oversight

Budget Issues: Alternative Approaches to Finance Federal Capital

Published by the Government Accountability Office on 2003-08-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              United States General Accounting Office

GAO           Report to the Chairman, Committee on
              the Budget, U.S. Senate



August 2003
              BUDGET ISSUES
              Alternative
              Approaches to
              Finance Federal
              Capital




GAO-03-1011
              a
                                                 August 2003


                                                 BUDGET ISSUES

                                                 Alternative Approaches to Finance
Highlights of GAO-03-1011, a report to           Federal Capital
Chairman, Committee on the Budget,
U.S. Senate




In an era of limited resources and               Capital projects are fully funded when Congress provides budget authority
growing mission demands, many                    for the full cost of an asset up front. Such up-front funding provides
agencies have turned to                          recognition for commitments that are embodied in budgetary decisions and
approaches other than full up-front              maintains governmentwide fiscal control. However, providing budget
funding to finance capital. GAO                  authority for the large up-front costs of capital assets creates challenges in
was asked to inventory examples
of alternative approaches that
                                                 an era of resource constraints. Agencies have been authorized to use an
agencies have employed to finance                array of approaches to obtain capital assets without full, up-front budget
the capital used in their operations.            authority. Our work identified 10 alternative financing approaches used by
                                                 one or more of 13 agencies. These approaches, which are described in our
                                                 letter, are:

                                                 •   incremental funding,
                                                 •   operating leases,
                                                 •   retained fees,
                                                 •   real property swaps,
                                                 •   sale-leasebacks,
                                                 •   lease-leasebacks,
                                                 •   public private partnerships,
                                                 •   outleases,
                                                 •   share-in-savings contracts, and
                                                 •   debt issuance.

                                                 From an agency’s perspective, meeting capital needs through alternative
                                                 financing approaches (i.e., not full funding) can be very attractive because
                                                 the agency can obtain the capital asset without first having to secure
                                                 sufficient appropriations to cover the full cost of the asset. Depending on the
                                                 financing approach, an agency may spread the asset cost over a number of
                                                 years or may never even incur a monetary cost that is recognized in the
                                                 budget. From a governmentwide perspective, however, as we have reported
                                                 in the past, the costs associated with these financing approaches may be
                                                 greater than with full, up-front budget authority. Regardless of the financing
                                                 approach—up-front budget authority or any of the other approaches—
                                                 agencies would receive the same program benefits.

                                                 This document summarizes how these approaches are typically structured as
                                                 well as examples of projects financed through these approaches. It notes
                                                 the claimed project benefits from an agency’s perspective and some
                                                 questions associated with each.




www.gao.gov/cgi-bin/getrpt?GAO-03-1011.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Susan J. Irving,
(202) 512-9142, irvings@gao.gov.
Contents



Letter                                                                                                                   1



Appendixes
               Appendix I:    Full Funding                                                                               9
               Appendix II:   Incremental Funding                                                                    11
              Appendix III:   Operating Leases                                                                       17
              Appendix IV:    Retained Fees                                                                          27
               Appendix V:    Real Property Swaps                                                                    32
              Appendix VI:    Sale-Leaseback                                                                         42
             Appendix VII:    Lease-Leaseback                                                                        45
             Appendix VIII:   Public Private Partnerships                                                            47
              Appendix IX:    Outleases                                                                              54
               Appendix X:    Share-In-Savings Contracts                                                             60
              Appendix XI:    Debt Issuance                                                                          66


Table                         Table 1: Alternative Financing Approaches                                                  4




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                              Page i                                     GAO-03-1011 Alternative Financing Approaches
A
United States General Accounting Office
Washington, D.C. 20548



                                    August 21, 2003                                                                  Leter




                                    The Honorable Don Nickles
                                    Chairman
                                    Committee on the Budget
                                    United States Senate

                                    Dear Mr. Chairman:

                                    In your March 11, 2003 letter you asked us to report on approaches federal
                                    agencies have employed to finance capital projects. On June 25, 2003, we
                                    briefed Committee staff on the preliminary results of our work. As agreed
                                    with your office, this letter summarizes and transmits the information
                                    provided in that briefing.

                                    For purposes of this work, capital projects include land, improvement
                                    projects, and buildings or equipment used in federal operations. It
                                    excludes investments in high technology assets, such as information
                                    technology, and assets owned by state and local governments, such as
                                    highways. We identified alternative financing approaches based on both
                                    prior GAO work and more current research. Specifically, we queried
                                    analysts throughout GAO about alternative approaches they had found
                                    during the course of their work. In addition, we did web-based research on
                                    publications issued by the Congressional Research Service (CRS),
                                    Congressional Budget Office (CBO), General Services Administration
                                    (GSA), and professional research organizations such as RAND. To a very
                                    limited extent, we obtained clarification on specific examples from
                                    knowledgeable federal officials. While this work was not intended to result
                                    in a comprehensive list of all capital financing approaches, we believe we
                                    identified the major approaches used. For each approach we identified, we
                                    provide a brief description, examples of how it has been used, and the
                                    project’s benefits from an agency’s perspective. We did not independently
                                    verify the accuracy of this information. Moreover, the nature of our review
                                    did not result in the identification of additional financing costs incurred by
                                    the government as a whole due to the use of an approach other than full,
                                    up-front budget authority. Indepth reviews of individual contracts would
                                    be necessary to identify such costs. Our work was done in Washington,
                                    D.C., from November 2002 through June 2003, in accordance with generally
                                    accepted government auditing standards.

                                    Capital assets usually cost large amounts of money. In fiscal year 2002
                                    alone, the federal government invested close to $100 billion in major



                                    Page 1                               GAO-03-1011 Alternative Financing Approaches
          physical capital used in its operations.1 The high cost of capital assets
          creates challenges for budgeting in an era of resource constraints.

          The requirement that an agency have adequate budget authority before it
          enters into a contract or other obligation for payment was established over
          100 years ago in the Adequacy of Appropriations Act, 41 U.S.C. § 11, and the
          Antideficiency Act, 31 U.S.C. § 1341. The financing approach known as full
          funding has broader requirements than those found in these two acts and is
          enforced by policy rather than statute.2 We have advocated the financing
          approach known as full funding as the best way to ensure recognition of
          commitments embodied in budgetary decisions and to maintain
          governmentwide fiscal control. However, agencies have been authorized to
          use an array of approaches to obtain capital assets without full, up-front
          budget authority. In an era of limited resources and growing mission
          demands, many agencies have turned to these alternative approaches as a
          practical way to finance capital, even though over the long run they may
          result in a higher cost to the taxpayer.3



Summary   We identified 10 capital financing approaches that have been used by one
          or more of 13 federal agencies (see table 1). From an agency’s perspective,
          meeting capital needs through alternative financing approaches (i.e., not
          full funding) can be very attractive because the agency can obtain the
          capital asset without first having to secure sufficient appropriations to
          cover the full cost of the asset. Depending on the financing approach, an
          agency may spread the asset cost over a number of years or may never even
          incur a monetary cost that is recognized in the budget. In other words,
          alternative financing approaches can make it easier for agencies to meet

          1
           This amount includes investments in such assets as buildings, equipment, and information
          technology. However, we did not include investments in information technology within the
          scope of this report.
          2
            The difference between these two acts and full, up-front funding is that the acts apply to
          individual contracts while full, up-front funding applies to a useful segment or an entire
          project, which may involve several contracts. As described by CBO, full funding would
          require budget authority for the construction of a whole ship, even though the construction
          may involve several contracts, while the Adequacy of Appropriations and Antideficiency
          Acts would require budget authority for a single contract, for example, to construct the hull
          of the ship.
          3
            Because the federal government’s financing costs are always less than the private sector’s,
          acquiring assets with private sector financing may result in a higher cost of capital to the
          taxpayer.




          Page 2                                       GAO-03-1011 Alternative Financing Approaches
mission capital demands within the constraints of their appropriation. As
we have reported in the past, however, from a governmentwide perspective
the costs associated with these financing approaches may be greater than
with full, up-front budget authority. Regardless of the financing approach
used to obtain the capital, agencies would receive the same program
benefits.

Table 1 below shows an array of approaches that agencies have used to
finance capital.




Page 3                              GAO-03-1011 Alternative Financing Approaches
Table 1: Alternative Financing Approaches

            Incremental                                              Real property
Agency      funding              Operating lease    Retained fees    swaps
GSA                              PTO building;      Phillip Burton   Albuquerque,
                                 DOT                Conf. Center     NM, federal
                                 headquarters                        building and
                                                                     parking;
                                                                     L. Mendel
                                                                     Rivers Building
DOD         CVN-21 Aircraft      USAF Mid-air                        Army Reserves
            Carriers; Atlantic   Refueling                           facilities;
            Intracoastal         Tankers; USAF                       LAAFB
            Waterway Bridge      Operational
                                 Support Aircraft
VA

Interior                                            Recreation fee   Georgetown -
                                                    demonstration    Foxhall
                                                    program (NPS,    (proposed)
                                                    FWS, BLM)
USDA                                                Recreation fee
                                                    demonstration
                                                    program
                                                    (Forest
                                                    Service)
TVA

Coast Guard Deepwater
            Program; CGC
            Alex Haley
DOE

DOT         Northern CA air
            traffic control
            system
USPS


State       USAID Annex
            (Kampala,
            Uganda)
Smithsonian Castle
Commerce




Page 4                                    GAO-03-1011 Alternative Financing Approaches
                                     Public private                                                                              Debt
Sale-leaseback     Lease-leaseback   partnerships                   Outlease                         Share-in-savings            issuance
Charleston, WV                       Southeast Federal Center;      Tariff Bldg.; McCormack          Energy savings
Federal Building                     El Paso border station;        PO Courthouse;                   performance
                                     Ronald Reagan Building;        Galveston                        contracts ($100s of
                                     Atlanta Food Court             customhouse; RRB                 millions in total)
                                                                    bldg.; Metcalfe Building

                                     Family housing on bases;       Ft. Sam Houston,
                                     Portsmouth Shipyard            Ft. Leonard Wood, Brooks
                                     Prison (Navy); Army            AFB; NAVSEA field
                                     utilities privatization        activities

                                     At least 27 enhanced-
                                     use leases
                                     Ft. Mason Foundation;
                                     Thoreau Center/Presidio




                   Combustion                                                                                                    Capital
                   turbines                                                                                                      acquisitions
                                                                    Maine lights, Coast
                                                                    Guard stations

                                     Oak Ridge National
                                     Laboratory




                                     New Brunswick, NJ Civic
                                     Square; Rincon Center;
                                     Grand Central Station




                                                                                                     HVAC upgrade

                                         Note: Italics and bold type indicate where details of specific projects are included in this document.




                                         Page 5                                             GAO-03-1011 Alternative Financing Approaches
The 10 alternative financing approaches we identified are briefly described
below. In parentheses, we have included a measure of the magnitude of the
use of each approach based on our research. These must be interpreted
cautiously, however, since our methodology would not identify every
instance where alternative financing approaches were used.

Incremental funding (about 1/3 of about $92 billion provided for civilian
capital projects funded through fiscal year 2000) – Incrementally funded
projects are those for which budget authority is provided for only part of
the estimated costs of a capital acquisition or for part of a usable asset.

