The military services face the challenge of dealing with a large backlog of facilities maintenance and repair and insufficient funding devoted to sustainment, restoration and modernization. To address this issue, DOD is pursuing an installation strategy to reduce infrastructure and base operating costs and reshape military installations to meet the needs of the 21st century. After the Cold War, military force structure was reduced by 36 percent. Consequently, the Department was left with infrastructure it no longer needed for current military operations. To address this imbalance, the Department has undergone four rounds of base realignment and closures that have reduced its infrastructure holdings by about 21 percent. Even after the four rounds of base realignment and closures, the Department estimates that 20 to 25 percent of its infrastructure is not needed to meet current mission requirements. Meanwhile, service budgets frequently have been insufficient to address facility needs. In December 2001, Congress passed the National Defense Authorization Act for Fiscal Year 2002 giving the Department the authority for another round of base realignment and closure in 2005. The Department estimates it will save approximately $3 billion annually following these actions. Although the Department views the base realignment and closure process as having the greatest impact in terms of savings, it is only one initiative in a multi-part strategy to reshape and make the services’ installations more efficient. Other important initiatives include, but are not limited to, housing and utility privatization, competitive sourcing of non-inherently governmental functions, demolition, and leasing of real property and facilities. DOD’s leasing authority can be traced back to the Act of July 28, 1892. The act provided general authority for the Secretary of War to enter into leases for a maximum of 5 years for property that was “not for the time required for public use.” The Navy received similar authority under a separate law in 1916. Neither statute permitted the services to retain cash proceeds or accept non-cash or “in-kind” consideration. Additionally, the Miscellaneous Receipts Act required all cash payments to be deposited in the Treasury. Congress expanded the Department’s leasing authority in 1947. The expansion permitted the service secretaries to enter into leases for longer periods, grant the lessee a first right to buy the property in case of sale, and accept in-kind consideration. The expansion also provided that in-kind consideration could be applied specifically to the leased property or to the entire installation, if a substantial part of the installation was leased. Congress also provided limited relief from the Miscellaneous Receipts Act by permitting the services to be reimbursed for the costs of utilities or services provided in connection with a lease. The basic authority remained relatively unchanged until 1990, when Congress amended 10 U.S.C. 2667 to establish special accounts for cash payments. The amendment required the services to use the accounts for environmental restoration or facilities maintenance and repair. The amendment provided that, to the extent provided in appropriation acts, half of the proceeds were to be returned to the installation where the property was located and the other half was to be available for use by the services. The services had the option of allocating some or all of a service’s half of the cash proceeds to the installation leasing the property or retaining it for any property owned by the service. Even with these amendments to 10 U.S.C. 2667, the Department believed that further revisions were needed to make the statute a better tool for utilizing its property. Section 2814 of the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 required the Department to provide Congress with an assessment of its authority to lease real property and proposed adjustments to 10 U.S.C. 2667. In its report, the Department proposed four changes that would have allowed the Department, in its view, to use its surplus capacity more effectively to further reduce installation support costs. The proposed changes included (1) allowing the use of cash proceeds without the additional step of congressional appropriation, (2) permitting environmental indemnification, (3) expanding the use of in-kind consideration, and (4) permitting new construction as in-kind consideration. Congress acted on these proposals, but did not implement all of the Department’s proposals. In the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, Congress significantly expanded the services’ authority to accept in- kind consideration. Specifically, Congress expanded authorized use of in- kind consideration to include additional services, such as construction of new facilities. It also allowed service secretaries to accept in-kind consideration at any property or facility under their control, rather than at only the installation leasing the property. Congress made similar changes to the authority to use funds from the special accounts for cash payments. These accounts may now be used for acquisition of facilities and facilities operation support, as well as construction of new facilities. The Department of Veterans Affairs has had similar enhanced leasing authority since 1991, which permits it to lease property for the purpose of generating revenues to improve services to veterans. Appendix II provides examples of Veterans Affairs’ use of their enhanced leasing authority. The services have leased real property on their bases for years as a means to reduce infrastructure and base operating costs. The military services leased space for banks, credit unions, ATMs, storage, schools, and agricultural grazing. These projects served the needs of the community and generated modest amounts of revenues. From 1994 to 1998, the services entered into approximately 1,800 real property leases that generated $21.9 million. Agricultural and grazing leases comprised 36 percent of the total number of leases for all military Departments combined. Revenues from agricultural and grazing leases are retained to cover administrative costs of leasing and to cover financing of land-use management programs at installations. Service revenues from leasing increased to $10.7 million in fiscal year 1999, $14.4 million in fiscal year 2000, and $12.9 million in fiscal year 2001. These amounts do not include in-kind consideration. The Department estimates that, including in-kind consideration, the services collected the equivalent of $22 to $25 million annually for the 3-year period. This figure represents approximately one- third of 1 percent of the Department’s $6 billion facilities capital improvement requirement. In the Department of Defense’s 1999 leasing report to Congress, the Department estimated that the expanded leasing authority could increase its revenues to $100 to $150 million annually after the first 5 years of the expanded authority. To accomplish this, the Department expects the services to focus on larger and more complex leases, to include major development projects that involve real estate developers who lease the property, restore it, and in turn sublease the property to a variety of tenants. The services are also exploring ways to share in future revenues with developers as part of lease agreements. The services continue to use 10 U.S.C. 2667 for traditional leases, but the services have made limited efforts to use the expanded leasing authority, which was expected to result in larger and more complex projects. As a result, the services may not meet the Department’s expectations of generating $100 to $150 million in annual revenues from the expanded authority. To date, the Army has completed two projects based on the expanded authority and has identified several other potential projects. (See app. III for more details on the projects currently under consideration by the Army using the expanded leasing authority.) On June 21, 2001, the Army signed a lease, with a developer who will restore several buildings at Fort Sam Houston, San Antonio, Texas, and sublease them. The Army expects to receive $253 million in revenue over the next 50 years from this project. On September 26, 2001, the Army signed a 33-year lease with the University of Missouri, which will develop and sublease 62 acres on Fort Leonard Wood, Missouri, for a technology park. The University of Missouri Systems and the State of Missouri will provide an initial investment of $4 million. According to an Army official, the Army will receive $500 annually for each sub-leased acre and 7 percent of the net proceeds collected from the sublease. This project will enhance the installation’s mission by enabling industry and academic partners to co-locate on the installation. According to Air Force and Navy officials, they are in the process of identifying potential projects that would use the expanded leasing authority. However, as noted below, the services have cited numerous factors that were likely to limit the use of the expanded leasing authority. The services have identified a number of factors that have limited the use of the expanded leasing authority and that could adversely affect the program in the future. However, the Army’s leasing experience indicates that leasing opportunities may exist notwithstanding these factors. A significant factor that could hinder the use of the expanded leasing authority may be the absence of strong program emphasis, including detailed program guidance and goals and a financial system capable of tracking revenues and in-kind consideration from leases. The services have identified a number of impediments that have made them cautious about using the expanded leasing authority. Some of their concerns have been raised by the congressionally authorized round of base realignment and closure scheduled for 2005 and force protection issues resulting from the events of September 11. Other potential impediments include mission compatibility, budget implications, legal requirements, and resource availability. Navy and Air Force officials cite the planned base realignment and closure process authorized for 2005 as one of the main obstacles to expanding their leasing efforts in the short-term. The services are hesitant to lease property on bases that might be subject to a base realignment and closure action or may be required for future mission needs. Navy officials expressed concern about having to terminate leases if an installation should subsequently be subject to a base realignment and closure action, citing costs it had inccurred under similar circumstances.