Defense Infrastructure: In-Kind Construction and Renovation Projects Initiated by DOD during Fiscal Year 2013
Released: 2015-09-09T00:00:00

Letter

Background

The departments of the Army, Navy, and Air Force have a variety of statutory authorities that allow them to accept payments in the form of in- kind renovation or construction of facilities. For example, in fiscal year 2013, DOD used authority provided by sections 2667 and 2668 of Title 10 of the United States Code to lease or issue easements relating to domestic real property under their control or jurisdiction in exchange for payment in the form of in-kind construction or renovation projects. A description of these authorities is provided in table 1.

For leases, the services are required under section 2667 of Title 10 to receive payments in an amount that is not less than the fair-market value of the property interest, as determined by the military department Secretary. Concerning cash payments received in exchange for leases and easements, section 2667 provides that, generally, money rentals must be deposited into a special account in the U.S. Treasury and must be appropriated before they can be used. Once appropriated, section 2667 provides that at least 50 percent of the funds shall be available for use only at the installation where the leased property is located.

Overseas in-kind payment projects are subject to specific bilateral agreements and statutory authorities. Bilateral agreements include efforts to relocate U.S. forces and consolidate infrastructure being used by DOD. There are also other agreements between the United States and host nations to defray some of the costs of stationing U.S. forces overseas, and to support installations that will continue to be used by the United States—known as enduring installations—through the use of host-nation resources.

According to DOD real-property management officials, installation personnel are generally responsible for selecting domestic in-kind payment projects based on the needs of the installation and its chain of command. Each installation has a list of unfunded construction and renovation projects that were not included in the military services’ budget submissions to the Office of the Secretary of Defense. The military services generally allow each installation to decide which projects from these lists should be considered for in-kind payment projects. The responsibility for managing in-kind payment projects is generally shared between installation personnel and the services’ respective real-property management offices or agencies. Within the Navy, the Secretary of the Navy has delegated certain real-property management responsibilities to Naval Facilities Engineering Command. Specifically, Naval Facilities Engineering Command, subject to certain requirements, is authorized to grant, execute, amend, administer, and terminate all instruments granting the use of Navy-controlled real property, to include real-estate transactions using in-kind payment projects. Within the Air Force, the Secretary of the Air Force has delegated certain real-property management responsibilities to the Air Force Civil Engineer Center. The Air Force Civil Engineer Center is responsible for acquiring, disposing of, and managing all Air Force-controlled real property. Within the Army, the Chief of Engineers is the principal advisor to the Secretary of the Army for policy formulation related to real property. According to Army officials, the Secretary of the Army generally has delegated responsibilities to the Army Corps of Engineers for execution of a variety of real-estate transactions, including transactions that include in-kind payments.

DOD Reported Initiating 137 In-Kind Payment Projects in Fiscal Year 2013, and Cited Advantages and a Disadvantage from Receiving In-Kind Payment Projects versus Cash Payments

DOD Reported that the Military Services Initiated 137 In-Kind Construction and Renovation Payment Projects in Fiscal Year 2013 with an Estimated Value of at Least $1.8 Billion

DOD reported that the military services initiated 137 in-kind payment projects in Asia, Germany and the United States during fiscal year 2013 with an estimated value of at least $1.8 billion. In Asia, DOD reported initiating 105 in-kind construction and renovation projects with a total value that DOD estimated to be at least $1.6 billion. Of the 105 projects in Asia, 31 are in Korea with an estimated value of $1.57 billion and 74 are in Japan—32 of which have an estimated value of $264 million. In Germany, DOD reported initiating 3 in-kind payment projects with a total value that DOD estimated to be almost $20.7 million. For domestic locations, DOD reported initiating 29 in-kind construction and renovation projects with a total value that DOD estimated to be $18.6 million. Of the 29 domestic projects, the Navy initiated 22 and the Air Force initiated 7. The Army and Marine Corps did not initiate any domestic in-kind payment projects in fiscal year 2013. Table 2 summarizes the number and value of in-kind payment projects by location and also highlights the most frequently reported purpose for which the projects were used.

Appendixes II through V provide more detailed information for each in- kind payment project initiated by DOD in fiscal year 2013.

Military Services’ Real- Property Management Officials Reported Advantages and One Disadvantage in Accepting In-Kind Payment Projects in Exchange for Interests in Domestic Real-Property Transactions

The military services’ real-property management officials reported as many as four advantages to accepting in-kind payment projects rather than cash payments in domestic real-estate transactions, and officials from the three services reported one disadvantage.

