oversight

Public-Private Partnerships: Key Elements of Federal Building and Facility Partnerships

Published by the Government Accountability Office on 1999-02-03.

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

                United States General Accounting Office

GAO             Report to the Honorable Stephen Horn
                Committee on Government Reform
                House of Representatives


February 1999
                PUBLIC-PRIVATE
                PARTNERSHIPS
                Key Elements of
                Federal Building and
                Facility Partnerships




GAO/GGD-99-23
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      General Government Division



      B-278675

      February 3, 1999

      The Honorable Stephen Horn
      Committee on Government Reform
      House of Representatives

      Dear Mr. Horn:

      The U.S. government is one of the world’s largest property owners, with a
      real estate portfolio of almost 435,000 buildings and over half a billion
      acres of land. Most of the government’s real property holdings are national
      parks, forests, other public lands, and military facilities. Overall,
      government-owned real estate is under the custody and control of at least
      30 federal agencies, although most is under the jurisdiction of 8
      organizations. These organizations are the Departments of Agriculture,
      Defense, Energy, the Interior, and Veterans Affairs; the General Services
      Administration; the Tennessee Valley Authority; and the U.S. Postal
      Service.

      As federal agencies find themselves under budgetary constraints with
      increasing demands to improve service, the importance of making the
                                                  1
      most effective use of capital assets grows. To do this, federally owned
      buildings and land should be strategically acquired, managed, and disposed
                                                                        2
      of so that the taxpayers’ return on the investment is maximized. To
      maximize returns on buildings and facilities, federal agencies are
      increasingly interested in managing them in a more businesslike manner,
      including exploring the formation of partnerships through contracts or
                                                                           3
      agreements between the federal government and the private sector.

      These arrangements, which sometimes are called “public-private
      ventures,” typically involve a government agency contracting with a
      private partner to renovate, construct, operate, maintain, and/or manage a
      facility or system, in part or in whole, that provides a public service.

      You asked us to identify the key elements of partnerships between the
      federal government and the private sector that were formed to help the
      1
          See Budget Issues: Budgeting for Capital (GAO/T-AIMD-98-99, March 6, 1998).
      2
       Federal Real Property: Key Acquisition and Management Obstacles (GAO/T-GGD-93-42, July 27,
      1993).
      3
       See, for example, Executive Order 12893, Principles for Federal Infrastructure Investments, January
      26, 1994; and Executive Order 12803, Infrastructure Privatization, April 30, 1992.




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                   government acquire and operate federal real estate and facilities more
                   efficiently and effectively. This report responds to your request by
                   describing key elements and related experiences from six federal
                   partnerships. The six were projects of three agencies: the National Park
                   Service (Park Service) within the Department of the Interior, the
                   Department of Veterans Affairs (VA), and the U.S. Postal Service (Postal
                   Service). (See apps. II through IV for more information about each of the
                   projects.)

                   Although each of the six projects we reviewed tailored its efforts to
Results in Brief   address its specific needs and environments, there also were elements that
                   were common among the projects that appeared to be key to their
                   implementation. These elements are shown in figure 1.




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Figure 1: Key Elements of Public-Private Partnerships




                                          Note: The sequence in which these key elements occurred during implementation varied by project.
                                          a
                                              Business plans may identify issues that require legislative action.
                                          Source: GAO analysis of selected federal building and facility public-private partnerships.




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First of all, there was a catalyst for change that led each of the three
agencies to form a partnership with the private sector. For example,
community pressure and fiscal constraints were the catalyst in the two
Park Service projects we reviewed, in which the Park Service decided to
enter into public-private partnerships mainly to obtain partners that could
finance needed preservation efforts.

Second, for all six projects we reviewed, Congress enacted legislation that
provided a statutory basis for the agency to enter into the partnership and
keep the revenues it received from that partnership. The legislation was
either project-specific, as it was for one of the Park Service projects, or
broader in scope, as was the 1991 law that authorized VA to lease its
properties and retain the resulting revenues. According to building and
facility managers in all of the projects we reviewed, a primary reason for
an agency to enter into these partnerships was the incentive to keep for its
own use the revenue that it would receive from the partnership.

Third, the agencies we reviewed also told us that they established
organizational structures and acquired the necessary expertise to interact
with private sector partners to ensure effective partnership
implementation. For example, VA established an Office of Asset and
Enterprise Development to promote the partnership concept within VA,
design and implement public-private partnership projects, and be a single
point of contact with VA’s private sector partners. The office was staffed,
VA officials said, with professionals experienced in portfolio management,
architecture, civil engineering, and contracting.

Fourth, in all six projects we reviewed, asset management officials used
business plans or similar documents to make informed decisions and
protect the government’s interests. According to Postal Service officials,
the development and execution of a business plan, which included
information about the division of risks and responsibilities between the
Postal Service and its private sector partner, was critical to its success in
implementing its large-scale real estate development projects. For each of
the projects we reviewed, business plans were drafted jointly between the
public and private sector parties to help ensure close involvement of both
parties in the design and implementation of the project.

Finally, support from project stakeholders was an important factor in
developing and implementing the public-private partnerships. In all of the
projects we reviewed, agencies had the support of the local community
and other stakeholders to create the partnership. For example, in the two
Park Service projects, community leaders who were worried about



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             preserving historic structures without over-commercialization became
             sponsors of the projects.

             Generally, federal partnerships entail contractual arrangements between a
Background   federal agency and one or more private sector partners. Under these
             arrangements, the agency may retain ownership of the public facility or
             system, but the private party generally invests its own capital to design and
             develop the properties. The private partner may be a nonprofit
             organization or a for-profit business. Some federal agencies also enter into
             such partnerships with a state or local government.

             According to the federal building and facility managers whom we spoke
             with, most partnerships fall into one of three general categories:
             lease/develop/operate, lease/purchase, and contract services. There are
             different public and private sector responsibilities and benefits associated
             with each of these types of partnerships. For example, under a
             lease/develop/operate partnership, the private party leases a facility from a
             public agency; invests its own capital to renovate, modernize, and/or
             expand the facility; and then operates it under a contract with the public
                     4
             agency. In a lease/purchase partnership, which is typically used for new
             construction, the private sector finances and builds a facility that it then
             leases to a public agency. At the end of the lease term, the public agency
             owns the facility or purchases it at the cost of any remaining unpaid
             balance in the lease.

             The third category of partnership, contract services, consists of two
             subtypes: (1) operations and maintenance; and (2) operations,
             maintenance, and management. Under both of these categories, the public
             partner retains ownership of the public facility. Under the first category
             the public partner contracts with a private partner to provide and/or
             maintain a specific public service or system. In the second, a public agency
             contracts with a private partner to operate, maintain, and manage a facility
             or system providing a public service and may invest its own capital in the
             facility or system.

             One project in our review made use of another type of partnership—
             design/build/operate. In this type of partnership, a single contract is
             awarded for the design, construction, and operation of a capital

             4
              In addition to lease/develop/operate arrangements, the Park Service has used develop/operate
             arrangements as part of cooperative agreements. The only difference in these arrangements is that in a
             cooperative agreement the Park Service charges no rent. Instead, the private sector partner agrees to
             renovate, maintain, and operate the facility. This was the case with the Fort Mason project discussed
             in this report.




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improvement. Title to the facility remains with the public sector. A
glossary that provides additional information on various types of
partnerships appears at the end of this report. Table 1 identifies the
projects that we reviewed and their related agencies.




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Table 1: Public-Private Partnership Projects We Reviewed

 Projects and related agencies                Type                  Brief description of projects
 Department of the Interior,
 National Park Service

 1. Fort Mason Foundation, San                Cooperative           These two urban parks were once military bases
 Francisco, CA, 1976, extended in             agreement to          and contain many historic but deteriorating
 1984.                                        develop/              structures. In each instance, the Park Service
                                              operate (20           contracted with a private sector partner to obtain
                                              years)                funding to restore historic structures while
 2. Thoreau Center at the Presidio,           Lease/develop/        keeping the park in public use. The partners rent
 San Francisco, CA, 1995.                     operate (55           the restored structures to nonprofit tenants.
                                              years)
 Department of Veterans Affairs                                     VA used statutory authority to enter into revenue-
                                                                    generating leases for both projects. In Texas, a
 3. VA Regional Office, Houston, TX,          Design/build/         private developer constructed a VA regional office
       a
 1993.                                        operate (35           building on VA’s medical campus. VA then leased
                                              years)                land to the developer on the medical campus. The
                                                                    developer constructed buildings on the land and
                                                                    rents space in them to commercial businesses. VA
 4. Cold Spring Medical Facility,             Lease/develop/        must approve the buildings’ tenants. In Indiana,
 Indianapolis, IN, 1995.
                         a                    operate (35           the state leased underutilized land and facilities
                                              years)                from VA to use as a psychiatric care facility. The
                                                                    leasing revenue that VA receives from both sites is
                                                                    to be used to fund veterans programs.
 U.S. Postal Service                                                 In both cities, the Postal Service owned an
                                                                     outdated, historic building in a highly desirable
 5. Grand Central Station Post Office,        Lease/develop/         downtown location. It leased each property to
 New York, NY, 1987.                          operate (99            private developers who built a commercial
                                              years)                 building adjacent to and/or on top of the historic
                                                                     structure. The Postal Service earns revenue from
 6. Rincon Center Post Office, San            Lease/develop/         its lease with the developer, and the developer
 Francisco, CA, 1985.                         operate (65            earns revenue from renting out commercial space
                                              years)                 in the new and historic buildings.

                                          a
                                          Both of these projects fall under the authority granted under VA’s
                                          Enhanced-Use Lease (EUL) legislation.




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              Use of public-private partnerships by the federal government is not new.
              Although there is no inventory of public-private partnerships involving
              federal entities, several properties owned by the federal government (e.g.,
              post offices, former military bases) have been renovated through such
              partnerships. The federal asset managers we spoke with said that the
              federal government’s use of partnerships has grown in recent years,
              although the number is probably still small.

              To identify the key elements and related experiences of federal agencies in
Scope and     creating and implementing innovative partnerships, we used a multistep
              process to identify and select projects to review. To identify projects to
Methodology   review, we surveyed 51 public and private sector individuals who were
              knowledgeable about privatization matters and asked them to nominate
              projects using certain criteria, including projects (1) identified in
              privatization literature as being innovative or models; (2) that were
              ongoing or completed; (3) that they believed provided significant public
              benefit (e.g., dollars saved, revenue generated, efficiency gained); and (4)
              that would represent a variety of federal departments.

              Fifty-two individual projects or programs were nominated, and we asked
              the appropriate agencies to provide data on their projects. Using the
              resulting information and with further research and consultation with
              several building and facility management experts that were included in our
              survey, we selected six projects to discuss in this report. We selected these
              projects because they were among those nominated the most frequently,
              and they were actually operating as partnerships at the time of our review.
              Those projects were two National Park Service projects (San Francisco),
              two VA projects (Indianapolis and Houston), and two Postal Service
              projects (New York City and San Francisco). We contacted officials from
              the six projects to obtain information about their experiences. To obtain
              information about the projects, we developed and used a structured data
              collection guide to interview 42 individuals from the projects, including top
              agency officials, project managers, property and facility managers,
              financing officials, and attorneys who played key roles in the partnership
              efforts. These 42 individuals worked for the agencies, state and local
              governments, public nonprofit organizations, and private entities involved
              with the 6 projects.

