether giving agencies special authorities to dispose of unneeded space through PPPs would yield greater returns than disposing of the same properties through the existing process.

Conclusion

Congressional interest in PPPs for purposes of federal real property management seems likely to persist—and may increase—given the constraints of the current real property disposal process and of the fiscal climate. A number of potential benefits of PPPs have been identified, and the common elements of such partnerships are widely recognized. The legal framework governing federal agencies' use of PPPs, in contrast, is less clear. Federal law does not define the term public-private partnership ; nor, with certain narrow exceptions, does it authorize agencies to enter PPPs, per se . Instead, federal agencies have historically relied upon their authority to lease, otherwise convey, or permit the use of federal real property, or their authority to enter certain long-term procurement contracts, when forming PPPs. However, because individual agencies have different authority to lease real property or take other actions in forming PPPs, there is often considerable variability in the types of PPPs they may enter. In addition, there can also be uncertainty as to the legal requirements governing agencies' use of leasing and related authorities in the PPP context. In legislating to expand agencies' authority to enter PPPs, or in overseeing their use of existing PPP authorities, Congress may wish to consider, among other things, agencies' capabilities to enter and perform PPPs; whether agencies should be required to develop business plans for PPPs; and the relationship between PPPs and the current real property disposal process.