Section 2667 of Title 10 provides authority to secretaries of the military departments to lease nonexcess real property under the control of the respective departments, subject to several provisions. For example, such leases must be considered by the respective secretary to be advantageous to the United States and include terms that the respective secretary considers will promote the national defense or be in the public interest. In addition, each lease may not be for more than 5 years, unless the secretary concerned determines that a lease for a longer period will promote the national defense or be in the public interest; shall permit the secretary to revoke the lease at any time, unless the secretary determines that the omission of such a provision will promote the national defense or be in the public interest; shall provide for the payment (in cash or in kind) by the lessee of consideration in an amount that is not less than the FMV of the lease interest, as determined by the secretary; and shall provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated. Concerning lease consideration, section 2667 provides that if the consideration is to be cash, then the cash payments must be deposited into a special account in the U.S. Treasury and may only be used in such amounts as provided in appropriations acts. Also, once these amounts are appropriated, section 2667 provides that the installation where the leased property is located receive at least 50 percent of that consideration and that the appropriated cash may be used for specific enumerated purposes relating to real property construction, maintenance services, lease of facilities, or payment of utility services. In the event that consideration for the lease is to be in kind, then section 2667 provides a nonexhaustive set of examples of acceptable forms of in-kind consideration that includes the maintenance, protection, alteration, repair, improvement, or restoration of property or facilities; the construction of new facilities; and the provision of facilities, utility services, or real property maintenance services. The military services have long used the authority under section 2667 to enter into short-term leases of military property for such uses as farming, grazing, and cellular towers, and in turn received cash consideration. According to the services, they had about 3,000 such leases, which generated about $20.8 million in cash consideration in fiscal year 2010. The services have also used the authority contained in section 2667 to enter into more complex leases that the services refer to as EULs. Although the authorizing statute, section 2667, does not use “enhanced use lease” to differentiate leases executed pursuant to this authority, the services generally distinguish an EUL from a normal outlease on the basis of scope, process, term, and consideration. For example, according to the services, EULs generally involve larger amounts of property, generally undergo a more detailed evaluation and review before approval and greater oversight after approval, often are executed for longer periods of time (such as 25 to 50 years), and generally focus on in-kind, rather than cash, consideration. Each service has issued policy guidance for implementing EULs using the authority provided by section 2667. In general, EUL program management includes those activities involved with the identification, evaluation, and justification of potential EULs; the solicitation and selection of the EUL developer; lease negotiation; and lease administration to include oversight of in-kind services. The Office of the Secretary of Defense has overall responsibility and oversight of DOD real property and establishes overarching guidance and procedures for the management of DOD real property. However, because section 2667 provides authority to the military service secretaries to lease real or personal property, subject to the provisions contained in the section, the military departments have direct responsibility for implementing leases under section 2667. In the Army, the authority to execute EULs was delegated to the Deputy Assistant Secretary of the Army (Installations and Housing), and certain responsibilities for executing the Army EUL program have been further delegated to the U.S. Army Corps of Engineers. In the Navy, the authority to establish and supervise execution of Navy policies and procedures relating to the use of real property and real estate contracting actions (including EULs) has been delegated to the Deputy Assistant Secretary of the Navy (Energy, Installations, and Environment), and real estate contracting authority for the Navy EUL program has been delegated to the Naval Facilities Engineering Command. In the Air Force, overall responsibility for the execution of initial EUL transaction documents and leases has been delegated to the Assistant Secretary of the Air Force (Installations, Environment and Logistics), and responsibility for executing additional leases pursuant to section 2667 has been delegated to the Air Force Real Property Agency. At the end of fiscal year 2010, the Army, the Navy, and the Air Force reported that a total of 17 EULs were in place and that 37 additional EULs were in various phases of review or negotiation for possible future implementation. Table 1 breaks down this information by service, and appendix II identifies and provides details on each of the 17 EULs. As shown in table 1, the Army reported 7 EULs in place and 14 EULs under consideration at the end of fiscal year 2010. Many of the Army’s EULs were long-term leases that called for the development of leased land, which would be rented to private sector entities for profit. Army officials stated that many of the leases provided for the Army to receive a share of the net rental income as compensation in the form of in-kind services for the maintenance or improvement of installation facilities. The three Army EULs in our case studies, which were composed of several different leases and other legal documents, follow: Fort Sam Houston EUL. In June 2001, the Army entered into three 50- year lease agreements at Fort Sam Houston, Texas. According to the Army, the overall purpose of the EUL was to lease three large, deteriorated, vacant buildings situated on the installation to a private developer who would renovate the buildings as office space and then sublease the space to private sector tenants for profit. As consideration, the Army was to receive a share of the development’s net rental income. Such revenue was to be deposited into an escrow account in order to fund future work projects on installation facilities. Army officials stated that the EUL also benefited the Army by eliminating Army costs associated with maintaining the old buildings. Picatinny Arsenal EUL. In September 2006, the Army entered into a master agreement with a private developer at Picatinny Arsenal, New Jersey. The master agreement does not lease any property but instead is an agreement to later enter into separate leases with the lessee to incrementally develop 13 different parcels of property, which consists of 100,000 square feet of existing facility space in four buildings and about 120 acres of land. The master agreement makes the majority of the parcels available for lease at the lessee’s sole discretion, in any order and at any time of the lessee’s choosing. The Army’s expectation was that the developer would renovate or replace the existing buildings and build and rent laboratory, administrative, educational, and light manufacturing space as part of a research campus on up to 120 acres, which would in turn be leased to private sector tenants for profit. As consideration, the Army would receive certain up-front payments upon the execution of leases for the various parcels, and would also receive a share of the net rental income generated by the developed property. Both the up-front payments and the revenue share were to be deposited into an escrow account, from which funds could be disbursed as cash or to pay for in-kind projects at the installation. At the time of our review, the Army had entered into two separate site lease agreements with the lessee with 50-year terms—one concurrently with the master agreement and the other in August 2007. Aberdeen Proving Ground EUL. In September 2006, the Army entered into a master agreement at Aberdeen Proving Ground, Maryland. The master agreement does not lease any property but instead is an agreement to later enter into separate leases with the lessee to incrementally develop 416 acres of Army land. In turn, the lessee was expected to construct buildings for an office and technology park. As consideration, the EUL called for the lessee to pay the Army rent on completed buildings and the rent would be deposited into an escrow account, from which funds would be disbursed as cash or to pay for in-kind projects at the installation. At the time of our review, the Army had entered into eight separate site lease agreements with 50-year terms. Table 1 also shows that the Navy reported 5 EULs in place and 10 EULs under consideration at the end of fiscal year 2010. Most of the Navy’s EULs involved leases of Navy property that the lessee used without further development, such as the leasing of Navy-owned land to a private company for off-loading and storing automobiles. According to the Navy, the leases typically provided for the Navy to receive rent as consideration for the leased property in the form of in-kind services for the maintenance or improvement of installation facilities. The Navy EULs in our case studies did not provide for consideration to be deposited in an escrow account, from which funds could be disbursed to pay for in-kind services. Rather, upon satisfactory completion of in-kind services, the rental payment value due would be credited by an amount equal to the cost of the in-kind services. The three Navy EULs in our case studies follow: Naval Base Point Loma EUL. In October 2005, the Navy entered into a 5- year lease agreement at Naval Base Point Loma, California. According to the Navy, the overall purpose of the EUL was to lease about 432,000 square feet of industrial and storage space in a Navy-owned building to a private sector company, which planned to use the property to assemble rocket propulsion fuel tanks in fulfillment of military contracts. The EUL required the lessee to pay rent to the Navy in five consecutive, annual payments; but at the option and sole discretion of the Navy, the annual rental payment could be offset by the costs of accomplishing in-kind services. Upon satisfactory completion of in-kind services, the annual rental payment due would be credited by an amount equal to the cost of the services. Thus far, all of the consideration the Navy has received under this EUL has been in the form of in-kind services, such as performing roof repairs and modernizing restrooms at the leased building. Naval Base Ventura County EUL. In March 2007, the Navy entered into a 5- year lease agreement at Naval Base Ventura County, California. According to the Navy, the overall purpose of the EUL was to lease over 100 acres of Navy land to a private sector company, which planned to use the property to off-load and store automobiles. As consideration, the Navy would receive annual rent; but at the sole option of the Navy, the annual rent could be offset by the cost of accomplishing in-kind services. Thus far, all of the consideration the Navy has received under this EUL has been in the form of in-kind services, such as performing road and pavement repairs at the installation. Naval Base San Diego EUL. In August 2008, the Navy entered into a 30- year lease agreement at Naval Base San Diego, California. According to the Navy, the overall purpose of the EUL was to lease about 4.8 acres of Navy land and one Navy-owned building situated on the land to a private sector company, which planned to use the property to assist in the construction of ships under a contract with the Navy. As consideration, the EUL provided for rental payments, but in lieu of cash payments, the lessee would