              We reviewed these officials’ answers to our interview questions and other
              project information we gathered from them, looking for common elements
              that respondents believed contributed to the success of the partnerships.
              We developed from that analysis a list of five key elements that appeared
              to be important to the implementation of the projects. Finally, we verified



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                      with the public and private officials from each project in our study that
                      these elements were critical to the implementation of their partnerships.

                      Because our objective was to identify key elements experienced by the six
                      projects, we did not evaluate the results that the partnerships said the
                      projects achieved or independently verify the accuracy of the information
                      the partnerships provided. The elements are not generalizable to
                      partnerships in other federal agencies. Appendix I contains a more detailed
                      discussion of our objective, scope, and methodology.

                      We did our work at the project locations (Houston, Indianapolis, New York
                      City, and San Francisco) and in Washington, D.C., from August 1997
                      through October 1998 in accordance with generally accepted government
                      auditing standards. In November 1998, we provided the Secretaries of the
                      Interior and Veterans Affairs as well as the Postmaster General with a draft
                      of this report for review and comment. Their comments are discussed near
                      the end of this letter.

                      Officials from each of the three agencies said they were confronted with
Catalyst for Change   the need to look for new ways to effectively manage their buildings and
                      facilities. Governmentwide management reforms as well as fiscal and
                      community pressures were among the factors that led agencies to seek
                      ways to better manage their properties—including the formation of
                      partnerships with the private sector. These partnerships were designed to
                      permit the agencies to effectively support their core agency missions
                      and/or increase revenues while minimizing the cost of maintaining certain
                      properties.

                      At the Department of the Interior, for example, when Congress created the
                      Golden Gate National Recreation Area (GGNRA) in 1972, two former army
                      bases located in San Francisco near the Golden Gate Bridge—Fort Mason
                      and the Presidio—were to be transformed into urban parks and made part
                      of GGNRA.

                      The Presidio and Fort Mason contain about 1,250 historic structures
                                                                                    5
                      protected by the National Historic Preservation Act of 1966. However, the
                      structures required restoration. Park Service officials said the agency

                      5
                        The National Historic Preservation Act of 1966, 16 U.S.C. 470 et seq., established a national
                      preservation program and a system of procedural protection to encourage both the identification and
                      protection of historic and cultural resources at the federal, state, and local levels through the use of a
                      federal-state-local partnership and State Historic Preservation Officers. Section 106 of the act directs
                      federal agencies to consider the effects of their activities on properties that are listed, or are eligible for
                      listing, in the National Register.




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lacked sufficient capital funds and technical expertise to restore them all
to a reasonable standard consistent with the act. But they also said that the
Park Service did not want the structures to continue to degrade and
become even more costly to restore. The Park Service therefore
considered two options for obtaining restoration funds: issuing
concessions contracts for some or all of the facilities at the two sites or
using a partnership approach to draw in the private sector.

Although the decisions were made separately nearly 20 years apart, the
Park Service decided to use a partnership approach for certain
installations in both parks. In each case, according to leasing documents,
the Park Service partnered with an entity that agreed to continue its
public-use philosophy for the park and to restore the historic structures.
To restore the piers and warehouses located in lower Fort Mason, the Park
Service partnered with a nonprofit foundation; and to restore an old
military hospital located in the Presidio, it partnered with a for-profit
entity. Funding for capital improvements of the historic structures has
come essentially from private sector financing and philanthropic sources
obtained by the private partners. These partners repay their loans from
rents they charge their park tenants. However, the Park Service funded
some infrastructure costs and is responsible for overseeing all restoration.

Park Service officials said that through lobbying efforts, the local
community helped to influence the Park Service’s decision to use
partnerships rather than over-commercializing the parks’ facilities. They
said that the local community, which had a history of being actively
involved with the operations of and decisionmaking for the two parks, did
not want the two parks to become overly commercialized.

The two Postal Service projects that we reviewed illustrate situations
where the considerable revenue-generating potential of the partnership
projects served as the catalyst for the Postal Service to partner with the
private sector. The two properties were located in New York City
(midtown Manhattan) and downtown San Francisco and, because of their
locations, had high commercial value. Each property included a large
building that housed mail processing operations and post office services.
According to planning documents obtained from the Postal Service, the
Rincon Annex Post Office building in San Francisco was an underutilized
and outdated structure that the Postal Service planned to sell. These
documents also show that Grand Central Station Post Office in New York
City, though still used, was in need of significant renovation. Both
buildings were historic structures, subject to preservation laws, and the
Postal Service could not demolish them.



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                  According to planning documents, in the case of both properties the Postal
                  Service decided to enter into partnerships with private sector developers
                  in order to (1) obtain long-term revenue sources and (2) uphold the
                  historic preservation of the buildings. The Postal Service leased one
                  property for 99 years and the other property for 65 years. The developers
                  built over the existing building (New York) or adjacent to and over the
                  existing building (San Francisco). The San Francisco property included a
                  large parking lot on which the developer constructed a new building. In
                  both New York and San Francisco, the Postal Service maintained a portion
                  of the property for postal purposes. The Postal Service operates in a
                  businesslike manner in attempting to maximize the revenue potential from
                  its properties. Postal Service officials said that the Postal Service, like
                  federal agencies and private businesses, must be concerned with the views
                  of local communities toward its projects. For example, these officials told
                  us that historic preservationists in San Francisco were particularly vocal
                  about preserving the building there.

                  In all of the projects we reviewed, Congress had enacted legislation that
Statutory Basis   enabled (1) the partnership to take place and (2) the agency to use for its
                  mission any revenue it would receive from the partnership. According to
                  building and facility managers in all of the partnerships we reviewed,
                  obtaining legislative approval for a public-private partnership can take
                  several years because of the time it can take to obtain consensus among an
                  often diverse set of stakeholders.

                  The building and facility managers we spoke with said that a primary
                  reason for an agency to enter into partnerships is the incentive to keep for
                  its own use the revenue it would receive from the partnership. The federal
                  real property disposal rules prohibit most agencies from using revenues
                  from the lease or sale of excess properties. Thus, in each case, a statute
                  was needed in order to allow the organizations we reviewed to enter into a
                  partnership to lease its facilities and keep the revenues generated. As one
                  federal asset manager explained, “true asset management requires you to
                  examine all of your properties, including the lease or disposal of properties
                  to generate revenue in order to further enhance the agency’s core
                           6
                  mission.”


                  6
                   Currently, the general rule for most federal agencies is that all proceeds from the sale of federal land
                  and buildings go either to the general treasury or the Land and Water Conservation Fund. Under the
                  Federal Property and Administrative Services Act of 1949, when an agency declares a piece of property
                  excess, GSA generally tries to find another use for it at another agency or at the state or local
                  government level. If GSA cannot find another taker, it is to declare the property surplus and sell it on
                  the private market. Some federal agencies are exempt from this general property disposal rule.




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  For all six projects, the legislation enabling the partnership was either
  project specific (i.e., for a single, identified project) or was broader in
  scope without identifying any one project. The Park Service project at the
  Presidio is an example of legislation that was project or site specific. In
  1993, Congress authorized the Secretary of the Interior through Public Law
  103-175 to lease the former Letterman hospital complex, including what is
  known now as the Thoreau Center at the Presidio, and to retain the
  proceeds from such a lease for the preservation, restoration, operation,
  maintenance, and other related expenses incurred with Presidio
  properties.
                                                                     7
  A 1991 law that enabled VA to engage in partnerships is an example of
  authorization that is broader in scope. The two VA projects we reviewed
  were undertaken using this authority. In 1991, Congress enacted legislation
  authorizing the Secretary of VA to enter into long-term agreements called
  “Enhanced-Use Leases” (EUL). The enhanced-use leasing concept is a
  revenue-generating approach to asset management. Some of the basic
  elements of the EUL authority follow.


• The lease allows for non-VA uses or activities on VA property in the form
  of services, activities, or facility development provided that such uses or
  activities are not inconsistent with VA’s mission.
• The lease’s overall objective must enhance VA’s mission or program.
• In return for the lease, VA may obtain any combination of monetary
  consideration, services, facilities, or other benefits from the operation of
  the non-VA uses so long as the benefit is determined by the VA Secretary
  to be “fair consideration.”

  In the two VA projects we reviewed, the revenue that VA receives from the
  two property leases is to go into funds that serve veterans. Also, as part of
  the partnership agreement in one of the projects, VA’s private sector
  partner built an office building that it sold to VA. VA purchased the
  building, according to VA officials, at a price that was about one-third less
  than the amount appropriated for the building’s construction.

  The legislation that opened the way for the Postal Service to enter into
  partnerships was broader still than the legislation behind the partnership
  projects of the other three agencies. Under the Postal Reorganization Act
  of 1970, the Postal Service is to operate in a businesslike manner and is

  7
      P.L. 102-86 (38 U.S.C. Sections 8161-8169).




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                                                                                                                 8
                 authorized to manage its properties using businesslike arrangements. In
                 addition, the 1970 act generally phased out appropriated funds for the
                 Postal Service, and it no longer receives appropriated funds for its basic
                             9
                 operations.

                 Officials in the three agencies told us that they established organizational
Organizational   structures and acquired the necessary expertise to interact with private
                 sector partners to ensure effective partnership implementation. The
Structure        officials said these organizational structures were each built with a team of
                 employees experienced in building and facilities management. They said if
                 a team lacked needed expertise, the agencies acquired that expertise
                 through contract with the private sector.

                 According to officials in these three agencies that had established such
                 structures, new organizational units were often needed because an
                 agency’s cultural resistance to change can hamper partnership
                 implementation. These officials said that they generally had to create units
                 to overcome or bypass a strong federal culture that discouraged the use of
                 federally owned assets for generating revenue. Moreover, agency officials
                 told us that they created a team that provided a single point of contact to
                 facilitate interaction with the private sector partner. Officials from these
                 agencies said that private sector partners prefer to work with a single
                 point of contact within the partner agency. Establishing that single point of
                 contact, they said, is crucial to the success of partnerships.

                 The organizational structures established by the agencies to conduct day-
                 to-day partnership activities ranged from full-time permanent offices to
                 task force teams. For example, VA established an Office of Asset and
                 Enterprise Development within its Facilities Management Office to
                 promote the partnership concept within VA and develop policies and
                 procedures to carry out the day-to-day tasks of designing and
                 implementing partnership projects. Moreover, according to VA officials,
                 this office provided a single point of contact for the partnership and was
                 staffed with professionals experienced in portfolio management,
                 architecture, civil engineering, and contracting. This office also drew on
                 the expertise available in VA’s Facility Management Office and General

                 8
                  The Postal Reorganization Act of 1970 (P.L. 91-375, 84 stat. 719 (1970)) reorganized the U.S. Post
                 Office Department into the U.S. Postal Service.

                 9
                  The Postal Service does not depend on appropriations for its basic operations, but it receives some
                 funds to subsidize free and reduced-rate mail. In fiscal year 1998, the Postal Service reported about
                 $60 billion in operating revenues and about $67 million in appropriated funds for free and reduced-rate
                 mail.




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                    Counsel’s Office to provide single-point service to its VA clients and the
                    private sector.

