oversight

Federal Real Property: Executive and Legislative Actions Needed to Address Long-standing and Complex Problems

Published by the Government Accountability Office on 2003-06-05.

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

                             United States General Accounting Office

GAO                          Testimony
                             Before the Committee on Government
                             Reform, House of Representatives


For Release on Delivery
Expected at 10:00 a.m. EDT
June 5, 2003                 FEDERAL REAL
                             PROPERTY
                             Executive and Legislative
                             Actions Needed to Address
                             Long-standing and Complex
                             Problems
                             Statement of Bernard L. Ungar
                             Director, Physical Infrastructure Issues




GAO-03-839T
                                                June 5, 2003


                                                FEDERAL REAL PROPERTY

                                                Executive and Legislative Actions
Highlights of GAO-03-839T, a testimony          Needed to Address Long-standing and
before the Committee on Government
Reform, House of Representatives                Complex Problems



Long-standing problems with                     Over 30 agencies control hundreds of thousands of real property assets
excess and underutilized real                   worldwide, including facilities and land, which are worth hundreds of
property, deteriorating facilities,             billions of dollars. Unfortunately, much of this vast, valuable portfolio
unreliable real property data, and              reflects an infrastructure based on the business model and technological
costly space challenges are shared              environment of the 1950s. Many of the assets are no longer effectively
by several agencies. These factors
have multibillion-dollar cost                   aligned with, or responsive to, agencies’ changing missions and are therefore
implications and can seriously                  no longer needed. Further, many assets are in an alarming state of
jeopardize agencies’ missions.                  deterioration; agencies have estimated restoration and repair needs to be in
Federal agencies face many                      the tens of billions of dollars. Compounding these problems are the lack of
challenges securing real property               reliable governmentwide data for strategic asset management, a heavy
due to the threat of terrorism. This            reliance on costly leasing instead of ownership to meet new needs, and the
testimony discusses long-standing,              cost and challenge of protecting these assets against potential terrorism.
complex problems in the federal
real property area and what actions             Resolving these problems will require high-level attention and effective
are needed to address them.                     leadership by both Congress and the administration. Also, because of the
                                                breadth and complexity of the issues, the long-standing nature of the
                                                problems, and the intense debate that will likely ensue, current structures
This testimony discusses                        and processes may not be adequate to address the problems. Thus, as we
recommendations that we have                    have reported, there is a need for a comprehensive, integrated
previously made in GAO reports.                 transformation strategy for real property that will focus on some of the
Generally, there is a need for a                underlying causes that contribute to these problems, such as competing
comprehensive and integrated real               stakeholder interests in real property decisions; various legal and budget-
property transformation strategy                related disincentives to businesslike outcomes; inadequate capital planning
that could identify how best to                 and the lack of governmentwide focus on real property issues. It is equally
realign federal real property and
                                                important that Congress and the administration work together to develop
dispose of unneeded assets;
address significant real property               and enact needed reform legislation to give real property-holding agencies
repair and restoration needs;                   the tools they need to achieve better outcomes. This would also foster a
develop reliable, useful real                   more businesslike real property environment and provide for greater
property data; resolve the problem              accountability for real property stewardship.
of heavy reliance on costly leasing;
and minimize the impact of
terrorism on real property.

An independent commission or
governmentwide task force may be
needed to develop this strategy and
legislative actions are needed to
provide agencies with tools—such
as retaining a portion of disposal
proceeds—to help them address
the problems.


www.gao.gov/cgi-bin/getrpt?GAO-03-839T.           The Vacant L. Mendel Rivers Federal      The U.S. Patent and Trademark
                                                  Building, Charleston, S.C.               Office (PTO) Construction Project in
To view the full product, including the scope
and methodology, click on the link above.
                                                  Source: Ernst and Young.                 Alexandria, VA (February 2003)
For more information, contact Bernard Ungar                                                Source: PTO.
at (202) 512-4232 or ungarb@gao.gov.
Mr. Chairman and Members of the Committee:

We welcome the opportunity to testify on the executive and legislative
branch actions that are needed to address the long-standing and complex
problems that led to our designation of federal real property as a high-risk
area. As you know, at the start of each new Congress since 1999, we have
issued a special series of reports, entitled the Performance and
Accountability Series: Major Management Challenges and Program
Risks. In January 2003, we designated federal real property a high-risk
area as part of this series.1 My testimony is based on our January 2003
high-risk report; work we have done to update information on some of the
example properties from our January 2003 high-risk report; and other GAO
reports on real property issues, including public-private partnerships.2 My
testimony focuses on the problems with federal real property and what
needs to be done to address them.

Summary

Over 30 agencies control hundreds of thousands of real property assets
worldwide, including facilities and land. These assets are worth hundreds
of billions of dollars. Unfortunately, much of this vast, valuable portfolio
reflects an infrastructure based on the business model and technological
environment of the 1950s. Many of the assets are no longer effectively
aligned with, or responsive to, agencies’ changing missions and are
therefore no longer needed. Further, many assets are in an alarming state
of deterioration; agencies estimate that restoration and repair needs are in
the tens of billions of dollars. Compounding these problems are the lack of
reliable governmentwide data for strategic asset management, a heavy
reliance on costly leasing instead of ownership to meet new space needs,



1
 U.S. General Accounting Office, High-Risk Series: Federal Real Property, GAO-03-122
(Washington, D.C.; Jan. 2003); the report on real property is a companion to GAO’s 2003
high-risk update, U.S. General Accounting Office, High-Risk Series: An Update,
GAO-03-119 (Washington, D.C.: Jan. 2003); these reports are intended to help the new
Congress focus its attention on the most important issues and challenges facing the federal
government.
2
 Under a public-private partnership, a contractual arrangement is formed between public
and private sector partners that can include a variety of activities that involve the private
sector in the development, financing, ownership, and operation of a public facility or
service. In the case of real property, the federal government typically would contribute the
property and a private sector entity contributes financial capital and borrowing ability to
redevelop or renovate the property.



Page 1                                                                         GAO-03-839T
                       and the cost and challenge of protecting these assets against potential
                       terrorism.

                       Resolving these long-standing problems will require high-level attention
                       and effective leadership by both Congress and the administration. Also,
                       because of the breadth and complexity of the issues, the long-standing
                       nature of the problems, and the intense debate that will likely ensue,
                       current structures and processes may not be adequate to address the
                       problems. Thus, there is a need for a comprehensive, integrated
                       transformation strategy for real property. This strategy should also reflect
                       lessons learned and leading practices of public and private organizations.
                       Realigning the government’s real property, considering the future federal
                       role and workplace needs, will be critical to improving the government’s
                       performance and ensuring accountability within expected resource limits.