Operating leases (about 5 percent of GSA’s leases are for 20 years or
longer) – An operating lease gives the federal government the use of an
asset for a specified period of time, but the ownership of the asset remains
with the lessor. The Office of Management and Budget (OMB) identifies six
criteria (presented in the enclosed briefing) that a lease must meet to be
considered an operating lease.

Retained fees (5 organizations) – In some cases, agencies have been
authorized to finance capital projects and improvements with fees earned
through business-type or market-oriented activities with the public.

Real property swaps (7 agreements) – A real property swap is an
exchange of property owned by the federal government for another
property owned by either a private entity or a state or local government.

Sale-leaseback (1 case) – Under a sale-leaseback agreement, a federal
agency sells an asset and then leases back some or all of the asset from the
purchaser.

Lease-leaseback (1 case) – A lease-leaseback agreement between a
government agency and a private entity may consist of three stages: the
government agency purchases an asset; the agency then leases out the
same asset to a private entity for a fixed time period in return for a lump
sum payment; finally the agency leases back the use of the same asset.

Public private partnerships (54 arrangements) – Public private
partnerships tap the capital and expertise of the private sector to improve
or redevelop federal real property assets. Ideally, the partnerships are
designed so that each participant makes complementary contributions that
offer benefits to all parties.




Page 6                               GAO-03-1011 Alternative Financing Approaches
                         Outleases (36 cases) – Excess or underused properties are outleased to
                         shift the cost of maintenance and restoration to the private sector lessee,
                         thus relieving the federal government of these expenses.

                         Share-in-savings contracts (hundreds of millions of dollars) – Some
                         federal agencies work with contractors who purchase and install new
                         energy systems in federal buildings. Agencies then pay back the
                         contractors over time for the equipment plus a percentage of the energy
                         costs saved as a result of the more efficient energy systems and relief of in-
                         house maintenance costs.

                         Debt issuance (1 agency) –A few federal organizations, such as the
                         Tennessee Valley Authority, have authority to borrow from the public. This
                         authority can be used to finance capital acquisitions.



Organization of Report   The remainder of this report consists of sections on each of the above
                         financing approaches. Each section begins with a brief description of the
                         approach, followed by examples of specific projects financed by using the
                         approach.



Additional Work To Be    As agreed with your staff, we will further examine examples of some of
                         these alternative approaches. A report on this follow-on work will be sent
Done                     to you.


                         We will send copies of this letter to the Ranking member of the Senate
                         Committee on the Budget, the Chair and Ranking Member of the House
                         Committee on the Budget, and other committees as appropriate. Copies
                         will be made available to others on request. In addition, the report will be
                         available at no charge on the GAO Web site at http://www.gao.gov.

                         We appreciate the opportunity to be of assistance. If you or your staff have
                         any questions regarding the briefing or this letter, please contact me at
                         (202) 512-9142 (irvings@gao.gov) or Christine Bonham, Assistant Director,
                         at (202) 512-9576 (bonhamc@gao.gov). Other key contributors to this




                         Page 7                               GAO-03-1011 Alternative Financing Approaches
briefing were Carol Henn, Maria Edelstein, David Eisenstadt, and Dewi
Djunaidy.

Sincerely yours,




Susan J. Irving
Director, Federal Budget Analysis
Strategic Issues




Page 8                              GAO-03-1011 Alternative Financing Approaches
Appendix I

Full Funding                                                                                        AA
                                                                                                     ppp
                                                                                                       ep
                                                                                                        ned
                                                                                                          n
                                                                                                          x
                                                                                                          id
                                                                                                           e
                                                                                                           x
                                                                                                           Iis




               A fully-funded capital project receives budget authority up front, before a
               commitment is made, for the project’s full estimated cost or for a stand-
               alone stage if the project is divisible into stages and the result of that stage
               is a usable asset.1 We and others have advocated full funding for capital
               asset acquisition as the best way to ensure recognition of commitments
               embodied in budgetary decisions and maintain governmentwide fiscal
               control. The requirement that an agency have adequate budget authority
               before it enters into a contract or other obligation for payment was
               established over 100 years ago in the Adequacy of Appropriations Act, 41
               U.S.C. § 11, and the Antideficiency Act, 31 U.S.C. § 1341. The financing
               approach known as full funding has broader requirements than those found
               in these two acts and is enforced by policy rather than statute.

               Fully-funded projects can take the form of new construction, renovations,
               or purchases. New construction of federal buildings is generally done
               through the General Services Administration (GSA). Over the last 10 years,
               GSA’s new construction program has focused on courthouses and border
               stations. Purchases typically are not used for facilities.

               There are two types of leases for which up-front funding is now required:
               lease-purchases and capital leases. A lease-purchase is a lease in which the
               federal government contracts to make annual lease payments to a
               developer and to take ownership of the building at the end of the lease
               period. During the 1980s, Congress authorized agencies to enter into lease-
               purchase agreements in which the annual lease payments were recorded in
               the budget over the lease period. Because this is generally more costly to
               the government than outright purchase and because the government is
               obligated to take ownership of the building, the House and Senate Budget
               Committees, the Office of Management and Budget (OMB), and the
               Congressional Budget Office (CBO), in connection with the Omnibus
               Budget Reconciliation Act of 1990, changed the budget scoring rules so
               lease-purchase budget authority and obligations are now scored up front
               rather than on an annual basis.

               Capital leases are those that do not meet the six criteria for an operating
               lease. (See operating leases.) Generally the present value of the minimum
               lease payments over the life of the lease exceeds 90 percent of the fair


               1
                 For more information on this, see U.S. General Accounting Office, Budget Issues:
               Incremental Funding of Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb.
               26, 2001).




               Page 9                                   GAO-03-1011 Alternative Financing Approaches
Appendix I
Full Funding




market value of the asset at the beginning of the lease term. For capital
leases, budget authority must be available for the net present value of the
total cost of the lease before it can be signed. Agencies may be reluctant to
use capital leases because of this scoring requirement.




Page 10                              GAO-03-1011 Alternative Financing Approaches
Appendix II

Incremental Funding                                                                           Appendx
                                                                                                    Ii




              Incrementally funded projects are those for which budget authority is
              provided for only part of the estimated cost of a capital acquisition or part
              of a usable asset. It erodes future fiscal flexibility for programs because
              funding is needed to complete procurements begun in previous years. In
              addition, it limits cost visibility and accountability. However, incremental
              funding can be attractive to agencies that request a particular acquisition in
              an era of tight budgets when the full amount of funding needed may be
              difficult to obtain.

              Distortions in the allocation of resources can result when the full costs of
              proposed commitments are not recognized at the time budget decisions are
              made. Incremental funding can be justified, however, for high technology
              capital projects because such projects are often closer in nature to
              research and development, where useful knowledge can be obtained even
              if no additional funding is provided. Space exploration equipment would
              be an example of such a project.

              As we reported in February 2001, of the nearly $92 billion provided for
              civilian capital projects funded through fiscal year 2000, about $31 billion
              was incrementally funded.1 At that point in time, at least $45 billion in
              additional funds would have been needed to complete these projects.

              Following are a few examples of incrementally funded projects.

              • Northern California Terminal Radar Approach Control facilities,

              • Alex Haley Conversion Project-Phase II,

              • Deepwater, and

              • Navy CVN-21 Aircraft Carrier Program.




              1
                  GAO-01-432R.




              Page 11                              GAO-03-1011 Alternative Financing Approaches
                           Appendix II
                           Incremental Funding




Northern California
Terminal Radar
Approach Control           Financing approach:                   Incremental funding
Facilities                 Capital project:                      Northern California Terminal Radar
                                                                 Approach Control facilities
                           Department/agency:                    Federal Aviation Administration


Description of project     Terminal air traffic in northern California increased 89 percent from 1982 to
                           1998 and is projected to further increase another 42 percent from 1998 to
                           2015. The infrastructure of the Federal Aviation Administration’s (FAA) air
                           traffic control system—Terminal Radar Approach Control (TRACON)—in
                           the northern California area requires modernization and expansion to meet
                           the increased traffic demands. For example, the Bay, Sacramento, and
                           Stockton TRACONs are in aging buildings without sufficient space to grow
                           or transition to modern equipment. The Northern California TRACON
                           program constructed a facility in Sacramento to consolidate and integrate
                           the approach control functions of four northern California TRACONs and
                           some Oakland airspace.

Description of financing   From fiscal years 1996 through 2000, funds were appropriated for the
approach                   consolidated facility. Specifically, funds were used for environmental and
                           airspace impact studies, site adaptation, building design and construction,
                           air traffic control equipment procurement and installation, and program
                           management. However, an estimated $6.7 million was needed to complete
                           installation and implementation activities, program management, new
                           building services, ancillary maintenance equipment, and the
                           telecommunications network required to consolidate the four TRACON
                           facilities.

Benefits claimed           FAA projects that the full northern California TRACON consolidation will
                           reduce operation and maintenance costs for consolidated facilities, reduce
                           locality pay, and lower costs associated with employee turnover. Other
                           potential benefits include fuel and time savings resulting from efficient
                           airspace management and route design.

Source                     Federal Aviation Administration’s FY 2001 President’s Budget Submission.




                           Page 12                              GAO-03-1011 Alternative Financing Approaches
                           Appendix II
                           Incremental Funding




Alex Haley Conversion
Project-Phase II
                           Financing approach:                  Incremental funding
                           Capital project:                     Alex Haley Conversion Project-Phase II
                           Department/agency:                   U.S. Coast Guard


Description of project     Coast Guard Cutter Alex Haley was recently converted to operate in the
                           harsh Alaska/Bering Sea. Its primary mission is homeland security, search
                           and rescue, and international domestic fisheries enforcement. Continuing
                           improvements are being made for crew habitability, operation capability,
                           and machinery and personal safety. For example, a helicopter hangar was
                           installed to allow deployment of an HH-65 helicopter.

Description of financing   Funding for project start-up was provided in fiscal year 1998, with
approach                   completion estimated in fiscal year 2005. Although $23.2 million had been
                           provided as of fiscal year 2001, estimates of the amount needed to
                           complete the project had not been provided as of February 2001.

Benefits claimed           The improvements provide a safer environment for the professional men
                           and women that serve on the Alex Haley. In addition, the new helicopter
                           hangar enables the cutter to launch and recover aircraft and better manage
                           conditions in the Gulf of Alaska and the Bering Sea.

Source                     U.S. General Accounting Office, Budget Issues: Incremental Funding of
                           Capital Asset Acquisitions, GAO-01-432R (Washington, D.C.: Feb. 26,
                           2001).




                           Page 13                             GAO-03-1011 Alternative Financing Approaches
                           Appendix II
                           Incremental Funding




Deepwater Program

                           Financing approach:                             Incremental funding
                           Capital project:                                Deepwater Program
                           Department/agency:                              U.S. Coast Guard


Description of project     The Coast Guard is working to modernize its aging fleet of deepwater ships
                           and aircraft. Rather than using the traditional approach of replacing an
                           individual class of ships or aircraft, the Coast Guard adopted a “system-of-
                           systems” approach intended to integrate ships, aircraft, sensors, and
                           communication links together as a system to accomplish mission
                           objectives more effectively.