                    According to experienced former federal asset managers with whom we
Detailed Business   consulted, the amount and type of planning that takes place between the
                    governmental partner and the private organization involved in a public-
Plans               private partnership project differ greatly from the planning ordinarily
                    found when an agency simply contracts out to a private developer. These
                    managers said that when the government contracts out to the private
                    sector, an agency typically plans the project, obtains authorization and
                    funding, and contracts for implementation generally without involving the
                    private contractor. They said, as a result of this, the views, analysis, and
                    experience of the private sector contractor that will actually implement
                    the project are usually not taken into account before the design is set and
                    the contract is finalized.

                    By their very nature, public-private partnerships typically require an
                    agency to work closely with its private partners and create very detailed
                    plans along the way. Federal asset managers in our review told us that
                    partnership projects are different in that the agency prepares its business
                    plan in close conjunction with its private sector partner. This plan forms
                    the basis for the final project contract. The business plans we reviewed
                    generally addressed such detailed topics as the responsibilities and risks
                    that are to be undertaken by both the federal agency and the private
                    partners, existing and projected marketplace conditions affecting the
                    project, and project financing. Some plans we examined also identified
                    issues, such as required legislative authority. Asset managers we spoke
                    with said that these types of issues were often absent from the business
                    plans submitted by agencies that simply contract with the private sector to
                    implement predetermined plans.

                    A detailed business plan (or a set of similar documents acting in this
                    capacity) was prepared for each of the partnerships we reviewed. We
                    found that usually the agency’s building and facilities management staff
                    created these plans in close coordination with the project’s private sector
                    partner and before formal partnership contracts were executed. Officials
                    of the three agencies told us that the use of business plans helped them to
                    make informed partnership decisions, made these decisions easier to
                    justify to potential critics and to implement, and helped protect the
                    government’s interests.

                    For example, in connection with the partnership project at the Presidio,
                    the Park Service and its private sector partner negotiated a letter of intent;



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                        a preliminary lease agreement; and the detailed leasing agreement, a 55-
                        year ground lease. According to Park Service officials, the letter of intent
                        and preliminary lease agreement served as the business plan. These
                        documents spelled out mutual performance criteria and milestones that
                        had to be accomplished before the ground lease was signed. To implement
                        these agreements, the Park Service appointed a staff project manager to
                        provide full-time coordination during the lease development phase and a
                        historic architect to coordinate the Park Service’s responsibilities for
                        historic preservation, construction oversight, and review of building
                        alteration plans proposed by tenants. The private partner was responsible
                        for obtaining approved construction documents, appropriate insurance,
                        and evidence of in-place project financing before the Park Service would
                        sign the final ground lease.

                        Detailed planning documents were also a key element of the Postal
                        Service’s partnerships in both New York City and San Francisco.
                        According to the former Postal Service Asset Manager responsible for both
                        sites, selection of a private partner by the Postal Service was followed by a
                        series of negotiations between the Postal Service asset managers and
                        attorneys and private sector teams. These groups produced several
                        planning documents that functioned collectively as a business plan for
                        each of these projects. These plans detailed topics such as project
                        financing, time frames, the various risks for the Postal Service and the
                        private sector, and how those risks were to be divided between the two
                        parties. This Postal Service official told us that much of this analysis, as
                        well as the subsequent agreements stemming from this process, was
                        ultimately incorporated into the final leases drawn up between the Postal
                        Service and its private sector partners.

                        By policy, VA’s EUL projects must have business plans and the Secretary
                        of VA must approve them. In both VA cases that we reviewed, the
                        Department followed this policy.

                        In projects we reviewed, agencies had to have the support of the local
Stakeholders’ Support   community and other stakeholders to create the partnership. As noted,
                        sometimes the local community acted as a catalyst for change, predating
                        the partnership. For example, in the two Park Service projects we
                        reviewed, local community groups wanted the historic properties
                        preserved. According to Park Service officials, over a several-year span
                        these community groups were able to effectively lobby political leaders to
                        help change the Department of the Interior’s property management
                        policies. They said these changes enabled local organizations to provide




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                      B-278675




                      the parks with day-to-day management and assist in making needed repairs
                      to the historic structures.

                      Sometimes ascertaining stakeholders’ views was required by law. VA’s
                      EUL authority requires that public hearings be held on proposed
                      partnerships to determine their possible impact on veteran services,
                      employees, local commerce, and the community. According to VA officials
                      and our review of the VA projects, public hearings were advertised in local
                      newspapers, and written notices were given to individuals or groups who
                      had an interest in the projects or their potential impacts.

                      In November 1998 we sent a draft of this report to the Secretaries of the
Agency Comments and   Interior and Veterans Affairs and the Postmaster General for their review
                      and comment. On December 8, 1998, VA officials provided minor technical
Our Evaluation        suggestions, which we incorporated in the report where appropriate. Also,
                      on December 8, 1998, we received clarifying and technical suggestions
                      from the Office of Facilities and the Office of General Counsel, United
                      States Postal Service, that are reflected in the report where appropriate.
                      Officials from these offices also told us that the Postal Service is in the
                      process of selling the bulk of the Rincon Project to the private sector
                      developer. They said that this transaction is likely to close in the first
                      quarter of 1999. We added this information to appendix IV. On December
                      10, 1998, we received written comments from the Assistant Secretary for
                      Fish and Wildlife and Parks, Office of the Secretary of the Interior,
                      indicating agreement with the report and offering some clarifying and
                      technical suggestions that we incorporated in the report where
                      appropriate.

                      As agreed, unless you announce the contents of this report earlier, we plan
                      no further distribution until 30 days from the date of this letter. At that
                      time, we will send copies of this report to the Chairman and Ranking
                      Minority Member of the Senate Committee on Governmental Affairs; the
                      Chairman and Ranking Minority Member of the House Committee on
                      Government Reform; the Chairman and Ranking Minority Member of the
                      Senate Committee on Environment and Public Works; the Chairman and
                      Ranking Minority Member of the Public Buildings, Economic
                      Development, and Special Transportation Subcommittee; the




                      Page 16      GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
B-278675




Secretaries of the Interior and Veterans Affairs; the Postmaster General;
and other interested parties. Copies will be made available to others upon
request.

The major contributors to this report are listed in appendix V. Please
contact me on (202) 512-8676 if you have any questions.

Sincerely yours,




J. Christopher Mihm
Associate Director, Federal Management
   and Workforce Issues




Page 17      GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Contents



Letter                                                                                                       1


Appendix I                                                                                                  22

Objective, Scope, and
Methodology
Appendix II                                                                                                 26
                          Overview of National Park Service Projects                                        26
Department of the         The Fort Mason Project                                                            27
Interior, National Park   Thoreau Center Project at the Presidio                                            32

Service
Appendix III                                                                                                38
                          Overview of Department of Veterans Affairs Projects                               38
Department of             The Houston Regional Office Center Project                                        39
Veterans Affairs          The Cold Spring Medical Facility Project                                          43


Appendix IV                                                                                                 47
                          Overview of United States Postal Service Projects                                 47
United States Postal      The Grand Central Station Project                                                 48
Service                   The Rincon Center Project                                                         52


Appendix V                                                                                                  56

Major Contributors to
This Report
Glossary                                                                                                    57
                          Types of Public-Private Partnerships Discussed in This                            57
                            Report
                          Other Terms Related to Public-Private Partnerships                                58


Tables                    Table 1: Public-Private Partnership Projects We Reviewed                           7


Figures                   Figure 1: Key Elements of Public-Private Partnerships                              3
                          Figure II.1: The Fort Mason Project                                               31
                          Figure II.2: Thoreau Center Project at the Presidio                               37
                          Figure III.1: The Houston Regional Office Project                                 42
                          Figure III.2: The Cold Spring Medical Facility Project                            46


                          Page 18      GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Contents




Figure IV.1: The Grand Central Station Post Office                                51
  Project
Figure IV.2: The Rincon Center Project                                            55




Page 19      GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Contents




Abbreviations

API         Amelang Partners, Inc.
EUL         enhanced-use lease
GGNRA       Golden Gate National Recreation Area
GSA         General Services Administration
NYCRR       New York Central Railroad
RCA         Rincon Center Associates
RFP         request for proposal
RFQ         request for qualifications
TCP         Thoreau Center Partners
VA          Department of Veterans Affairs
VAMC        VA Medical Center


Page 20    GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Page 21   GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix I

Objective, Scope, and Methodology


               Our objective was to identify the key elements and related experiences of
               federal agencies in creating and implementing innovative public-private
               partnerships that were formed to make use of federal real estate and
               facilities. To meet this objective, we went through a multistep process to
               identify projects to survey and conducted background research on
               selected projects. We then contacted officials from those projects to obtain
               additional information and insights on their partnership experiences.

               To develop a list of potential federal partnership projects to review, we
               surveyed 51 public and private sector individuals whom we identified as
               knowledgeable about privatization matters from congressional testimony,
               studies, and other published literature. These individuals included federal
               building and facility managers and individuals with partnership knowledge
               and experience from research organizations, major accounting firms, and
               asset management companies. We identified the 51 individuals from our
               past work on privatization, our review of partnership literature, our review
               of documents associated with legislation on federal partnership activities,
               and our early discussions with public and private sector real property asset
               managers.

               We sent a survey form to the 51 individuals asking them to nominate
               projects that they believed would be “good candidates” to review. In
               making nominations, we asked them to use the following criteria:

             • Consider projects identified in privatization literature and by public-private
               partnership experts as being innovative and projects that would be
               recognized as models.
             • Consider projects that were ongoing or completed.
             • Consider projects that they believed provided significant public benefit
               (e.g., dollars saved, revenue generated, efficiency gained).
             • Consider projects that would represent a variety of federal departments.

               Fifty-two individual projects or partnership programs were nominated.
               Twenty-two individuals nominated projects; the other 29 individuals did
               not, citing a lack of knowledge on federal partnerships. Approximately half
               of the 29 individuals who declined to nominate projects said they knew of
               partnership activities at the state or local government level.

               Our next step was to pare down the 52 nominations to a more manageable
               number for further review. We did so by focusing our further efforts on
               projects that were identified more frequently than others. We took the
               view that the more times a project or program was independently
               nominated, the greater its potential for identifying the key elements in



               Page 22       GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
  Appendix I
  Objective, Scope, and Methodology




  creating and implementing a public-private partnership. Projects and
  programs in six agencies were identified by four or more survey
  respondents who nominated projects: the National Institutes of Health;
  U.S. Postal Service; General Services Administration; and the Departments
  of Defense, Veterans Affairs, and the Interior.

  We further reviewed and collected data on the nominated projects and
  programs from the six agencies. For the nominated programs, we asked
  the agencies to provide data on their projects. We then compared their
  specific project data against the criteria we had asked our survey
  recipients to use. Next, after consultation with several public and private
  sector real property asset management experts, most of whom were drawn
  from among the 22 respondents to our survey who nominated projects, we
  selected 6 completed projects in 3 agencies to review further and report
  on. These partnership projects were completed in the sense that a contract
  or partnership agreement had been executed. The six projects were the

• Department of the Interior Fort Mason Foundation project, San Francisco,
  California;
• Department of the Interior Thoreau Center at the Presidio, San Francisco,
  California;
• Department of Veterans Affairs, Houston Benefits Center project, Houston,
  Texas;
• Department of Veterans Affairs Cold Spring Medical Facility, Indianapolis,
          1
  Indiana;
• U.S. Postal Service, Grand Central Station project, New York City, New
  York; and
• U.S. Postal Service, Rincon Center project, San Francisco, California.