provide in-kind consideration in the form of maintenance, repair, improvement, and construction of new facilities. Specifically, the EUL required the lessee to perform the in-kind services at its own expense, and in exchange, the Navy would provide a rent credit for the actual cost incurred against the annual rent. Thus far, all of the consideration the Navy has received under this EUL has been in the form of in-kind services. Table 1 further shows that the Air Force reported 5 EULs in place and 13 EULs under consideration at the end of fiscal year 2010. Air Force officials stated that Air Force EULs generally were long-term leases that included various arrangements from relatively straightforward leases of land in exchange for rent payments as consideration to one more complex lease that called for the development of leased land, which would be rented to private sector tenants with the Air Force receiving a consideration payment when the EUL was signed and also receiving a share of the development’s net rental income as compensation. According to Air Force officials, the Air Force EULs generally called for consideration to be received in the form of in-kind services for the maintenance or improvement of installation facilities. The three Air Force EULs in our case studies follow: Eglin Air Force Base. In October 2006, the Air Force entered into a 30-year lease agreement at Eglin Air Force Base, Florida. According to the Air Force, the overall purpose of the EUL was to lease 255.5 acres of land to a Florida county government, which planned to use the property to construct a new wastewater treatment plant and disposal system. As consideration, the Air Force would receive rent to be deposited into an escrow account and disbursed as cash or to pay for in-kind projects performed on installation facilities. Eglin Air Force Base. In July 2007, the Air Force entered into a 25-year lease agreement at Eglin Air Force Base, Florida. According to the Air Force, the overall purpose of the EUL was to lease 130.8 acres of land to a Florida county government, which planned to use the property to operate and maintain an existing airport terminal and rental car services. As consideration, the Air Force would receive rent to be deposited into an escrow account and disbursed as cash or to pay for in-kind projects performed on installation facilities. Hill Air Force Base. In August 2008, the Air Force entered into a master development agreement with a private developer at Hill Air Force Base, Utah. The master development agreement does not lease any property. Instead, the agreement explains that the EUL site consists of 499 acres that will be outleased incrementally through individual site leases and sets forth the general terms, conditions, and rights under which the Air Force and the developer may later execute these site leases. The developer was expected to construct commercial facilities for rent to private sector tenants for profit. As consideration for the EUL, the Air Force received an up-front payment from the developer when the master development agreement was signed. The Air Force also expects to receive a share of the development’s net rental revenues from developed property, which is to be placed in a special account outside the U.S. Treasury and used to fund in-kind services at the installation. Additionally, grants from the State of Utah were anticipated to be disbursed to the developer for acceptable state purposes—such highway improvements and infrastructure development—that may facilitate and benefit the Hill Air Force Base EUL. At the same time that the Air Force entered into the master development agreement, the Air Force also entered into a master lease, which grants to the developer certain limited property rights for a 50-year term, including entry, planning and constructing certain utility systems and infrastructure necessary to support development of the anticipated site leases. At the time of our review, the Air Force had entered into one 50-year site lease. One of the Army EULs included in our case studies did not comply with some requirements contained in the EUL authorizing statute, section 2667 of Title 10. On March 30, 2011, GAO issued a legal opinion finding that certain terms and conditions of the legal documents comprising the Army’s Picatinny Arsenal EUL violated subsection 2667(e), which requires that cash consideration be deposited into the U.S. Treasury, and certain other statutes (see app. III). Also, while no two EULs are identical, we found that the other five Army and Air Force case study EULs included some terms and conditions similar to those that were found to be problematic by the legal opinion, which raises questions about the extent to which such EULs comply with the statutory requirements. In addition, beyond those issues addressed in the legal opinion, we found that the three Army case study EULs and one Air Force case study EUL did not fully comply with another provision in section 2667 that requires that each lease executed pursuant to section 2667 provide for lease renegotiation if taxes are imposed on leased property. We did not find similar legal issues in the three Navy EUL case studies. Unless the Army and the Air Force review their EULs and take steps, if needed, to ensure compliance with applicable statutes, then uncertainty will continue to exist as to whether the services’ EULs meet all statutory requirements. On March 30, 2011, we issued a legal opinion in which we concluded that certain terms and conditions of the legal documents comprising the Army’s Picatinny Arsenal EUL failed to comply with subsection 2667(e) of Title 10 and the miscellaneous receipts statute by failing to require that cash consideration be deposited into the appropriate account of the U.S. Treasury. Further, the opinion found that the Picatinny Arsenal EUL violated the Antideficiency Act by including a clause in the escrow agreement whereby the government indemnified the escrow account agent against all liabilities arising under the escrow agreement. A summary of the legal opinion follows: First, the opinion concluded that certain terms and conditions of the Picatinny Arsenal EUL did not comply with section 2667. Section 2667 specifies that consideration for a lease executed under this authority must come in one of two forms—cash payments or in-kind consideration—and subsection 2667(e) requires that cash payments be deposited into a special account in the U.S. Treasury and are available to the Secretary concerned only to the extent provided in appropriations acts. However, the applicable legal documents comprising the Picatinny Arsenal EUL provided that rent consideration from the lessee be deposited into an escrow account—specifically, deposited into an individual interest-bearing account at a local credit union. The legal documents further provide that such escrowed funds may be disbursed either to a third-party contractor as payment for services rendered or directly as a cash payment to the Army. At the time of our visit to Picatinny Arsenal in July 2010, about $1.5 million of escrowed funds had been disbursed to pay third-party contractors for construction, repairs or similar work performed on property under the control of the Secretary. The opinion found that the terms and conditions of the legal documents comprising the Picatinny Arsenal EUL indicated that the Army had control over the disposition of the escrow funds which, except for the payment of expenses of the escrow agent, are used solely for the benefit of the Army. Therefore, the opinion concluded that the Picatinny Arsenal EUL violated section 2667 by effectively receiving cash, not in-kind, consideration, and depositing such proceeds into an escrow account instead of the special account in the U.S. Treasury for such purposes as required by subsection 2667(e). Second, the opinion concluded that certain terms and conditions of the Picatinny Arsenal EUL did not comply with the miscellaneous receipts statute. The miscellaneous receipts statute provides that an official or agent of the government receiving money for the government from any source shall deposit the money in the U.S. Treasury as soon as practicable without deduction for any charge or claim. However, as discussed above, the applicable legal documents comprising the Picatinny Arsenal EUL provided that rent consideration from the lessee be deposited into an escrow account at a local credit union. The opinion found that the escrowed funds constituted “money for the government” and that the Army’s failure to immediately deposit the consideration received for the Picatinny Arsenal EUL into the appropriate account in the U.S. Treasury was a violation of the miscellaneous receipts statute. Third, the opinion concluded that an indemnification provision in the escrow agreement for the Picatinny Arsenal EUL, whereby the government agreed to indemnify the escrow agent against all liabilities, violated the Antideficiency Act. The Antideficiency Act prohibits agencies from spending, or committing themselves to spending, in advance of or in excess of appropriations, unless specifically authorized by law. Once it has been determined that there has been a violation of the Antideficiency Act, the agency head must report immediately to the President and Congress all relevant facts and provide a statement of actions taken, and must also transmit a copy of each report to the Comptroller General. The opinion concluded that the open-ended indemnification provision constituted a violation of the Antideficiency Act. Further, the opinion noted that although the Army subsequently cured the violation by amending the escrow agreement to delete the indemnification provision, a report of the violation is still required. The legal opinion recommended three actions. First, with respect to the section 2667 and miscellaneous receipts violation, the opinion recommended that the Army transfer the balance of the escrow funds to the appropriate account in the Treasury, and with respect to the escrow funds that have been expended to date, the Army adjust its accounts by transferring funds from an Army account available to pay for services to property under the control of the Secretary to the appropriate account in the Treasury. Further, the opinion noted that if the Army finds it lacks sufficient budget authority to adjust its accounts, it should report a violation of the Antideficiency Act. Second, with respect to the indemnification provision in the original escrow agreement, the opinion encouraged the Army to make the necessary report as soon as possible. Third, the opinion stated that to the extent that the Army has entered into EULs on substantially similar terms and conditions as the Picatinny Arsenal EUL, the Army should take the same corrective action. While no two EULs are identical, we found that the five other Army and Air Force EULs in our case study review required that some or all cash consideration received pursuant to the EUL be deposited into an escrow account and not the U.S. Treasury before being disbursed from the escrow account to pay for in-kind construction and maintenance projects, which raises questions about the extent to which such EULs comply with section 2667 and the miscellaneous receipts statute. For example, the Aberdeen Proving Ground EUL, the Fort Sam Houston EUL, the Hill Air Force Base EUL, and the two Eglin Air Force Base EULs provide for some or all consideration received pursuant to the EUL to be first deposited into an escrow, or similar, account and not the U.S. Treasury. In addition, although not included in our EUL case studies, the escrow agreements executed by the Army in connection with the EUL at Yuma Proving Ground, Arizona, and the EUL at Fort Detrick, Maryland, contained indemnification provisions similar to the indemnification provision in the Picatinny Arsenal EUL that was discussed in our legal opinion. The Army took similar action with respect to these indemnification provisions as it did with the Picatinny Arsenal EUL provision by amending the escrow agreements to delete the indemnification