Reported Advantages

Installations can generally obtain facilities more quickly. According to officials of the Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command, in-kind payment projects can be advantageous because the value received does not need to be re- appropriated and can be immediately available to the installation. While congressional notification is required if the estimated annual fair-market value of a lease or easement exceeds $750,000, the law does not require appropriation of the funding for in-kind payment projects, so the benefits may be realized sooner. For example, in 2008 at Nellis Air Force Base, Nevada, the Air Force entered into an agreement with the city of North Las Vegas to allow construction of a wastewater treatment plant on 41 acres of land leased from Nellis. As part of its payment to the base, the city agreed to fund the construction of a new $27 million fitness center. According to Air Force Civil Engineer Center officials, the base had a longstanding requirement for an updated fitness center but was unable to secure funding for it. Once the agreement was signed, the city immediately began construction and the base was able to open the new fitness center in 2012. By contrast, if an installation receives cash payments, section 2667 requires the immediate deposit of all cash into a special account in the U.S. Treasury where it is subject to the appropriation process before the installation can use it. Officials stated that it can take up to a year between the deposit of the cash payments and the funds being provided to the installation.

The originating installation is more likely to receive100 percent of the negotiated payments for the real property interest. According to Army Corps of Engineers, Air Force Civil Engineer Center and Naval Facilities Engineering Command officials, although the receipt of in-kind payment projects is at the discretion of the respective military department Secretary, the military department secretaries generally allow the installations where the real-property is located to receive 100 percent of any negotiated in-kind payments resulting from real property agreements. Conversely, section 2667 states that, subject to appropriations, installations are guaranteed to receive only 50 percent of any deposited cash payments, and can receive the other 50 percent only at the discretion of the respective military department secretary. In-kind payments are not governed by similar restrictions, and, as such, are more likely to result into the installation receiving 100 percent of the value generated by its real estate transactions.

Installations may have the opportunity to potentially receive infrastructure improvements worth more than the fair-market value of the property interest. Air Force Civil Engineer Center and Naval Facilities Engineering Command officials stated that the nature of a potential developer’s business or expertise and economies of scale may allow the developer to provide in-kind payment projects worth more than the fair-market value of the property interest by obtaining construction materials or labor at a below-market cost. For example, in 2004 the Navy entered into an agreement with a real-estate development firm to redevelop the Moanalua Shopping Center at the Pearl Harbor Naval Complex, Pearl Harbor, Hawaii. As part of the agreement, the Navy conveyed the existing shopping center to the developer as well as development rights for up to another 15,000 square feet of new commercial market space. As payment to the Navy, the developer was required to demolish over 40,000 square feet of existing space and to develop 40,000 square feet of new administrative space to be used as a Navy community support services center. A 2004 Navy analysis valued these demolition and construction projects at about $21 million—which was about $8 million more than the appraised market value of the property conveyed by the Navy.

Installation officials generally have more flexibility in real-estate transactions. According to officials of the Air Force Civil Engineer Center, in-kind payment projects offer installation officials greater flexibility in executing real-estate transactions, especially in cases where a developer does not have cash readily available at the time the real-estate transaction is executed. Also, allowing in-kind payment projects can increase the potential pool of developers, the officials stated. For example, in-kind payment projects may be the only way to secure adequate value from non-profit or charitable organizations that may not have adequate cash resources but have the ability to provide goods and services.

Reported Disadvantage

These same military service officials reported that one common disadvantage to accepting in-kind payment projects rather than cash payments is the amount of additional administrative work and oversight needed to execute the in-kind agreements. Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command officials identified three scenarios in which in-kind payment projects likely will require additional work and oversight.

Additional work and oversight to ensure that the transaction complies with statutory requirements. Several statutes govern the receipt of in- kind payment projects, so installation personnel conduct reviews to ensure that the transactions follow appropriate financial and administrative procedures as required by law.

Additional work and oversight to ensure that the developer is complying with the terms of the transaction. For example, installation personnel work to properly monitor construction and renovation progress to ensure that the developer is adequately providing any agreed-upon services over the terms of the agreement.

Additional work and oversight to ensure that in-kind payment projects are properly valued over time. Some transactions involving in-kind payment projects, such as enhanced-use leases, can last as long as 50 years and the in-kind payment projects may continue over these 50 years. As a result, installation personnel will be responsible for the extra work to value in-kind payment projects during the 50-year lease. By contrast, cash value is known and requires no extra work to value.