  We used a structured data collection guide to obtain additional
  information and documents from 33 public and private sector officials
  whom we interviewed during our visits to the 6 partnership projects. We
  designed the data collection guide to collect information—to the extent it
  was available—on the experiences of project officials in creating and
  implementing the projects. The guide included the topics that the requester
  asked us to cover in reviewing these projects. These topics included

• project background (year initiated/completed, type of partnership,
  partners, and location);
  1
   This partnership arrangement was a public-public partnership in which VA entered into a long-term
  leasing arrangement with the State of Indiana instead of a private sector entity. We chose this large-
  scale project because it was often mentioned by experts we surveyed, and it met all of our other
  project selection criteria.




  Page 23           GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
  Appendix I
  Objective, Scope, and Methodology




• participants’ reason/rationale for partnering (e.g., to satisfy unmet federal
  needs or gain access to private sector innovations);
• contractual arrangements (e.g., responsibilities of the private sector
  partner, procurement issues, innovative practices used, and financing
  arrangements);
• challenges that may have arisen and strategies employed to overcome
  them (e.g., legislation, funding);
• events, conditions, or individuals that facilitated the project’s progress
  (e.g., legislative authorities or special conditions that allowed the projects
  to succeed); and
• project-reported results (e.g., cost savings, tax revenue, and unmet needs
  served).

  The officials we interviewed at the six projects included top management
  officials, public and private sector project managers, facility and property
  managers, financing officials, and attorneys who played key roles in the
  partnership effort. We reviewed documents, such as pertinent legislation,
  business plans, requests for proposals and qualifications, policy and
  procedural guidance, budget documents, legislative analyses, audit reports,
  and site photographs. We also contacted the Office of the Inspector
  General at each project’s parent agency to obtain any audit and oversight
  data it had on the project.

  To determine the key elements involved in the creation and
  implementation of the six projects, we reviewed the responses of project
  officials to our structured data collection guide and interview questions.
  We also reviewed documents officials provided that described their
  projects. On the basis of our analysis of this information, we derived a list
  of major elements that the projects shared in common. We confirmed from
  public and private experts in the use of partnerships for buildings and
  facilities that these elements were generally key to the successful
  implementation of the partnership projects we reviewed.

  Because our objective was to identify key elements of the partnership
  projects we visited, we did not evaluate the results that the partnerships
  said the projects achieved or independently verify the accuracy of the
  information they provided. The elements are not generalizable to
  partnerships in other federal agencies because they were derived from our
  review of a select and limited number of partnerships. We also prepared a
  glossary so that the various types of partnership we refer to in this report
  can be understood in the context of the range of public-private efforts that
  can occur. The glossary appears at the end of the report.




  Page 24        GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix I
Objective, Scope, and Methodology




We did our work at the project locations (Houston, Indianapolis, New York
City, San Francisco) and in Washington, D.C., from August 1997 through
October 1998 in accordance with generally accepted government auditing
standards. In November 1998, we provided the Secretaries of the Interior
and Veterans Affairs as well as the Postmaster General with a draft of this
report for review and comment. We have incorporated their comments
where appropriate.




Page 25        GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix II

Department of the Interior, National Park
Service

                        The U.S. National Park Service was founded in 1916 to promote, regulate,
Overview of National    and protect the 40 national parks and monuments that existed at the time
Park Service Projects   so that they would be “unimpaired for the enjoyment of future
                                      1
                        generations.” Over the more than 80 years that have passed since its
                        founding, the Park Service has grown to encompass 378 national sites,
                        including parks, recreational areas, battlefields, and scenic trails and other
                        units that occupy over 80 million acres.

                        Accompanying this growth in the size of the park system has been a large
                        increase in the number of visitors to national parks. According to the Park
                        Service, the annual number of visitors has grown from 198 million in 1980
                        to over 275 million in 1997, an increase of almost 40 percent. Financial
                        constraints and increasing service demands have led the Park Service to
                        search for new and creative approaches to improve the upkeep of the
                        lands and buildings in its charge as well as improve the programs and
                        services it provides to the increasing numbers of visitors. One such
                        approach is the Park Service’s expanded use of partnerships with such
                        organizations as state and local governments, nonprofit entities, and some
                        private sector organizations. The Park Service has worked with nonprofit
                        cooperating associations to operate visitor centers and gift shops since
                        1920.

                        Since the 1970s, the role and scope of the Park Service partnerships with
                        outside entities have expanded beyond concession contracts. A 1976
                        cooperative agreement between the Park Service and the community-
                        based Fort Mason Foundation in San Francisco was one of the first
                        examples of an arrangement between the Park Service and an outside
                        partner to develop and manage facilities that did not primarily support an
                        existing park function. More recently, the Park Service leased buildings on
                        the property of the Presidio, a historic Army installation on San Francisco
                        Bay, to a private, for-profit enterprise, Thoreau Center Partners, that
                        financed the rehabilitation of the buildings. This enterprise subleases
                        space in the buildings to other organizations while being required to pay
                        for the ongoing operations and maintenance of the buildings.




                        1
                            National Park Service Organic Act, 16 U.S.C. 1.




                        Page 26              GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
                             Appendix II
                             Department of the Interior, National Park Service




The Fort Mason Project

Participants                 Public: The Golden Gate National Recreation Area (GGNRA) in
                                        2
                             California, which the Department of the Interior’s National Park Service
                             manages.

                             Private: The Fort Mason Foundation, a private, nonprofit organization
                             that is governed by a Board of Directors consisting of cultural, civic, and
                             business leaders from the San Francisco Bay area.

The Form of Public-Private   The partnership between GGNRA and the Fort Mason Foundation was a
                                                                                                  3
                             develop/operate arrangement as part of a cooperative agreement. Under
Cooperation                  the agreement, the Park Service provides the buildings rent free. In return,
                             the Foundation is required to renovate, maintain, and operate the lower
                             Fort Mason area, located in San Francisco and consisting of three historic
                             piers, five warehouses, and several smaller buildings. It is also required to
                                                                             4
                             develop and administer the Fort Mason Center to provide programs that
                             allow public participation at minimum or no cost in a variety of cultural,
                             recreational, and educational programs. It accomplishes this by leasing
                             low-cost to nonprofit groups and to other outside parties for events,
                             meetings, and exhibits, at rates approved by the Park Service. In addition,
                             the Foundation is required to maintain the facilities and to pay all utility
                             costs. The Park Service is to replace particular facility elements (e.g.,
                             foundations and roofs). GGNRA has a veto right over the nature and type
                             of merchandise, services, and activities that may be sold or furnished by
                             the Foundation.

                             The original 1976 agreement expired in 1984 and was replaced by another
                             agreement, which expires on March 28, 2004. According to Park Service
                             officials, a longer term agreement was needed to enable the Foundation to
                             expand operations to attract private financing and philanthropic support.



                             2
                              Congress established GGNRA in 1972 to preserve for public use and enjoyment certain areas in Marin
                             and San Francisco counties in California, including the Presidio.
                             3
                              This is similar to a lease/develop/operate arrangement. However, instead of a lease, the Park Service
                             used a cooperative agreement, and no rent was charged to the Fort Mason Foundation.
                             4
                              The Fort Mason Center encompasses nine buildings and two of the three piers within the lower Fort
                             Mason area. According to Park Service officials, negotiations are currently under way to incorporate
                             the third pier into the Fort Mason Center and develop it into a marine learning center.




                             Page 27           GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
                        Appendix II
                        Department of the Interior, National Park Service




Background              The lower Fort Mason area, located in San Francisco, was one of a number
                        of U.S. Army installations transferred to GGNRA upon its creation. The
                        area is historically significant as the major point of embarkation for
                        American troops bound for the Pacific Theater during World War II. In
                        1973, GGNRA assumed responsibility for the maintenance, restoration, and
                        use of the lower Fort Mason area.

                        In 1975, a Park Service study found that the unoccupied structures of the
                        lower Fort Mason area had been subject to vandalism and general
                        deterioration. According to Park Service officials, the lower Fort Mason
                        area was a difficult property for the Park Service to manage because the
                        area was one of the largest, most capital-intensive installations in its
                        purview, and it had a large number of buildings that could not be torn
                        down because of their historic significance. These officials said that they
                        realized that GGNRA lacked sufficient funds and expertise to restore and
                        develop the lower Fort Mason facilities to the standard required by the
                        Historic Preservation Act of l966.

                        Also in 1975, a number of nonprofit groups in San Francisco expressed
                        interest in locating to the area, which is located near the heart of central
                        San Francisco, and the Park Service held a series of meetings with those
                        groups. In 1976, business and civic leaders created the Fort Mason
                        Foundation for the purpose of negotiating with the Park Service on behalf
                        of the nonprofit community to renovate the installation, serve as its
                        administrator, and manage rental agreements with resident nonprofit
                        organizations.

                        In 1977, the Foundation provided a plan that met the objectives of GGNRA
                        and the Park Service—to administer warehouses and piers located in the
                        lower Fort Mason area as low-cost public use space and to assist nonprofit
                        organizations in their efforts to provide cultural, educational, and
                        recreational activities to the public at little or no cost to the public and the
                        federal government. The creation of the Foundation allowed the Park
                        Service to deal with just one entity, rather than the multitude of entities
                        that would ultimately repair and occupy space and operate programs in the
                        lower Fort Mason area.

Major Facilitating or   Several factors facilitated the formation of a partnership between the Park
                        Service and the Fort Mason Foundation. First, according to Park Service
Constraining Factors    documents, GGNRA was financially unable to provide the necessary
                        restoration or rehabilitation work for the many historic buildings within
                        the park that needed to be restored and maintained. The public-private
                        partnership at the Fort Mason complex provided a way for the Park



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                   Appendix II
                   Department of the Interior, National Park Service




                   Service to address the problem of decaying buildings without requiring a
                   substantial increase in funding or staff at GGNRA. Second, according to
                   Park Service officials, there was strong support in the San Francisco
                   community, especially among local nonprofit organizations, for the
                   creation of a nonprofit center in order to avoid over-commercialization of
                   the site. The extent of this support can be seen in the founding of the Fort
                   Mason Foundation in 1976. This organization brought together numerous
                   small and fragmented groups into one body so that they could more
                   effectively negotiate with the Park Service. Park Service officials said that
                   dealing with one nonprofit with a strong, unified organization was key to
                   implementing the partnership approach. Third, both Park Service and Fort
                   Mason Foundation officials told us that the General Superintendent of
                   GGNRA at the time was a young, dynamic, and creative force who was
                   willing to innovate and take some risks including those posed by a public-
                   private partnership.

                   In creating their partnership, both the Park Service and the Fort Mason
                   Foundation also encountered constraints. Among these was the fact that
                   the newly formed Fort Mason Foundation had no track record in the
                   business it was about to undertake. However, this constraint was mitigated
                   somewhat by the relevant experience, expertise, and resources of the
                   individuals chosen to serve on the Foundation’s board of directors.

