Federal Real Property: Improved Cost Reporting Would Help Decision Makers Weigh the Benefits of Enhanced Use Leasing
Released: 2013-01-18T00:00:00

Letter

Background

EULs are typically long-term leases of federal land or buildings to public sector or private sector companies. Some agencies with EUL authority are authorized to accept in-kind consideration, such as improvements to agency properties or construction of new facilities in place of cash rent. There is no government-wide definition of an enhanced use lease and agencies’ EUL authorities and guidance vary, as these examples illustrate:

VA was authorized to enter into EULs for up to 75 years with public and private entities for leases that contributed to VA’s mission and would enhance the use of the property for cash or in-kind consideration; however, this authority expired on December 31, 2011. Prior to the expiration of VA’s EUL authority, VA entered into 92 EULs that remain active. In August 2012, VA’s EUL authority was reauthorized through December 2023, but the current authority allows VA to enter into EULs up to 75 years only for the provision of supportive housing for veterans or their families that are at risk of homelessness or are homeless. VA may accept cash consideration, or it may enter into an EUL without receiving consideration, and it is prohibited from entering into leasebacks. VA may not enter into an EUL without advanced written certification from OMB that the lease complies with the statutory requirements. VA reports annually on the details, benefits, and costs of its EUL program. The annual report states that it gives a transparent view of the measureable outcomes of the cost-effective benefits to veterans that the EUL program provides.

NASA is authorized to enter into EULs of agency properties for cash consideration or, if the EULs involve the development of renewable energy production facilities, in-kind consideration. NASA may not enter into leasebacks. NASA policy requires that EULs relate to and support the agency’s mission of research, education, and exploration. The agency’s longest EUL term is 95 years. NASA’s EUL authority expires in December 2017. NASA reports annually to Congress on its EUL program’s status, proceeds, expenditures, and effectiveness.

State is authorized to enter into EULs for its properties acquired in foreign countries for diplomatic and consular establishments.longest EUL term is 99 years and expires in 2090. According to State officials, the agency does not have a formal EUL program. It has only State’s utilized EULs in three instances. State uses EULs on a case by case basis when directed by Congress to retain properties or when it does not consider disposal a desirable option due to the strategic or historic value of an asset. For example, State was required to retain the Palazzo Corpi building in Istanbul, Turkey.its property inventory and monitors the transactions and the cash flows but does not report externally on its EUL program.

State carries the EULs in

USDA is authorized to demonstrate whether enhanced use leasing of agency real property at its Beltsville Agricultural Research Center and the National Agricultural Library for cash consideration will enhance the use of the leased property. The authority requires that EULs be consistent with the USDA’s mission and have terms no longer than 30 years. USDA’s EUL authority expires in June 2013. USDA reported to Congress on the management and performance measures associated with its EUL demonstration program and is required to report on the success of the program upon completion in 2013.

Table 1 shows how the four agencies we reviewed used EULs.

OMB coordinates and provides guidance on federal real property management government-wide in its role as Chair of the Federal Real Property Council, which is composed of federal real property-holding agencies. For example, OMB Circular A-11 provides general guidance on evaluating the performance of federal programs and on the budgetary treatment of federal leases, including EULs and leaseback arrangements. OMB’s guidance does not provide specific information about the treatment of EULs, but does require EULs with leasebacks above certain threshold amounts be submitted to OMB for their budgetary-scoring impact. OMB’s instructions also outline how budget authority for the cost of leasing an asset is to be recorded in the budget, depending on how risk is shared between the government and the lessee, for three types of leases: operating leases, capital leases, and lease purchases.

Agencies Attributed Benefits of EULs to Their EUL Programs, but Did Not Always Do the Same with All Costs

Agencies Cited Various EUL Benefits

Agency officials told us that EULs provide a variety of benefits to the government in addition to better utilization of underutilized federal property. The commonly cited benefits include enhanced mission activities, cash rent revenue, and value received through in-kind consideration.

Officials from the four agencies we reviewed said that EULs contribute to their ability to conduct mission-related activities; for example:

VA officials said that EULs provide the agency mission-related benefits such as veterans’ priority placement for housing. For example, according to VA, its EUL with Vancouver Housing Authority in Washington to develop a previously vacant site at a VA medical center campus supports the agency’s strategic goals of (a) eliminating homelessness among veterans by providing housing and (b) reducing its inventory of vacant and underutilized capital assets.