To address the disadvantage of accepting in-kind versus cash payments, some of the military services have implemented policy changes for accepting cash. For example, the Army has issued guidance stating that cash payments are preferred over in-kind payment projects. According to the Army memorandum, leases typically involve only cash payments because procedures to properly value and assure receipt of in-kind payment projects over a lease’s terms can be administratively burdensome. This memorandum was issued partly in response to our 2011 work that found problems with the adequacy of those procedures. Army officials stated that in-kind payment projects may still be accepted, however, if installation officials determine that accepting them is in the best interest of the installation and they document the basis for that determination. Approaching the disadvantage from a different angle, the Air Force issued guidance that requires the return of 100 percent of the net proceeds from cash payments—up to $1 million—to the originating installation. This policy negates the advantage in-kind payment projects have in assuring that the originating installation receives 100 percent of the negotiated value of the in-kind payment projects for the real-property interest since the originating installation receives the full amount of the cash payment up to $1 million. According to Air Force officials, the policy was implemented to not only eliminate some of the administrative burden of accepting in-kind payment projects but also to reward installations for finding ways to reduce infrastructure costs by identifying alternative funding sources to military construction appropriations.

Military Services Have Issued Guidance Regarding the Receipt of Fair- Market Value and Follow Similar Procedures for Valuing Domestic In- Kind Payment Projects to Ensure Receipt of Fair- Market Value

Our review of various service policies governing real-estate transactions identified that all three services have issued guidance requiring that the cumulative value of in-kind payment projects reflect the fair-market value of the real-property interest in real-estate transactions and follow similar procedures to value domestic in-kind payment projects to ensure the receipt of fair- market value. Based, in part, on prior GAO recommendations, each of the services has issued guidance to require the determination of fair-market value for real-property assets included in real-estate transactions and have provided instructions on how to determine the fair-market value. For example, to determine the fair- market value of the real-property interest, the Army, Air Force and Navy use certified real-estate appraisers to determine the full market value of their real-property interests and require that the appraisals be conducted in accordance with the Uniform Standards of Professional Appraisal Practice prior to the finalization of any real-estate transaction. However, our review of service-level guidance governing real-estate transactions did not identify any specific steps to follow for valuing in-kind payment projects. Officials from the offices of the Army Corps of Engineers, Air Force Civil Engineer Center, and Naval Facilities Engineering Command confirmed that no specific guidance is available, but described similar broad procedures and documentation requirements that they used for determining the value of their in-kind payment projects. Officials indicated that installation public-works personnel, with the aid as needed of the respective service’s regional real-property management office, generally were responsible for determining the value of the in-kind payment projects. In some cases, installation personnel prepare formal requirements documents, such as a DOD form 1391 or some other form of a statement of work, or independent government cost estimate to document the value of the in-kind work to be performed. In other cases, installation personnel review and validate a contractor’s cost estimates for valuing certain projects instead of obtaining an independent cost estimate. Once the cost estimate is developed, installation public-works personnel, with the aid as needed of the respective service’s regional real-property management office, use the cost estimate to negotiate with the lessee for the completion of the work. If the developer and installation officials agree to the value of the work and that the value of the work is within the range of fair-market value of the real-estate interest, the parties execute the agreement to document the services to be performed as an in-kind payment project in lieu of cash.

Table 3 describes the 29 domestic projects and lists which type of procedures the service used to document the value of the in-kind payment projects. To confirm that the installations used the cost- estimating methods described for valuing in-kind payment projects by service officials, we collected and reviewed the documentation available that the Air Force and Navy used to value the domestic in-kind payment projects initiated during fiscal year 2013. All 29 projects had documentation available showing how the cost estimates were established and that the services had processes in place to value in-kind payment projects.

Agency Comments

We are not making any recommendations in this report. We provided DOD with a draft of this report for review. DOD provided technical comments on our findings, which we have incorporated where appropriate.

We are sending copies of this report to appropriate congressional committees and to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and the Director of the Office of Management and Budget. In addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please contact me at (202) 512- 4523 or leporeb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI.