provision. Thus, the indemnification provisions that were present in the Yuma Proving Ground EUL and the Fort Detrick EUL raise questions about the extent to which such EULs complied with the Antideficiency Act and the associated reporting requirements. Beyond those issues addressed in the legal opinion, we found that the legal documents executed in several Army and Air Force EULs in our case study review failed to include a provision providing that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated. Specifically, all of the Army EULs in our case study and one of the Air Force EULs in our case study executed pursuant to section 2667 contained at least one lease that either failed to address what would happen should the leased property be later made taxable by state or local governments under an act of Congress or otherwise did not provide for lease renegotiation in accordance with section 2667. For example, the Eglin Air Force Base Wastewater EUL contained no provision addressing what would happen should the leased property later become taxable. In the Fort Sam Houston EUL, each of the four leases requires the lessee to pay any and all taxes imposed, while the two site leases executed as part of the Picatinny Arsenal EUL and two of the eight site leases executed as part of the Aberdeen Proving Ground EUL require the lessee to pay taxes imposed by the state and permit the lessee to reduce the amount of rent payable to the Army by the amount of any taxes on the leased property. By failing to include the required tax provision, these legal documents were not in compliance with the section 2667 requirement. The services’ expectations for EUL development time frames and financial benefits were not realized in two Army EULs and one Air Force EUL included in our case studies, and some received markedly less consideration to date than initially estimated. Service expectations for the remaining two Air Force and three Navy EUL case studies were generally realized, and for the remaining Army EUL case study, we could not clearly determine whether development time frame expectations were realized because the Army did not prepare detailed development plans that established clear time frame expectations for the project. According to the services, the recent economic downturn caused development plans for several EULs to significantly slow down or to be placed on hold. As a result, buildings were not constructed or renovated as planned and were not rented to private sector tenants as planned. Thus, projected rental revenues and the services’ expected share of these revenues did not materialize. We found that expected development time frames and financial benefits were not realized in two of the Army and one of the Air Force EULs we reviewed. For example, when the first site leases for the Fort Sam Houston EUL were signed in 2001, the Army expected that the developer would renovate the three large, deteriorated buildings included in the lease for use as office space and then sublease the space to private sector tenants for profit. Initially, the Army expected that it would receive about $253 million in in-kind consideration over the 50-year lease term from its share of the project’s net rental revenue. However, the project has not been developed as expected. Specifically, the lessee has renovated only two of the three deteriorated buildings, and according to Army officials, nearly all of the EUL office space is rented to the Army rather than to private sector tenants. This occurred for two reasons. First, after the terrorist attacks of September 11, 2001, access to the installation became restricted, which increased the complexity of renting space to private sector tenants. Second, the Army made several decisions after the lease was signed to relocate Army organizations to Fort Sam Houston, which resulted in a significant increase in the need for Army office space at the installation. Even if the Army had wanted to terminate one or all of the EUL leases because of these changes, none of the leases included a clause to permit the government to terminate the lease for convenience. At the time of our visit in August 2010, the Army estimated that EUL consideration over 50 years would total about $198 million, or about 22 percent less than was originally expected. Moreover, rather than resulting from the Army’s share of rental revenues from private sector tenants, Army officials stated that nearly all of the estimated future consideration is now expected to be the result of the Army getting back a portion of the rent that the Army pays to the developer for using EUL office space. Figure 1 contains photographs of property included in the Fort Sam Houston EUL, including views of one of the renovated buildings, the building that has not been renovated, and a newly constructed office building on leased land. The Picatinny Arsenal EUL is the second EUL where expectations were not realized. When the master agreement for the Picatinny Arsenal EUL was signed in 2006, the Army anticipated that by October 2007 the developer would have renovated or replaced the four Picatinny Arsenal buildings included in the lease plan to provide 100,000 square feet of new or renovated office space that would be rented to private sector tenants for profit. Also, by May 2008, the Army anticipated that the developer would have constructed and rented to private sector tenants about 150,000 square feet of office space on vacant land included in the lease plan. Further, the Army initially estimated that it would receive about $500 million in total in-kind consideration over the term of the EUL, of which about $7.4 million in in-kind consideration from developer payments and the Army’s share of net rental revenues would have been received by the end of 2010. However, the project has not been developed as expected and the expected financial benefits have not been realized. At the time of our visit in July 2010, about 27,500 square feet of office space, or about 89 percent less than the amount initially expected, had been developed and about 16,200 square feet of this space was rented to private sector tenants. Also, through the end of 2010, the Army had received $1.7 million in consideration for the lease, or 77 percent less than the amount initially expected, and the entire amount was paid by the developer when the first site lease was signed in 2006. According to Army officials, the project has not met expectations because of the economic downturn and it is not clear how much additional consideration will be obtained over the remaining lease term. The leases do not include a provision requiring minimal consideration payments to the Army in the event that the property was not developed as expected, and none of the leases contain a termination for convenience clause in the event that the Army desired to terminate the lease before the end of the EUL term. Figure 2 shows photographs of buildings covered by the Picatinny Arsenal EUL. The Hill Air Force Base EUL is the third EUL where expectations were not yet realized. When the Hill Air Force Base master agreement was signed in 2008, the Air Force estimated that in addition to $10 million in developer paid consideration, the Air Force would receive about $385 million in in- kind facility improvements as consideration from its share of the project’s net rental revenue over the EUL term. The Air Force also anticipated that about $75 million in public funds from tax increment financing proceeds and public grants from the State of Utah would be provided to help support infrastructure improvements near military installations. Further, by the end of 2010, the Air Force estimated that the developer would have begun construction of at least seven commercial buildings and that four of these buildings would be completed, leased to private sector tenants, and generating net rental income from which the Air Force would be receiving a share as consideration. However, the project has not been developed as expected largely, according to Air Force officials, because of the economic slowdown. At the time of our visit in August 2010, construction had not begun on any commercial buildings, and the only lease consideration actually received by the Air Force was about $2.5 million, which the developer paid when the master lease agreement was signed in 2008. Also, of the projected $75 million in public funding, the Air Force originally estimated that $45 million would be available to benefit the project by the end of fiscal year 2010. However, at the end of fiscal year 2010, about $10 million in state grants had been made toward military installation infrastructure improvements—$35 million less than estimated—and of this amount, about $800,000 had been used to pay for the design of two facilities at Hill Air Force Base. The balance of the state funds was held by a state-created military installation development authority. Installation officials stated that they remained optimistic that the project would eventually develop as envisioned. Although not one of our case studies, the EUL at Kirtland Air Force Base, New Mexico, also illustrates missed expectations. When the Kirtland Air Force Base EUL was signed in 2005, the Air Force expected that the lessee would develop the 8.3 acre property by constructing and subleasing office, research, and education facilities. Over the 50-year lease, the Air Force estimated that it would receive about $2.7 million in lease consideration from annual ground rent payments and additional rent payments as the planned facilities were completed. However, from the time the lease was signed in 2005 through December 2010, Air Force officials stated that the Air Force received no consideration for the lease—the lessee made no ground rent payments to the Air Force and no facilities were constructed to generate additional rent. In December 2010, the Air Force terminated the lease because of lessee default. Our review of the services’ management of the EUL program identified several weaknesses related to internal controls and program guidance. First, because the services generally lacked methodologies, analyses, or other documentation showing how certain provisions contained in the authorizing statute, section 2667 of Title 10, were addressed, it is not clear to what extent the services systematically considered and assessed each provision before entering into the leases. Second, while the statute leaves the determination of FMV to secretarial discretion and thus a particular methodology for determining FMV is not required, we found cases where it is not clear how and to what extent the services provided for the receipt of consideration in an amount that is not less than the FMV of the lease interest. Third, some EULs included property that was being used by the military or might be needed for military purposes over the lease term, which could result in increased costs to relocate military activities or increased potential government costs in the event a service had to terminate a lease to regain use of the property. Fourth, the services have not regularly monitored EUL program administration costs to help ensure that the costs are in line with program benefits. In the nine EUL case studies we reviewed, we found that the services generally lacked methodologies, analyses, or other documentation showing that certain provisions contained in section 2667 were addressed prior to entering into the leases. Among other things, section 2667 requires that each lease does not include excess property. This determination is particularly important given that some EULs include terms of 50 years or more and in view of recent emphasis on the disposal of excess or underused federal property as a cost savings measure. Other section 2667 provisions require that a lease may not be for a term in excess of 5 years, unless the secretary concerned determines that the lease will promote the national defense or be in the public interest, and that each lease permit the service to revoke the lease at any time, unless the secretary concerned determines that omission