NASA officials said that EULs provide the agency mission-related benefits, such as research and development of aerospace technologies. For example, according to a NASA official, NASA’s EUL with a company that researches and develops battery systems for electric vehicles advances the agency’s mission of developing new power and propulsion systems for vehicles used in space launches.

State officials said that EULs provide mission-related benefits by allowing the department to maintain properties symbolic of U.S. history and diplomacy. For example, State declared the historically significant Talleyrand building in Paris excess (see fig. 1) but chose not to dispose of it because the building had served as the administrative headquarters for the Marshall Plan, the postwar American reconstruction plan for Western Europe. According to State Department officials, State’s EUL lessee supports the agency’s mission by maintaining the building and retaining space inside of it for the George C. Marshall Center including a permanent exhibit commemorating the Marshall Plan.

USDA officials said that the agency’s EUL program allows it to better utilize property while also collaborating with researchers on mission- related goals. For example, USDA officials told us that its EUL of greenhouse space at its Beltsville Agricultural Research Center has allowed the agency to advance its mission of developing more efficient crops because the lessee conducts research at the EUL site directly linked to this goal. According to USDA officials, each EUL lessee is required to have a formal collaborative research agreement with the agency.

All four agencies we reviewed reported cash benefits from EULs. Individual EULs can generate millions of dollars for the federal government, but most EULs generate small amounts of cash revenue. For example, the average VA EUL generated about $25,000 in cash revenue in fiscal year 2011.the four agencies in our review received in fiscal year 2011.

Agencies’ Experiences in Using EULs Provide Illustrative Examples about EUL Use

Based on recent agency experiences, EULs may be a viable option for redeveloping underutilized federal real property when disposal is not possible or desirable, but agencies raised issues pertaining to EULs that affect their use or budgetary treatment. First, NASA has reported that the limitation on its authority to accept in-kind consideration has limited its ability to encourage use of EULs and investments in underutilized NASA property. Second, recognizing potential budget impacts associated with EUL leasebacks and other long-term commitments has proved challenging for VA. Although the results of our review cannot be generalized to all agencies, these challenges provide illustrative examples of the types of issues that can affect a federal agency’s decision or ability to use EULs.

In-Kind Consideration

According to NASA officials, in-kind consideration is critical for encouraging lessees to invest in agency properties. NASA’s ability to accept in-kind consideration expired at the end of 2008; it was restored on a limited basis in 2011 exclusively for renewable energy projects. NASA officials said that this limitation in the agency’s ability to accept in- kind consideration has hindered its ability to enter into EULs that could improve the property. In particular, according to the NASA officials, prospective lessees are reluctant to make capital improvements that will have to be conveyed to the government at the end of the lease without receiving other compensation, such as a reduction in cash rent. For example, a lessee, as previously discussed, agreed to invest $11 million in infrastructure projects that would benefit the company during the lease but benefit the government during and after the lease in return for a reduction in the lessee’s cash rent payments. Representatives from NASA and the lessee told us that this provision was critical to successfully negotiating the EUL.

Budget Impacts of EULs

VA officials said that assessing and recognizing the budget impacts of EULs is complicated and maybe interpreted differently by agencies with EUL authority. In particular, VA EULs can include long-term commitments that are recognized in the federal budget in different ways. OMB’s Circular No. A-11 guidance specifies that lease obligations be recorded when the contract is signed; sufficient budget authority must be available at that time to cover the obligation. However, the obligated amount that is to be recorded differs by type of lease. For capital leases and lease purchases, OMB Circular A-11 states that the amount obligated should equal the net present value of these lease payments over the full term of the lease. For operating leases, OMB Circular A-11 states that agencies should record an amount equal to the total payments under the full term of the lease or the first year’s lease payments plus cancellation costs.VA views EUL leasebacks as operating leases and consequently does not obligate the total amount of these commitments upfront in its budget. VA’s leaseback costs are nearly $16 million annually (see table 3), but VA and CBO disagree on the extent to which VA should account for the budget impacts for EULs that could include long-term government commitments. For example, VA’s leaseback costs for its Chicago West Side EUL were about $3.5 million in fiscal year 2011. VA regards its underlying office and parking purchase agreements as 2-year operating leases, as opposed to capital leases or lease purchases. VA officials said that the department is properly treating the office and parking purchase agreements as operating leases, because VA can cancel the office and parking leasebacks at the end of each 2-year agreement. However, in a 2003 report to Congress on the budgetary treatment of leases, CBO found that VA used this enhanced use lease to obtain a $60 million regional headquarters building and parking facility. The CBO report stated that VA entered into a 35-year enhanced use lease for a four-acre site with an owner trust, with VA as the sole named beneficiary. VA subsequently leased back space in the building and the parking facility that the lessee constructed on the site.