Appendix I: Scope and Methodology

To identify the in-kind payment projects that DOD reported it initiated during fiscal year 2013, we requested information and compiled data on in-kind construction and renovation projects for fiscal year 2013, their estimated value in U.S. dollars, the source of the in-kind payment project, the agreement or statutory authority, and their purpose and need from DOD components—U.S. Pacific Command; U.S. European Command; the Departments of the Army, Navy (including the Marine Corps), and Air Force. To determine whether a project was an in-kind payment project, we defined “in-kind construction and renovation projects” in this report as those resulting from certain host-nation support programs or from transactions (whether domestic or overseas) in which DOD provides goods, services, real property, or an interest in real property (including, but not limited to, a leasehold or easement) in exchange for compensation, and in which any part of that compensation is provided in the form of construction or renovation services. This definition of “in-kind construction and renovation projects,” which was also used in our 2014 report, is broader than the concept of in-kind “payments” for residual value or received in-lieu-of cash compensation as part of a domestic agreement with a third party because the definition includes host-nation support for installation facilities overseas. Voluntary contributions made by a host nation for the purpose of defraying costs to station, maintain, and train U.S. military forces in its country do not constitute a payment or obligate a host nation to make payments to the United States. We excluded from our definition of “in-kind construction or renovation projects” gifts, sustainment projects (e.g., regularly scheduled maintenance and inspections), and cash sales or rent used to finance construction or renovation. To determine that a project was initiated in 2013, we also re-used our 2014 report’s definition for “initiated” as that point at which the party responsible for completing the construction or renovation project received an official notice that allowed them to proceed with the project. To summarize the purposes of the projects, we used the real-property system classification code reported by DOD for each project as part of their data submission to us. The first digit of the code represents the facility class, and we used the facility class to represent the purpose of the projects. We corroborated the project data that each DOD component submitted by requesting that the component provide the supporting documentation where the data was obtained. We attempted to obtain supporting documentation for all the data elements for all of the domestic and overseas projects. We were able to obtain corroborating documentation for all of the domestic projects and the projects in Germany. The Office of the Assistant Secretary of Defense for Energy, Installations and Environment also reviewed the information the DOD components provided to GAO on in-kind construction and renovation projects for fiscal year 2013 for consistency and to ensure that the data were for projects that we considered “in-kind payment projects.” Lastly, after we compiled the project data, we provided each component with an additional opportunity to review and confirm the data. By taking these steps, we determined that the reported project data for the domestic projects and the projects in Germany were generally sufficiently reliable for the purposes of this report. However, numerous projects in Korea and Japan were executed under bilateral agreements or as part of voluntary host nation programs where the host nation manages the programming and execution processes and supporting documentation for these projects was not readily available in English or the specific project costs incurred by the Governments of Korea and Japan were, according to DOD officials, not required to be disclosed to the United States. In the absence of supporting documentation, we asked DOD to describe, to the extent possible, the source or calculation method for the estimated value of the project cost, initiation date and the real-property system classification code. However, DOD officials had a limited explanation of the source of some of this basic project information because of international agreements and host-nation requested relocation projects that, according to DOD officials, do not require disclosure of specific costs by the host nation. For instance, DOD officials reported that for the 74 in- kind payment projects in Japan, they did not know the specific basis used by Japanese officials for calculating the value for 32 of the projects in Japan and did not have any information on the value for another 42 projects. The report notes instances where we were unable to determine the reliability of reported data for various projects in Japan and Korea Appendixes II through V provide a listing and detailed information for each in-kind payment project initiated by DOD in fiscal year 2013.

To describe the potential advantages and disadvantages of accepting in- kind payments instead of cash for domestic real-estate transactions, we reviewed the services’ policies and procedures regarding the types of payments (cash or in-kind payment project) to be included in real-estate transactions and Army and Air Force guidance that informs when cash or in-kind payment projects are advantageous or not advisable. We also interviewed officials from the Army Corps of Engineers, Air Force Civil Engineering Center, and Naval Facilities Engineering Command to discuss the factors they consider in determining whether to accept cash or in-kind payment projects, the rationale for preferring one type of payment (cash or in-kind payment project) over another, and the advantages and disadvantages in terms of administration and costs of executing cash versus in-kind payment projects.