                       The federal real property environment has many stakeholders and involves
The Federal Real       a vast and diverse portfolio of assets that are used for a wide variety of
Property Environment   missions. Real property is generally defined as facilities; land; and
                       anything constructed on, growing on, or attached to land. The U.S.
                       government’s fiscal year 2002 financial statements show an acquisition
                       cost of more than $335 billion for real property assets held by the federal
                       government on September 30, 2002.3 In terms of facilities, the latest
                       available governmentwide data from the General Services Administration
                       (GSA) indicated that, as of September 30, 2002, the federal government
                       owned and leased approximately 3.4 billion square feet of building floor
                       area worldwide.4 The Department of Defense (DOD), U.S. Postal Service
                       (USPS), GSA, and the Department of Veterans Affairs (VA) hold the
                       majority of the owned facility space.

                       Federal real property managers operate in a complex and dynamic
                       environment. Numerous laws and regulations govern the acquisition,
                       management, and disposal of federal real property. The Federal Property


                       3
                        This value does not include stewardship assets, which are not reported on the
                       government’s balance sheet. These assets include wilderness areas, scenic river systems,
                       monuments, defense facilities (including military bases), and national defense assets. Also,
                       real property data contained in the financial statements of the U.S. government have been
                       problematic. As discussed in more detail later, we were unable to express an opinion on
                       the U.S. government’s consolidated financial statements for fiscal year 2002.
                       4
                        U.S. General Services Administration, Federal Real Property Profile, as of September 30,
                       2002 (Washington, D.C.).



                       Page 2                                                                        GAO-03-839T
                      and Administrative Services Act of 1949, as amended (Property Act), and
                      the Public Buildings Act of 1959, as amended, are the laws that generally
                      apply to real property held by federal agencies; and GSA is responsible for
                      the acts’ implementation.5 Agencies are subject to these acts, unless they
                      are specifically exempted from them, and some agencies may also have
                      their own statutory authority related to real property. Agencies must also
                      comply with numerous other laws related to real property.


                      Despite significant changes in the size and mission needs of the federal
The Federal           government in recent years, the federal portfolio of real property assets in
Government Has        many ways still largely reflects the business model and technological
                      environment of the 1950s. In the last decade alone, the federal government
Many Assets It Does   has reduced its workforce by several hundred thousand personnel, and
Not Need              several federal agencies have had major mission changes. With these
                      personnel reductions and mission changes, the need for existing space,
                      including general-purpose office space, has declined overall and
                      necessitated the need for different kinds of space. At the same time,
                      technological advances have changed workplace needs, and many of the
                      older buildings are not configured to accommodate new technologies.
                      Furthermore, the advent of electronic government is starting to change
                      how the public interacts with the federal government. These changes will
                      have significant implications for the type and location of property needed
                      in the 21st century.

                      One reason the government has many unneeded assets is that some of the
                      major real property-holding agencies have undergone significant mission
                      shifts that have affected their real property needs. For example, after the
                      Cold War, DOD’s force structure was reduced by 36 percent. Despite four
                      rounds of base closures, DOD projects that it still has considerably more
                      property than it needs. The National Defense Authorization Act for Fiscal
                      Year 2002,6 which became law in December 2001, gave DOD the authority
                      for another round of base realignments and military installation closures
                      in 2005. In the mid-1990s, VA began shifting its role from being a
                      traditional hospital-based provider of medical services to an integrated
                      delivery system that emphasizes a full continuum of care with a significant


                      5
                       For the Property Act, see 40 U.S.C. § 101 et. seq.; the Property Act excludes certain types
                      of property, such as public domain assets and land reserved or dedicated for national forest
                      or national park purposes; for the Public Buildings Act, see 40 U.S.C. § 3301 et. seq.
                      6
                      P.L. 107-107, 115 Stat. 1012, 1342 (2001).



                      Page 3                                                                       GAO-03-839T
shift from inpatient to outpatient services. Subsequently, VA has struggled
to reduce its large inventory of buildings, many of which are underutilized
or vacant. Although the Department of Energy (DOE) is no longer
producing new nuclear weapons, it still maintains a facilities
infrastructure largely designed for this purpose.

The magnitude of the problem with underutilized or excess federal
property puts the government at significant risk for wasting taxpayers’
money and missed opportunities. First, underutilized or excess property is
costly to maintain. DOD estimates that it is spending $3 billion to $4 billion
each year maintaining facilities that are not needed. In July 1999, we
reported that vacant VA space was costing as much as $35 million to
maintain each year.7 Costs associated with excess DOE facilities, primarily
for security and maintenance, exceed $70 million annually.8 It is likely that
other agencies that continue to hold excess or underutilized property are
also incurring significant costs for staff time spent managing the
properties and on maintenance, utilities, security, and other building
needs. Second, in addition to day-to-day operational costs, holding these
properties has opportunity costs for the government, because these
buildings and land could be put to more cost-beneficial uses, exchanged
for other needed property, or sold to generate revenue for the government.
Finally, continuing to hold property that is unneeded does not present a
positive image of the federal government in local communities. Instead, it
presents an image of waste and inefficiency that erodes taxpayers’
confidence. It also can have a negative impact on local economies if the
property is occupying a valuable location and is not used for other
purposes, sold, or used in a public-private partnership.

Appendix I discusses some examples of vacant, highly visible properties
that are in the federal inventory—the L. Mendel Rivers Federal Building in
Charleston, S.C., St. Elizabeths Hospital in Washington, D.C., and the
former main post office building in downtown Chicago, Ill. These
examples demonstrate the challenges agencies face in disposing of
unneeded property.




7
U.S. General Accounting Office, VA Health Care: Challenges Facing VA in Developing an
Asset Realignment Process, GAO/T-HEHS-99-173 (Washington, D.C.: July 22, 1999).
8
DOE Office of the Inspector General, Disposition of the Department’s Excess Facilities,
DOE/IG-0550 (Washington, D.C.: Apr. 3, 2002).



Page 4                                                                    GAO-03-839T
                             Restoration, repair, and maintenance backlogs in federal facilities are
The Federal Portfolio        significant and reflect the federal government’s ineffective stewardship
Is in an Alarming            over its valuable and historic portfolio of real property assets. The state of
                             deterioration is alarming because of the magnitude of the repair backlog—
State of Deterioration       current estimates show that tens of billions of dollars will be needed to
                             restore these assets and make them fully functional. This problem has
                             accelerated in recent years because much of the federal portfolio was
                             constructed over 50 years ago, and these assets are reaching the end of
                             their useful lives. As with the problems related to underutilized or excess
                             property, the challenges of addressing facility deterioration are also
                             prevalent at major real property-holding agencies. For example:

                         •   Over the last decade, DOD reports that it has been faced with the major
                             challenge of adequately maintaining its facilities to meet its mission
                             requirements. Although DOD no longer reports data on backlog of repairs
                             and maintenance, it reported in 2001 that the cost of bringing its facilities
                             to a minimally acceptable condition was estimated at $62 billion; the cost
                             of correcting all deficiencies was estimated at $164 billion.9

                         •   The Department of the Interior (Interior) has a significant deferred
                             maintenance backlog that the Interior Inspector General (IG) estimated in
                             April 2002 to be as much as $8 billion to $11 billion. This backlog has
                             affected numerous national treasures, such as Ellis Island, Independence
                             Hall, Yellowstone National Park, and Mount Rushmore, just to name a few.