Description of financing   The Coast Guard chose a contracting approach that depends on a sustained
approach                   funding stream of over $500 million each year (in 1998 dollars) for at least
                           the next 20 years. Already, the funding provided for the project is less than
                           the amount the Coast Guard had planned. The fiscal year 2002 and 2003
                           appropriations for the project were about $28 million and about $90 million
                           below the planned levels, respectively. Further, the President’s fiscal year
                           2004 budget request for the Coast Guard is not consistent with the
                           Deepwater funding plan. If the requested amount of $500 million for fiscal
                           year 2004 is appropriated, it would represent another shortfall of $83
                           million, making the cumulative shortfall about $202 million in the project’s
                           first 3 years. If appropriations hold steady at $500 million (in nominal
                           dollars) through fiscal year 2008, the Coast Guard estimates that the
                           cumulative shortfall will reach $626 million.2

Benefits claimed           By replacing its deepwater fleet through an integrated approach, the Coast
                           Guard expects to improve the effectiveness of its operations and reduce
                           operating costs. However, delays in the project, which have already
                           occurred, could jeopardize the Coast Guard’s future ability to effectively
                           and efficiently carry out its mission.




                           2
                             The $28 million shortfall is expressed in 2002 dollars, the $90 million shortfall in 2003
                           dollars, and the $202 million shortfall in 2004 dollars. The $626 million shortfall is expressed
                           in 2008 dollars.




                           Page 14                                       GAO-03-1011 Alternative Financing Approaches
          Appendix II
          Incremental Funding




Sources   U.S. General Accounting Office, Coast Guard: Challenges during the
          Transition to the Department of Homeland Security, GAO-03-594T
          (Washington, D.C.: Apr. 1, 2003).

          Coast Guard: Actions Needed to Mitigate Deepwater Project Risks, GAO-
          01-659T (Washington, D.C.: May 3, 2001).




          Page 15                           GAO-03-1011 Alternative Financing Approaches
                           Appendix II
                           Incremental Funding




Navy CVN-21 Aircraft
Carrier Program
                           Financing approach:                   Incremental funding
                           Capital project:                      Navy CVN-21 Aircraft Carrier Program
                           Department/agency:                    Department of Defense/Navy


Description of project     The Navy plans to procure the CVN-21 aircraft carrier in fiscal year 2007
                           and commission it into service in 2014. The CVN-21 is an evolved version
                           of the Nimitz-class design that will replace the Enterprise (CVN-65), which
                           will then be 53 years old.

Description of financing   For fiscal year 2004, the administration proposed continued advanced and
approach                   incremental funding to procure and perform research and development
                           work on the ship. The proposed funding for the CVN-21 would spread the
                           appropriations over 8 fiscal years, presumably to ease the strain on any one
                           year’s budget.

Benefits claimed           Compared to prior aircraft carriers, the CVN-21 would require significantly
                           fewer sailors to operate and would feature an entirely new and less
                           expensive nuclear reactor plant, a new electrical distribution system, and
                           an electromagnetic (as opposed to steam-powered) aircraft catapult
                           system. In addition, the CVN-21 is projected to have lower life-cycle
                           operation and support costs.

Source                     Congressional Research Service, Navy CVN-21 (Formerly CVNX) Aircraft
                           Carrier Program: Background and Issues for Congress, RS20643
                           (Washington, D.C.: Mar. 21, 2003).




                           Page 16                              GAO-03-1011 Alternative Financing Approaches
Appendix III

Operating Leases                                                                               Appendx
                                                                                                     iI




               An operating lease gives the federal government the use of an asset for a
               specified period of time, but the ownership of the asset does not change.
               The Office of Management and Budget (OMB) identifies six criteria that a
               lease must meet to be considered an operating lease.

               • Ownership of the asset remains with the lessor and is not transferred to
                 the government at or shortly after the lease.

               • Lease does not contain a bargain-price purchase option.

               • The lease term does not exceed 75 percent of the estimated economic
                 life of the asset.

               • The asset is a general-purpose asset and is not built to unique
                 specifications of the government lessee.

               • There is a private sector market for the asset.

               • The present value of the lease payments does not exceed 90 percent of
                 the fair market value.

               • A lease not meeting any one of the six criteria is considered a capital
                 lease.

               Operating leases are generally intended to be used for assets that are
               needed for a specified period of time. For self-insuring entities like GSA, an
               operating lease requires that only 1 year’s amount of budget authority be
               obtained annually to fund the lease. As the federal government’s real
               property manager, GSA provides leased space for most agencies. GSA and
               we agree that ownership is more cost-effective than leasing if (1) GSA has a
               justifiable need for a property over a 20-year term, (2) the space
               requirement is large enough, and (3) the property is located in an
               appropriate market.

               We have previously reported that the budget scoring rules have the effect of
               favoring operating leases and, given current budget constraints, there is a
               concern that capital assets are being obtained through operating leases
               rather than through the generally more cost-effective ownership option. In
               2001,we reported on 12 GSA lease projects in which the lease term was




               Page 17                              GAO-03-1011 Alternative Financing Approaches
Appendix III
Operating Leases




affected by budget scoring.1 While in the short run operating leases may
appear less costly than ownership options such as construction or
purchase, for long-term needs construction is generally less expensive than
leasing. We have previously reported that one option to improve
scorekeeping would be to treat operating leases that are used for long-term
needs on the same basis as purchases or construction in the budget. This
change would require an increase in available budget authority.

Following are examples of operating leases used for long-term needs:

• Patent and Trademark Office building in Washington, D.C.,

• Department of Transportation headquarters in Washington, D.C. ,

• Air Force lease of 737 Operational Support Aircraft, and

• Air Force lease of Boeing 767 tankers.




1
  U.S. General Accounting Office, Budget Scoring: Budget Scoring Affects Some Lease
Terms, but Full Extent Is Uncertain, GAO-01-929 (Washington, D.C.: Aug. 31, 2001).




Page 18                                   GAO-03-1011 Alternative Financing Approaches
                           Appendix III
                           Operating Leases




Patent and Trademark
Office (PTO) Lease in
Washington, D.C.           Financing approach:                   Operating lease
                           Capital project:                      Patent and Trademark Office (PTO) lease in
                                                                 Washington, D.C.
                           Department/agency:                    General Services Administration (GSA)


Description of project     In 1989, the Patent and Trademark Office (PTO) began working with GSA
                           on approaches to meet its long-term space requirements. In August 1995,
                           OMB authorized GSA to seek congressional approval to consolidate PTO
                           operations at a single location in new leased space. That same year, the
                           appropriate Senate and House committees approved the prospectus for the
                           lease. The committees authorized the competitive procurement of a 20-
                           year operating lease for about 2 million square feet for the purpose of
                           consolidating PTO.

                           On June 1, 2000, GSA signed a 20-year lease for approximately 2.2 million
                           rentable square feet, which were to be built to suit GSA/PTO needs and to
                           house 7,100 staff in Alexandria, Virginia. The lease was valued at $1.24
                           billion over 20 years, plus operating expenses and taxes. PTO plans to
                           begin moving into the new building in late 2003.

Description of financing   GSA entered into a 20-year operating lease that only required the annual
approach                   payments to be scored in each year of the lease. Thus PTO’s yearly rent of
                           $62 million would need to be appropriated for each of the 20 years as an
                           operating lease.

Benefits claimed           GSA will be able to consolidate and collocate PTO staff that had previously
                           been located in 18 different buildings under 33 different leases.

Budgetary observations     Had the PTO lease been considered a capital lease, the net present value of
                           the $1.2 billion in total lease costs would have needed to be appropriated to
                           GSA in fiscal year 2003. The Federal Buildings Fund would not have been
                           able to absorb the cost of this construction project without additional
                           appropriations. We reported that while construction would have been an
                           estimated $48 million less costly than leasing space for PTO, the award of
                           the PTO lease as an operating lease was in accordance with OMB’s scoring
                           criteria. We also reported that construction was not a viable alternative at
                           the time GSA made the decision for the PTO facility because funds were



                           Page 19                              GAO-03-1011 Alternative Financing Approaches
         Appendix III
         Operating Leases




         not available to provide for government ownership. A PTO official stated
         that the administration and PTO’s appropriation committees agreed that a
         competitive lease was the only viable option because neither user fees nor
         taxpayer funding were available to construct or purchase a new PTO
         facility.

Source   U.S. General Accounting Office, Acquisition of Leased Space for the U.S.
         Patent and Trademark Office, GAO-01-578R (Washington, D.C.: June 5,
         2001).




         Page 20                             GAO-03-1011 Alternative Financing Approaches
                           Appendix III
                           Operating Leases




Department of
Transportation (DOT)
Headquarters Building      Financing approach:                   Operating lease
                           Capital project:                      Department of Transportation (DOT)
                                                                 Headquarters Building
                           Department/agency:                    General Services Administration (GSA)


Description of project     In 2002, GSA reached a deal to sell 11 acres of land at the federally owned
                           Southeast Federal Center in Washington, D.C. for $40 million to the JBG
                           Companies partnership for the development of a new DOT complex. The
                           complex may have multiple buildings and up to 1.35 million rentable square
                           feet of office space that GSA will lease for 15 years for DOT headquarters
                           operations. DOT is seeking to replace its current leased space for which the
                           lease expired March 31, 2000, and to consolidate some of its field
                           operations. The DOT locations to be consolidated are the Nassif Building
                           (400 7th Street, SW) and the Transpoint Building (2100 2nd Street, SW).
                           DOT currently occupies approximately 1.1 million occupiable square feet
                           of office and related space at the Nassif Building and approximately
                           450,000 occupiable square feet of office and related space at the Transpoint
                           Building.

Description of financing   GSA entered into a 15-year operating lease for a new DOT headquarters
approach                   complex to be built with up to 1.35 million rentable square feet of office
                           space. GSA will convey 11 acres of federally owned land at the Southeast
                           Federal Center to the private partnership building the new office complex.

Benefits claimed           This lease will replace DOT’s current lease and allow it to consolidate some
                           of its field offices at one location within current budget constraints.

Budgetary observations     According to GSA officials, during the planning for the Department of
                           Transportation lease, it was realized that due to the rental rates in
                           Washington, D.C., a 20-year lease would probably not satisfy the 90 percent
                           scoring criterion for being an operating lease. To address this issue, GSA
                           reduced the lease term to 15 years. In addition, OMB encouraged GSA to
                           consider financing above-standard items through the Federal Buildings
                           Fund or DOT rather than through the lease to reduce the lease costs and
                           thus help it meet the requirements for an operating lease. The President’s
                           2003 and 2004 budgets included $25 million and $45 million respectively for
                           the new DOT headquarters building.



                           Page 21                              GAO-03-1011 Alternative Financing Approaches
                    Appendix III
                    Operating Leases




Sources             U.S. General Accounting Office, Budget Scoring: Budget Scoring Affects
                    Some Lease Terms, but Full Extent Is Uncertain, GAO-01-929
                    (Washington, D.C.: Aug. 31, 2001).

                    Washington Business Forward, April 2002.

                    January 19, 2001, letter from OMB to GSA regarding DOT headquarters
                    lease; and July 17, 2001, letter from GSA to OMB regarding DOT
                    headquarters lease.

Related questions   • How was the $40 million from the land purchase used?

                    • Was the $25 million used to buy down the lease so it qualified as an
                      operating lease?

                    • How will the $45 million in the President’s 2004 Budget be used if
                      appropriated?