Reported Results   According to Park Service officials, this partnership appears to be meeting
                   the chief objective of the Park Service—the preservation of the historic
                   character of the lower Fort Mason area. The nine buildings and two piers
                   that make up the Fort Mason Complex have been fully renovated and
                   maintained over the last 22 years at minimal cost to the Park Service.
                   According to Foundation and Park Service officials, the cumulative cost to
                   renovate and improve the Fort Mason area has been approximately $16.5
                   million. The Park Service estimates the government’s portion of this
                   expense to have been about $3.5 million and the Foundation portion to
                   have been about $13 million. According to the Park Service officials, the
                   agency’s annual operating expenses for the project have been
                   approximately $250,000. These officials stated that they believe that this
                   amount is far less than what one would expect for such an enterprise.
                   According to Park Service officials, the partnership arrangement also
                   meets the Park Service objective to assist nonprofit organizations in their
                   efforts to provide a broad range of cultural, educational, and recreational
                   activities at little or no cost to the public.

                   The partnership also appears to be meeting one of the principal aims of the
                   Fort Mason Foundation—to solicit the participation of diverse nonprofit



                   Page 29         GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix II
Department of the Interior, National Park Service




groups with the ability to provide low cost or free recreational and
educational programs of both wide and specialized appeal to the public.
The Foundation leases space to a wide variety of social, cultural, and arts
organizations at the Fort Mason Center, including the San Francisco
African American Historical & Cultural Society, Museo ItaloAmericano, the
Mexican Museum, the Young Performers Theater, and the Friends of the
River. The Center also provides galleries, classrooms, meeting rooms,
pavilions for performances and other events, as well as a 440-seat theater
for the public. In 1996, resident and nonresident groups hosted
approximately 15,000 activities at the Fort Mason Center. Yearly
attendance at the Center has risen from 125,000 in 1977 to 1.8 million in
l996. According to Park Service officials, the Foundation also serves the
public by providing leased space at relatively low cost, about $8 per square
foot, for its 50 resident nonprofit organizations. These officials told us that
this rate is about 60-70 percent less than the current rental market price.
The Foundation reported that its current annual operating expenses are
about $2.3 million. Officials at the Fort Mason Foundation told us that the
Foundation reinvests any net income generated back into its operations
and into capital improvements for the site.

Figures II.1A and II.1C show conditions before and after the renovation of
the Fort Mason site. Figure II.1B provides an aerial view of the Fort Mason
area, which is located near downtown San Francisco.




Page 30         GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
                                      Appendix II
                                      Department of the Interior, National Park Service




Figure II.1: The Fort Mason Project




                                      Page 31         GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
                             Appendix II
                             Department of the Interior, National Park Service




Thoreau Center
Project at the Presidio


Participants                 Public: The Golden Gate National Recreation Area (GGNRA) in
                             California, which the Department of the Interior’s National Park Service
                             manages.

                             Private: Thoreau Center Partners (TCP), a for-profit California real estate
                             limited partnership that is made up of Highwater, Inc., a for-profit
                             subsidiary of the nonprofit Tides Foundation, and Equity Community
                             Builders, a San Francisco-based real estate developer of housing and
                             mixed-use projects.

The Form of Public-Private   The partnership between GGNRA and TCP was a lease/develop/operate
                                                                                                    5
                             arrangement. The Park Service entered into a 55-year ground lease with
Cooperation                  the for-profit TCP, which arranged conventional real estate financing in the
                             form of loans and equity. TCP is responsible for the design, construction,
                             and ongoing management of the rehabilitated buildings under the terms of
                             the lease with the Park Service. Under the terms of the lease, the Park
                             Service is to provide fire and police services and maintain the surrounding
                             open space, roads, and utility systems, as it is to do for the entire Presidio.

Background                   In 1989, the Department of Defense announced the closure of the Presidio
                                                                                                    6
                             under the provisions of the Base Realignment and Closure Act of 1988.
                             The Presidio covers about 1,480 acres, approximately 800 of which are
                             open space, and includes 870 structures, 510 of which are designated as
                             historic. Following the closure decision, the Departments of the Army and
                             the Interior signed an agreement transferring the Presidio to GGNRA on
                             October 1, l994. In 1998, the Presidio Trust, a wholly owned trust
                             established by statute, assumed administrative responsibility over the
                                                     7
                             Presidio from GGNRA.

                             According to Park Service officials, the Park Service was concerned that it
                             would not have the funds, ability, or expertise to finance large-scale

                             5
                              A ground lease is a lease for the use and occupancy of land only, usually for a long period of time. It is
                             also called a land lease.
                             6
                                 P.L. 100-526.
                             7
                                 P.L. 104-333.




                             Page 32             GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix II
Department of the Interior, National Park Service




building rehabilitation, maintenance, and operation of the Presidio
buildings. In 1993, legislation was enacted authorizing the Secretary of the
                                          8
Interior to lease the Letterman Complex, a 55-acre former hospital and
research complex, within the Presidio, with over 1.2 million gross square
feet of built space in 47 historic and nonhistoric buildings.

From 1990 to 1994, the Park Service developed a publicly approved
management plan for the entire Presidio. Under this management plan and
the legislation authorizing the leasing of the Letterman Complex, the goal
for the site included the creation of a national and international center for
scientific, research, or educational activities, particularly those relating to
health and the environment.

In December 1993, the Park Service’s Presidio Project Office assembled a
real estate team, including Park Service staff and private sector real estate
consultants, to assist the Park Service in issuing a request for
                                                            9
qualifications (RFQ) for leasing buildings in the Complex. Park Service
officials told us that they distributed the RFQ to more than 500 individuals,
organizations, and companies and received 16 responses.

In June 1994, the Park Service selected a proposal submitted by TCP to
serve as the lessee under a 55-year ground lease with the Park Service for
four buildings in the Letterman Complex, totaling over 75,000 square feet.
Consistent with the Presidio’s management plan, TCP proposed to lease
and rehabilitate the buildings and then sublease the improved office space
to a variety of subtenant organizations. The four buildings were to be
known as the Thoreau Center for Sustainability. According to Park Service
officials, the Park Service selected TCP’s proposal because it best met the
programmatic, rehabilitation, and occupancy goals expressed by the Park
Service in the RFQ, including the need to use private sector funds to
finance the rehabilitation of the buildings.

In September 1995, the Park Service and TCP signed the lease for Phase I
of the project, which was completed and occupied by March 1996.
Exercising an option as part of the Phase I lease, the Park Service and TCP
signed in July 1997 a Phase II lease, which was similar in its terms and
conditions. This lease covered an additional eight buildings encompassing
about 85,000 square feet, making TCP responsible for the restoration,

8
    P.L. 103-175.
9
 The Park Service stated that it used an RFQ rather than a request for proposal (which would have
specified the details of the project) because that format allowed respondents to propose a wide variety
of development schemes for different combinations of buildings.




Page 33             GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
                        Appendix II
                        Department of the Interior, National Park Service




                        preservation, and operation of a total of 12 buildings. Construction and
                        occupancy of Phase II were completed in the spring of 1998. According to
                        Park Service officials, each lease was preceded by a development
                        agreement that spelled out specific project design and financing
                        requirements and milestones that TCP had to achieve before the Park
                        Service would sign the ground leases.

Major Facilitating or   According to Park Service officials, the major factor that motivated the
                        Park Service to enter into a public-private partnership in this project was
Constraining Factors    the agency’s need to preserve buildings that were in a deteriorated
                        condition while avoiding the considerable cost of making the repairs itself.
                        Since the buildings at the Letterman site were designed to serve as part of
                        a hospital complex, a considerable amount of modification was necessary
                        before they could be adapted for office use. Park Service officials also told
                        us that these buildings required extensive and costly electrical, plumbing,
                        and structural improvements as well as asbestos removal to bring them up
                        to code. GGNRA managers viewed a public-private partnership as a means
                        of achieving their goal of restoring and maintaining a portion of the
                        Letterman site without having to pay for it out of their limited funds.

                        Park Service officials mentioned several other factors that facilitated the
                        formation of a partnership in this case. According to Park Service officials,
                        one of these factors concerned the legal ability of the Park Service to enter
                        into a long-term lease with the private sector partner. Because the
                        legislation authorizing the lease of the Letterman Complex permitted the
                        government to enter into a long-term lease with a private sector partner,
                        TCP was able to take advantage of important tax benefits. For example,
                        according to a document published by the National Trust for Historic
                        Preservation, to qualify for historic rehabilitation tax credits on leased
                        properties, the term of the lease must be for at least as long a term as the
                                                                                              10
                        depreciation schedule for the building (approximately 40+ years). This
                        played an important role in the Park Service’s ability to lease the
                        Letterman buildings and fund their restoration.

                        Another major facilitating factor mentioned by Park Service officials was
                        the fact that GGNRA could retain the revenues from the lease of the
                        Letterman buildings. This provided the Park Service with the incentive to
                        commit the time and staff needed to develop and participate in such a
                        complex transaction. Finally, the “compelling vision” of the Presidio


                        10
                          “The Thoreau Center for Sustainability: A Model Public-Private Partnership.” Preservation
                        Information, National Trust for Historic Preservation, May 1997.




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                   Appendix II
                   Department of the Interior, National Park Service




                   master plan and the attractiveness of the site were also identified by Park
                   Service staff as significant factors in facilitating the partnership.

                   Interviews conducted with Park Service officials revealed some
                   constraining factors that affected the formation of this public-private
                   partnership. Park Service staff told us that without an ownership interest,
                   potential private sector partners are often reluctant to enter into an
                   agreement with the public sector that entails substantial financial
                   commitment and other responsibilities. These officials also pointed out
                   that there are requirements for public disclosure when a government
                   agency is involved in a public-private partnership deal that are significantly
                   beyond those that are typically expected in a private sector transaction.
                   This would include concerns about potential public disclosure of financial
                   and business information that is typically considered proprietary. These
                   requirements can inhibit the private sector, which does not normally
                   encounter such conditions. Finally, private sector concerns about the
                   ability of the government to be a reliable partner and lessor over the life of
                   a long-term lease were factors that Park Service officials found may
                   discourage potential lessees and lenders from entering into these types of
                   transactions.

Reported Results   By entering a public-private partnership, the Park Service passed on the
                   cost of rehabilitating and maintaining the properties to the private sector
                   while simultaneously creating a source of revenue that can be used for
                   other needs within GGNRA. The privately managed and funded
                   rehabilitation, which combined historic preservation and sustainable
                   design principles, has received national acclaim, including a prestigious
                   award from the National Trust for Historic Preservation. Additionally, the
                   ground lease for the site currently generates more than $170,000 annually
                   in rent and fees for the Park Service. Under the terms of the lease, this
                   amount is to increase over the course of the lease based on both a fixed
                   schedule and market-based real estate reappraisals. Park Service officials
                   said they view the Thoreau Center project as a successful, replicable
                   partnership and a model for the entire park system. Other Park Service
                   staff members, along with real estate and design experts as well as U.S.
                   and foreign government officials, have toured the project in an effort to
                   learn from the Presidio’s example.