                         •   GSA has struggled over the years to meet the repair and alteration
                             requirements identified at its buildings. In March 2000, we reported that
                             GSA data showed that over half of GSA’s approximately 1,700 buildings
                             needed repairs estimated at about $4 billion.10 More recently, in August
                             2002, we reported that this estimated backlog of identified repair and
                             alteration needs was up to $5.7 billion.11




                             9
                             U.S. Department of Defense, Report to Congress: Identification of the Requirements to
                             Reduce the Backlog of Maintenance and Repair of Defense Facilities (Washington, D.C.:
                             Apr. 2001).
                             10
                              U.S. General Accounting Office, Federal Buildings: Billions Are Needed for Repairs and
                             Alterations, GAO/GGD-00-98 (Washington, D.C.: Mar. 30, 2000).
                             11
                              U.S. General Accounting Office, Financial Condition of Federal Buildings Owned by the
                             General Services Administration, GAO-02-854R (Washington, D.C.: Aug. 8, 2002).




                             Page 5                                                                    GAO-03-839T
    Other agencies with repair backlogs that we highlighted in our high-risk
    report include the Department of State (State), DOE, the Smithsonian
    Institution, and USPS. Since issuing our high-risk report, we have updated
    our assessment of facility conditions at DOD and State.

•   In February 2003, we reported that although the amount of money the
    active forces have spent on facility maintenance had increased recently,
    DOD and service officials said that these amounts had not been sufficient
    to halt the deterioration of facilities.12 Too little funding to adequately
    maintain facilities is also aggravated by DOD’s acknowledged retention of
    facilities in excess of its needs. Furthermore, there is a lack of consistency
    in the services’ information on facility conditions, making it difficult for
    Congress, DOD, and the services to direct funds to facilities where they
    are most needed and to accurately gauge facility conditions. And, although
    DOD has a strategic plan for facilities, it lacks comprehensive information
    on the specific actions, time frames, responsibilities, and funding needed
    to reach its goals. In May 2003, we also reported on a similar problem with
    Guard and Reserve facilities.13

•   In March 2003, we reported that many of the primary office buildings at
    overseas embassies and consulates were in poor condition.14 In 2002, State
    estimated that its repair backlog was $736 million. In addition, the primary
    office building at more than half of the posts does not meet certain fire/life
    safety standards. State officials stated that maintenance costs would
    increase over time because of the age of many of the buildings, and
    overcrowding has become a problem at several posts.

    Our work over the years has shown that the deterioration problem leads to
    increased operational costs, has health and safety implications that are
    worrisome, and can compromise agency missions. In addition, we have
    reported that the ultimate cost of completing delayed repairs and
    alterations may escalate because of inflation and increases in the severity



    12
     U.S. General Accounting Office, Defense Infrastructure: Changes in Funding Priorities
    and Strategic Planning Needed to Improve the Condition of Military Facilities,
    GAO-03-274 (Washington, D.C.: Feb. 19, 2003).
    13
      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.: May15, 2003).
    14
     U.S. General Accounting Office, Overseas Presence: Conditions of Overseas Diplomatic
    Facilities, GAO-03-557T (Washington, D.C.: Mar. 20, 2003).



    Page 6                                                                    GAO-03-839T
                      of the problems caused by the delays.15 As discussed above, the overall
                      cost could also be affected by government realignment. That is, to the
                      extent that unneeded property is also in need of repair, disposing of such
                      property could reduce the repair backlog. Another negative effect, which
                      is not readily apparent but nonetheless significant, is the effect that
                      deteriorating facilities have on employee recruitment, retention, and
                      productivity. This human capital element is troublesome because the
                      government is often at a disadvantage in its ability to compete in the job
                      market in terms of the salaries agencies are able to offer. Poor physical
                      work environments exacerbate this problem and can have a negative
                      impact on potential employees’ decisions to take federal positions.
                      Furthermore, research has shown that quality work environments make
                      employees more productive and improve morale. Finally, as with excess
                      or underutilized property, deteriorated property presents a negative image
                      of the federal government to the public. This is particularly true when
                      many of the assets the public uses and visits the most—such as national
                      parks and museums—are deteriorated and in generally poor condition.


                      Compounding the problems with excess and deteriorated property is the
Key Decisionmakers    lack of reliable and useful real property data that are needed for strategic
Lack Reliable and     decisionmaking. GSA’s worldwide inventory database and related reports
                      are the only central source of descriptive data on the makeup of the real
Useful Data on Real   property inventory, such as property address, square footage, acquisition
Property Assets       date, and property type. However, in April 2002, we reported that the
                      worldwide inventory contained data that were unreliable and of limited
                      usefulness.16 GSA agreed with our findings and has recently revamped this
                      database and produced a new report on the federal inventory, as of
                      September 30, 2002.17

                      In addition to problems with the worldwide inventory, real property data
                      contained in the financial statements of the U.S. government have been




                      15
                        U.S. General Accounting Office, Federal Buildings: Funding Repairs and Alterations
                      Has Been a Challenge—Expanded Financing Tools Needed, GAO-01-452 (Washington,
                      D.C.: Apr. 12, 2001).
                      16
                       U.S. General Accounting Office, Federal Real Property: Better Governmentwide Data
                      Needed for Strategic Decisionmaking, GAO-02-342 (Washington, D.C.: Apr. 16, 2002).
                      17
                       U.S. General Services Administration, Federal Real Property Profile as of September 30,
                      2002 (Washington, D.C.).



                      Page 7                                                                     GAO-03-839T
                     problematic.18 In April 2003, we reported that—for the sixth consecutive
                     year—we were unable to express an opinion on the U.S. government’s
                     consolidated financial statements for fiscal year 2002.19 We have reported
                     that because the government lacked complete and reliable information to
                     support asset holdings—including real property—it could not
                     satisfactorily determine that all assets were included in the financial
                     statements, verify that certain reported assets actually existed, or
                     substantiate the amounts at which they were valued. Aside from the
                     problematic financial data, some of the major real property-holding
                     agencies—including DOD, State, GSA, and Interior—have faced challenges
                     in developing quality management data on their real property assets. The
                     problems at these agencies are discussed in more detail in our high-risk
                     report.