                    Page 22                             GAO-03-1011 Alternative Financing Approaches
                           Appendix III
                           Operating Leases




Lease of 737
Operational Support
Aircraft                   Financing approach:                     Operating lease
                           Capital project:                        Lease of 737 Operational Support Aircraft
                           Department/agency:                      DOD/Air Force


Description of project     The Air Force plans to award a firm, fixed price, multiyear contract to
                           Boeing for four leased C-40 aircraft (the military variant of the commercial
                           737). Because the aircraft take 18 to 24 months to build, the Air Force plans
                           to lease two used 737 aircraft to provide an interim capability. After two
                           new C-40 aircraft are delivered, the used 737 aircraft would be returned to
                           Boeing to be reconfigured to C-40s and then returned to the Air Force.

Description of financing   Under this arrangement, the Air Force would lease three aircraft for 6 years
approach                   and the fourth for 5 years. At the end of the lease period, the Air Force
                           would have the option to purchase the aircraft for a specified negotiated
                           price. It appears that the leases would be operating leases and thus the
                           negotiated purchase price would have to reflect the value of the planes. If
                           the lease contained a bargain purchase price, it would be a lease-purchase
                           and budget authority for the entire cost of the lease and purchase would
                           have to be provided up front.

Benefits claimed           The Air Force estimated that it would save $3.9 million (net present value)
                           from leasing these four Boeing 737 aircraft compared to the outright
                           purchase of the aircraft. This is a savings of about 1 percent.

Budgetary observations     The Air Force complied with the OMB criteria in making its case that
                           leasing was more advantageous than purchasing. However, relatively small
                           changes in assumptions can reduce claimed savings or make leasing more
                           expensive. The Congressional Budget Office (CBO) questioned the
                           estimated cost to purchase the aircraft, which is a key assumption in
                           computing the cost of purchase. The Air Force did not negotiate a purchase
                           price and CBO believes it could have negotiated a lower purchase price
                           than it used in its analysis, just as it negotiated a lower lease price than the
                           initial estimate. Using the Air Force’s lease data, CBO used a model to
                           work backwards and determine a purchase price. CBO found that based
                           on the lease agreement the purchase price could be $5 million less per
                           aircraft than the purchase price used in the Air Force’s analysis. If the Air
                           Force could negotiate a purchase price $5 million less than the estimate



                           Page 23                               GAO-03-1011 Alternative Financing Approaches
                    Appendix III
                    Operating Leases




                    used, the purchase would save about $15 million in net present value terms
                    over the lease. CBO also questioned the assumptions for the residual value
                    of the aircraft and the cost of self-insurance. Small changes in these
                    assumptions could result in leasing being more costly.

Sources             U.S. General Accounting Office, Discussion points and August 1, 2002
                    Congressional Relations memo related to the Air Force lease of 737
                    operational support aircraft.

                    Congressional Budget Office review of report on leasing Boeing 737
                    aircraft, July 23, 2002.

Related questions   • Has this lease been signed?

                    • What is the negotiated purchase price at the end of the lease?




                    Page 24                             GAO-03-1011 Alternative Financing Approaches
                           Appendix III
                           Operating Leases




Leasing of Boeing 767
Tankers
                           Financing approach:                    Operating lease
                           Capital project:                       Leasing of Boeing 767 tankers
                           Department/agency:                     DOD/Air Force


Description of project     The Air Force has determined that it needs to replace its KC-135 mid-air
                           refueling tankers. The Air Force thought it might be able to accelerate its
                           refueling tanker replacement efforts in the aftermath of September 11,
                           2001, because commercial aircraft manufacturers were faced with the
                           prospect of reduced or canceled orders. Congress included language in
                           section 8159 of the fiscal year 2002 Defense Appropriations Act allowing
                           the Air Force to establish a multiyear pilot program for leasing Boeing 767
                           aircraft. The Air Force is considering leasing Boeing 767 aircraft and
                           converting them to serve as tankers. At the end of the lease period, the Air
                           Force would have the option to purchase the aircraft for a specified,
                           negotiated price.

Description of financing   The Air Force plans to obtain refueling tankers through an operating lease
approach                   in which budget authority will be scored in each year of the lease.

Benefits claimed           KC-135 tankers will be replaced earlier than expected. GAO reported that
                           although there is a long-term requirement to replace the aging fleet of KC-
                           135 tankers, the urgency of the need in the short term is unclear.

Budgetary observations     If the aircraft were returned at the end of the 6-year lease period, the Air
                           Force tanker fleet would be reduced and the Air Force would have to find
                           some way to replace the lost capability even though lease payments would
                           have paid almost the full cost of the aircraft. For this and other reasons, we
                           have reported that returning the aircraft would probably make little sense
                           and the Congress would almost certainly be asked to fund the purchase of
                           the aircraft at their residual value when the leases expire. In a July 10,
                           2003, report to the Senate Committee on Armed Services, the Air Force
                           estimated that purchasing the aircraft would be about $150 million less
                           than leasing, on a net present value basis.

Sources                    U.S. General Accounting Office, Military Aircraft: Considerations in
                           Reviewing the Air Force Proposal to Lease Aerial Refueling Aircraft,
                           GAO-03-1048T (Washington, D.C.: July 23, 2003).



                           Page 25                              GAO-03-1011 Alternative Financing Approaches
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Operating Leases




U.S. General Accounting Office, Air Force Aircraft: Preliminary
Information on Air Force Tanker Leasing, GAO-02-724R (Washington,
D.C.: May 15, 2002).

U.S. General Accounting Office, U.S. Combat Air Power: Aging Refueling
Aircraft Are Costly to Maintain and Operate, GAO/NSIAD-96-160
(Washington, D.C.: August 8, 1996).




Page 26                           GAO-03-1011 Alternative Financing Approaches
Appendix IV

Retained Fees                                                                                    Appendx
                                                                                                       iIV




                Proceeds that result from business-type or market-oriented activities with
                the public, such as the sale or lease of property, are known as offsetting
                collections. The legislation authorizing these collections may earmark
                them for a specific purpose or require them to be appropriated in annual
                appropriation acts before they can be spent. In some cases, agencies have
                been authorized to retain earned fees to fund capital projects and
                improvements.

                While retaining fees enables agencies to obtain the funding needed to make
                capital improvements, repairs, and maintenance, it also raises questions of
                equity. International experience with departments retaining asset sale
                proceeds has shown that those that were asset-rich continued as such and
                those that were asset-poor continued to run down their asset bases. Since
                the ability to retain fees results in a shift of control over the use of monies
                from Congress to the agencies, Congress would have limited ability to
                direct the collections to higher priority needs.

                Following are examples of a few projects funded through retained fees.

                • Capital improvements, repairs, and maintenance by federal land
                  management agencies and

                • Phillip Burton Conference Center.




                Page 27                               GAO-03-1011 Alternative Financing Approaches
                           Appendix IV
                           Retained Fees




Capital Improvements,
Repairs, and
Maintenance                Financing approach:                           Retained fees
                           Capital project:                              Capital improvements, repairs, and
                                                                         maintenance
                           Department/agency:                            Federal land management agencies


Description of project     Since 1996, federal land management agencies1 have collected over $900
                           million in recreation fees from the public under an experimental initiative
                           called the Recreational Fee Demonstration Program. Congress first
                           authorized the program in 1996 for 3 years and has extended it four times.
                           The authority to collect these fees expires at the end of fiscal year 2004.

Description of financing   The Recreational Fee Demonstration Program permits four land
approach                   management agencies to use new or increased fees collected from visitors
                           to help address deteriorating conditions at many federal recreation areas,
                           among other things. At least 80 percent of the revenues are to be spent at
                           the site that collects the fees; the remaining 20 percent can be spent at
                           other sites at the discretion of each agency. To ensure that fee revenues
                           remain available for improvements after 2004, the administration has
                           indicated it will propose legislation providing permanent fee authority.

Benefits claimed           For many sites, the additional fee revenues increased their annual budgets
                           by 20 percent or more. With this infusion of revenues, some units with
                           maintenance backlogs could address their unmet needs in relatively few
                           years. Other units with small or nonexistent backlogs could undertake
                           further development and enhancement.

Sources                    U.S. General Accounting Office, Recreation Fees: Information on Forest
                           Service Management of Revenue from the Fee Demonstration Program,
                           GAO-03-470 (Washington, D.C.: Apr. 25, 2003).




                           1
                             The four land management agencies include the National Park Service, Fish and Wildlife
                           Service, Bureau of Land Management, and Forest Service. Together, the Park Service and
                           Forest Service collect over 90 percent of the fees under the Recreational Fee Demonstration
                           Program. In fiscal year 2001, the Park Service collected $126 million and the Forest Service
                           collected $35 million.




                           Page 28                                     GAO-03-1011 Alternative Financing Approaches
                   Appendix IV
                   Retained Fees




                   U.S. General Accounting Office, Recreation Fees: Demonstration Fee
                   Program Successful in Raising Revenues but Could Be Improved,
                   GAO/RCED-99-7 (Washington, D.C.: Nov. 20, 1998).

Related question   • What is the effect of inequities between relatively high revenue
                     producing National Parks and those that earn relatively less?




                   Page 29                             GAO-03-1011 Alternative Financing Approaches
                         Appendix IV
                         Retained Fees




Phillip Burton
Conference Center
                         Financing approach:                        Retained fees
                         Capital project:                           Phillip Burton Conference Center
                         Department/agency:                         General Services Administration (GSA)


Description of project   To increase the use of underused space in the Phillip Burton Federal
                         Building and U.S. Courthouse in San Francisco,2 GSA established a
                         Government Conference and Training Center to operate as a self-sustaining
                         center. Facilities are available to both the federal community and the
                         public.

Benefits claimed         The income received from the conference center has been used to further
                         enhance the conference center and the tenant agencies in the building.
                         Underused space was converted into space that could more effectively be
                         used by the federal government and the community.

Source                   General Services Administration, Real Property Policysite, Office of
                         Governmentwide Policy, Best Practices: News and Views on Real Property
                         Policy, Special Edition, Washington, D.C., February 1999, 10 - 11.

Related questions        • How was the original construction financed?

                         • Do the fees charged cover those costs or just operating costs?

                         • Under what authority may fees be retained?

                         • Can all the fees be retained or just a portion—what constraints are on
                           this?

                         • Did any tenants need to be relocated as a result of the construction?

                         • Is there any connection between the construction of the conference
                           center and the funding of the plaza in front of the building (plaza work
                           done in 1996 through 1999)?


                         2
                          The Phillip Burton Federal Building was built in 1962. GSA owns and manages the
                         building, which houses several agencies.




                         Page 30                                   GAO-03-1011 Alternative Financing Approaches
Appendix IV
Retained Fees




• Were original financing costs repaid?




Page 31                            GAO-03-1011 Alternative Financing Approaches
Appendix V

Real Property Swaps                                                                          Append
                                                                                                  x
                                                                                                  i
                                                                                                  V




              A real property swap is an exchange of property owned by the federal
              government with either a private entity or a state or local government for
              another property. In many cases, the property exchanged by the federal
              government has been underused because it is deteriorating. Despite a
              federal property’s poor condition, a private entity may consider the same
              property valuable for future development and enter into a property swap
              with the federal government. Under such an arrangement, the federal
              government receives another existing property, or the private entity
              constructs a new facility for the federal government equal in value to the
              land received in exchange.

              Property swaps can relieve the federal government of maintenance and/or
              renovation costs and result in a real asset that may be used immediately
              with no additional appropriations required. However, determining fair
              value for the properties exchanged is not always a clear-cut process and
              congressional oversight of these exchanges is limited.