The CBO report also stated that:

VA’s lease payments played a crucial role in allowing the lessee to borrow funds. VA is committed to a two-year lease of 95 percent of the space in the building and 95 percent of the parking facility; almost all of the lessee’s revenue will initially come from VA.

The initial two-year lease is automatically renewed unless the VA takes specific steps at the end of the lease period to halt it. In addition, as long as VA chooses to occupy any portion of the facility it must make payments that are sufficient to cover amortization and interest on the lessee’s debt.

VA also has the right to purchase the building from the lessee at any time for a price that would cover payments on the lessee’s debt.

Thus, VA has a long-term commitment to cover the lessee’s capital costs even if it reduces its occupancy in the building, and this, together with an implicit right to renew the lease, would appear to make the arrangement either a lease-purchase or, if the trust is not viewed as a separate entity from VA, a government purchase financed by federal borrowing.

As such, CBO concluded in its report that the intent of the West Side EUL project was to provide VA with capital assets (an office building and parking facilities for VA staff) without recording the cost of the purchase upfront in the budget. In general, we have also consistently stated that the full costs of the government’s commitments should be reflected upfront in the budget.officials said the agency made changes in subsequent EULs to address and in their view eliminate CBO’s early concerns related to EULs with leasebacks.

Conclusions

Agencies have shown that EULs have the potential to produce mission- related and financial benefits for otherwise underutilized federal real property, but the costs and benefits of these programs are not fully understood, given different agency practices in accounting for EUL costs. Some EULs bring in large amounts of cash rent, such as the State Department’s $20.6 million Istanbul EUL and NASA’s $147.7 million EUL, but most EULs have much more modest benefits to the government where the costs could more easily outweigh the benefits. For example, the average VA EUL earned about $25,000 in cash revenue last year— financial benefits that could be outweighed by consultant, termination, and leaseback costs, which agencies have not consistently attributed to their EUL programs. Lacking clear guidance and failing to incorporate all of the costs related to agencies’ EUL programs could cause agencies to overstate the net benefits of these programs when reporting the performance of their EUL programs or making decisions about future EULs.

Recommendation

To promote transparency about EULs, improve decision-making regarding EULs, and ensure more accurate accounting of EUL net benefits, we recommend that OMB work with VA, NASA, State, and USDA, and any other agencies with EUL authority, to ensure that agencies consistently attribute all costs associated with EULs (such as consulting, termination, and leaseback costs) to their EUL programs, as appropriate.

Agency Comments

We provided a draft of this report to the Deputy Director for Management of OMB and the Secretaries of Veterans Affairs, State, and Agriculture and the Administrator of NASA for review and comment. In commenting on a draft of this report, OMB generally agreed with GAO’s observations and recommendation. OMB emphasized that Circular No. A-11 provides guidance on budget scoring and is not intended to address the costs and benefits of EULs. We amended our recommendation to reflect that there are a variety of ways to ensure that the costs of EULs are consistently tracked and reported. Veterans Affairs, State, Agriculture, and NASA generally agreed with our conclusions and the agencies provided technical comments, which we incorporated as appropriate. See appendix III for VA’s comments along with our responses to the technical comments.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Deputy Director for Management of OMB and the Secretaries of Veterans Affairs, State, and Agriculture, and the Administrator of NASA. Additional copies will be sent to interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs maybe found on the last page of this report. Major contributors to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to determine: (1) To what extent do agencies attribute the full benefits and costs of their EULs in their assessments of their EUL programs? (2) What have been the experiences of agencies in using their EUL authority?