of such a provision will promote the national defense or be in the public interest. These determinations are left to secretarial discretion and supporting analyses or documentation evidencing the determinations is not specifically required by law. Nevertheless, internal control standards call for the documentation of management decisions and our review found that the services lacked guidance on how to make the determinations and document them. Without such evidence, it is not clear to what extent the services systematically considered and assessed each requirement to ensure that each was met prior to entering into the leases. In most cases, the services lacked supporting analyses or other specific documentation to show how the excess property determination was made. For example, five of the nine EULs in our case studies provided declarative statements in the lease documents that the property included in the lease was not excess property, and four EULs were silent on the matter. Similarly, concerning the secretarial determinations that leases exceeding 5 years would promote the national defense or be in the public interest, six of the seven EULs in our case studies with terms exceeding 5 years provided declarative statements that the leases promoted the national defense or were in the public interest, and the remaining EUL was silent on the issue. However, in most cases the services did not have analyses or documentation to support the determinations. Service officials explained that the declarative statements alone in some cases constituted the totality of the documentation of the secretary’s determination. Further, seven of the nine EULs in our case studies did not include terms permitting the government to revoke the lease at any time. According to some service officials, the primary reason for the omission is that at least for those EULs that call for property development, the lessee normally seeks commercial loans to aid in the development and commercial lenders would not lend money for a project that might be terminated before the lender was able to recover the loan. Thus, the services often omit from their EULs a clause permitting lease termination at the government’s convenience. However, the statute requires a determination that the omission would promote the national defense or be in the public interest. We found that six of the seven EULs without the clause included a declarative statement that the omission would promote the national defense or be in the public interest and the remaining EUL was silent on the matter. Yet in all seven cases the services lacked analyses or documentation showing how the secretary determined that the omission would promote the national defense or be in the public interest. Table 2 summarizes our analysis of the services’ consideration of these three section 2667 provisions. How and to what extent the Army’s and the Air Force’s EULs provide for the receipt of the FMV of the leased property, as required by section 2667, is unclear. Section 2667 requires that each lease provide for the payment (in cash or in kind) by the lessee of consideration in an amount that is not less than the FMV of the lease interest, as determined by the service secretary. While the statute leaves the determination of FMV to secretarial discretion, and thus a particular methodology for determining FMV is not required, we found cases where receipt of FMV was questionable largely because service guidance for determining and ensuring the receipt of FMV for proposed EULs was not always clear. Specifically, as illustrated below, we found one Army case where receipt of FMV cannot be ensured because the FMV of leased property was not determined; two Air Force cases where the agreed-to amount of lease consideration was below at least one appraisal of the value of the leased property; and other cases where the receipt of FMV depended on the service receiving a share of the net rental revenues from a project’s development, which could potentially result in FMV not being obtained in the future. First, the Army did not appraise about 39 of the approximately 41 acres of land included in the Fort Sam Houston EUL. The three 2001 site leases comprising the Fort Sam Houston EUL initially included three primary old, deteriorated buildings and associated land that was used mostly for parking. According to the Army, about 36 acres of land was included in these original leases. To determine the FMV of the property, the Army used an appraisal that determined that the FMV of several buildings was $1.00 per year because of their poor condition. However, in determining the FMV of the land, an appraisal was conducted for only 2 acres—not the 36 total acres included in the original leases. Also, Army officials stated that the Army and the lessee subsequently agreed in 2008 to add several acres of Fort Sam Houston land to the EUL in exchange for the lessee returning to the Army some land associated with two of the old buildings’ parking lots. The Army wanted to build a lodging facility on the land that had been included in the original lease. Although Army officials stated that the exchange resulted in a net increase of the total amount of Army land included in the EUL by about 5 acres, the Army did not determine the FMV of the additional land, which the lessee subsequently used as the site for constructing a new office building. Without a determination of the FMV of the land included in the Fort Sam Houston EUL, the Army cannot ensure that the FMV of this property will be obtained over the remaining term of the EUL. Second, for two of the three Air Force EULs in our case studies, the Air Force had appraisals completed to help determine the value of the property that was to be leased. Ultimately, the Air Force relied upon negotiations with the lessee, rather than the appraisals, to determine the FMV of the property, and in both cases, the Air Force accepted a negotiated amount of consideration that was less than the appraised value of the property. According to the Air Force, although it uses property appraisals as a guide for determining FMV, a property’s actual FMV is the price a willing buyer could reasonably expect to pay a willing seller in a competitive market to acquire the property. Yet, in at least these two EUL cases, the Air Force’s negotiations did not take place in a competitive market because the Air Force only negotiated with one party to determine the amount of consideration accepted for the lease interest. To illustrate, the Air Force hired a company to review two appraisals with differing estimates of the value of the property included in one Eglin Air Force Base EUL, referred to as the Okaloosa County Regional Airport EUL, and to provide its perspective on the value of the property. The company estimated that the FMV of the property was $1,274,000 annually. After negotiations with one party, the lessee, the Air Force agreed to accept $318,000 annually as consideration. Thus, the negotiated amount was $956,000, or 75 percent, less per year than the appraised value of the property. As another example, at the request of the Air Force, the U.S. Army Corps of Engineers performed an appraisal on about 256 acres of land included in the other Eglin Air Force Base EUL, referred to as the Arbennie Pritchett Water Reclamation Facility EUL. The appraisal estimated that the FMV of the leased property was $513,000 annually. After negotiations with one party, the lessee, the Air Force agreed to accept $325,000 annually as consideration. Thus, in this case, the negotiated amount was $188,000, or 37 percent, less per year than the appraised value of the property. Such cases raise questions about the extent to which the EULs will provide for receipt of the FMV of the lease interest. Third, we found that FMV, as determined by the secretary concerned, might not be obtained in some EULs because of the terms contained in the lease agreements. For example, providing for the receipt of FMV can be problematic in EULs where, in accordance with lease terms, the receipt of FMV depends on the service receiving a share of the net rental revenues from a project’s development rather than receiving agreed-to rent payments or sufficient up-front cash payments that match or exceed the FMV. In such cases, if project development does not occur as expected, then project rental revenues—and thus the service’s share of the rental revenues—also would not materialize as expected and the FMV of the lease interest might not be obtained. To illustrate, in the Picatinny Arsenal case, the Army determined that the FMV of the property that had been leased to the developer at the time of our visit in July 2010 was $1,850,000. The Army received $1,700,000 from the lessee when the first site lease was signed. However, obtaining the balance of the FMV depends on the Army receiving a share of net rental revenues, and because the project has not been developed as expected, the Army had not received any share of net rental revenues at the time of our visit. Because of the cost to relocate military activities or the increased potential financial liability to the government if a service had to terminate a lease to regain use of leased property, it would appear imprudent for economic reasons for the services to lease property needed for military purposes. Yet, as illustrated below, we found cases where the military was using property included in the EUL and cases where there appeared to be reasonable potential that property included in the EUL might be needed for military purposes over the lease term, particularly in cases where the leased property was located in the interior, rather than at the perimeter, of an installation. As a result, the government apparently will incur increased relocation costs in one case and in other cases increased potential for future costs in the event that the service has to terminate a lease to regain use of the property. In 2008, after many of the leases in our case studies were signed, the Congress added a provision to section 2667 requiring that property to be leased must not for the time be needed for public use. However, we found that the services lacked guidance on the analyses and documentation needed to show that property to be leased is not needed for public use. Without such documentation, it will not be clear that the new provision will be met prior to entering into future leases. For example, the master development agreement and master lease for the Hill Air Force Base EUL included property being used by the Defense Non- Tactical Generator and Rail Equipment Center, a DOD depot-level maintenance activity. The master development agreement obligates the Air Force to maintain and deliver the project site “free of tenants.” As such, the Air Force told the center that it would not be renewing the permit that allowed the center to operate on Air Force land and that the center would have to relocate. However, according to the Army, which manages the center, funds were not available to pay for the relocation, which was estimated to cost from about $37 million to $45 million. Because the legal agreements that the Air Force signed obligate the Air Force to maintain and deliver the project site “free of tenants,” Air Force officials stated that if the center does not relocate, the lessee could sue the Air Force for $41 million in damages. The issue was not resolved at the time we completed our review. Figure 3 shows photographs of the Defense Non- Tactical Generator and Rail Equipment Center at Hill Air Force Base. As another example, when the first three site leases for the Fort Sam Houston EUL were signed in 2001, Army officials stated that the installation had no apparent need for the three large, deteriorated buildings and the associated land included in the lease. Still, given that the property was located in the interior of the installation surrounded by other Army buildings and activities, it would appear that there was a reasonable probability that the Army might have a need for the property over the 50- year lease term. As noted previously, shortly