              While Congress may receive notification of pending swaps, these
              transactions are not reflected in the budget since there are no federal
              government cash flows involved. Congressional budget decisionmakers
              therefore do not have an opportunity to consider whether the value of the
              exchanged property should be reallocated to other competing resource
              needs.

              Examples of real property swaps include:

              • Los Angeles Air Force Base,

              • Albuquerque, NM, federal building and parking,

              • Army Reserves fire station,

              • Army Reserves Fort Snelling, MN, and

              • L. Mendel Rivers Building, Charleston, SC.




              Page 32                             GAO-03-1011 Alternative Financing Approaches
                           Appendix V
                           Real Property Swaps




Los Angeles Air Force
Base Systems
Acquisition                Financing method:                      Real property swap
Management Support         Capital project:                       Los Angeles Air Force Base Systems
                                                                  Acquisition Management Support project
Project                    Department/agency:                     Department of Defense/Air Force


Description of project     The Air Force traded government-owned land on the Los Angeles Air Force
                           Base to a private developer in exchange for the design and construction of
                           a new 560,000 square foot facility on the base for the Space and Missile
                           Systems Center. The new office space will replace the use of buildings
                           constructed in 1957 and 1966 that are outdated and vulnerable to
                           earthquakes.

Description of financing   The National Defense Authorization Act of 2001 (Pub. L. 106-398)
approach                   authorized the Secretary of the Air Force to sell or lease all or part of the
                           real property at Los Angeles Air Force Base (LAAFB). The statute also
                           provided that the only consideration that the Air Force could receive for
                           the property was “the design and construction on [unconveyed]
                           property…of one or more facilities to consolidate the Space and Missile
                           Systems Center mission and support functions.” Furthermore, the Act
                           provided that if the value of the new facility received by the Air Force
                           exceeded the value of the property it conveyed, then the Air Force should
                           “lease back” the new facility from the developer for a period up to 10 years,
                           with the Air Force taking title to the facility at the end of the lease period.
                           As of October, 2002, the Air Force still was negotiating the final terms of the
                           contract, which includes a property swap and the probability of a lease-
                           purchase agreement to make up the difference in value between the new
                           facility and the property conveyed by the Air Force.

Benefits claimed           The Air Force gains a new office complex at a fraction of the cost of
                           independently contracting for a new office complex while the Los Angeles
                           area communities gain land for potential development. The Air Force is
                           able to dispose of up to 865,000 square feet of substandard buildings and
                           eliminate requirements for $130 million to $150 million in military
                           construction projects. Furthermore, reduction of the base size lowers
                           ongoing operations and maintenance costs by more than $3 million per
                           year.




                           Page 33                               GAO-03-1011 Alternative Financing Approaches
          Appendix V
          Real Property Swaps




Sources   Comptroller General decisions in the matter of SAMS El Segundo, LLC,
          B-291620 and B-291620.2, February 3, 2003.




          Page 34                           GAO-03-1011 Alternative Financing Approaches
                             Appendix V
                             Real Property Swaps




Albuquerque, NM,
Federal Building and
Parking                      Financing method:                     Real property swap
                             Capital project:                      Albuquerque, NM, federal building and
                                                                   parking
                             Department/agency:                    General Services Administration (GSA)


Description of project and   The General Services Administration acquired a large city parking garage
financing approach           near federal buildings in exchange for two smaller parking areas and a
                             partially vacant historic building that was in need of repair. GSA had been
                             operating the historic federal building, which was 30 to 40 percent vacant,
                             at an annual loss of $200,000 and had faced building modernization costs of
                             $3 million. Because the exchanges are non-cash, it cannot be known
                             whether the exchanged property could have been sold competitively for a
                             different value than the properties received in exchange.

Benefits claimed             GSA reports that it improved its real estate portfolio performance. GSA
                             will meet a projected federal tenant demand for 450 additional parking
                             spaces. The agency relieved itself of a money-losing property and millions
                             of dollars in building renovation costs. Money that would have been lost or
                             spent on repairs for this building can be reinvested in property retained in
                             GSA’s portfolio.

Source                       General Services Administration, Real Property Policysite, Office of
                             Governmentwide Policy, Best Practices: News and Views on Real Property
                             Policy, Special Edition, Washington, D.C., December 2000, 25-26.

Related questions            • Do existing federal buildings have enough space to absorb the
                               employees that will move from the historic building? If not, where will
                               the employees move and at what cost?

                             • Was this transaction compared to costs of GSA restoring the building
                               either by itself or through some other kind of partnership and
                               maintaining existing office space? Were competing offers considered?

                             • How much could the building have sold for independent of this
                               arrangement?




                             Page 35                              GAO-03-1011 Alternative Financing Approaches
Appendix V
Real Property Swaps




• What were the parking arrangements for federal employees prior to
  obtaining the large garage? How do parking costs now compare to the
  prior situation?

• Were the $3 million in repairs already budgeted for in GSA’s accounts?

• Was any statutory authority required to make this transaction (e.g.,
  Historic Building Preservation Act)?




Page 36                             GAO-03-1011 Alternative Financing Approaches
                           Appendix V
                           Real Property Swaps




Parks Reserve Forces
Training Area Fire
Station                    Financing method:                     Real property swap
                           Capital project:                      Parks Reserve Forces Training Area fire
                                                                 station
                           Department/agency:                    Department of Defense/Army Reserves


Description of project     The Army Reserves entered into a real property exchange agreement with a
                           private land developer. The Army Reserves conveyed about 11 acres of
                           training area land to the developer in exchange for construction of a new
                           fire station.

Description of financing   The developer receives land appraised at $1.8 million to construct an
approach                   access road into its new housing development. The Army Reserves
                           receives a new fire station valued at $3.9 million. The appraisal process is
                           meant to determine the fair market value of the property to be conveyed by
                           the Army Reserves. The property received in exchange must be at least of
                           equal value and must meet minimal requirements that have changed since
                           the old facility was constructed. In order to meet this second requirement,
                           the value of the property received may be higher than the appraised value
                           of the property conveyed by the Army Reserves. Nonetheless the size of
                           the discrepancy raises questions about the appraisal process. The initial
                           appraisal of the Army Reserves’ 11-acres was $75,500 because the land’s
                           current condition was assessed rather than the most valuable use of the
                           property by a developer.

Benefits claimed           The Army Reserves receives a new fire station without paying out any
                           money up front in military construction costs to replace an older, less
                           modern station.

Source                     U.S. General Accounting Office, Defense Infrastructure: Changes in
                           Funding Priorities and Management Processes Needed to Improve
                           Condition and Reduce Costs of Guard and Reserve Facilities, GAO-03-516
                           (Washington, D.C.: May 15, 2003).

Related questions          • What are the locations of the old and new fire stations?

                           • How does the Army Reserves explain the size of the discrepancy in the
                             exchanged values?



                           Page 37                              GAO-03-1011 Alternative Financing Approaches
Appendix V
Real Property Swaps




• What is the appraisal process used to determine the value of the
  property exchanged?




Page 38                            GAO-03-1011 Alternative Financing Approaches
                           Appendix V
                           Real Property Swaps




Army Reserves
Facilities at Fort
Snelling, MN               Financing method:                    Real property swap
                           Capital project:                     Army Reserves facilities at Fort Snelling,
                                                                MN
                           Department/agency:                   Department of Defense/Army Reserves


Description of project     The Army Reserves entered into two real property exchange agreements:
                           first with the Metropolitan Airport Commission in August 2002; and then
                           with the Minnesota Department of Transportation and the Metropolitan
                           Council in November 2002. In the first agreement, the Army Reserves
                           conveyed 11 acres of property that will be used to expand the runway at the
                           Minneapolis-St. Paul International Airport. In return, the Army Reserves
                           received a newly constructed maintenance facility in St. Joseph,
                           Minnesota. In the second agreement, the Army Reserves conveyed seven
                           acres of property in exchange for a 38,000 square foot addition to its
                           permanent facility.

Description of financing   In the August 2002 agreement, the Army Reserves conveyed property
approach                   appraised at $1.4 million in exchange for a new maintenance facility valued
                           at $1.7 million. In the November 2002 agreement, the Army Reserves
                           conveyed property appraised at $2 million in exchange for a building
                           addition worth about $5.1 million. Because the exchanges are non-cash, it
                           cannot be known whether the exchanged property could have been sold for
                           a different value than the properties received in exchange.

Benefits claimed           The Army Reserves receives new building space without having to draw on
                           the Defense Department’s military construction budget and at a greater
                           appraised value than the property given up.

Source                     U.S. General Accounting Office, Defense Infrastructure: Changes in
                           Funding Priorities and Management Processes Needed to Improve
                           Condition and Reduce Costs of Guard and Reserve Facilities, GAO-03-516
                           (Washington, D.C.: May 15, 2003).

Related questions          • How does the Army Reserves explain the size of the discrepancy in the
                             exchanged values?




                           Page 39                             GAO-03-1011 Alternative Financing Approaches
Appendix V
Real Property Swaps




• What is the appraisal process used to determine the value of the
  property exchanged?




Page 40                            GAO-03-1011 Alternative Financing Approaches
                           Appendix V
                           Real Property Swaps




L. Mendel Rivers
Building, Charleston,
SC                         Financing method:                     Real property swap
                           Capital project:                      L. Mendel Rivers Building, Charleston, SC
                           Department/agency:                    General Services Administration (GSA)


Description of project     The seven-story L. Mendel Rivers building was constructed in 1965 with
                           almost 100,000 rentable square feet of space. It has a surface parking lot
                           and sits on over two acres of land. Since Hurricane Floyd damaged the
                           building in October 1999, it has been totally vacant and its tenants have
                           relocated to leased space. The building is contaminated with asbestos and
                           GSA has determined that it would be too costly to rehabilitate or replace
                           the building. While the Rivers building is vacant, GSA still incurs expenses
                           for its basic maintenance and utilities. In fiscal years 2002 and 2003, GSA
                           spent about $28,000 to operate and maintain the building. Occasionally,
                           GSA rents out the parking lot and uses the rental income to help offset
                           some of the building expenses.

Description of financing   For a number of years, GSA has been engaged in discussions with the City
approach                   of Charleston to exchange the L. Mendel Rivers site for a new building.
                           Under the proposed agreement, the city would construct a new building
                           with about 27,000 useable square feet next to the federal court complex
                           and a parking garage in which GSA would have 60 parking spaces in
                           exchange for the L. Mendel Rivers site. While the building to be constructed
                           is much smaller than the L. Mendel Rivers building, the new building is in
                           the historic downtown business area where land values are higher;
                           appraisals show that the exchange sites are of equal value. According to a
                           GSA official, the mayor of Charleston has signed a memorandum of
                           understanding with GSA that sets forth the terms and conditions for the
                           exchange and the GSA Administrator is expected to sign the memorandum
                           in early July. The exchange will not occur until independent appraisals
                           show the value of the properties to be exchanged are equal in value.

Benefits claimed           GSA would be relieved of a money-losing property and in return it would
                           obtain new office space without needing an appropriation.

Sources                    GSA’s Asset Business Plan and interviews with GSA officials.




                           Page 41                              GAO-03-1011 Alternative Financing Approaches
Appendix VI

Sale-Leaseback                                                                                   Appendx
                                                                                                       iVI




                 Under a sale-leaseback agreement, a federal agency sells an asset and then
                 leases back some or all of the asset from the purchaser. Agencies might
                 consider such an arrangement when the property they are using needs
                 renovation or when they need only a fraction of the total building space.
                 When building renovations are necessary, sale-leaseback agreements may
                 transfer renovation costs to the purchaser of the property. The government
                 may then lease back after improvements have been made.