                   TCP also appears to have benefited from its partnership thus far. As of
                   September 1998, Park Service documents show that the Thoreau Center
                   had approximately 45 subtenants, including nonprofit organizations such
                   as the Energy Foundation and the Wilderness Society. Both Phase I and
                   Phase II of the project are fully leased. These documents also indicate that



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Appendix II
Department of the Interior, National Park Service




the bank and private loans are being repaid according to schedule
(approximately $1,040,000 annually), and the project’s first stabilized year
of occupancy and operations—1998—is expected to meet TCP’s
projections. According to Park Service officials, subtenant rents generate
sufficient money for TCP to repay the debt and equity that funded the
rehabilitation, provide for ongoing operations and maintenance of the
complex, and provide rental payments to the Park Service.

Figures II.2A and II.2C show conditions before and after the renovation of
the Thoreau Center in the Letterman Complex at the Presidio. Figure II.2B
is a map of the Presidio area identifying the location of the Thoreau
Center.




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                                            Department of the Interior, National Park Service




Figure II.2: Thoreau Center Project at the Presidio




                                            Page 37         GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix III

Department of Veterans Affairs


                   The primary responsibility of the Department of Veterans Affairs (VA) is to
Overview of        provide care and services—e.g., medical, housing, insurance, education,
Department of      income, and burial—to eligible U.S. veterans. Its mission includes the use
Veterans Affairs   of its facilities to educate and train a large portion of the nation’s medical
                   practitioners through affiliations with medical schools and supporting
Projects           research that benefits veterans’ health care and quality of life. In addition,
                   VA is responsible for providing medical services in a war or national
                   emergency.

                   To accomplish its mission, VA owns and operates 173 hospitals, over 450
                   ambulatory-care clinics, 133 nursing homes, 40 domiciliaries, 206
                   counseling centers, and various other facilities. Many of VA’s buildings are
                   aged, deteriorating, and in need of significant maintenance and
                                   1
                   modernization. According to VA officials, in the 1980s, funding pressures
                   became a catalyst for the agency to investigate ways to reduce expenses
                   and increase revenues. In August 1991, Congress passed legislation that
                   allowed VA to engage in public-private partnerships through an Enhanced-
                                     2
                   Use Lease (EUL). This legislation allows VA to manage underutilized
                   property through leasing arrangements with state or local governments or
                   private sector organizations and generate income. According to VA asset
                   managers, VA’s EUL program gives VA more discretion to manage its
                   properties than it would otherwise have under federal regulations—which
                   require that agencies acquire or dispose of all property through the
                   General Services Administration (GSA).

                   As of June 1998, VA had implemented 10 EULs with an estimated asset
                   value in excess of $50 million. According to VA officials, these EULs have
                   provided an estimated $25 million in savings for VA in terms of lower
                   construction, operation, and maintenance costs. We reviewed two VA EUL
                   projects-–the Houston regional office center project and the Cold Spring
                   Medical Facility in Indianapolis.




                   1
                    See Independent Review of the Department of Veterans Affairs’ Office of Facilities Management, Final
                   Report, Price Waterhouse, June 17, 1998.
                   2
                    Enhanced-use leasing is a VA asset management program that can include a variety of different
                   leasing arrangements (e.g., lease/develop/operate or build/develop/operate). See the glossary at the
                   end of this report for additional information on EULs and the type of leasing arrangements mentioned
                   above.




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                             Department of Veterans Affairs




The Houston Regional
Office Center Project

Participants                 Public: Department of Veterans Affairs.

                             Private: Amelang Partners, Inc. (API), a private sector real estate
                             developer headquartered in Houston, Texas.

The Form of Public-Private   Under the terms of a 35-year EUL, API agreed to design, build, and
                             maintain the Houston VA regional office building, add 500 parking spaces,
Cooperation                  and develop and maintain the remainder of the 20-acre VA-owned site with
                             commercial buildings. Following expiration of a lease/purchase agreement
                             with the developer, VA purchased the regional office building. VA does not
                             assume any risk or make any guarantees to finance API’s commercial
                             developments, and API assumes all financial obligations and risks
                             associated with private development. VA and the city of Houston are first
                             to approve all private development proposed for the site. In return for
                             providing API with commercial development rights on the VA property, VA
                             obtained long-term operation and maintenance services at reduced costs.
                             At the end of the 35-year lease, VA will own the commercial properties that
                             API developed and now leases.

Background                   The Houston VA regional office had been housed in a GSA-leased, privately
                             owned building in the southern part of Houston, approximately 10 miles
                             from the VA Medical Center (VAMC) campus. In 1992, VA’s 20-year lease
                             with GSA for this property was about to expire. According to VA officials,
                             the building was in serious disrepair, and VA officials felt that by relocating
                             the regional office to the grounds of the VAMC campus, which had
                             approximately 20 acres of available land, VA could reduce costs and
                             enhance services to veterans by placing the office in close geographical
                             proximity to other services on the campus. This proximity would enable
                             veterans to schedule visits to and receive services from both facilities
                             during a single visit.

                             In 1992, Congress provided VA with $17 million to build a new Houston
                             Regional Office on the VAMC campus. VA officials chose to use an EUL
                             instead of designing and building the facility themselves. After a public
                             hearing in September 1991 and congressional notification, as required by
                             the EUL legislation, VA sponsored a national competition to develop the
                             20-acre site on the VAMC campus for a regional office building, plus some
                             VA-approved commercial developments (e.g., dialysis center and a dental



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                        office). Eight developers submitted proposals to develop the site. In
                        January 1993, VA selected Amelang Partners, Inc. (API), a 32-year-old
                        Houston-based developer, to design, build, and operate the VA office
                        building as well as to develop the remainder of the property.

                        API owns and operates 29,000 square feet of commercial property,
                        consisting of retail and medically oriented offices that it leases to private
                        tenants and provides VA with a percentage of the rents. In addition, VA
                        agreed to lease-purchase the office building within a 1-year period after its
                        construction at savings of more than 30 percent of the amount that
                        Congress appropriated to build a new regional office.

Major Facilitating or   The 1991 legislation authorizing EULs was the major facilitating factor for
                        this project because it provided a legal basis for VA to keep lease payments
Constraining Factors    from EUL projects and use them to fund appropriate VA activities. VA’s
                        EUL program eliminated or streamlined many processes that are typically
                        required in government acquisitions. For example, VA officials told us that
                        the use of an EUL provided VA with the flexibility to quickly select the best
                        qualified development team on the basis of past experience, building and
                        site design concepts, and proposed cost savings rather than using the
                        traditional and often very slow federal contracting procedures. According
                        to VA asset managers involved in the project, Houston’s local zoning laws
                        also functioned as a facilitating factor because they permitted a degree of
                        freedom and flexibility that made the project more attractive to the parties
                        involved.

                        Interviews with senior VA officials at the Houston regional office and
                        senior executives at API made no mention of major constraining factors in
                        this project. Perhaps there were no constraining factors because of the
                        combination of API’s considerable experience and familiarity with federal
                        contracts and the fact that VA had already received sufficient funding from
                        Congress to build the regional office.

Reported Results        The Houston VA Regional Office building and parking facility was
                        completed in March 1995. According to VA officials, this building was
                        constructed in 11 months. As of September 1998, all of the commercial
                        development was completed, and all businesses were open.

                        According to VA officials, the Houston project is one of VA’s newest, state-
                        of-the-art regional office centers and represents VA’s efforts to co-locate
                        benefits and medical service in the Houston area. In addition, VA contends
                        that some of the commercial development in the project should further
                        benefit its clients. For example, two of the businesses in the commercial



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Department of Veterans Affairs




development are a kidney dialysis facility and a dental office. Through an
arrangement with VAMC, the dialysis center provides services to VA
clients as well as the surrounding community and the neighboring
University of Texas Medical School.

Overall, VA officials reported that the use of an EUL reduced the time
needed to structure and execute this development and resulted in
significant cost savings over VA’s design and development of the property
by itself. According to VA officials, VA purchased the office building for
approximately $11 million ($6 million less than the $17 million
appropriated by Congress for a new regional office). In addition, a VA
report presented to Congress stated that VA should save an additional $10
million in operation and maintenance costs over the 35-year term of the
EUL. According to the EUL, API currently pays VA about $75,000 annually
from revenues of the commercial development. This amount is in addition
to a one-time $75,000 rental payment made by the developer at the
                        3
execution of the lease.

In May 1995, this project earned a “Hammer” award from Vice President
Gore’s National Performance Review for its contributions to VA’s efforts to
improve business practices and provide better services to veterans. The
Hammer award is given to a person or team whose efforts dramatically
improve the way government does business.

Figure III.1A shows the new Houston VA Regional Office building
against the backdrop of the city’s skyline. Figure III.1B provides an aerial
view of a portion of the VAMC campus, illustrating areas of new and
future development.




3
 API and VA are currently negotiating a proposal to develop a biomedical research and development
facility and a hotel on remaining enhanced-use property.




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                                           Department of Veterans Affairs




Figure III.1: The Houston Regional Office Project




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                            Department of Veterans Affairs




The Cold Spring
Medical Facility
Project

Participants                Public: Department of Veterans Affairs.
                                                                 4
                            Private: State of Indiana.

The Form of Public-Public   Officials from VA and the state of Indiana signed an EUL that provided for
                            a 35-year lease of the Cold Spring Medical Facility to the state in return for
Cooperation                 a one-time direct payment of $200,000 to VA as well as a payment of $9.8
                            million that was placed in a VA EUL trust. Under the trust agreement, VA is
                            to use these funds to provide benefits for veterans residing in Indiana.
                            However, the Secretary of Veterans Affairs, at his discretion, may
                            designate the provision of veterans’ benefits without regard to residency.

Background                  In 1932, the federal government built the Cold Spring VA Medical Center in
                            the northwest section of Indianapolis. This facility is located on 30 acres,
                            the majority of which contain hospital facilities. In 1950, VA built a new
                            hospital facility approximately 1.5 miles from Cold Spring and converted
                            the old medical center into a veterans’ psychiatric facility. In 1995, VA
                            decided to close Cold Spring, given that the number of patients it served
                            was declining because of a trend toward outpatient rather than inpatient
                            care. Outpatients and any patients requiring hospitalization could be
                            accommodated at the new facility. An Indianapolis VAMC business plan
                            strongly supported consolidating the operations of both facilities. This
                            decision was made on the basis that consolidation on the site of the new
                            facility would eliminate surplus space and inpatient costs, resulting in
                            impressive cost savings from improved program/plant management.
                            However, according to VA asset management officials, under traditional
                            federal property management and disposal procedures, VA faced the
                            prospect of either maintaining the facilities at Cold Spring for limited VA
                            uses at costs that would adversely affect patient care or undertaking a
                            lengthy disposal process through the General Services Administration
                            (GSA), which they said could take 3 to 4 years to complete.



                            4
                             This partnership arrangement was a public-public partnership where VA entered into a long-term
                            lease with the state of Indiana instead of a private sector entity. As discussed in appendix I, we chose
                            this large-scale project because it was often mentioned by experts we surveyed, and it met all of our
                            other selection criteria.




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                        Department of Veterans Affairs




                        Through discussions with officials from the state of Indiana, VAMC was
                        able to market the potential re-use of Cold Spring by the state as a
                        replacement facility for a state psychiatric hospital that was located
                        adjacent to VAMC’s new facility. Using EUL authority, VA entered into
                        negotiations with Indiana officials in January 1996. On September 12, 1996,
                        these negotiations were concluded, and VA executed an EUL with the state
                        of Indiana, which leased 22.29 acres of the 30-acre Cold Spring facility. The
                        leased property includes the core hospital facilities, related facilities,
                        parking and associated fixtures, and equipment within such facilities.