after the three original leases were signed in 2001, the Army relocated several Army organizations to Fort Sam Houston, which created a significant demand for office space. Because other office space on the installation was not readily available, Army officials stated that the Army leased back from the developer nearly all of the space in the EUL buildings that had been renovated. During our visit to Fort Sam Houston in August 2010, installation officials stated that the installation continued to have a need for office space and that the officials had considered terminating a portion of the EUL to regain control of the one large building that the developer had not renovated so that the Army could renovate the building for its use. However, the officials stated that the Army most likely would not pursue this option because the lease did not include a termination for convenience clause, and therefore early termination could be very costly to the Army. Instead, installation officials stated that the Army was in the process of converting an old barracks building at the installation into office space for Army use. In another instance involving property included in the EUL, in 2008, the Army needed some of the land included in the EUL to build a new lodging facility. In this instance, Army officials stated that the Army was able to regain use of the needed property through a land exchange by amending the lease. However, Army officials stated that the exchange resulted in a net increase of about 5 acres in the total amount of Army land included in the EUL. We found that the services have not regularly monitored or performed periodic analyses of EUL program administration costs to help ensure that such costs are in line with program benefits. According to internal control standards for the federal government, activities need to be established to monitor performance measures and indicators, such as analyses of data relationships, so that appropriate actions can be taken, if needed. Without regular monitoring and analysis, the services have less assurance that their EUL program administration costs are in line with program benefits. While the services have no criteria for how much they should be spending on EUL program administration costs relative to program benefits, our analysis showed that EUL program administration costs ranged from 31 percent to 135 percent of the total EUL consideration received during fiscal years 2006 through 2010. Specifically, our analysis of information provided by the services concluded that EUL program administration costs, including personnel and consultant costs, equaled about 31 percent of the total EUL consideration received by the Army and the Navy and about 135 percent of the total EUL consideration received by the Air Force. As shown in table 3, the Air Force spent about $10.4 million more to administer its EUL program than the amount of consideration received from its five EULs during fiscal years 2006 through 2010. It is important to note that many of the EULs have long terms and consideration received in the future might significantly increase the net benefits from the program. In particular, Army and Air Force officials expressed expectations of greater EUL consideration in the future. EULs offer the military services opportunities to reduce infrastructure costs by leasing nonexcess, underused military real property in exchange for cash or in-kind consideration that can be used to maintain or construct military facilities. However, the Army and the Air Force did not ensure that certain EULs were in compliance with some requirements contained in the EUL authorizing statute, section 2667 of Title 10, and similar compliance issues may exist in other EULs. Unless the Army and the Air Force review their EULs and take steps, as needed, to ensure that all EULs are in compliance with applicable statutes, then uncertainty will continue to exist as to whether the services’ EULs meet all statutory requirements. However, an amendment to a lease must be negotiated and agreed to by the parties to the lease and thus may involve some costs. In addition, the services’ management of the EUL program contains weaknesses related to internal controls and program guidance. First, unless the services issue guidance on how to determine and document that certain section 2667 provisions were addressed, it will not be clear how and to what extent the services systematically considered and assessed each provision to ensure that each was met prior to entering into the leases. Second, without additional guidance on how the FMV of the lease interest should be determined and how the receipt of FMV can be best ensured, it will not be clear how and to what extent the services’ EULs provide for the receipt of the FMV of the leased property. Third, section 2667 now requires that property to be leased must not be needed for public use during the lease term. However, unless guidance is issued on the analyses or documentation needed to ensure compliance with this requirement, future EULs could include property that might be needed for military purposes over the lease term, thus increasing potential government financial liabilities. Fourth, unless the services regularly monitor and analyze their EUL program administration costs, the services will have less assurance that program costs are in proportion with program benefits. We are making six recommendations to address EUL statutory compliance issues and EUL program management concerns. Specifically, we are recommending that the Secretaries of the Army and the Air Force take the following three actions: Review all EULs for terms and conditions similar to those that our legal opinion concluded were inconsistent with applicable statutes; determine whether steps are needed to help ensure that the EULs are in compliance with applicable statutes; and, if so, then implement these steps. Take steps to ensure that all EULs provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated, as required by subsection 2667(f) of Title 10, U.S. Code. Review and clarify guidance describing how the FMV of the lease interest should be determined and how the receipt of FMV can be best ensured. We also recommend that the Secretaries of the Army, the Navy, and the Air Force take the following three actions: Issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations. Issue guidance on the analyses or documentation needed to show that future leases executed under section 2667 do not include property needed for public use, as is now required by section 2667. Develop procedures to regularly monitor and analyze EUL program administration costs to help ensure that the costs are in line with program benefits. In written comments on a draft of this report, DOD stated that it concurred with all of our recommendations and that the military services were taking appropriate measures to comply with the recommendations. However, DOD did not provide time frames for completing the planned actions to implement the recommendations. DOD’s comments are reprinted in appendix IV. DOD concurred with our recommendation to review all EULs for terms and conditions similar to those that our legal opinion concluded were inconsistent with applicable statutes; determine whether steps are needed to help ensure that the EULs are in compliance with applicable statutes; and, if so, then implement these steps. DOD stated that the Army and Air Force will review all their EULs executed to date and will amend lease terms and conditions as necessary in order to comply with applicable statutes. In addition, DOD proffered its view that the use of an escrow agreement as part of a EUL transaction represents a reasoned and permissible exercise of agency discretion to implement its statutory authority to collect in-kind consideration from a lessee through use of a commonly used legal instrument that provides substantial protection of U.S. financial interests. As the facts in the Picatinny Arsenal EUL demonstrated, the Army received a payment of cash and did not deposit it in the appropriate account in the U.S. Treasury as required by law. Instead, such consideration was deposited into an escrow account in satisfaction of the lessee’s rent obligations, and the Army used these funds as if they were permissible in-kind consideration. Several provisions in the Picatinny Arsenal EUL and its associated legal documents indicated that the Army owned the funds in the escrow account. For example, the lessee was not obligated to provide any additional in-kind consideration beyond the funds deposited in the escrow account, escrow funds could only be used with the Army’s consent, the lessee had no rights to the escrow funds, no in- kind deliverables were specified, and any interest earned in escrow was earned by the Army for income tax purposes. We would emphasize that simply calling a cash payment “in-kind services” does not make it so. As a consequence, the Army violated section 2667, violated the miscellaneous receipts statute, and augmented its appropriations. In its comments, DOD also stated that the department does not read either our report or our legal opinion as prohibiting the use of escrow agreements in connection with EUL transactions, provided the terms of those escrow agreements do not amount to constructive receipt of funds in the escrow agreement by the government. As we stated in our legal opinion, the opinion pertains primarily to the Picatinny Arsenal EUL and its associated legal documents. However, to the extent other EULs are on substantially similar terms as the Picatinny Arsenal EUL, our conclusions in the legal opinion apply to those EULs as well, hence our recommendation, with which DOD concurred and said that it would implement. DOD also concurred with our recommendation that the Army and the Air Force take steps to ensure that all EULs provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated, as required by subsection 2667(f) of Title 10, U.S. Code. DOD stated that the services will amend their existing EULs as needed and will incorporate the required provision in future EUL legal instruments. In response to our recommendation that the Army and the Air Force review and clarify guidance describing how the FMV of the lease interest should be determined and how the receipt of FMV can best be ensured, DOD concurred. DOD stated that the Army and Air Force will revise their processes for establishing the FMV and prepare appropriate guidance, which will also establish procedures to verify that in-kind consideration received is not less than the FMV of the leasehold. DOD also concurred with our recommendation that the Army, the Navy, and the Air Force issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations. DOD did not provide specific details for implementing the recommendation. Concerning our recommendation that the services issue guidance on the analyses or documentation needed to show that future leases executed under section 2667 do not include property needed for public use, as is now required by section 2667, DOD concurred and stated that all three services will issue and update their EUL guidance on the analyses or documentation needed to establish that leases executed do not include property needed for public use. While concurring with the recommendation, DOD also stated that it disagreed with our use of the Fort Sam Houston EUL as an example of military property that was leased when there was a reasonable probability that the Army might have a need for the property in the future. DOD stated that the combination of circumstances that occurred after lease execution, including the terrorist attacks of September 11, 2001, and consequent effects on base access and Army space requirements, could not have been reasonably foreseen. We agree that the specific events that occurred after lease execution might not have been reasonably foreseen. However, our point is that the leased property was located in the interior of the installation surrounded by other Army buildings and activities and that over the 50-year lease time frame, there was a reasonable probability that the Army might develop a need for the property, regardless of the specific events that might create a need. At a minimum, the Army could have anticipated that a requirement for the property or a portion of the property might arise and mitigated the potential consequences by including a termination for convenience clause or other appropriate provisions in the EUL. Finally, DOD concurred with our recommendation that the services develop procedures to regularly monitor and analyze EUL program administration costs to help ensure that the costs are in line with program benefits. DOD stated that the Army will revise its EUL guidance to require standardization of EUL accounting and reporting of program costs and benefits and that the Air Force is developing methodology for baselining and tracking project and program administrative costs and rates of return to better enable the Air Force to forecast and monitor the effectiveness of the EUL program. DOD also stated that it expected administrative costs to decline in the future through the use of standardized documents and processes and that some EULs have benefits other than rental consideration that should be considered when comparing program costs and benefits. