VA Real Property: Actions Underway to Improve the Leasing of Outpatient Clinics
Released: 2015-06-25T00:00:00

Letter

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

Project Delays

Our April 2014 report noted that VA has experienced substantial delays in executing new outpatient-clinic lease projects; nearly all of the delays occurred in the planning stages prior to entering into a lease agreement with the developer. Specifically, we found that 39 of the 41 outpatient- clinic projects for which a prospectus was submitted 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 in the planning stages 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 the 11 outpatient-clinic projects selected for detailed review mentioned that the large majority of schedule delays occur during the planning stages prior to entering into a lease agreement.

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 VHA 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 in many instances, either that CFM either did not receive VHA’s requirements on time or that 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 to the time they were completed.

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. However, the officials said that the negotiations resulted in keeping project costs lower. In addition, there were significant environmental clean-up requirements at the site, requirements that needed to be satisfied 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.

Outdated Guidance: At the sites we reviewed, we found that outdated policy and guidelines resulted in challenges for VA staff to complete leasing projects on time. 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.

Project Cost Increases

In addition to substantial delays, our April 2014 report noted that 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. For the 31 projects with complete cost data, we found that “total first-year costs,” when compared to the prospectus costs, increased from $153.4 million to $172.2 million, an increase of nearly $19 million (12 percent). However, 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).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. Although first year’s rents increased for the 31 projects—increasing overall total costs—VA’s total “build-out” costs were lower than reported in the projects’ prospectuses. 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. 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. The downturn created more competition among developers and helped VA realize more competitive pricing on its medical build-out requirements than was anticipated in the prospectuses.

Such increases in rent have long- term implications for VA, 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. 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.

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

Our April 2014 report found that VA has made some progress in addressing issues with its major medical-facilities leasing program. Specifically, in April 2012, VA formed a high level council, the Construction Review Council, to oversee the department’s capital asset program, including leasing. Based on the findings of the council and our work for the April 2012 report on VA’s major leased outpatient clinics, 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. However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them.

Requiring detailed design requirements earlier in the facility-leasing process. VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress:

Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost;

Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA’s 2014 budget submission did not clarify that its estimates for future lease projects included only one year’s rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA’s 2015 budget submission.

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 VHA guidance for clinic leasing (used by staff involved with projects) since 2004. We reviewed VHA’s 2004 Handbook 1006.1, Planning and Activating Community-Based Outpatient Clinics, VHA’s overall guidance for leasing outpatient clinics. This Planning Handbook is intended to establish consistent planning criteria and standardized expectations. The Planning 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 out of date and 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 organizations is necessary for a successful lease project.

As of November 2013, VHA’s leasing program has a long-term liability of $5.5 billion, 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 for achieving effective results. The lack of updated guidance can affect coordination among stakeholders and 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 in the Planning Handbook were developed based on an old planning methodology that VA no longer uses; thus, the guidance does not reflect VA’s current process.

In our April 2014 report, we recommended 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. VA concurred with our recommendation and reported that it had created a VHA Lease Handbook that was in the concurrence process to address the roles and responsibilities of staff involving in leasing projects. In October 2014, VA reported that it had revised its clinic leasing guidance in response to GAO’s recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes.

Chairman DeSantis and Ranking Member Lynch, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time.

If you have any questions about matters discussed in this testimony, please contact Dave Wise, (202) 512-2834 or WiseD@gao.gov. Other key contributors to this testimony include Ed Laughlin, Assistant Director; Nelsie Alcoser; George Depaoli; Jessica Du; Raymond Griffith; Amy Rosewarne; and Crystal Wesco.

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