Major Facilitating or   VA’s ability to use an EUL, which allows the agency to keep lease revenues
                        for appropriate VA uses, was a critical factor facilitating the creation of a
Constraining Factors    federal-state partnership in this project. Local VA officials told us that they
                        believed that the decision to create a partnership was also facilitated by
                        the fact that VA’s organizational culture strongly favors keeping, rather
                        than selling, existing properties. They said that this cultural bias against
                        the sale of VA properties was reinforced by the strong position of veterans
                        service organizations against selling VA properties. Finally, the partnership
                        between VA and Indiana was facilitated by the economic and physical
                        condition of Indiana’s existing mental hospital. According to the
                        superintendent of the Indiana facility, the state badly needed an updated
                        facility but did not have sufficient money to refurbish the old hospital or
                        build a new one. The partnership presented a cost-effective alternative for
                        the state of Indiana and thus an eager partner.

                        VA medical center managers told us that they encountered resistance
                        toward the partnership from several places. These officials told us that
                        they initially met with concerns from their own regional and headquarters
                        officials, mainly because partnerships differ from the traditional way in
                        which the federal government manages and disposes of excess property.
                        Additional constraints to the partnership came from the fears and
                        apprehensions of personnel working at the medical center. Both the
                        Director and the Facility Planner of the regional office told us that they
                        faced strong opposition from employees who did not want to move out of
                        the underutilized Cold Spring facility.

                        Another, less serious constraint mentioned by senior managers in VA’s
                        regional office concerned the timetable for congressional review. Under
                        EUL legislation, no final action can be taken on a proposed partnership for
                        a period of 60 days, during which Congress must be in session. This
                        notification is intended to allow Congress sufficient time to review and
                        comment on the proposal. According to VA staff, EUL private sector
                        partners sometimes grow impatient with this requirement because it can



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                   Department of Veterans Affairs




                   slow down the approval process. Depending on the congressional
                   calendar, this 60 day time period can actually stretch into several months.

Reported Results   As fair consideration for the EUL of the Cold Spring Medical Facility,
                   Indiana provided VA with both monetary and “in-kind” consideration
                   with an estimated total value of $15.64 million. Of this amount, VA
                   received an up-front rental payment of $200,000. An additional $9.8
                   million was placed by the state into a trust to fund the acquisition of
                   construction, facilities, space, and other services for veterans in the
                   state of Indiana as determined by VA. The remainder represented
                   services the state would provide to VAMC, including parking,
                   maintenance of grounds, use of facilities, and utility payments.
                   VA officials said they also expected to realize substantial operational
                   savings from reduced overhead and maintenance costs. For example,
                   according to business planning documents developed by Indianapolis’
                   VAMC facility planner, VA expects to realize annual savings of $5 million
                   by avoiding recurring maintenance and operating costs. VA also
                   anticipates saving more than $11.7 million in unspent capital funds. Under
                   the terms of the EUL, VA is no longer responsible for construction at Cold
                   Spring that it would otherwise have had to undertake if the property had
                   not been leased to the state.

                   Indiana reported it received the benefit of the facility and saved between
                   $10 and $15 million in either significant renovation or construction of a
                   new addition to the facility where the psychiatric patients would have been
                   otherwise located. This project also received a Hammer Award from the
                   Vice President’s National Performance Review.

                   Figure III.2 provides an aerial view of the 30-acre Cold Spring Medical
                   Facility in Indianapolis.




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                                             Department of Veterans Affairs




Figure III.2: The Cold Spring Medical Facility Project




                                             Page 46        GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix IV

United States Postal Service


                        Before the mid-1970s, large postal mail processing facilities were often
Overview of United      built as close as possible to the center of urban areas and on rail lines that
States Postal Service   were used to transport much of the mail. As mail transportation shifted to
Projects                airplanes and trucks, distribution centers were gradually transferred to
                        suburban areas, leaving the urban facilities underutilized. Beginning in the
                        late 1970s, the United States Postal Service began to consider how to
                        handle its excess and often obsolete real property assets, including these
                        distribution centers. Its first efforts were aimed at lowering real estate
                        operating expenses through the sale of excess properties.

                        In 1982, the Postal Service began to seriously explore the degree to which
                        its excess property could be made to generate income and formed a real
                        property asset development division, which was responsible for disposing
                        of surplus real estate in the best interest of the Postal Service. Postal
                        Service officials came to believe that partnering with the private sector
                        was essential to develop and manage projects that would generate income
                        from excess Postal Service property. Postal Service facility officials said
                        their knowledge of real estate development and management was limited
                        to satisfying Postal Service requirements. They also said that they lacked
                        the expertise to plan for buildings that would house private sector
                        occupants, raise private funds for development, and manage space to
                        private sector standards and requirements.

                        We looked at two public-private partnerships entered into by the Postal
                        Service involving the Grand Central Station Post Office in New York City
                        and Rincon Center in San Francisco. The former Postal Service Asset
                        Manager responsible for these projects told us that although the Postal
                        Service used requests for proposals (RFP) to identify a private sector
                        partner, it soon became obvious that the most important factor in the
                        developers’ submissions was not the original proposal. Instead, during the
                        selection process the Postal Service asset managers placed a large amount
                        of emphasis on the qualifications of the developer—his or her track record
                        for making sound, low-risk, business deals. Consequently, the Postal
                        Service’s solicitation process evolved; and, according to this asset
                        manager, the Postal Service generally issues a request for qualifications
                        (RFQ) rather than a RFP for public-private partnerships. In the RFQ, the
                        Postal Service describes the properties and the needs of the Postal Service
                        and invites interested parties to submit information on their prior
                        experience and qualifications for developing such a property.

                        According to the Postal Service, most of its partnership projects have used
                        ground leases as the contracting arrangement (where the Postal Service is
                        the lessor and the developer is the ground lessee). The leases are



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                             United States Postal Service




                             structured so that the private partner benefits only if the deal benefits the
                             Postal Service. The Postal Service’s contribution is the underutilized land
                             and buildings, and the private sector’s contribution is financing and
                             business know-how.


The Grand Central
Station Project
Participants                 Public: The United States Postal Service, an independent establishment of
                             the executive branch of the United States government.

                             Private: The 450 Lexington Venture (Hines), a joint venture consisting of
                             Hines Interests, Sterling Equities, Royal Dutch Shell Pension Fund, and
                             Prudential Insurance Company that built, financed, and operates the
                             project.

The Form of Public-Private   The partnership between the Postal Service and Hines was a
                             lease/develop/operate arrangement. According to Postal Service officials,
Cooperation                  the property was developed under a lease of the air rights from the Postal
                             Service that enabled Hines to build a 32-story tower above the existing 5-
                             or 6-story post office. Under the terms of the lease, Hines agreed to obtain
                             final zoning approvals and build and operate the tower. The lease holds
                             Hines responsible for maintaining both the tower and the exterior of the
                             original post office building. The lease also requires that Hines ensure the
                             compatibility of the new building with its neighbors in terms of form, bulk,
                             use, design, facade, treatment, and fenestration. At the end of the 99-year
                             lease term, the building reverts to Postal Service control.

                             According to Postal Service officials, the ground lease supersedes any
                             other debt, so there is little risk to the Postal Service associated with the
                             financing. If all the tenants move out and the loan is defaulted, the lender
                             could foreclose but would be obligated to pay the ground rent. They said if
                             the lender did not pay the ground rent, the Postal Service would take the
                             building and either re-lease it or use it.

Background                   The Grand Central Station Postal Facility, originally built and owned by
                             the New York Central Railroad (NYCRR), was constructed in 1906 over
                             NYCRR tracks. In 1936, NYCRR sold the structure to the U.S. government,
                             and the government later transferred it to the Postal Service. The location
                             of this property, 450 Lexington Avenue, is in the heart of New York City’s
                             midtown “high-rent” commercial district. According to Postal Service
                             officials, the facility was once the largest post office in the country in



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                        United States Postal Service




                        terms of revenue and deliveries. However, by the 1980s, it had become
                        functionally obsolete and was significantly larger than necessary for a
                        modern mechanized postal operation.

                        In considering how to dispose of this facility, the Postal Service considered
                        several options. These options included renovating the existing space and
                        renting a portion of it, conducting an outright sale, or renovating the
                        existing space and entering into a long-term lease of the air rights above
                        the building. According to the former Postal Service asset manager for this
                        project, the Postal Service needed less than 170,000 square feet of the
                        approximately 370,000-square-foot facility. Ultimately, Postal Service
                        officials concluded that the most profitable course of action was to partner
                        with a private sector asset management company to redevelop the Postal
                        Service property to maximize its revenue potential.

                        In 1984, the Postal Service issued an RFP and received nine responses
                        from qualified developers. The Postal Service selected Hines from this field
                        and subsequently entered into a 99-year ground lease with Hines for the
                        redevelopment of the property. Following 2 years of planning, design, and
                        the temporary relocation of postal operations from the building, Hines
                        demolished and rebuilt the core of the original building and added an
                        880,000-square-foot, 32-story office tower. Hines has sole responsibility for
                        financing the project and for leasing the office space to a variety of
                        commercial tenants.

Major Facilitating or   Several factors facilitated the formation of a public-private partnership in
                        this case. Perhaps the most fundamental of these is the Postal
Constraining Factors    Reorganization Act of 1970. This act generally directs the Postal Service to
                        operate in a businesslike manner and authorizes the Postal Service to
                        manage its properties using businesslike arrangements. By vastly reducing
                        the amount received by the Postal Service in the annual federal
                        appropriations process, the act made the Postal Service’s ability to
                        generate its own revenues critical to its survival.

                        Another factor cited by Postal Service officials as significant in bringing
                        about the partnership concerned the arrival of new leadership in the Postal
                        Service’s asset management office. This change of leadership facilitated
                        the exploration of partnerships and other innovative approaches to the
                        organization’s asset management. A third facilitating factor mentioned by
                        Postal Service officials was the use of extremely detailed business plans
                        and leasing arrangements by the Postal Service and Hines. Finally, the fact
                        that Hines was able to adapt private sector practices to accommodate
                        federal contracts and procedures was also mentioned by Postal Service



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                   United States Postal Service




                   and Hines officials as playing a facilitating role in the formation of their
                   partnership with the Postal Service.

                   In our interviews with senior Postal Service asset management officials
                   and representatives of Hines, there was no mention of significant
                   constraining factors that hindered the formation of a public-private
                   partnership in this case.

Reported Results   According to the lease, for the first 13 years (until June 2002), the ground
                   rent is about $6 million per year for the Postal Service. In June 2002 ground
                   rent for the building jumps to $10.4 million for the next 5 years, with
                   additional increases built into the lease over the remaining life of the lease.
                   In addition to receiving rent for the air rights above the Grand Central Post
                   Office, the Postal Service receives approximately $6 million a year from
                   Hines in what is known as Tax Equivalency Rent. This charge reflects the
                   amount that Hines would have had to pay to the City of New York if the
                   site did not have a federal exemption from taxation. The Postal Service has
                   the potential of realizing even larger rents from the site because the lease
                   contains a “percentage rent” provision. Under this provision, additional
                   rent is due to the Postal Service if the net operating income generated by
                   the site reaches a certain threshold. In addition, the Postal Service remains
                   in possession of a 170,000-square-foot facility on the site; and, according to
                   Postal Service officials, the historical characteristics of the building have
                   been preserved.