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. The report also is available at no charge on the GAO Web site 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. Key contributors to this report are listed in appendix V. To assess the extent to which enhanced use leases (EUL) selected for our case study complied with section 2667 of Title 10, U.S. Code, we reviewed the statute’s legislative history; examined the statute’s provisions; and obtained and assessed the military services’ guidance, policies, instructions, and practices for ensuring compliance with the statute. We also interviewed officials from the Office of the Secretary of Defense, the Army, the Navy, and the Air Force to discuss the EUL program and service efforts to ensure that each EUL complies with the provisions contained in section 2667. While we reviewed information on all 17 EULs in place at the end of fiscal year 2010, to specifically assess EUL compliance with statutory requirements, we selected 9 of the 17 EULs for detailed case study review. The EULs were selected nonrandomly to include 3 from each service and a range of lease purposes, estimated financial benefits, and geographic locations. We judgmentally selected these EULs because they represented each of the military services and were located in several different geographic locations. In each case study, we obtained, reviewed, and compared the lease agreements and related documentation with the statutory requirements in place at the time the respective agreements were signed, as well as applicable case law, to assess compliance. Also, at each installation visited, we discussed with installation officials the policies, procedures, and practices used for implementing the EULs and ensuring compliance with section 2667. Further, for those areas where we identified questions regarding compliance, we asked each service’s general counsel’s office for a legal response to our questions, which we considered as part of our review. On March 30, 2011, on the basis of information developed during our review, GAO issued a legal opinion on the terms and conditions of the legal documents comprising the Picatinny Arsenal EUL. The legal opinion supplements our audit report. To determine to what extent the services’ expectations for their EULs have been realized, we obtained and summarized EUL program information from the services, including information on each EUL’s estimated and actual development time frames and financial benefits received through September 30, 2010. For the nine EUL case studies, we obtained and reviewed more detailed information on how the services initially estimated expected EUL development time frames and financial benefits and how actual EUL development progress and financial benefits through September 2010 compared to expectations. We mostly relied on the services for the accuracy of the information on EUL development time frames and financial benefits, although we corroborated the information based on our review of EUL legal documentation and escrow account records. In the case studies where the expected development time frames and financial benefits were not realized, we discussed the reasons why with officials at service headquarters and at the installations where the EULs were located. Further, we observed EUL property and, when applicable, development progress at most installations where the case study EULs were located. To evaluate the services’ management of the EUL program, we reviewed and considered Department of Defense and military service guidance, policies, instructions, and practices for managing the EUL program in view of federal internal control standards. We also interviewed officials from the Office of the Secretary of Defense; Army, Navy, and Air Force headquarters; the U.S. Army Corps of Engineers; the Naval Facilities Command; and the Air Force Real Property Agency to discuss the implementation and management of the EUL program. We specifically discussed with these officials how and to what extent they document various secretarial determinations required by section 2667—that the lease does not include excess property; that the lease may not be for more than 5 years unless the service secretary determines that a longer term will promote the national defense or be in the public interest; and that the lease include a provision permitting the service to revoke the lease at any time, unless the secretary determines that omission of such a provision will promote the national defense or be in the public interest. In addition, for the nine case studies, we determined how the service determined and provided for the receipt of the fair market value of the lease interest and reviewed how the leased property was used before the lease was signed. We also discussed with service officials the potential that the leased property might be needed for military purposes during the lease term. Further, we discussed with service officials how and to what extent they monitor EUL program administration costs, and we obtained and compared each service’s EUL program administration costs, including the costs of service personnel and consultants used to administer the program, during fiscal years 2006 through 2010, with the total amount of consideration received from each service’s EULs through fiscal year 2010. We conducted this performance audit from May 2010 to June 2011 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. As shown in table 4, the services reported that 17 enhanced use leases (EUL) were in place as of September 30, 2010—the Army reported 7, the Navy reported 5, and the Air Force reported 5. The Hoorable Carl Levi Cirman The Hoorable Joh McCa Ranking Memer Committee o Armed Service Uited Ste Snate The Hoorable Daniel K. IuyCirman The Hoorable ThCochran Ranking Memer Subcommittee o DefensCommittee o Approritions Uited Ste Snate The Hoorable Howrd P. “Bck” McKeo Cirman The Hoorable AdSmith Ranking Memer Committee o Armed Service House of Rretive The Hoorable C.W. Bill Young Cirman The Hoorable Norman D. Dick Ranking Memer Subcommittee o DefensCommittee o Approritions House of Rretive Subject: Deprtt of te Ary—Escrow Accouts and te Miscellaneous Receipts The HousCommittee o Armed Service Rort ccompanyng H.R. 136, the Ntional Defense Athoriztio Act for Fil Yer 2011, 111th Cng. (2010), direct GAO to reort to the DefensCommittee of Cngress the Departmet of Defens’s imlemetio of 10 U.S.C. §by the eectio of eanced usleas (EUL). H.R. R. No. 111-491, 08 (2010). I the coe of or review, we idetified legal issu cocerng the Departmet of the Army’s use of ecrow ccoun and idemifictio agreeme rovided for i EUL. Thiio ddress thoaspect of the Army’s imlemetio of 10 U.S.C. § 2667. Sectio 2667() authorizech Secret of the rmed force to leas-ecess reroert tht i under the cotrol of the Secret cocered and tht i ot rretl eeded for public use, rovided the leassatifie cert tor criteri. 10 U.S.C. § 2667(). The Arm emloys the term, “anced use lease,” to decrie leasected under the authorit of 10 U.S.C. § 2667() and tht reqire the paymet of an annual rel considertio meeting or eceeding cert tor threhold tht trigger congressional reorting reqireme. See 10 U.S.C. §§ 2662, 2667(c)(4). Such eanced use leas o ted to e long-term (30 or more) with coanle of develomet. Dring the coe of GAO’s review, we examied idividual EULected by the Arm with respect to roert locted t three Armnslltions: Pictinny Arm Arnal, NJ; Aerdee Proving Ground, MD; and Fort Sam Housto, TX. Or review of the legal docme comring the Pictinny EUL red qtions abt the comliance of the EUL with 10 U.S.C. § 2667, as well as with the Atideficie Act, 31 U.S.C. § 1341, and the micellaneous recei te, 31 U.S.C. § 3302(). We agreed with ff to deliver pate legal oio ddressng thee issu. A diussed i more detil elow, we coclde tht the Pictinny EUL (as defied elow) doe ot com with 10 U.S.C. § 2667. Specificll, the Arm received cash considertio for the Pictinny EUL, and did ot deit it i the speciccount of the Treasu as reqired by 10 U.S.C. § 2667(e)(1)(C). B diverting the cash to ancrow ccoununder the cotrol of the Armther than deiting such mount i the speciccount, the Arm violted the micellaneous recei te, 31 U.S.C. § 3302(), anby spding such fun the Arm imroerl augmeted it approritions. I dditio, the idemifictio roviio ancrow agreemet (subseqtl removed by medmet) was violtio of the Atideficie Act wrranting the filing of reort i ccordance with 31 U.S.C. §1. While thiio ertns rimril to the Pictinny EUL and the ancill docmeected i connectio therewith, to the etet the EUL for the other Arm cess roerty” means roert under the cotrol of federag tht the hed of the ag determi ot reqired to meet the agy’s eed or respnsilitie. 40 U.S.C. § 102(3). nslltions re o subsantill imilr term as the Pictinny EUL, or coclusions here app to thoe EUL as well. Ech Secret of the rmed forceay lease cert -ecess reroertchange for cash or i-kid considertio. 10 U.S.C. §§ 2667(), ()(4)–(). All mo re received pusuant to leastered ito under 10 U.S.C. § 2667() muse deited ito speciccount i the Treasuablihed for the Secret cocered. 10 U.S.C. § 2667(e)(1)(A)(i). The cash considertio deited i the speciccount i ilable to the Secret cocered o to the eterovided i approritions ct and for specific enumerted pu relting to reroert constrctio, mtenance ervice, lease of fcilitie, or paymet of tilit ervice. 10 U.S.C. § 2667(e)(1)(c). Cverel, if “-ki” considertio received, such considertioay cceted any roert or fcilitie under the cotrol, and for the efit, of the Secret cocered thre elected for thpue. 