                     As a general rule, building ownership options through construction or
Reliance on Costly   purchase are the least expensive ways to meet agencies’ long-term
Leasing              requirements for space. Lease-purchases—where payments are spread out
                     over time and ownership of the asset is eventually transferred to the
                     government— are generally more expensive than purchase or
                     construction but are generally less costly than using ordinary operating
                     leases to meet long-term space needs.20 However, over the last decade, we
                     have reported that GSA—as the central leasing agent for most agencies—
                     relies heavily on operating leases to meet new long-term needs because it
                     lacks funds to pursue ownership. In 1999, we reported that for nine major
                     operating lease acquisitions that GSA had proposed, construction would
                     have been the least-cost option in eight cases and would have saved an
                     estimated $126 million. Lease-purchase would have saved an estimated
                     $107 million, compared with operating leases but would have cost $19




                     18
                       The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government
                     Management Reform Act, required the annual preparation and audit of individual financial
                     statements for the federal government’s 24 major agencies. The Department of the
                     Treasury was also required to compile consolidated financial statements for the U.S.
                     government annually, which we audit.
                     19
                       U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial
                     Statements: Sustained Leadership and Oversight Needed for Effective Implementation of
                     Financial Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).
                     20
                       In an operating lease, the government makes periodic lease payments over the specified
                     length of the lease in exchange for the use of the property.



                     Page 8                                                                      GAO-03-839T
million more than construction.21 A prime example of this problem was the
Patent and Trademark Office’s long-term requirements in northern
Virginia, where the cost of meeting this need with an operating lease was
estimated to be $48 million more than construction and $38 million more
than lease-purchase. In August 2001, we also reported that GSA reduced
the term of a proposed 20-year lease for the Department of Transportation
headquarters building to 15 years so that it could meet the definition of an
operating lease. GSA’s fiscal year 1999 prospectus for constructing a new
facility for this need showed the cost of construction was estimated to be
$190 million less than an operating lease.

Operating leases have become an attractive option in part because they
generally look cheaper in any given year. Pursuant to the scoring rules
adopted as a result of the Budget Enforcement Act of 1990, the budget
authority to meet the government’s real property needs is to be scored—
meaning recorded in the budget—in an amount equal to the government’s
total legal commitment. For example, for lease-purchase arrangements,
the net present value of the government’s legal obligations over the life of
the lease contract is to be scored in the budget in the first year. For
construction or purchase, the budget authority for the full construction
costs or purchase price is to be scored in the first year. However, for many
of the government’s operating leases—including GSA leases, which,
according to GSA, account for over 70 percent of the government’s leasing
expenditures and are self-insured in the event of cancellation—only the
budget authority to cover the government’s commitment for an annual
lease payment is required to be scored in the budget.22 Given this, although
operating leases are generally more costly over time, compared with other
options, they add much less to a single year’s appropriation total than
these other arrangements, making an operating lease a more attractive
option from an annual budget perspective, particularly when funds for
ownership are not available. Although the requirement for “up-front
funding” permits disclosure of the full costs to which the government is
being committed, the budget scorekeeping rules allow costly operating



21
 U.S. General Accounting Office, General Services Administration: Comparison of Space
Acquisition Alternatives—Leasing to Lease-Purchase and Leasing to Construction,
GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).
22
  According to the scoring rules (OMB Circular A-11, app. B), in cases where the operating
lease does not have a cancellation clause or is not paid for with federal funds that are self-
insuring, budget authority to cover the total costs expected over the life of the lease is to be
scored in the first year of the lease.



Page 9                                                                          GAO-03-839T
                      leases to “look cheaper” in the short term and have encouraged an
                      overreliance on them for satisfying long-term space needs.

                      Decisionmakers have struggled with this matter since the scoring rules
                      were established and the tendency for agencies to choose operating leases
                      instead of ownership became apparent. We have suggested the alternative
                      of scoring all operating leases up-front on the basis of the underlying time
                      requirement for the space so that all options are treated equally.23 Although
                      this could be a viable alternative, there would be implementation
                      challenges if this were pursued, including the need to evaluate the validity
                      of agencies’ stated space requirements. Another option—which was
                      recommended by the President’s Commission to Study Capital Budgeting
                      in 1999 and discussed by GAO24—would be to allow agencies to establish
                      capital acquisition funds to pursue ownership where it is advantageous,
                      from an economic perspective. To date, none of these options has been
                      implemented, and debate continues among decisionmakers about what
                      should be done. Finding a solution for this problem has been difficult;
                      however, change is needed because the current practice of relying on
                      costly leasing to meet long-term space needs results in excessive costs to
                      taxpayers and does not reflect a sensible approach to capital asset
                      management.


                      Terrorism is a major threat to federally owned and leased real property
Security Against      assets, the civil servants and military personnel who work in them, and the
Terrorism Is an       public who visits them. This was evidenced by the 1995 Oklahoma City
                      bombing; the 1998 embassy bombings in Africa; the September 11, 2001,
Overarching Concern   attacks on the World Trade Center and Pentagon; and the anthrax attacks
                      in the fall of 2001. Since the Oklahoma City bombing, the federal
                      government has spent billions of dollars on security upgrades within the
                      country and overseas. A study of federal facilities done by the Justice
                      Department in 1995 resulted in minimum-security standards and an
                      evaluation of security conditions in the government’s facilities. In October
                      1995, the President signed Executive Order 12977, which established an
                      Interagency Security Committee (ISC) to enhance the quality and



                      23
                        U.S. General Accounting Office, Supporting Congressional Oversight: Budgetary
                      Implications of Selected GAO Work for Fiscal Year 2003, GAO-02-576 (Washington, D.C.:
                      Apr. 26, 2002).
                      24
                       U.S. General Accounting Office, Accrual Budgeting: Experiences of Other Nations and
                      Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.: Feb. 18, 2000).



                      Page 10                                                                  GAO-03-839T
effectiveness of security in nonmilitary federal facilities. Since the attacks
on the World Trade Center and the Pentagon, the focus on security in
federal buildings has been heightened considerably. Real property-holding
agencies have gone on high alert and are employing such measures as
searching vehicles that enter federal facilities, restricting parking, and
installing concrete barricades. As the government’s security efforts
intensify, the government will be faced with important questions regarding
the level of security needed to adequately protect federal facilities and
how the security community should proceed. Furthermore, the 1995
Justice study placed an emphasis on increasing security where large
numbers of personnel are located. However, a risk-based approach—
which GSA is using for the federal buildings it controls—appears to be
more desirable in light of this new round of threats. In September 2001, we
reported that DOD uses a risk-based approach to reduce installation
vulnerabilities, but this approach was applied primarily to installations
with 300 or more personnel assigned on a daily basis.25 We recommended
that DOD improve this approach by ensuring all critical military facilities
receive a periodic vulnerability assessment conducted by their higher
headquarters regardless of the number of personnel assigned. DOD
concurred and began taking action.