                 Federal agencies generally are not permitted to retain the proceeds from
                 the sale of assets unless specific legislation states otherwise. In at least
                 one instance, Congress has authorized GSA to credit the Federal Buildings
                 Fund with proceeds from the sale of a federal building. GSA then leased
                 back a portion of the sold building.

                 The potential drawback of sale-leaseback agreements is that over the long
                 term they may be more expensive, particularly in cases when the federal
                 government occupies the entire building. Renovations financed by the
                 private sector will always cost more than those financed by Treasury
                 borrowing. As a result, the share of the building to be used by the federal
                 government can be an important determinant of the value.

                 We identified one example of a sale-leaseback arrangement in a transaction
                 involving a federal building in Charleston, West Virginia.




                 Page 42                              GAO-03-1011 Alternative Financing Approaches
                           Appendix VI
                           Sale-Leaseback




Charleston, WV,
Federal Building
                           Financing method:                           Sale-leaseback
                           Capital project:                            Charleston, WV, Federal Building
                           Department/agency:                          General Services Administration (GSA)


Description of project     The construction of the Robert C. Byrd U.S. Courthouse in Charleston, WV
                           enabled tenants of the federal building at 500 Quarrier Street to relocate.
                           Originally, GSA had planned to excess the Quarrier Street building after the
                           move but the Social Security Administration (SSA) contacted GSA with a
                           space request to consolidate their functions with West Virginia’s Disability
                           Determination Agency. GSA entered into an agreement to sell the 130,000
                           square foot Quarrier Street building to a developer and lease back about
                           82,000 square feet in the same building so that SSA could collocate with the
                           state government agency.

                           Congress included language in the appropriation bill1 for the Byrd
                           Courthouse that approved the sale and leaseback of the federal building
                           and allowed GSA to retain funds from the sale of the building for the
                           Federal Buildings Fund.

Description of financing   In September 1998, GSA sold the federal building on Quarrier Street to a
approach                   developer for $3.5 million. The developer committed to investing
                           $11 million to upgrade the facility from Class C to Class A. In exchange,
                           GSA committed to lease back a portion of the facility for 20 years.

Benefits claimed           SSA and GSA both claim benefits from this arrangement. SSA maintains a
                           presence in Charleston’s central business district and can increase
                           productivity by consolidating functions and collocating with West Virginia’s
                           social service agency. GSA retains funds from the building sale and does
                           not directly incur the estimated $11 million cost of upgrading the building.

Source                     General Services Administration, Real Property Policysite, Office of
                           Governmentwide Policy, Best Practices: News and Views on Real Property
                           Policy, Special Edition, Washington, D.C., December 1999, 7.


                           1
                            101st Congress, HR 5241, 1991 Treasury, Postal Service and General Government
                           appropriations bill.




                           Page 43                                   GAO-03-1011 Alternative Financing Approaches
                    Appendix VI
                    Sale-Leaseback




Related questions   • What kind of cost benefit analysis did GSA do to compare costs of
                      leasing two-thirds of the building vs. doing the repairs itself and
                      outleasing the remaining 48,000 square feet to the private sector?

                    • Where were the SSA employees working before?

                    • How long does SSA believe it will require the leased space? What are
                      the terms of the lease?

                    • What efficiencies are gained from the new space that is shared with the
                      state agency?

                    • Are there other cases of GSA receiving permission to retain sale
                      proceeds?




                    Page 44                             GAO-03-1011 Alternative Financing Approaches
Appendix VII

Lease-Leaseback                                                                                Append
                                                                                                    x
                                                                                                    iVI




               A lease-leaseback agreement between a government agency and a private
               entity may consist of three stages: the government agency purchases an
               asset; the agency then leases out the same asset to a private entity for a
               fixed time period in return for a lump sum payment; finally, the agency
               leases back the use of the same asset over the same time period via
               incremental payments. For this type of arrangement, the net result is
               similar to the agency entering into a lease-purchase contract since the asset
               is privately financed and paid for incrementally. The agency maintains
               ownership and control of the asset and thus retains both the economic
               benefits and risks related to asset ownership.

               We identified three Tennessee Valley Authority (TVA) lease-leaseback
               contracts for combustion turbine units. TVA signed the respective
               contracts in fiscal years 2000, 2002, and 2003.




               Page 45                              GAO-03-1011 Alternative Financing Approaches
                             Appendix VII
                             Lease-Leaseback




Combustion Turbines

                             Financing method:                      Lease-leaseback
                             Capital project:                       Combustion turbines
                             Department/agency:                     Tennessee Valley Authority (TVA)


Description of project and   TVA, a wholly-owned government corporation, entered into contracts in
financing approach           fiscal years 2000, 2002, and 2003 to outlease combustion turbine units to
                             private investors in exchange for a lump-sum payment. At the same time
                             TVA agreed to lease back the same assets by making regular incremental
                             payments over the term of the contract. TVA maintains ownership of the
                             generators but it can relinquish the property to the private sector at the end
                             of the term. Thus, according to TVA, the private sector bears the “residual
                             value” risk of the asset.

Benefits claimed             According to TVA, entering into the fiscal year 2000 and 2002 lease-
                             leaseback arrangements could, over time, save the agency approximately
                             $50 million. Lease-leasebacks provide financial flexibility to TVA because
                             of early buyout and termination options in the contract. TVA may
                             terminate its lease if the economic conditions of operating the combustion
                             turbine units change at some point during the term of the lease. For
                             example, the turbine units may become obsolete, or TVA may decide to sell
                             the units because they no longer meet TVA’s load requirements.
                             Furthermore, TVA can relinquish the property to the private entity at the
                             end of the lease term, so that the private entity bears the “residual value”
                             risk of the asset.

                             The $50 million benefit claimed by TVA does not necessarily mean that the
                             lease-leaseback was the best financial deal for the government as a whole.
                             For example, tax preferences used by the private entity represent a cost to
                             the government but not to TVA.

Source                       U.S. General Accounting Office, Tennessee Valley Authority: Information
                             on Lease-Leaseback and Other Financing Arrangements, GAO-03-784
                             (Washington, D.C.: June 30, 2003).




                             Page 46                               GAO-03-1011 Alternative Financing Approaches
Appendix VIII

Public Private Partnerships                                                                                  Appendx
                                                                                                                   iI
                                                                                                                   V




                Given today’s budget constraints, evolving private sector markets and the
                expansion of creative real property development alternatives, several
                agencies have established public private partnerships as a means of
                leveraging the intrinsic equity value of real property. Ideally, the
                partnerships are designed such that each participant makes
                complementary contributions that offer benefits to all parties. Public
                private partnerships tap the capital and expertise of the private sector to
                improve or redevelop federal real property assets.1 They are considered
                most appropriate where excess capacity exists within the asset and where
                existing government facilities do not adequately satisfy the current or
                potential future needs.

                OMB Circular A-76 describes the federal government’s longstanding policy
                to rely on the private sector for needed commercial services. Public
                private partnerships are consistent with this policy so long as the product
                or service provided by the private partner cannot be procured more
                economically by the federal government. Partnerships raise questions
                about what functions are most appropriately performed by the federal
                government.

                Proponents of public private partnerships argue that this approach
                provides a realistic, less costly alternative to leasing when planning and
                budgeting for real property needs. Proponents also note that federal
                partners benefit from improved, modernized, and/or new facilities plus a
                minority share of the income stream generated by the partnership or use of
                the asset at a lower cost than a commercial lease.

                Critics of public private partnerships caution that these ventures are not
                the least expensive means of meeting capital needs, although they may
                appear to be in the short-term. They remind decisionmakers that up-front
                payment of appropriated funds is the least expensive way to obtain assets.
                Although partnerships may be more costly, it is possible that they could
                make sense from a mission perspective. However, the full costs should be
                transparent to decisionmakers through inclusion in primary budget data.




                1
                  Public private partnerships take a variety of forms. In addition to some of the partnerships
                described in this section, other types of partnerships might include outleases of real
                property and share-in-savings contracts. These partnerships are described in greater detail
                in other sections.




                Page 47                                      GAO-03-1011 Alternative Financing Approaches
Appendix VIII
Public Private Partnerships




Following are examples of a few public private partnerships.

• Civic Square II Project,

• Houston Regional Office Collocation,

• Veterans Affairs Office Collocation and Parking Garage, Chicago, and

• Oak Ridge National Laboratory.




Page 48                            GAO-03-1011 Alternative Financing Approaches
                          Appendix VIII
                          Public Private Partnerships




Civic Square II Project

                          Financing approach:                  Public private partnership
                          Capital project:                     Civic Square II project
                          Department/agency:                   U.S. Postal Service


Description of project    The main post office in the city of New Brunswick, NJ, which was
                          constructed in 1936, had been underused and had accumulated an
                          increasing amount of deferred maintenance. Accordingly, the Postal
                          Service negotiated a public private partnership that resulted in a newly
                          restored Post Office and a facility housing the Middlesex County
                          Prosecutor’s Office, the New Brunswick Police Department, and an
                          underground parking garage. The Post Office leased its land to the local
                          government, which contracted for the restoration of the Post Office and
                          construction of additional facilities for its own use.

Benefits claimed          The Postal Service now has a restored Post Office along with significant
                          revenue from the ground lease. All federal, city, and county offices have
                          benefited from the building through improved operations, higher customer
                          satisfaction, and greater employee morale.

Source                    General Services Administration, Real Property Policysite, Office of
                          Governmentwide Policy, Best Practices: News and Views on Real Property
                          Policy, Special Edition, Washington, D.C., December 1999, 20.

Related questions         • Who fronted the construction funds?

                          • Who makes lease payments to whom?

                          • How long is the life of lease arrangement?

                          • Was a comparison made between the cost of the federal government
                            doing it all and forming the partnership?




                          Page 49                             GAO-03-1011 Alternative Financing Approaches
                         Appendix VIII
                         Public Private Partnerships




Houston Regional
Office Collocation
                         Financing approach:                   Public private partnership
                         Capital project:                      Houston Regional Office Collocation
                         Department/agency:                    Veterans Benefits Administration


Description of project   The Veterans Benefits Administration (VBA) needed to relocate its regional
                         office in order to better serve veterans and their beneficiaries throughout
                         southern Texas. The Department of Veterans Affairs (VA) negotiated an
                         enhanced-use lease of underused VA medical center land to a local
                         developer, which constructed a 140,000 square foot state-of-the-art regional
                         office. As part of this arrangement, VA signed short-term operating leases
                         to obtain use of the newly developed space. The developer also financed,
                         built, owns, and operates businesses on the balance of the site.

Benefits claimed         VA states that this project saved taxpayers over $6 million in construction
                         costs and generated an additional $10 million savings in operating costs.
                         VA also receives a small share of the developer’s profits.

Source                   VA’s briefing packet on enhanced-use leasing.

Related questions        • How many years does the lease cover?

                         • Does VA maintain the master ground lease?

                         • What happens to the developer-owned businesses at the end of the lease
                           life?