10 U.S.C. § 2667(c)(2). Pictinny Eanced Ue Lease AreemeanRelted Ecrow AreemeThe Armtered ito Master Areemet to Lease For Eanced Ue Lease, Rrch Develomeand Engeering Command Armme Rrch, Develomeand Engeering Cter Pictinny Arnal, New Jer, with InSitech Ic., lessee, o Stemer 26, 2006 (Master Areemet). The roert subject to the Master Areemet cons of 100,000 uare feet of etingcilit space, as well ascre of land tht i to e develoed ito millio uare feet of dmitrtive, labortor, and liht manuctring space (Project Site). The Master Areemerovide tht the Project Site will e leased icremeortions as pate parcel pusuant to pate ite leas. The ite leas and the Master Areemere collectivel referred to herei as the Pictinny EUL. Ech parcel i to ctice whessung deciions and oions to o the view of the relevanagcie order to eablictual record and to eablih the agcies’ legaitions the subject mtter of the reqt. GAO, Procedures and Prctices for Legl Decisioand Opiio, GAO-06-1064SP (Washingto, D.C.: St. 2006), ilble www.gao.ov/legal/rerce.html. The record i thiase cons of docmetio and iformtio rovided to us by the Departmet of the Arm with respect to the Pictinny EUL. The record o iclde letter from the Depu GeerCunsel, Departmet of the Arm, to the Assant GeerCunsel for DefensCapabilitie and Managemet, GAO, dted Nov. 10, 2010 (Arm Legal Letter), roviding the Army’s legal view cert term and coditions of the Pictinny EUL, iclding the use of ecrow ccoun under 10 U.S.C. § 2667. develoed pusuant to ans approved by the Secret of the Arm ansubject to the term and coditions rovided ich ite lease. The Master Areemeet forth the term and coditions under which the Arm and the lessee will eter ito ech ite lease. The Master Areemet cotemte tht ech ite lease will e o subsantill the same term and coditions. To the etet there i coflict etwee the roviions of the Master Areemean particite lease, the ite lease will cotrol. A of Octoer 19, 2010, the Armd etered ito two ite leas under the Master Areemet. Site Lease 1 wasected o Stemer 26, 2006. Site Lease 2 wasected o August 14, 2007. Uder the term of the Master Areemet, the aggregate cash considertio to paid by the lessee for ll parcel leased under Site Lease 1 anSite Lease 2 i as follow (collectivel, RCnsidertio): “(1) A oe-time, l-supaymet of $1.7 millio doll (up-fropaymet), which was paid upectio of Site Lease 1; (2) A aggregate annual rebased oerting revenued by the lessee from the leased roert and clcted ccording to re- anced Ue LeasRrch Develomeand Engeering Command Armme Rrch, Develomeand Engeering Cter Pictinny Arnal, Pictinny, NJ etwee the Arm and InSitech Ic. (Lease No. DACA31-1-06-444 for Bildingsand 33), St. 26, 2006 (Site Lease 1). Crretl with the eectio of Site Lease 1, the lessee etered ito sublease with Fore Techology, LLC. Uder the sublease, the sublessee will reovte and/or demolih the eting buildings leased under Site Lease 1 and constrct, develo anusew buildings, pusuant to ite an approved by the Secret. Because the term and coditions of the Subleasre ot relevant to or deciio here, the re ot diussed i thiio. anced Ue LeasRrch Develomeand Engeering Command Armme Rrch, Develomeand Engeering Cter Pictinny Arnal, Pictinny, NJ etwee the Arm and InSitech Ic. (Lease No. AR-E3-07-G-003 for Bilding0), August 14, 2007 (Site Lease 2). The Master Areemerovide thas dditionaite leas re eected, the lessee i reqired to pay dditionaup-fropayme. See Master Areemet, ¶¶ 1.6.4, 1.6., 1.6.7. determied form rovided i the Master Areemeand ech ite lease; an(3) Supplemel ret of up to $8er r.” See Master Areemet, ¶¶ 1.6.3, 1.6.11, 1.6.12. The Master Areemet chcterize the RCnsidertio as “un for i-kiervice us” anrovide th“it i the itet of the partie tht the ret may e collected iash or as-kid considertio as authorized by [10 U.S.C. §] 2667.” Master Areemet, ¶ 1.6.14. The lessee i reqired to deit the RCnsidertioto andividual itereringcrow ccount Pictinny FederCredit Uio, which ct as the ecrow agt. U deiting the RCnsidertioto the ecrow ccount, the lessee “sll hve satified itligatio with respect to the repayable [under Master Areemeand ech ite lease], it eing undertood tht lessee ll hve o oligatio to rovide any other and/or dditional i-kid considertio.” Master Areemet, ¶ 1.6.14; Site Lease 1, ¶ 4(e)(i); Site Lease 2, ¶ 4(e)(i). The up-fropaymet was deited ito the ecrow ccount. The ecrow ccount i the name of the lessee and the Arm. Pictinny FederCredit Uio AccounSteme for Oct. 2009 and Nov. 2009. The ecrow fun re subject to the term and coditions of an Ecrow Areememong the Arm, the lessee and the ecrow agt (Ecrow Areemet). No annual ret or supplemel ret hee paid to the Arm as of Novemer 10, 2010. Anyteret or roceed erted by the reqired to pay an aggregate annual ret equal to erceage of the Cash Flow Avilable for Ditributio (CFAD). See Master Areemet, ¶ 1.6.3. CFAD ilcted t the ed of ech cleand i equal to the aggregate et revenuerted from the oertio of the Eting Bildings leased under ite leas, less (1) moun ced i reerve ccount for capitl imroveme and mtenance expns, (2) mounxpded by the lessee for certfrastrctre imroveme, and (3) tive annual 10 ercet ret mounveted by the lessee i the develomet of the Project Site. See Master Areemet, t 3–4. If CFAD i zero for any ive leasr, annual ret ianpayable. Site Lease 1 anSite Lease 2 ech rovide for roortionapaymet of the annual reand the supplemel ret. Site Lease 1, ¶ 4(), (c); Site Lease 2, ¶ 4(), (c). o oligated to mke supplemel repayme to the Arm, rovided the Lessor has erted aggregate et revenue from ll leased eting buildingscess of $20 millio. I such circance, the lessee muspay the Arm supplemel ret of $80,000, less any annual repaid for thr. xped thecause the lessee has ot erted eugh oerting revenue to cover ititil ivetmet, there has ot ee any CFAD to wrranany paymet of annual ret or supplemel ret. See supr oteand 7. crow fun re deemed to e icome to Arm for icome tax pu. Ecrow Areemet, ¶ 3(). The Arm diclim any owerhi the ecrow ccount, but clim ecred iteret i the ecrow fun. Ecrow Areemet, Recitl D. Frther, as decried i more detil elow, the Armert cotrol over the ecrow ccounand the ecrow fun re tilized for the efit of the Arm. The Ecrow Areemerovide tht oce the RCnsidertio deited ito the ecrow ccounby the lessee (or it sublessee): (1) such payme“sll constitte i-kid considertio paymes” by the lessee; (2) such paymet i to e credited aganst the totl ret owed by the lessee; and (3) the lessee “shall have o rigts” or to the ecrow fun held i or disbued from the ecrow ccount. Ecrow Areemet, ¶ 2 (emas dded). The ecrow agt may disbue ecrow fun either—(1) to third-part cotrctor as paymet for ervice redered by such cotrctor to roert under the cotrol of the Secret pusuant to temet of work approved by the Arm, or (2) directl as aspaymet to the Arm. Ecrow Areemet, ¶ . The Ecrow Areemerovide for lti-te rocess for the disbuemet of ecrow fun to third-part cotrctor as paymet for ervice. Ecrow Areemet, ¶ 6. Firt, the Arm deliver to the lessee an “-kiervice req” the form of temet of work. The lessee the elect and cotrct with third part to comlete the temet of work. U comletio of the work by the third-part cotrctor, Arm emloee from Pictinny’s Departmet of Public Worknspect the work anotif the lessee whether the work has ee satictoril comleted. If o, the lessee direct the ecrow agt to disbue fun from the ecrow ccounsufficiet to pay the third-part cotrctor. crow funay used to pay third-part cotrctor for the following ervice: “() Mtenance, rotectio, ltertio, repair, imrovemet, or retortio (icldingviromel retortio) of roert or cilitie under the cotrol of the Secret; () Cnstrctio of ew fcilitie for the Secret; (c) Proviio of fcilitie for usby the Secret; (d) Fcilitieertio support for the Secret; an(e) Proviio of such other ervice relting to ctivitie tht will occr o the leased roert as the Secret consider approrite.” Ecrow Areemet, ¶ 4. A of June 2010, $1,474,63.04 of the ecrow funas ee disbued to pay for vrious ervice erformed o roert under the cotrol of the Secret. Arm Writte Rspns to GAO Writte Qtions, dted Jun. 29, 2010, t 6. I dditio, we underand thas of such dte, Pictinny’s Departmet of Public Workd iitited two other ervice req thre anticipated to cot $248,000. Id. t 7. At the time of eectio, the Ecrow Areemet iclded andemifictio roviio thted tht the Arm and the lessee “joitl aneverll agree to idemif and hold the ecrow agt hrmless from anagansany anll liabilitie, caus of ctio, clim, deman, jme, dag, co and expns (iclding reasnable ttorys fee and expns) tht may rie ot of or i connectio with the ecrow ag’s ood fith cceance of or erformance of ittie and oligations under thi Ecrow Areemet.” Ecrow Areemet, ¶ 3(i). O J 2, 2009, the partie modified the Ecrow Areemet to delete the idemifictio roviio. The Arm assert tht the “aspaymet for i-kiervice us” it received as RCnsidertio constitte-kid considertio under 10 U.S.C. § 2667()(4). We disagree. The Armas, ict, received cash considertio for the Pictinny EUL anunder ectio 2667 i reqired to deit such moun speciccount i the Treasuablihed for such pue. The cash considertioas deited i ancrow ccount rther tht the degnated ccount i the Treasu. We will firt diuss the imlictions of the Army’s ctions under ectioand the micellaneous recei te. Net, we will diuss the idemifictio roviio coed i the Ecrow Areemeand the Atideficie Act. by the lessee, of the roert leased as the paymet of part or ll of the considertio for the lease; (c) Type of in-kind conideration.—(1) I dditio to any-kid considertio cceted under subsectio ()(), i-kid considertio cceted with respect to leasunder thi ectioayclde the following: (A) Mtenance, rotectio, ltertio, repair, imrovemet, or retortio (icldingviromel retortio) of roert or fcilitie under the cotrol of the Secret cocered. (B) Cnstrctio of ew fcilitie for the Secret cocered. (C) Proviio of fcilitie for usby the Secret cocered. (D) Proviio or paymet of tilit ervice for the Secret cocered. (E) Proviio of reroerttenance ervice for the Secret cocered. (F) Proviio of such other ervice relting to ctivitie tht will occr o the leased roert as the Secret cocered consider approrite. (2) I-kid considertio under paagaph (1) may cceted any roert or fcilitie under the cotrol of the Secret cocered thre elected for thpuby the Secret cocered. 10 U.S.C. §§ 2667()(), 2667(c)(1)–(2). which tht language i used, and the roder cotet of the te as whole.” Robiso v. Sell Oil Co., 19 U.S. 337, 340–41 (1997) (iternal qottiork and cittions omitted); B-318897, Mr. 18, 2010, t 2. Sections 2667()() and 2667(c)(1)–(2) re ke dicerng the coheret, constet meanng thCngressteded. Thesubpaagap illustrte tht the i-kiconsidertio cotemted by ectio 2667()(4) iclde the roviio of ervice or roert. With the ecetio of the “[]roviio or paymet of tilit ervice,”ch exale of i-kid considertio detiled by thesubpaagap decri specific deliverable relted to the roviio of ervice to roert under the cotrol of the Secret (for exale, “tenance, rotectio, ltertio, repair, imrovemet, or retortio . . . of roert or fcilities”) or the roviio of reroertcilit (for exale, “[]roviio of fcilitie for usby the Secret cocered”). 10 U.S.C. §§ 2667()(), 2667(c)(1)–(2). Where Cngress ermit the cceance of fun withot reqiring their deit i the speciccount i the Treasu, the te ixplicit. See, e.g., 10 U.S.C. §§ 2667(c)(1)(D), 2667(e)(1)(B), 2667(e)(3)-(). Subpaagaph (c)(1)(D) ermit either the provisio of tilit ervice or the of tilit ervice for the Secret cocered. All other typ of i-kiervicenumerted i ectio 2667(c)(1) re for the provisio of ervice. 10 U.S.C. § 2667(c)(1) (emas dded). Sectio 2667(e)(1)(B) specifie dditional insance where caspayme received by the Secret under leaseed ot e deited i the speciccount. For exale, mo re received for leasunder ectio 2667 for agricltl or zing pu of land may e reted by the Secret cocered and expded i such moun as the Secret consider ecessa to cover the dmitrtive expns of leasng for such pu. 10 U.S.C. §§ 2667(e)(1)(B)(ii), 2667(e)(3). The Arm assert tht the use of ancrow ccount i ermissle under 10 U.S.C. §as long as the ccount doe ot lter the lessee’s respnsilit to rovide i- kiervice usng the ecrow fun. Arm Legal Letter, t 9. However, other than the deit of the RCnsidertioto the ecrow ccount, either the Master Areemet, Site Lease 1, Site Lease 2, or the Ecrow Areemespecif any-kid deliverable to rovided by the lessee to roert under the cotrol of the Secret. Rather, the Master Areemet, Site Lease 1, anSite Lease 2 specif thup deiting the reqired caspaymeto the ecrow ccount, the lessee has “no oligatio to rovide any other and/or dditional i-kid considertio.” Master Areemet, ¶ 1.6.14; Site Lease 1, ¶ 4(e)(i); Site Lease 2, ¶ 4(e)(i). Ict, under the lease term, third-part cotrctor will rovide i-kiervice if the Secret of the Arm o o ome oit i the fre. Ecrow Areemet, ¶ . Ecrow funay e disbued either—(1) as paymet to third-part cotrctor for ervice redered pusuant to temet of work issued by the Arm or (2) as direct caspaymet to the Arm. Oce the RCnsidertio deited ito the ecrow ccount, the lessee has o riht to ecrow fun. Ict, for icome tax pu, anyteret eed ied by the Arm, another icidece of owerhi. The fct tht the RCnsidertio, paid iash, may ltimtel used to comnsate third-part cotrctor throvide to the Arm the typ of ervice thre ermissle under 10 U.S.C. § 2667(c)(1) doe ot change the esstinare of the transactio: the Armas anted leasehold iteret i the Project Site ichange for cash considertio. The cash considertioas