Since 1996, we have produced more than 60 reports and testimonies on the
federal government’s efforts to combat terrorism. Several of these reports
have recommended that the federal government use risk management as
an important element in developing a national strategy.26 We have also
reported extensively on the security problems and challenges at individual
real property-holding agencies. Our high-risk report identifies the
problems and challenges faced by State, DOD, Interior, GSA, USPS, and
the ISC. More recently, we testified on security conditions of overseas
diplomatic facilities.27 We found that State has done much over the last 4
years to improve physical security at overseas posts by, for example,
constructing perimeter walls, anti-ram barriers, and access controls at
many facilities. However, even with these improvements, most office
facilities do not meet security standards. As a result, thousands of U.S.


25
 U.S. General Accounting Office, Combating Terrorism: Actions Needed to Improve DOD
Antiterrorism Program Implementation and Management, GAO-01-909 (Washington,
D.C.: Sept. 19, 2001).
26
 U.S. General Accounting Office, Homeland Security: A Risk Management Approach Can
Guide Preparedness Effort, GAO-02-208T (Washington, D.C.: Oct. 31, 2001).
27
 GAO-03-557T.



Page 11                                                               GAO-03-839T
government employees may be vulnerable to terrorist attacks.
Furthermore, our work has shown that agency coordination is critical to
addressing security challenges. In our February 2003 report on threats to
selected agencies’ critical computer and physical infrastructures, selected
agencies identified challenges, including coordinating security efforts with
GSA, which may often be responsible for protecting facilities that house
critical assets.28 We recommended that steps be taken to complete the
identification and analysis of their critical assets and their dependencies,
including setting milestones, developing plans to address vulnerabilities,
and monitoring progress.

In addition to the clear challenges agencies will continue to face in
securing real property assets, the security issue has an impact on the other
problems that we have discussed. To the extent that more funding will be
needed to increase security, funding availability for repair and restoration,
preparing excess property for disposal, and improving real property data
systems may be further constrained. Furthermore, real property managers
will have to dedicate significant staff time and other human capital
resources to security issues and thus may have less time to manage other
problems. Another broader effect is the impact that increased security will
have on the public’s access to government offices and other assets. Debate
arose in the months after September 11, 2001, and continues to this day on
the challenge of providing the proper balance between public access and
security. In November 2002, legislation was enacted establishing the
Department of Homeland Security (DHS).29 DHS was given responsibility
to protect buildings, grounds, and property owned, occupied, or secured
by the federal government that were previously under the Federal
Protective Service, which was part of GSA. In addition, the Act provided
DHS with authority to protect the buildings, grounds, and property of any
other agency whose functions were transferred under the Act. In
September 2002, we reported on the implications that the creation of DHS
would have on ISC. We concluded that the need to address the ISC’s lack




28
  U.S. General Accounting Office, Critical Infrastructure Protection: Challenges for
Selected Agencies and Industry Sectors, GAO-03-233 (Washington, D.C.: Feb. 28, 2003); the
agencies reviewed were the Departments of Health and Human Services, Energy, and
Commerce, and the Environmental Protection Agency.
29
 P.L. 107-296; 116 Stat. 2135 (2002).



Page 12                                                                    GAO-03-839T
                         of progress in fulfilling its responsibilities should be taken into account in
                         establishing this new department.30


                         Although the federal government faces significant, long-standing problems
Various Efforts          in the real property area, it is important to give Congress, Office of
Initiated, but Real      Management and Budget (OMB), GSA, and the major real property-holding
                         agencies credit for proposing several reform efforts and other initiatives in
Property Problems        recent years. Legislative proposals in the 107th Congress (S. 161231 and
Persist Due to Factors   H.R. 394732) were aimed at improving real property data, establishing
                         senior real property managers at agencies, developing asset management
that Require High-       principles, and identifying specific conditions under which GSA and other
Level Attention          agencies can enter into real property partnerships with the private sector.
                         In July 2001, we reported that public-private partnership authority could
                         be an important management tool to address problems in deteriorating
                         federal buildings, but that further study of this tool was needed.33
                         Appendix II summarizes this report and discusses two examples of public-
                         private partnership opportunities. Another initiative in the National
                         Defense Authorization Act for fiscal year 2002 gave DOD the authority for
                         another round of base realignment and military installation closures in
                         2005. DOD officials testified that these actions could result in recurring
                         annual net savings of about $3 billion. Despite these and other initiatives
                         agencies have undertaken and the sincerity with which the federal real
                         property community has embraced the need for reform, the problems have
                         persisted and have been exacerbated by several factors that will require
                         high-level attention from Congress and the administration. These factors
                         include competing stakeholder interests in real property decisions; various
                         legal and budget-related disincentives to businesslike outcomes; the need
                         for improved capital planning; and the lack of a strategic, governmentwide
                         focus on federal real property issues. More specifically:




                         30
                          U.S. General Accounting Office, Building Security: Interagency Security Committee Has
                         Had Limited Success in Fulfilling Its Responsibilities, GAO-02-1004 (Washington, D.C.:
                         Sept. 17, 2002).
                         31
                          Title III of the Managerial Flexibility Act of 2001 (2001) is entitled Federal Property Asset
                         Management Reforms.
                         32
                          The Federal Property Asset Management Reform Act of 2002 (2002).
                         33
                          U.S. General Accounting Office, Public-Private Partnerships: Pilot Program Needed to
                         Demonstrate the Actual Benefits of Using Partnerships, GAO-01-906 (Washington, D.C.:
                         July 25, 2001).



                         Page 13                                                                         GAO-03-839T
•   Competing Stakeholder Interests - In addition to Congress, OMB, and the
    real property-holding agencies themselves, several other stakeholders also
    have an interest in how the federal government carries out its real
    property acquisition, management, and disposal practices. These include
    foreign and local governments; business interests in the communities
    where the assets are located; private sector construction and leasing firms;
    historic preservation organizations; various advocacy groups; and the
    public in general, which often views the facilities as the physical face of
    the federal government in local communities. As a result of competing
    stakeholder interests, decisions about real property often do not reflect
    the most cost-effective or efficient alternative that is in the interests of the
    agency or the government as a whole but instead reflect other priorities.

•   Legal and Budgetary Disincentives - The complex legal and budgetary
    environment in which real property managers operate has a significant
    impact on real property decisionmaking and often does not lead to
    businesslike outcomes. For example, we have reported that public-private
    partnerships might be a viable option for redeveloping obsolete federal
    property when they provide the best economic value for the government,
    compared with other options, such as federal financing through
    appropriations or sale of the property. However, most agencies—except
    for DOD, VA, and USPS—are precluded from entering into such
    arrangements.34 Resource limitations, in general, often prevent agencies
    from addressing real property needs from a strategic portfolio perspective.
    When available funds for capital investment are limited, Congress must
    weigh the need for new, modern facilities with the need for renovation,
    maintenance, and disposal of existing facilities, the latter of which often
    gets deferred. In the disposal area, a range of laws intended to address
    other objectives—such as laws related to historic preservation and
    environmental remediation—make it challenging for agencies to dispose
    of unneeded property.