                         Page 50                              GAO-03-1011 Alternative Financing Approaches
                          Appendix VIII
                          Public Private Partnerships




Veterans Affairs Office
Collocation and
Parking Garage,           Financing approach:                  Public private partnership
Chicago                   Capital project:                     Veterans Affairs Office Collocation and
                                                               Parking Garage, Chicago
                          Department/agency:                   Veterans Benefits Administration


Description of project    The Veterans Benefits Administration sought to avoid high-cost leased
                          office space and improve service delivery and accessibility to veterans.
                          Moreover, VA Medical Center Westside needed relief from the lack of
                          available parking. Accordingly, VA negotiated a long-term outlease of six
                          acres of flat parking space to a developer that then built and managed a
                          95,000 square foot office building and a 1,565 car parking garage. VA then
                          established short-term operating leases to obtain use of the newly
                          developed space.

Benefits claimed          The average annual cost to VA for the new office space and parking is
                          expected to be 50 percent less than comparable market rates.

Source                    VA’s briefing packet on enhanced-use leasing.

Related questions         • What happened to the space that employees used to be in?

                          • How much is what they are paying compared to what they were paying?

                          • How long is the term of the outlease?




                          Page 51                             GAO-03-1011 Alternative Financing Approaches
                           Appendix VIII
                           Public Private Partnerships




Oak Ridge National
Laboratory
                           Financing approach:                             Public private partnership
                           Capital project:                                Oak Ridge National Laboratory
                           Department/agency:                              Department of Energy


Description of project     The Department of Energy (DOE) needed to replace deteriorating buildings
                           constructed during World War II with modern facilities at the Oak Ridge
                           National Laboratory (ORNL). However, it lacked adequate funding to do
                           this.

Description of financing   DOE designated federal land next to ORNL as excess and conveyed it to a
approach                   developer who would process the construction phase requirements from
                           bid solicitation through construction completion, on the land conveyed by
                           DOE. Although the land in its current state is excess to the needs of DOE,
                           the resulting building space to be constructed is needed to accomplish
                           DOE’s missions. The private developer would finance construction and
                           then lease the new buildings to DOE’s prime contractor for DOE missions.

                           At the end of the 30-year “payback plus profit” term, the quitclaim deed2
                           conveying the land requires that the private party offer no-cost repurchase
                           or reacquisition rights to the federal government for the land and facilities.
                           Ultimately, the government must reimburse lease payments to DOE’s prime
                           contractor. The quitclaim deed also contains restrictive language that
                           specifies use of the property so as not to compromise the integrity of ORNL
                           by the possible bankruptcy of the private developer or by DOE’s possible
                           cancellation of the lease.

Benefits claimed           DOE was able to obtain the needed space for its contractors without having
                           to obtain up-front funding or special legislation.

Source                     General Services Administration, Real Property Policysite, Office of
                           Governmentwide Policy, Best Practices: News and Views on Real Property
                           Policy, Special Edition, Washington, D.C., Fall 2002, 6.



                           2
                             A legal instrument used to release one party's right, title, or interest to another without
                           providing a guarantee or warranty of title.




                           Page 52                                       GAO-03-1011 Alternative Financing Approaches
                    Appendix VIII
                    Public Private Partnerships




Related questions   • Are DOE’s lease reimbursement payments included as part of the
                      negotiated payments to the “prime” contractor?

                    • Why would DOE not claim the property back after the 30-year period is
                      completed?




                    Page 53                           GAO-03-1011 Alternative Financing Approaches
Appendix IX

Outleases                                                                                     Appendx
                                                                                                    IiX




              Federal asset managers are confronted with numerous challenges in
              managing their multibillion dollar real estate portfolio, such as a large
              backlog of deferred maintenance and obsolete, underused properties. In
              response, some agencies have outleased excess or underused properties to
              shift the cost of maintenance and restoration to their private sector
              partners, thus relieving the federal government of these expenses.

              Historic but run-down properties are prime candidates for outleasing. This
              is because the National Historic Preservation Act authorizes agencies to
              use the lease proceeds of these historic properties to defray the costs of
              maintaining and repairing other historic properties they own.

              Outleasing historic properties promotes the restoration, repair, and
              maintenance of important national buildings. However, it is unclear
              whether the outright sale of such properties is possible and whether selling
              would accomplish the same purpose with greater economic benefit to the
              taxpayer.

              Following are examples of a few outleased projects.

              • Cooperative Use Outlease for Food Court;

              • Galveston, Texas Customhouse;

              • Maine Lights Program;

              • U.S. Tariff Building; and

              • McCormack Post Office-U.S. Courthouse.




              Page 54                              GAO-03-1011 Alternative Financing Approaches
                           Appendix IX
                           Outleases




Cooperative Use
Outlease for Food
Court                      Financing approach:                           Outlease
                           Capital project:                              Cooperative use outlease for food court
                           Department/agency:                            General Services Administration (GSA)


Description of project     Under the National Historic Preservation Act and the Public Buildings
                           Cooperative Use Act,1 GSA outleased 17,600 square feet of underused
                           space for a restaurant and retail center in the Railroad Retirement Board
                           (RRB) building located in Chicago, Illinois. The lease had a fixed term of
                           15 years, with three 5-year renewal options. GSA, RRB, the City of Chicago,
                           and the developer also will upgrade the sidewalks surrounding the building
                           (new pavers, planters, trees, and lamp posts) under GSA’s Good Neighbor
                           policy. A similar outlease was negotiated at Chicago’s Metcalfe Federal
                           Building.

Description of financing   Construction costs of about $10 million were paid by the project developer,
approach                   who is also responsible for the utility, maintenance, permits, taxes, and
                           insurance costs for the project. The developer’s revenue is derived solely
                           from sublease proceeds.

Benefits claimed           The outlease generates a substantial revenue stream to the Federal
                           Buildings Fund —about $10 million over the term of the lease.

Source                     General Services Administration, Real Property Policysite, Office of
                           Governmentwide Policy, Best Practices: News and Views on Real Property
                           Policy, Special Edition, Washington, D.C., December 1999, 18.




                           1
                             The National Historic Preservation Act authorizes agencies to lease or exchange federal
                           historic properties and retain the proceeds to defray the costs of maintaining other federal
                           historic properties. The Public Buildings Cooperative Use Act encourages the government
                           to develop the highest and best use of pedestrian access areas to federal facilities.




                           Page 55                                      GAO-03-1011 Alternative Financing Approaches
                         Appendix IX
                         Outleases




Galveston, Texas
Customhouse
                         Financing approach:                   Outlease
                         Capital project:                      Galveston, Texas Customhouse
                         Department/agency:                    General Services Administration


Description of project   The Galveston Customhouse is one of the oldest federal buildings west of
                         the Mississippi River. While the exterior of the building was in good
                         condition, the interior had fallen in disrepair and housed only six people.
                         However, it was decided that because of its historic significance, the
                         customhouse was not a good candidate for disposal. Instead, the building
                         was outleased to the Galveston Historical Foundation (GHF) for 60 years.
                         The GHF will preserve and restore the customhouse to ensure its historic
                         integrity. Once repairs are made, the customhouse will house both the
                         GHF headquarters and a visitor center for the historic Strand District of
                         Galveston.

Benefits claimed         The 60-year lease removes GSA’s estimated $162,000 per year cost of
                         operating an underused asset. The customhouse also benefits from $1
                         million that the GHF has invested in restoration and repair work. Finally,
                         the city and Historic Strand District also benefit by the continued use and
                         preservation of one of its most significant buildings.

Source                   General Services Administration, Real Property Policysite, Office of
                         Governmentwide Policy, Best Practices: News and Views on Real Property
                         Policy, Special Edition, Washington, D.C., December 1999, 17.

Related questions        • Was any cost analysis done to consider having GSA renovate the
                           building and then move federal employees currently leasing elsewhere
                           into the building?

                         • Has any thought been given to what will happen when the lease expires
                           at the end of the 60-year period?

                         • What happened to the six employees that had been working in the
                           customhouse?




                         Page 56                              GAO-03-1011 Alternative Financing Approaches
                           Appendix IX
                           Outleases




Maine Lights Program

                           Financing approach:                    Outlease
                           Capital project:                       Maine Lights Program
                           Department/agency:                     Coast Guard


Description of project     With the development of technological aids to navigate merchant and
                           sailing vessels, the need for lighthouses has greatly diminished. The Coast
                           Guard owns many lighthouses that deteriorate without day-to-day upkeep.
                           Moreover, the Coast Guard has become unable to maintain the properties
                           at the standards of the state historic preservation guidelines given the level
                           of funding for repairs and alterations. The Maine Lights Program outleased
                           and divested 28 historic lighthouses to organizations that will ensure the
                           maintenance, repair, and care of these historically significant properties.

Description of financing   Under the National Historic Preservation Act, the proceeds of these leases
approach                   may be used to offset expenses associated with other historic properties
                           owned by the Coast Guard.

Benefits claimed           This program ensures the lighthouses will maintain their historic integrity
                           while allowing the Coast Guard to avoid between $3 to $5 million in annual
                           repair and maintenance costs. Moreover, lease payments defray the costs
                           of other historic preservation efforts.

Source                     General Services Administration, Real Property Policysite, Office of
                           Governmentwide Policy, Best Practices: News and Views on Real Property
                           Policy, Special Edition, Washington, D.C., December 1999, 5.




                           Page 57                               GAO-03-1011 Alternative Financing Approaches
                           Appendix IX
                           Outleases




U.S. Tariff Building

                           Financing approach:                    Outlease
                           Capital project:                       U.S. Tariff Building
                           Department/agency:                     General Services Administration (GSA)


Description of project     GSA leased the U.S. Tariff Building, which had been vacant for a number of
                           years, to the Kimpton Hotel and Restaurant Group, Inc. (Kimpton Group)
                           for 60 years. The Kimpton Group restored the building, converting it into a
                           luxury hotel that includes restaurants, retail space, and meeting rooms.
                           GSA retains ownership of the 1839-built structure under the National
                           Historic Preservation Act, which encourages adaptive reuse of public
                           buildings that are no longer needed by federal agencies.

Description of financing   GSA contributed $5 million to clean the historic building’s exterior, repair
approach                   windows, and install a handicapped accessible elevator. The Kimpton
                           Group paid $32 million to renovate the interior of the building, using the 20
                           percent federal historic rehabilitation tax credit to finance a portion of the
                           rehabilitation costs.

Benefits claimed           Rents paid to GSA under the lease support the preservation of other
                           historic properties in GSA’s inventory. In addition, GSA is relieved of the
                           burden of maintaining an unproductive property. Finally, the restoration
                           contributes to the revitalization of the surrounding neighborhood.

Sources                    GSA press releases. U.S. General Services Administration Signs Lease
                           with Kimpton Group on Tariff Building (Nov. 23, 1999) and GSA
                           Celebration for Opening of Hotel Monoco (July 2002).

                           Paper issued by the Heritage Consulting Group, 2002; Preservation Online,
                           Hotel Opens in Historic D.C. Building, June 13, 2002.




                           Page 58                               GAO-03-1011 Alternative Financing Approaches
                           Appendix IX
                           Outleases




McCormack Post
Office-U.S. Courthouse
                           Financing approach:                    Outlease
                           Capital project:                       McCormack Post Office-U.S. Courthouse
                           Department/agency:                     General Services Administration (GSA)


Description of project     In the fall of 1998, the federal courts in Boston relocated from the John W.
                           McCormack Post Office-U.S. Courthouse to the new U.S. Courthouse,
                           leaving a large amount (228,000 square feet) of courtroom and court-
                           related space vacant. The Massachusetts State Trials Courts agreed to a 5-
                           year lease of this space, in “as is” condition, so that it could renovate its
                           own courthouse. With the common functions of the federal and state
                           courts, little build out of space was required.