ee deited ito the ecrow ccount i satictio of the lessee’s ret oligations under the lease insted of eing deited i the speciccount i the Treasulled for by 10 U.S.C. § 2667(e). Such diverio of caspayme ot authorized by 10 U.S.C. § 2667. The ecrow ccount ito which the Arm deited (or caused to e deited) the up-fropaymet i imilr to the trust issue i Motor Co Idustries v. Dole, 72 F.2d 98 (4th Cir. 1984). I Motor Co Idustries, the FAA and the irli ervicing Dlle Iternational Airort etered ito an “terwove et of agreemes” degned to fund the purchase of bus for irort round transporttio. Id. t 961. FAA agreed to wive cert fee it ormll ched the irli for ervice the FAA rovided t the irort, ichange for the irliablihing trus nationabanand funding tht trust with “per passnger fee” based o an FAA-approved form. Id. FAA moitored the cc of the irlis’ payme to the trusanerformed mot of the dmitrtive dtie associted with the collectio of the fee. Id. Although the irli were the ettlor of the trust, the cort found th“the FAA med firm cotrol over vitaspect of the trust.” Id. “The rus’s rerce were dedicted to the ojective of rim imortance to the ag—ecring suitable bus for Dlle Airort.” Id. No expditre from the trust cold e mde withot FAA authoriztio. Id. t 962. Cnsidering thee fct, the cort observed th“the FAA’sand was vile i ll criticaspect of the Trust—it cretio, itunding, and it dmitrtio.” Id. t 96. The cort oted tht while the irli were the ettlor of the trusand mde cotributions from their ow revenu, “there i everdictio tht their role was ominal.” Id. Thus, the cort found tht the trust moys were public mo. The role of the Arm and the lessee here re analous to thoe of FAA and the irli, respectivel, i Motor Co Idustries. The ecrow fun rere Idustriesvolved the chllenge of cotrct rd by an unsuccessl cometitor who asserted tht the Federl Avitio Admitrtio (FAA) hot followed federrocremeguideli rding cotrct for round transporttio t Dlle Iternational Airort. The Forth Circit Crt of App coclded tht the fun channeled by FAA to trust eablihed by the irli anused to purchasround transport bus for Dlle Iternational Airort were public i chcter; therefore the trust, like FAA was subject to federrocremeguideli, which hot ee followed. Id. t 964–6. rt oted tht the trusrrangemeundermied the iterit of the congressionaapproritions rocess, enabling the FAA to supplemet it buet by millions of doll withot congressionactio. Motor Co Idustries, 72 F.2d t 968. paymet ill by the lessee of the RCnsidertio. The lessee has o riht to the ecrow fun. Rather, the ecrow funay e disbued o the manner determied by the Secret. Thus, the Armas cotrol over the dispitio of the ecrow fun which, ecet for the paymet of expns of the ecrow agt, re used olel for the efit of the Arm. See, e.g., Sceduled Airlies Trffic Offices v. Dept. of Defese, 87 F.3d 136, 1361–62 (D.C. Cir. 1996) (fiding tht cocessio fee paid by trvel agto “Morle Fun” considertio for overmet rerce, tht i, the riht to occupy ag office space and to erve as the eclusive o-ite trvel agt, was “mo for the overme” and violted the micellaneous recei te). Despite the Army’s diclimer of owerhi of the ecrow ccount, there i o qtio tht the ecrow fun re cash considertio for the Pictinny EUL and constitte “mo for the overmet.” Uder ectio 2667, thee funuse deited i the degnated speciccount i the Treasu. 10 U.S.C. § 2667 (e)(1). Uder the micellaneous recei te, “an officil or agt of the Govermet receiving ey for te Governm from any rce ll deit the mo the Treasu as oo as cticable withot dedctio for any che or clim.” 31 U.S.C. § 3302() (emas dded). Axped above, the caspaymet i, ict, “mo for the overmet.” The reqiremet for deit “as oo as cticable withot dedctio for any che or clim” applie whether the correct ccount for deit i the erl fund of the Treasu or where, as here, the mouse deited ito specific fund i the Treasu. B-318274, Dec. 23, 2010; B-7210, Nov. 7, 1963. Therefore, the micellaneous recei te reqired the Arm to immeditel deit the roceed of the Pictinny EUL ito the approrite ccount i the Treasu. B-307137, J 12, 2006; B-300248, Jan. 1, 2004. whe it expded the fun, it imroerl augmeted it approritio. See B-307137 (fiding tht the Departmet of Eergy used ansale roceed (and engs thoroceed) i violtio of the micellaneous recei te, which resulted i DOE unwfll augmeting it approritions whe it directed it agt to receive, ret, anusroceed from the sale of overmeasset to comnsate the agt for expns it irred o ehlf of the overmet); B-26727, J 19, 1996 (fiding thSEC violted the micellaneous recei te and imroerl augmeted it approritions, by subleasng space anrrangng for the sublessee to mke it payme directl to the landlord). To remed the ituatio, the Armust deit the roceed from the Pictinny EUL ito the approrite ccount i the Treasu. Ufortunatel, the Armasxpded subsantill ll of the RCnsidertio with miimbaance remng the ecrow ccount. The Arm did ot hve the authorit to use the RCnsidertio to pay for ervice erformed o roert under the cotrol of the Secret. I doing o, the Arm augmeted it approritio. The Arm hold djust it ccoun by transferringun from an Arm ccounilable to pay for ervice to roert under the cotrol of the Secret to the approrite ccount i the Treasu. If the Arm fi tht it lck sufficiebuet authorit to cover the djustmet, it hold reort violtio of the Atideficie Act i ccordance with 31 U.S.C. §1. The Idemifictio Proviio and the Atideficie Act Prior to it medmet i J 2009, the Ecrow Areemet coed roviio pusuant to which the Armxpress agreed to idemif the ecrow agagansll liabilitie. Such an-eded idemifictio roviio commit the overmet to otetill unlimited liabilit and violte the Atideficie Act, 31 U.S.C. § 1341. See, e.g., B-260063, June 30, 199. Oce it i determied there has ee violtio of 31 U.S.C. § 1341, the ag he“sll reort immeditel to the ote tht hd the RCnsidertio ee deited i speciccount i the Treasuablihed for the Secret as reqired by 10 U.S.C. § 2667(e)(1)(A)(i), such moun wold ilable to the Secret to the eterovided i an approritio ct. 10 U.S.C. § 2667(e)(1)(C). Frther, the expditre of such approrited fun subject to cert limittions. 10 U.S.C. § 2667(e)(1)(C). For exale, t least fift ercet of the roceed the speciccounll ilable for expditre t the militnslltio where the roceed re derived. 10 U.S.C. § 2667(e)(1)(D). I dditio, oce approrited, o more than $00,000 may e expded ngle militnslltio until fter reort o the roed expditre i submitted to the defense committee of Cngress. 10 U.S.C. § 2667(e)(1)(E). Here, subsantill ll of the RCnsidertio received to dte has ee tilized for ervice t the Project Site. Such mounay ot hve ee ilable for expditre t the Project Site hd the RCnsidertio ee deited ito the speciccounas reqired. In addition to the contact named above Laura Durland, Assistant Director; Bonita Anderson; Grace Coleman; Michael J. Hanson; Katherine Lenane; and Gary Phillips made significant contributions to this report. Federal Real Property: Authorities and Actions Regarding Enhanced Use Leases and Sale of Unneeded Real Property. . Washington, GAO-09-283RD.C.: February 17, 2009. Federal Real Property: Progress Made in Reducing Unneeded Property, but VA Needs Better Information to Make Further Reductions. GAO-08-939. Washington, D.C.: September 10, 2008. Defense Infrastructure: Services’ Use of Land Use Planning Authorities. GAO-08-850. Washington, D.C.: July 23, 2008. NASA: Enhanced Use Leasing Program Needs Additional Controls. GAO-07-306R. Washington, D.C.: March 1, 2007. Defense Infrastructure: Greater Management Emphasis Needed to Increase the Services’ Use of Expanded Leasing Authority. Washington, D.C.: June 6, 2002. .

Summary: To help address challenges associated with deteriorating facilities and underused property, the Department of Defense (DOD) has pursued a strategy that includes leasing underused real property to gain additional resources for improving installation facilities. Section 2667 of Title 10, U.S. Code, provides authority to the military departments to lease nonexcess real property, subject to several provisions, in exchange for cash or in-kind consideration. According to the military services, some leases, referred to as enhanced use leases (EUL), are more complex with long terms and could provide hundreds of millions of dollars for in-kind services to improve installation facilities. A committee report accompanying the 2011 defense authorization directed GAO to review the EUL program. This report (1) assesses the extent to which selected EULs complied with section 2667 of Title 10, U.S. Code; (2) determines to what extent the services' expectations for their EULs have been realized; and (3) evaluates the services' management of the EUL program. GAO reviewed information on the services' 17 EULs in place at the end of fiscal year 2010 and selected 9 for detailed case study. One of the Army EULs included in the GAO case studies did not comply with the EUL authorizing statute, section 2667 of Title 10, U.S. Code. In March 2011, GAO issued a legal opinion finding that certain terms and conditions of the legal documents comprising the Army's Picatinny Arsenal EUL violated section 2667(e) and the miscellaneous receipts statute by failing to require that cash consideration be deposited into the appropriate account of the U.S. Treasury. Instead, the cash was deposited into an escrow account at a local credit union. Also, while no two EULs are identical, GAO found that the two other Army and the three Air Force case study EULs included some terms and conditions similar to those that were found to be problematic by the legal opinion, which raised questions about the extent to which such EULs also comply with the statutory requirements. Moreover, beyond those issues addressed in the legal opinion, GAO found that three Army and one Air Force case study EULs did not comply with another provision in section 2667, which requires that each lease executed pursuant to section 2667 provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated. The services' expectations for EUL development timeframes and financial benefits were not realized in two Army and one Air Force EULs included in the GAO case studies largely because, according to the services, the recent economic downturn caused EUL development plans to significantly slow down or to be placed on hold. To illustrate, in the Fort Sam Houston EUL that was signed in 2001, only two of the three large deteriorated buildings included in the lease have been renovated, and the Army now estimates that EUL consideration will be about 22 percent less than was originally estimated. Moreover, in this case, the Army, rather than private sector tenants as was originally planned, has rented most of the EUL space that has been renovated. Thus, Army officials stated that nearly all of the estimated future consideration is now expected to be the result of the Army getting back a portion of the rent that the Army pays to the EUL developer. The services' management of the EUL program included weaknesses related to internal controls and program guidance. First, because the services generally lacked documentation showing how certain provisions contained in the authorizing statute were addressed, it was not clear to what extent the services addressed each provision before entering into the leases. Second, in some EUL cases, it was not clear how and to what extent the services ensured the receipt of the fair market value of the lease interest, as required by the authorizing statute. Third, some EULs included property that was being used or might be needed by the military over the lease term, which could result in increased costs to relocate military activities or increased potential costs, if a lease had to be terminated early to permit the military to regain control of the property. Fourth, the services were not regularly monitoring EUL program administration costs, as called for by internal control standards, to help ensure that costs were in line with program benefits. GAO recommends that DOD take several actions to address EUL statutory compliance issues and EUL management weaknesses. DOD agreed with all of GAO's recommendations.