•   Need for Improved Capital Planning - Over the years, we have reported
    that prudent capital planning can help agencies to make the most of
    limited resources, and failure to make timely and effective capital


    34
      When agencies have additional flexibilities, we have found that they can still face
    impediments. For example, VA is required to use the proceeds from disposal of property
    for nursing home construction and DOD has lacked personnel with sufficient experience to
    undertake complex real estate transactions. See U.S. General Accounting Office, VA Health
    Care: Improved Planning Needed for Management of Excess Real Property, GAO-03-326
    (Washington, D.C.: Jan. 29, 2003); U.S. General Accounting Office, Defense Infrastructure:
    Greater Management Emphasis Needed to Increase the Services’ Use of Expanded
    Leasing Authority, GAO-02-475 (Washington, D.C.: June 6, 2002).



    Page 14                                                                     GAO-03-839T
                         acquisitions can result in increased long-term costs. GAO, Congress, and
                         OMB have identified the need to improve federal decisionmaking
                         regarding capital investment. Our Executive Guide,35 OMB’s Capital
                         Programming Guide and its revisions to Circular A-11 have attempted to
                         provide guidance to agencies for making capital investment decisions.
                         However, the guidance is not required to be used by agencies.
                         Furthermore, agencies have not always developed overall goals and
                         strategies for implementing capital investment decisions, nor has the
                         federal government generally planned or budgeted for capital assets over
                         the long term.

                     •   Lack of a Strategic, Governmentwide Focus on Real Property Issues -
                         Historically, there has not been a strategic, governmentwide focus on real
                         property issues among decisionmakers. Although some efforts in recent
                         years have attempted to address real property issues with some limited
                         success, the problems have persisted and will continue to grow in
                         magnitude unless they are adequately addressed from a governmentwide
                         standpoint. Resolving the long-standing problems will require high-level
                         attention and effective leadership by Congress and the administration and
                         a governmentwide, strategic focus on real property issues. Also, it is
                         important that key stakeholders develop an effective system to measure
                         results. Having quality data would be critical to evaluate the progress of
                         various reforms as they evolve.


                         The magnitude of real property-related problems and the complexity of
A Transformation         the underlying factors that cause them to persist put the federal
Strategy Is Needed       government at significant risk in this area. Real property problems related
                         to unneeded property and the need for realignment; deteriorating
                         conditions, unreliable data, costly space, and security concerns have
                         multibillion-dollar cost implications, and can seriously jeopardize mission
                         accomplishment. Because of the breadth and complexity of the issues
                         involved, the long-standing nature of the problems, and the intense debate
                         about potential solutions that will likely ensue, current structures and
                         processes may not be adequate to address the problems. Given this, we
                         concluded in our high-risk report that a comprehensive and integrated
                         transformation strategy for federal real property is needed, and that an
                         independent commission or governmentwide task force may be needed to
                         develop this strategy. Such a strategy, based on input from agencies, the


                         35
                          U.S. General Accounting Office, Executive Guide: Leading Practices in Capital
                         Decision-Making, GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).



                         Page 15                                                                  GAO-03-839T
    private sector, and other interested groups, could comprehensively
    address these long-standing problems with specific proposals on how best
    to

•   realign the federal infrastructure and dispose of unneeded property, taking
    into account mission requirements, changes in technology, security needs,
    costs, and how the government conducts business in the 21st century;

•   address the significant repair and restoration needs of the federal
    portfolio;

•   ensure that reliable governmentwide and agency-specific real property
    data—both financial and program related—are available for informed
    decisionmaking;

•   resolve the problem of heavy reliance on costly leasing; and

•   consider the impact that the threat of terrorism will have on real property
    needs and challenges, including how to balance public access with safety.

    To be effective in addressing these problems, it would be important for the
    strategy to focus on

•   minimizing the negative effects associated with competing stakeholder
    interests in real property decisionmaking;

•   providing agencies with appropriate tools and incentives that will facilitate
    businesslike decisions—for example, consideration should be given to
    what financing options should be available; how disposal proceeds should
    be handled; what process would permit comparisons between
    rehabilitation/renovation and replacement and among construction,
    purchase, lease-purchase, and operating lease; and how public-private
    partnerships should be evaluated;

•   addressing federal human capital issues related to real property by
    recognizing that real property conditions affect the federal government’s
    ability to attract and retain high-performing individuals and the
    productivity and morale of employees;

•   improving real property capital planning in the federal government by
    helping agencies to better integrate agency mission considerations into the
    capital decisionmaking process, make businesslike decisions when
    evaluating and selecting capital assets, evaluate and select capital assets



    Page 16                                                          GAO-03-839T
    by using an investment approach, evaluate results on an ongoing basis,
    and develop long-term capital plans; and

•   ensuring credible, long-term budget planning for facility sustainment,
    modernization, or recapitalization.

    The transformation strategy should also reflect the lessons learned and
    leading practices of organizations in the public and private sectors that
    have attempted to reform their real property practices. Over the past
    decade, leading organizations in both the public and private sectors have
    been recognizing the impact that real property decisions have on their
    overall success. Better managing real property assets in the current
    environment calls for a significant departure from the traditional way of
    doing business. Solutions should not only correct the long-standing
    problems we have identified but also be responsive to and supportive of
    agencies’ changing missions, security concerns, and technological needs in
    the 21st century. If actions resulting from the transformation strategy
    comprehensively address the problems and are effectively implemented,
    agencies will be better positioned to recover asset values, reduce
    operating costs, improve facility conditions, enhance safety and security,
    and achieve mission effectiveness.

    In addition to developing a transformation strategy, it is critical that all the
    key stakeholders in government—Congress, OMB, and real property-
    holding agencies—continue to work diligently on the efforts planned and
    already under way that are intended to promote better real property
    capital decisionmaking, such as enacting reform legislation, assessing
    infrastructure and human capital needs, and examining viable funding
    options. Congress and the administration could work together to develop
    and enact reform legislation to give real property-holding agencies the
    tools they need to achieve better outcomes, foster a more businesslike real
    property environment, and provide for greater accountability for real
    property stewardship. These tools could include, where appropriate, the
    ability to retain a portion of the proceeds from disposal and the use of
    public-private partnerships in cases where they represent the best
    economic value to the government. Congress and the administration could
    also elevate the importance of real property in policy debates and
    recognize the impact that real property decisions have on agencies’
    missions. Solving the problems in this area will undeniably require a
    reconsideration of funding priorities at a time when budget constraints
    will be pervasive. However, experimenting with creative financing tools
    where they provide the best economic value for the government and
    allocating sufficient funding will likely result in long-term benefits.