Description of financing   This outlease of space was done under Section 111 of the National Historic
approach                   Preservation Act, which allow funds from outleasing to be used to preserve
                           historical properties in the GSA inventory.

Benefits claimed           This outlease maintains the viability of a historic asset and ensures a safe
                           and productive work environment for the State Court of Massachusetts.

Source                     General Services Administration, Real Property Policysite, Office of
                           Governmentwide Policy, Best Practices: News and Views on Real Property
                           Policy, Special Edition, Washington, D.C., December 1999, 5.

Related questions          • Since the 5 years are just about up, what plans does GSA have for this
                             space next? (GSA received $76 million in fiscal year 2002 and
                             $73 million in fiscal year 2003 for major renovations of this building.)

                           • What specifically were the funds used for (i.e., what “preservation” work
                             was performed other than routine maintenance?)

                           • Is the post office still located in the building?




                           Page 59                               GAO-03-1011 Alternative Financing Approaches
Appendix X

Share-In-Savings Contracts                                                                                    Append
                                                                                                                   x
                                                                                                                   i
                                                                                                                   X




               Energy savings performance contracts, a type of share-in-savings contract,
               finance energy-saving capital improvements for federal facilities without an
               up-front cost to the government. First authorized in 1986, these share-in-
               savings contracts have been used to finance hundreds of millions of dollars
               of energy system upgrades and installations. Federal agencies may enter
               into contracts for as long as 25 years with contractors who purchase and
               install new energy systems in federal buildings. Agencies then pay back the
               contractors for the equipment plus a percentage of the energy costs saved
               as a result of the more efficient energy systems and relief of in-house
               maintenance costs. Agencies have some flexibility in determining when
               they take ownership of the energy systems. When a contract expires, the
               federal government owns the equipment and retains all of the future
               savings.

               Agencies other than the Department of Defense1 may retain 50 percent of
               the energy savings realized from energy savings performance contracts
               (after paying the contractor). The remaining 50 percent saved is
               transferred to the Treasury. Savings retained by the agency are available
               for specified energy and water conservation projects until expended.
               However, according to one Department of Commerce official, only about 1
               per cent of the total energy savings has been split between the agencies and
               the Treasury thus far. This is because agencies devote most savings to
               paying off the cost of equipment as soon as possible to reduce financing
               costs.

               Without share-in-savings contracts, Congress would have to appropriate
               hundreds of millions of dollars today to meet currently required energy
               consumption standards.2 Direct purchase of more efficient energy systems
               would allow all future savings to accrue to the government, rather than
               paying out a percentage of the savings to private contractors. Also,
               because a private contractor—which will have a higher cost of capital than
               the federal government—finances the capital improvements, share-in-
               savings contracts are likely to be more expensive over the long term than
               direct federal purchase. There could be an additional cost to the


               1
                 The Department of Defense is authorized to retain two-thirds of the amount of savings
               realized from contracted services for energy or water conservation. DOD contracts do not
               tie the amount of payment to the contractor to the amount of savings realized as a result of
               the contract activity.
               2
                 Consumption standards were defined in the Energy Policy Act of 1992 and then updated in
               Executive Orders 12902 and 13123.




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Appendix X
Share-In-Savings Contracts




government of reduced tax revenues when contractors maintain ownership
of energy equipment that may be amortized. However, such an
arrangement usually results in lower interest rates for the cost of
equipment, according to a Commerce Department official.

Examples of Energy Savings Performance Contracts include:

• Eisenhower Center;

• Tucson, AZ, Courthouse; and

• Department of Commerce HVAC system upgrade.




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                             Appendix X
                             Share-In-Savings Contracts




Eisenhower Center

                             Financing approach:                  Share-in-savings contract
                             Capital project:                     Eisenhower Center
                             Department/agency:                   General Services Administration,
                                                                  Department of Energy, and National
                                                                  Archives and Records Administration


Description of project and   The Eisenhower Center is comprised of the Eisenhower family home,
financing approach           Dwight D. Eisenhower Presidential Library, and the Dwight D. Eisenhower
                             Museum. A contractor installed $300,000 of new equipment to provide
                             more efficient management of energy and special lighting with ultra violet
                             lens shielding for archive records protection. The contractor will be
                             reimbursed for the equipment and its financing costs and also receive 50
                             percent of the energy savings.

Benefits claimed             With no up-front costs to the government, the Eisenhower Center gets a
                             modern energy management and lighting system that will better preserve
                             documents.

Source                       General Services Administration, Real Property Policysite, Office of
                             Governmentwide Policy, Best Practices: News and Views on Real Property
                             Policy, Special Edition, Washington, D.C., December 1999, 8.

Related questions            • When does ownership of the energy equipment transfer to the
                               government?

                             • How long does the contract run? Is there a plan for maintenance and
                               repairs when this contract expires?

                             • How was the contract’s value to the government determined? How does
                               this play out in the agency’s budget?

                             • What would it have cost the government to purchase and install the new
                               systems?




                             Page 62                             GAO-03-1011 Alternative Financing Approaches
                         Appendix X
                         Share-In-Savings Contracts




Tucson, AZ,
Courthouse
                         Financing approach:                  Share-in-savings contract
                         Capital project:                     Tucson, AZ, Courthouse
                         Department/agency:                   General Services Administration (GSA)


Description of project   The General Services Administration awarded an energy savings
                         performance contract for the new Courthouse in Tucson, Arizona before
                         the building was constructed. This is one of the first times that GSA used
                         an energy savings performance contract in the construction of a new
                         facility. The original courthouse plans would have cost more to implement
                         than Congress had appropriated. Thus, GSA was faced with either
                         reducing the size (and functionality) of the building by 1 or 2 floors or
                         finding a way to finance an integral part of the structure outside of the
                         appropriations process.

                         The winning bidder of the 25-year energy maintenance contract purchased
                         and installed a heating and cooling system that was more efficient than the
                         system in the original building plans. Energy savings were determined
                         according to the kilowatts per hour used by the installed system compared
                         to the energy system that was initially planned for. GSA took ownership of
                         the energy systems along with the rest of the building. Out of the money
                         saved on energy costs, GSA is repaying the contractor for the energy
                         systems and then sharing the money saved on energy costs with the
                         contractor.

Benefits claimed         The energy savings performance contract reduced the initial funds needed
                         to construct the new courthouse.

Source                   General Services Administration, Real Property Policysite, Office of
                         Governmentwide Policy, Best Practices: News and Views on Real Property
                         Policy, Special Edition, Washington, D.C., December 1999, 9.

Related questions        • When does ownership of the energy equipment transfer to the
                           government?

                         • How long does the contract run? Is there a plan for maintenance and
                           repairs when this contract expires?




                         Page 63                             GAO-03-1011 Alternative Financing Approaches
Appendix X
Share-In-Savings Contracts




• How was the contract’s value to the government determined? How does
  this play out in the agency’s budget?

• What would it have cost the government to purchase and install the new
  systems?




Page 64                            GAO-03-1011 Alternative Financing Approaches
                             Appendix X
                             Share-In-Savings Contracts




Heating, Ventilation,
and Air Conditioning
System Upgrade               Financing approach:                  Share-in-savings contract
                             Capital project:                     Heating, ventilation, and air conditioning
                                                                  system upgrade
                             Department/agency:                   Department of Commerce


Description of project and   The Department of Commerce entered into an agreement with the Potomac
financing approach           Electric Power Company (PEPCO) to improve the heating, ventilation, and
                             air conditioning system, install energy motors, and retrofit chilled water
                             pumps. The project costs will be repaid from future energy savings.

Benefits claimed             Commerce gains a more energy-efficient system without any initial costs to
                             the government.

Source                       General Services Administration, Real Property Policysite, Office of
                             Governmentwide Policy, Best Practices: News and Views on Real Property
                             Policy, Special Edition, Washington, D.C., 1997, 4.

Related questions            • When does ownership of the energy equipment transfer to the
                               government?

                             • How long does the contract run? Is there a plan for maintenance and
                               repairs when this contract expires?

                             • How was the contract’s value to the government determined? How does
                               this play out in the agency’s budget?

                             • What would it have cost the government to purchase and install the new
                               systems?




                             Page 65                             GAO-03-1011 Alternative Financing Approaches
Appendix XI

Debt Issuance                                                                                   Appendx
                                                                                                      iI
                                                                                                      X




                The federal government funds its operations in part by borrowing through
                the issuance of securities to the public. Several federal organizations, such
                as the Tennessee Valley Authority (TVA), Federal Housing Administration,
                and Farm Credit System Financial Assistance Corporation issue their own
                agency debt.

                The reasons for issuing debt differ considerably from one agency to
                another. The predominant issuer of agency debt is TVA. As of the end of
                2002, TVA had issued 94 percent of the total debt issued by agencies. TVA
                uses the borrowings primarily to finance capital expenditures. As a
                government corporation, TVA operated according to a different set of rules
                than most federal agencies.




                Page 66                              GAO-03-1011 Alternative Financing Approaches
                           Appendix XI
                           Debt Issuance




Debt Issuance

                           Financing Approach:                   Debt issuance
                           Department/Agency:                    Tennessee Valley Authority


Description of project     TVA is a wholly-owned U.S. government corporation and the nation’s
                           largest public power system. It was created to develop the resources of the
                           Tennessee Valley region in order to strengthen the regional and national
                           economy and national defense by providing (1) an ample supply of power
                           within the region, (2) navigable channels and flood control for the
                           Tennessee River System, and (3) agricultural and industrial development
                           and improved forestry in the region. TVA’s operations have typically been
                           divided into the power and nonpower programs. Substantially all TVA
                           revenues and assets are attributable to the power program. TVA is
                           authorized to issue debt and has primarily financed its capital construction
                           by selling bonds and notes to the public. TVA’s power program is required
                           to be self-supporting from power revenues and the issuance of debt.

Description of financing   During the Korean War and the late 1950s, Congress cut back on public
approach                   funding for TVA, and in 1959 Congress authorized TVA to sell bonds on the
                           public markets so that it could finance its own power operations. TVA has
                           been working to reduce its debt by buying back its bonds. TVA has reduced
                           its debt balance from $27.7 billion in 1997 to about $25 billion in 2002
                           through the exchange of lower interest bonds for outstanding higher
                           interest bonds and redeeming other outstanding bonds. TVA continues to
                           buy back its bonds. TVA’s borrowing authority is limited to $30 billion.

Benefits claimed           The ability to issue bonds allowed TVA’s power system to operate as a
                           business, made it responsible for its own financial operations, and freed the
                           power operations from dependence on congressional appropriations. TVA
                           bonds are backed solely by the revenues of the TVA power system; they are
                           not obligations of the U.S. government, nor are they guaranteed by the
                           government.

Sources                    Office of Management and Budget, Analytical Perspectives, Budget of the
                           United States Government, Fiscal Year 2004.

                           TVA’s Fiscal Year 2002 Annual Report.




(450172)                   Page 67                              GAO-03-1011 Alternative Financing Approaches
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      Full Funding



      Incremental Funding



      Operating Leases



      Retained Fees



      Real Property Swaps



      Sale Leasebacks



      Lease-Leasebacks



      Publice Private Partnerships



      Outleases



      Share-in-Savings Contracts



      Debt Issuance