To identify the extent to which the military services have developed and implemented guidance and procedures to value in-kind payment projects to ensure the receipt of fair-market value for domestic projects, we compared the military services’ guidance governing real-estate transactions to DOD’s guidance for leasing and obtaining fair-market value of its real-estate interest. We then reviewed the military services’ established policies and procedures where available to determine if their procedures would ensure receipt of fair-market value. Furthermore, we obtained and reviewed the in-kind payment project agreements and supporting documentation, such as the lease exhibits, site and task work orders, and the real-estate appraisal for the 29 domestic in-kind payment projects initiated during fiscal year 2013 to review whether the military services were following the established procedures they described for valuing these specific in-kind payment projects. In addition to the previously mentioned DOD offices, we also interviewed officials from the Office of the Assistant Secretary of Defense for Energy, Installations and Environment, Army Office Assistant Chief of Staff for Installation Management, Office of Assistant Secretary of the Air Force (Installations, Environment and Logistics), and Office of the Assistant Secretary of the Navy (Energy, Installations and Environment) to determine the procedures and documentation requirements used by the services to value in-kind payment projects.

We conducted this performance audit from August 2014 to September 2015 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 the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: DOD Construction and Renovation Projects Initiated in Korea in Fiscal Year 2013 Using In-Kind Payments

DOD reported that the military services initiated 31 in-kind payment projects involving construction or renovation in Korea in fiscal year 2013 with a value of about $1.6 billion. The projects support various DOD purposes throughout the Republic of Korea, but mostly for construction of new facilities at United States Army Garrison Humphreys. Most of the projects (23 of 31) initiated in Korea were either for improvements to or the construction of operations and training facilities (14 projects) or for housing and community facilities (9 projects). Table 4 provides a summary of the intended purposes and value of in-kind payment projects initiated in Korea in fiscal year 2013. We found that the reported values for 26 of the 31 projects were of undetermined reliability because of a lack of documentation.

Table 5 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the 31 in-kind payment projects involving construction or renovation initiated in Korea during fiscal year 2013.

Appendix III: DOD Construction and Renovation Projects Initiated in Japan in Fiscal Year 2013 Using In-Kind Payments

DOD reported that the military services initiated 74 in-kind payment projects involving construction or renovation in Japan in fiscal year 2013, 32 of which were valued at $264 million. The projects supported various purposes for the U.S. military’s presence in the country. A majority of the projects initiated in Japan (39 of 74) were for improvements to or construction of utility and ground improvement infrastructure (23 projects) or for operations and training facilities (16 projects). Table 6 provides a summary of the intended purposes, value, and number of in-kind payment projects initiated in Japan in fiscal year 2013. We found that the reported estimated values for the in-kind payment projects in Japan were of undetermined reliability because of a lack of documentation.

Table 7 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the 74 in-kind payment projects involving construction or renovation initiated in Japan during fiscal year 2013.

Appendix IV: DOD Construction and Renovation Projects Initiated in Germany in Fiscal Year 2013 Using In-Kind Payments

DOD reported that the Army initiated 3 in-kind construction and renovation projects in Germany with a value of over $20 million. The in- kind payment projects in Germany were initiated as compensation from the government of Germany to the United States for improvements the United States made to facilities that were being returned to the government of Germany. Table 8 provides specific information on the military service responsible for the project, location, purpose, type of agreement, source of in-kind payment project, and estimated value for the three in-kind payment projects involving construction or renovation initiated by the Army in Germany during fiscal year 2013.

Appendix V: DOD Construction and Renovation Projects Initiated in the United States in Fiscal Year 2013 Using In-Kind Payments

For the projects underway at U.S. locations, DOD reported that the military services initiated 29 in-kind construction and renovation projects with a total value estimated by DOD of $18.6 million. The Navy had the most in-kind payment projects (22), and all resulted from the lease of DOD property at Navy bases in Virginia, California, Florida, and West Virginia. A majority of the Navy projects (12) were for either improvements to or construction of research, development, test, and evaluation facilities (6 projects) or maintenance and production facilities (6 projects). The Air Force initiated seven in-kind payment projects, all resulting from either granting an easement or leasing DOD property at Eglin Air Force Base. All of the Air Force projects were for either improvements to or construction of administrative facilities or utility and ground infrastructure. The Army and Marine Corps did not initiate any domestic in-kind payment projects in fiscal year 2013. Table 9 provides a summary of the intended purposes and value of in-kind payment projects initiated in the United States in fiscal year 2013.

Table 10 provides specific information on the military service responsible for the project, location, purpose, agreement, type of agreement, and estimated value for the 29 in-kind payment projects involving construction or renovation initiated in the United States during fiscal year 2013.

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

GAO staff members who made key contributions to this report were Laura Durland, Assistant Director; Bonita Anderson; Shawn Arbogast; Pat Donahue; Dave Keefer; Richard Powelson; and Michael Willems.