    Page 17                                                            GAO-03-839T
                  Without effective tools; top management accountability, leadership, and
                  commitment; adequate funding; and an effective system to measure
                  results, long-standing real property problems will continue and likely
                  worsen. However, the overall risk to the government and taxpayers could
                  be substantially reduced if an effective transformation strategy is
                  developed and successfully implemented, reforms are made, and property-
                  holding agencies effectively implement current and planned initiatives.
                  Since our high-risk report was issued, OMB has informed us that it is
                  taking steps to address the federal government’s problems in the real
                  property area. Specifically, it has formed a team within OMB to determine
                  how to approach the resolution of these long-standing issues. To assist
                  OMB with its efforts, we have agreed to meet regularly to discuss progress
                  and are providing OMB with specific suggestions on the types of actions
                  and results that could be helpful in justifying the removal of real property
                  from the high-risk list.


                  Mr. Chairman, this concludes my prepared statement. I would be happy to
                  respond to any questions you or other members of the Committee may
                  have at this time.


                  For further information on this testimony, please contact Bernard L. Ungar
Contacts and      on (202) 512-2834 or at ungarb@gao.gov. Key contributions to this
Acknowledgments   testimony were made by Kevin Bailey, Christine Bonham, John Brummett,
                  Maria Edelstein, Anne Kidd, Mark Little, Susan Michal-Smith,
                  David Sausville, and Gerald Stankosky.




                  Page 18                                                         GAO-03-839T
Appendix I: Examples of Vacant Federal
Property

                             Three examples of vacant, highly visible federal properties are the L.
                             Mendel Rivers Federal Building in Charleston, S.C., St. Elizabeths Hospital
                             in Washington, D.C.; and the former main post office in downtown
                             Chicago.


L. Mendel Rivers Federal     The Charleston building, held by the General Services Administration
Building, Charleston, S.C.   (GSA), is a 7-story, 100,000-square-foot office building on just over 2 acres
                             (see fig. 1). The building is contaminated with asbestos and has been
                             unoccupied since it sustained damage in 1999, from Hurricane Floyd. In
                             July 2001, we reported that although there was a weak federal demand for
                             space where the property is located, the property is located in a highly
                             desirable location and that there was a strong potential for private sector
                             demand.1 Although the building is vacant, in fiscal year 2002, GSA still
                             incurred almost $28,000 in costs related to operations and maintenance,
                             such as utilities and fire protection. GSA receives a minimal amount of
                             revenue by occasionally renting out the parking lot. According to GSA,
                             although it may be advantageous for the government to retain the
                             property, there are limited options for redevelopment; and funding has not
                             been made available. Furthermore, GSA lacks authority to pursue a public-
                             private partnership to address the needs of the property.

                             Given this situation, GSA has been in discussion with the city of
                             Charleston officials for the last few years to exchange the Rivers building
                             for a new building. Under the proposal, the city would construct a 27,000
                             square foot building for the federal government in the historic downtown
                             business area adjacent to the existing federal building-courthouse in
                             exchange for the Rivers building. GSA would also get use of 60 parking
                             spaces in a city parking garage. Although the new building would be
                             smaller than the Rivers building, data from GSA have shown that the
                             exchange sites are of comparable value because of the new building’s
                             location in the central business district where land values are high.
                             According to a GSA official, as of April 2003, GSA and the city of
                             Charleston developed a memorandum of understanding (MOU) that
                             outlines the conditions under which the L. Mendel Rivers Building would
                             be exchanged. The MOU is currently with the city of Charleston and is
                             expected to be signed shortly. Figure 1 shows the vacant Charleston
                             building and its rear parking lot. The federal government owns the lot on
                             the left side where the tent is located.


                             1
                             GAO-01-906.



                             Page 19                                                          GAO-03-839T
Figure 1: The Vacant L. Mendel Rivers Federal Building and Parking Lot in Charleston, S.C.




St. Elizabeths Hospital,                 The west campus of St. Elizabeths, which has 61 mostly vacant buildings
Washington, D.C.                         containing about 1.2 million square feet of space on 182 acres, is held by
                                         the Department of Health and Human Services (HHS). During the Civil
                                         War, the hospital was used to house soldiers recuperating from
                                         amputations, and the property contains a civil war cemetery. In 1990, the
                                         property—which contains magnificent vistas of the rivers and the city—
                                         was designated a national historic landmark. This is the same designation
                                         given to the White House, the U.S. Capitol building, and other buildings
                                         that have historic significance. HHS has not needed the property for many
                                         years. In April 2001, we reported that the property had significantly
                                         deteriorated and had environmental and historic preservation issues that




                                         Page 20                                                        GAO-03-839T
would need to be addressed in order for the property to be disposed of or
transferred to another federal agency.2

In the last year, GSA, the District of Columbia (the District), HHS, and
various public interest groups have been working to resolve the situation
at St. Elizabeths. In May 2002, the Urban Land Institute formed an advisory
panel that reported on several options for redeveloping the site.3 The panel
recommended that the federal government transfer the west campus to the
District and that the District should identify a master developer for the
site. The panel further recommended that the master developer consider
redeveloping the site into four campus areas without changing the
character of the surrounding neighborhoods and without displacing
existing residents. The panel recommended preserving the historic
buildings through adaptive use and sensitive addition of new buildings. In
addition to the panel, an executive steering committee and a working
group, each consisting of representation from the District, HHS, GSA, and
public interest groups, have been established and HHS and GSA have
proceeded with a number of actions to prepare the property for disposal.
These include preparing the property for “mothballing,” which is work
done to minimize further deterioration of the property while the disposal
process proceeds; determining the extent of environmental remediation
needed; and conducting community outreach. Figure 2 shows the vacant,
boarded-up Center Building, which opened in 1855 and served as the main
hospital building.




2
 U.S. General Accounting Office, St. Elizabeths Hospital: Real Property Issues Related to
the West Campus, GAO-01-434 (Washington, D.C.: Apr. 16, 2001).


3
Urban Land Institute, An Advisory Services Panel Report: Saint. Elizabeths Campus,
Washington, D.C. (Washington, D.C.: May 2002).



Page 21                                                                     GAO-03-839T
                           Figure 2: The Vacant Center Building, St. Elizabeths Hospital, District of Columbia




                           Note: Photograph taken in January 2001.