To address these both of these objectives we reviewed prior GAO reports on enhanced use leasing and capital financing, and contacted the Office of Management and Budget (OMB), Congressional Budget Office (CBO) and 11 agencies: (1) Veterans Affairs (VA), (2) National Aeronautics and Space Administration (NASA), (3) Department of State (State), (4) Department of Agriculture (USDA), (5) General Services Administration (GSA), (6) Department of Energy (Energy), (7) Department of Interior (Interior), (8) Department of Justice (DOJ), (9) United States Postal Service (USPS), (10) St. Lawrence Seaway Development Corporation (SLSDC), and (11) Tennessee Valley Authority (TVA) based on size or evidence of EUL authority. We identified the 11 agencies based on our review of property data and documents from: (1) The 7 largest civilian real property holding agencies, by total square footage, as of fiscal year 2010, as listed in the Federal Real Property Profile, (2) GSA’s Real Property Authorities for Federal Agencies (2008), (3) Agencies’ Authorities Regarding EULs and Real Property Sales from GAO-09-283R, and (4) interviews with officials from agencies identified in the above 3 sources to determine if they used EULs and if they knew of any other agencies that used EULs. Using information from the 11 agencies we contacted, we selected the 4 agencies (VA, NASA, State and USDA) that have used their EUL authority to enter into EULs. We selected 16 case study EULs from the four agencies that have EULs based on a range of lease purposes (e.g., leasing of vacant land for development and leasing unused office space); estimated financial benefits (e.g., cash benefits and in-kind consideration); and varying geographic locations. The case studies were located in Chicago, IL; North Chicago, IL; Mountain Home, TN; Vancouver, WA; Somerville, NJ; Moffett Field, CA; Beltsville, MD; Fort Howard, MD; Paris, France; Istanbul, Turkey, and Singapore. Because the 16 case studies were selected based on a non-probability sample, observations made based on our review of the 16 case study locations do not support generalizations about other EUL sites. Rather, the observations made provided specific, detailed examples of issues that were described by agency officials and lessees. We also interviewed agency officials at the local level and headquarters locations, and reviewed relevant laws describing agencies’ EUL authorities and agency documentation, including agencies’ regulations and guidance on enhanced use leasing. We visited the 9 case studies located in the U.S. to observe the properties firsthand, interviewed agency officials and lessees about their experience with EULs at these locations, and reviewed documentation regarding these properties. The case study EULs were located at NASA’s Ames Research Center in Moffett Field, California, VA sites in Maryland, New Jersey and Washington state, and a USDA agricultural research center in Beltsville, Maryland. For the three State case studies we did not visit, we interviewed headquarters officials and reviewed relevant documentation including site-visit reports. For the four VA sites we did not visit in Chicago, Illinois, Chicago (West Side), Illinois; North Chicago, Illinois; and Mountain Home, Tennessee, we reviewed the agreements between VA and its lessees and the past work of the Congressional Budget Office and the VA’s Office of Inspector General. We also interviewed OMB, CBO, and GSA officials to better understand government-wide views, guidance, and practices on enhanced use leasing.

We conducted this performance audit from October 2011 to December 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: 16 Case Study Enhanced Use Leases by Location, Property Type, and Tenant Use

As shown in table 3, we reviewed 16 case study EULs. We reviewed 8 VA EULs, 4 from NASA, 3 from State, and 1 from USDA.

Appendix III: Comments from the Department of Veterans Affairs

GAO Comments

1. VA suggested changing this paragraph related to its energy programs.

We edited the paragraph to align with the related text in the body of the report to which we added context on the different types of EULs that can include long-term government commitments, including those types described in VA’s comment. 2. We made the changes suggested by VA. 3. VA indicated that it already reports its consultant costs associated with its EULs as part of its overall management costs. We continue to believe that VA should report all EUL costs as part of its EUL program specifically, including consultant costs. 4. VA indicated that it attributed termination costs to its overall program—but not its EUL program. We continue to believe that VA should report all EUL costs as part of its EUL program, including termination costs. 5. VA indicated that its leaseback of the second bay at Somerville was not identified at the time of lease execution, but this contention is not supported by the lease agreements.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Keith Cunningham, Assistant Director; Amy Abramowitz; Melissa Bodeau; Carol Henn; Hannah Laufe; James Leonard; Sara Ann Moessbauer; Lisa G. Shibata; and Crystal Wesco made key contributions to his report.