Former Chicago Main Post   The former Chicago main post office is a 2.5 million square foot facility
Office                     that was vacated when it was replaced with a new facility in 1997. The U.S.
                           Postal Service (USPS) is incurring about $2 million in annual holding costs
                           for the property. According to USPS, the property was listed for sale and
                           publicly offered. About five offers were received and the property was
                           placed under contract of sale for $17 million. According to USPS,
                           completion of the sale has been delayed due to the weakness of the
                           Chicago real estate market and the lack of an agreement between the


                           Page 22                                                                GAO-03-839T
developer and the city of Chicago that would abate real estate taxes on a
portion of the redevelopment cost for a number of years. According to
USPS, this situation has created a “chicken and egg” situation for the
developer. Potential tenants are unwilling to commit to the project unless
they are sure it will go ahead. The city appears unwilling to grant the tax
abatement until the users of the building are known. USPS is hopeful that
the city will begin to address the issue.

In addition to the holding costs USPS is incurring, a deteriorating façade
will add additional repairs costs to USPS’s annual budget. Furthermore,
deterioration of the system that funnels train exhaust up through eight
shafts to the roof of the building is a problem that will have to be
addressed. The estimated cost of repair is about $10 million and is a
condition of the sale. According to USPS, another factor, which bears on
the cost of redevelopment, is that the State Historic Preservation Office
wants to impose requirements on the redevelopment of the building.
Currently, according to USPS, these requirements will add millions of
dollars to the redevelopment costs and the buyer and USPS are reviewing
them. USPS said that this project is challenging because of the large
amount of space that needs to be developed. According to USPS, a
breakthrough in current market conditions will have to be achieved,
together with an agreement with the city before this project can move
forward. Figure 3 shows downtown Chicago with the vacant post office
building highlighted.




Page 23                                                         GAO-03-839T
Figure 3: The Former Main Post Office in Downtown Chicago




                                       Page 24              GAO-03-839T
Appendix II: Use of Public-Private
Partnerships to Redevelop Federal Property

              Under a public-private partnership, a contractual arrangement is formed
              between public and private sector partners that can include a variety of
              activities that involve the private sector in the development, financing,
              ownership, and operation of a public facility or service. In the case of real
              property, the federal government typically would contribute the property
              and a private sector entity contributes financial capital and borrowing
              ability to redevelop or renovate the property. Public-private partnerships
              can be a viable option for redeveloping obsolete federal property if they
              provide the best economic value for the government, compared with other
              options, such as federal financing through appropriations or sale of the
              property. However, most agencies are precluded from entering into such
              arrangements. DOD, VA, and USPS, however, have this authority.
              Proposed real property reform legislation in the last Congress—S. 1612
              and H.R. 3947—would have allowed most agencies to enter into such
              partnerships. In May 2002, the Congressional Budget Office concluded that
              the partnerships, like lease-purchase arrangements, should be recorded up
              front in the budget. S.1612 and H.R. 3947 were not enacted by the 107th
              Congress.

              Public-private partnerships need to be carefully evaluated to determine
              whether they offer the best economic value for the government, compared
              with other available options. In July 2001,1 we reported that 8 of 10 GSA
              properties were strong to moderate candidates for a partnership because
              there were potential benefits for both the private sector and the
              government. The potential internal rates of return (IRR)2 for the private
              partner ranged from 13.7 to 17.7 percent. It should be noted that we did
              not calculate the IRR for the government if the government had financed
              the entire project. Furthermore, public-private partnerships will not
              necessarily work or be the best option available to address the problems
              in all federal properties. Two examples of properties that were strong
              candidates for a partnership were the Internal Revenue Service (IRS)
              Service Center in Andover, MA and an office building in Portland, Ore. that
              houses the Immigration and Naturalization Service known as the 511
              Building. Since we profiled these properties in 2001, GSA officials said that
              they have been unable to pursue public-private partnerships for these




              1
              GAO-01-906.
              2
               IRR is the present value interest rate received for an investment consisting of payments
              and income that occur at regular periods; IRR measures the return, expressed as an
              interest rate, that an investor would earn on an investment.



              Page 25                                                                       GAO-03-839T
                          properties because GSA continues to lack authority to enter into such
                          arrangements.

IRS Service Center,       The Andover Service Center was a strong candidate for a partnership in
Andover, Mass.            terms of strong federal demand, moderate private sector interest in
                          development, and strong nonfederal demand for use of the property. The
                          property is a 375,000 square foot, single story, highly secured building that
                          is in need of capital repairs on 37 acres. At the time of our review, the IRS
                          was leasing about 336,000 square feet in additional space in the area. GSA
                          and IRS would like to consolidate IRS’s operations, and the property
                          would be desirable for the city of Andover and local developers to
                          develop. The redevelopment strategy involved a partnership to develop a
                          small office park consisting of six, 5-acre pads. Under this plan, the project
                          could progress as follows:

                      •   Year 1: Build a new 4-story, 700,000 square foot IRS facility and parking
                          structure for current and expiring IRS leases; the complex would be at
                          rear of site to allow for security and a phased development of the rest of
                          the site.

                      •   Year 2: IRS moves into the new facility and the old building is demolished;
                          the partnership constructs another 250,000 square foot federal office
                          building for non-IRS expiring leases.

                      •   Years 3 and 4: Partnership constructs two more 250,000 square foot federal
                          office buildings for compatible agency and private sector occupancy.
                          The analysis of this strategy projected a 14.4 percent lifetime IRR for the
                          private partner and a 9.4 percent lifetime IRR for the government. Figure 4
                          is an aerial view of the IRS Service Center in Andover, Mass.




                          Page 26                                                          GAO-03-839T
                      Figure 4: IRS Service Center, Andover, Mass.




Portland, Ore., 511   The 511 building was also a strong candidate for a partnership in terms of
Building              strong federal demand, strong private sector interest in development, and
                      moderate nonfederal demand for use of the property. The 511 building is
                      an historic, 6-floor building in a desirable location between downtown
                      Portland and the trendy “Pearl District” that housed offices of the
                      Immigration and Naturalization Service. The property includes a parking
                      lot that was sought by the city for a pedestrian mall. The redevelopment
                      strategy included renovating the existing historic office building, to
                      include storage use in the basement and retail or restaurant on the first
                      floor. In addition, the strategy included acquiring an additional site for
                      construction of a 240,000 square foot, federal office building across the
                      street. This strategy projected a 15.7 percent lifetime IRR for the private
                      partner and a 12.7 percent lifetime IRR for the government. Figure 5 shows
                      the 511 building (building in center of the picture).




                      Page 27                                                        GAO-03-839T
           Figure 5: 511 Building, Portland, Ore.




           If the federal government were to completely finance the Andover and
           Portland projects, it would not have to share returns with a private sector
           partner. However, we did not determine what the returns would be in such
           a situation and how the returns would compare to the returns under a
           partnership arrangement.




(543064)
           Page 28                                                        GAO-03-839T
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