                   For its part, Hines reports that the building is currently 100-percent
                   occupied. Hines leases office space in the building to about 25 tenants,
                   including law firms, financial service companies, and international trading
                   corporations. According to a senior Hines official, although the business
                   leasing market in New York City has been in flux over the last 8 years, it
                   has been particularly strong over the last 2 years.

                   Figure IV.1 shows the Grand Central Post Office building and tower in New
                   York City as it looks today. The lower right bracket identifies the original
                   1906 building, and the upper bracket identifies the 32-story addition built
                   in 1992.




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                                         United States Postal Service




Figure IV.1: The Grand Central Station
Post Office Project




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                             United States Postal Service




The Rincon Center
Project

Participants                 Public: The United States Postal Service, an independent establishment of
                             the executive branch of the United States government.

                             Private: Rincon Center Associates (RCA), a general partnership between
                             Pacific Gateway Properties (about 22 percent interest) and Perini
                             Corporation (about 78 percent interest), which is the managing general
                             partner.

The Form of Public-Private   The partnership between the Postal Service and RCA was a
                             lease/develop/operate arrangement. According to Postal Service officials,
Partnership                  the property was developed by RCA subject to a ground lease of the air
                             rights from the Postal Service for a period of 65 years. Under the terms of
                             the lease, RCA agreed to build a variety of structures above and around the
                             original Rincon Annex building. These included 240,000 square feet of
                             commercial space on the parking lot adjacent to the Rincon Annex
                             building and two towers containing 260,000 square feet of residential space
                             constructed over this commercial base. In addition, RCA agreed to
                             renovate the existing Rincon Annex building into office and retail space
                             and build a 72,000-square-foot rooftop addition to the annex.

                             Under the terms of the agreement, RCA was required to preserve both the
                             exterior of the original Rincon Annex as well as the historic murals found
                             within. RCA was also responsible for operating and maintaining all the
                             properties on the site as well as setting aside a portion of the housing units
                             for use by low- to moderate-income families. At the end of the 65-year
                             lease term the building reverts to Postal Service ownership.

Background                   In 1940, the federal government completed a postal facility, the Rincon
                             Annex, in the “South of Market” area of San Francisco. Market Street has
                             long been the boundary in downtown San Francisco between premium
                             developments and medium to lower level real estate. Occupying almost
                             half of a city block, this large facility was built on 3,800 wooden pilings
                             sunk in the mud of San Francisco Bay and is situated on a 3.5-acre site.

                             In 1979, the Postal Service announced that it planned to vacate and sell
                             most of the facility, as the operation had become inefficient. In 1979, the
                             National Park Service placed the building and the murals located in its
                             lobby on the National Register of Historic Places, thereby protecting the



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                        Appendix IV
                        United States Postal Service




                        building from destruction. After this happened, the Postal Service changed
                        its plan and considered developing the site instead. In 1985, the Postal
                        Service issued an RFP for renovation of the existing building plus
                        construction of new space, which was to be leased out to commercial and
                        residential tenants. The Postal Service required that all competitors submit
                        bids that included the following core elements: a central atrium or
                        shopping core, the division of the new construction into two buildings or
                        towers, compliance with historic preservation requirements, and provision
                        of affordable housing. The Postal Service received seven proposals and
                        selected RCA as the developer in 1985.

Major Facilitating or   The Postal Reorganization Act of 1970 was one of the major factors leading
                        to the public-private partnership between the Postal Service and RCA.
Constraining Factors    Because the act allows the Postal Service to operate in a businesslike
                        manner and authorizes the Postal Service to manage its properties using
                        businesslike arrangements, a partnership was possible.

                        In formulating their partnership, officials from both RCA and the Postal
                        Service had to overcome several constraints, including local requirements
                        to provide low- and moderate-income housing, and the need to fulfill the
                        city’s architectural requirements while preserving its historic character.
                        These requirements constrained the construction options open to both
                        RCA and the Postal Service and complicated the process of agreeing on
                        the partnership.

Reported Results        The rental of the Rincon property has proven to be lucrative for the Postal
                        Service. According to Postal Service officials, the ground rent is currently
                        about $4.5 million per year, an amount that has increased about 60 percent
                        since the start of the lease in 1985. As part of the partnership arrangement,
                        the Postal Service also retains a 14,000-square-foot facility on the site for a
                        post office. Despite the considerable amount of development that has
                        taken place, the historical characteristics of both the original Rincon
                        Annex post office and the murals have been preserved.

                        According to the general manager responsible for the leasing and
                        management of Rincon Center, the property was 100-percent leased in
                        September 1998. In addition to its 320 residential apartments and 38 retail
                        and service businesses, Rincon Center has 8 corporate tenants, which
                        include an international insurance company, a large utility company, and
                        law firms. According to this manager, the leasing market in San Francisco
                        has been the best it has been in 15 years. However, due to cost overruns
                        incurred during the construction of the project and a soft real estate




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Appendix IV
United States Postal Service




leasing market during Rincon Center’s first several years of operation, RCA
officials said the property has been only moderately successful.

In December 1998, Postal Service officials from the Office of Facilities and
the Office of the General Counsel told us that the Postal Service is in the
process of selling the bulk of the Rincon Project to the private sector
developer. These officials said that this transaction is likely to close in the
first quarter of 1999.

Figure IV.2A provides a view of downtown San Francisco with the
redeveloped Rincon Center set off by white brackets. Figure IV.2B shows
the interior of the Rincon Center.




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                                         Appendix IV
                                         United States Postal Service




Figure IV.2: The Rincon Center Project




                                         Page 55         GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Appendix V

Major Contributors to This Report



General Government       Donald L. Bumgardner, Project Manager, (202) 512-8676
Division                 Peter J. Del Toro, Evaluator
                         Anthony J. Wysocki, Evaluator

Staff Acknowledgements   Anthony Assia, Ruth Kassinger, and Kiki Theodoropoulos, GGD, provided
                         assistance in reviewing report drafts and in communicating this report’s
                         message. Kim Wheeler, GGD, provided graphics support. Alan Belkin,
                         Office of General Counsel, reviewed and provided assistance on the
                         glossary terms used in this report.




                         Page 56      GAO/GGD-99-23 Key Elements of Federal Building and Facility Partnerships
Glossary



Types of Public-Private
Partnerships
Discussed in This
Report
Contract Services
Operations and Maintenance     A public partner (federal, state, or local government agency or authority)
                               contracts with a private partner to provide and/or maintain a specific
                               service. Examples of the type of service provided include lab testing,
                               auditing, and the collecting of fines and penalties. Under the private
                               operation and maintenance option, the public partner retains ownership
                               and overall management of the public facility or system.

Operations, Maintenance, and   A public partner (federal, state, or local government agency or authority)
Management                     contracts with a private partner to operate, maintain, and manage a facility
                               or system providing a service. Under this contract option, the public
                               partner retains ownership of the public facility or system, but the private
                               party may invest its own capital in the facility or system. Any private
                               investment is carefully calculated in relation to its contributions to
                               operational efficiencies and savings over the term of the contract.
                               Generally, the longer the contract term, the greater the opportunity for
                               increased private investment because there is more time available in which
                               to recoup any investment and earn a reasonable return. Many local
                               governments use this contractual partnership to provide wastewater
                               treatment services.

Design/Build/Operate (DBO)     In a DBO project, a single contract is awarded for the design, construction,
                               and operation of a capital improvement. Title to the facility remains with
                               the public sector unless the project is a design/build/operate/transfer or
                               design/build/own/operate project. The DBO method of contracting is
                               contrary to the separated and sequential approach ordinarily used in the
                               United States by both the public and private sectors. This approach
                               involves one contract for design with an architect or engineer, followed by
                               a different contract with a builder for project construction, followed by the
                               owner’s taking over the project and operating it. A simple design-build
                               approach creates a single point of responsibility for design and
                               construction and can speed project completion by facilitating the overlap
                               of the design and construction phases of the project. On a public project,
                               the operations phase is normally handled by the public sector or awarded
                               to the private sector under a separate operations and maintenance
                               agreement. Combining all three phases into a DBO approach maintains the



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                                 Glossary




                                 continuity of private sector involvement and can facilitate private sector
                                 financing of public projects supported by user fees generated during the
                                 operations phase.

Enhanced-Use Leasing (EUL)       An EUL is an “asset management” program in the Department of Veterans
                                 Affairs (VA) that can include a variety of different leasing arrangements
                                 (e.g., lease/develop/operate, build/develop/operate). EULs enable VA to
                                 long-term lease VA-controlled property to the private sector or other
                                 public entities for non-VA uses in return for receiving fair consideration
                                 (monetary or in-kind) that enhances VA’s mission or programs. (See 38
                                 U.S.C. § 8161, et seq.)

Lease/Develop/Operate (LDO) or   Under these partnership arrangements, the private party leases or buys an
                                 existing facility from a public agency; invests its own capital to renovate,
Build/Develop/Operate (BDO)      modernize, and/or expand the facility; and then operates it under a
                                 contract with the public agency. A number of different types of municipal
                                 transit facilities have been leased and developed under LDO and BDO
                                 arrangements.

Lease/Purchase                   A lease/purchase is an installment-purchase contract. Under this model,
                                 the private sector finances and builds a new facility, which it then leases to
                                 a public agency. The public agency makes scheduled lease payments to the
                                 private party. The public agency accrues equity in the facility with each
                                 payment. At the end of the lease term, the public agency owns the facility
                                 or purchases it at the cost of any remaining unpaid balance in the lease.
                                 Under this arrangement, the facility may be operated by either the public
                                 agency or the private developer during the term of the lease.
                                 Lease/purchase arrangements have been used by the General Services
                                 Administration for building federal office buildings and by a number of
                                 states to build prisons and other correctional facilities.


Other Terms Related to
Public-Private
Partnerships

Air Rights                       Air rights provide the right to use, control, or occupy the space above a
                                 designated property. Air rights can be leased, sold, or donated to another
                                 party.

Anchor Tenant                    An anchor tenant is the major tenant that attracts or generates traffic
                                 within a commercial operation. Anchor tenants are strategically placed to



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                         Glossary




                         maximize business for all tenants. The type of anchor tenant depends on
                         the type of commercial activity.

Asset Sale               An asset sale is the transfer of ownership of government assets to the
                         private sector. Usually legislation or an Executive Order defines the
                         transfer price distribution and recoupment priorities needed to meet the
                         disposition requirements of federal administrative grant requirements. In
                         general, the government has no role in the financial support, management,
                         or oversight of the asset after it is sold. However, if the asset is sold to a
                         company in an industry with monopolistic characteristics, the government
                         may regulate certain aspects of the business, such as utility rates.

Cooperative Agreements   A cooperative agreement as set forth in 31 U.S.C. 6305 is the legal
                         instrument an executive agency uses to reflect a relationship between the
                         United States Government and a state, a local government, or other
                         recipient when (1) the principal purpose of the relationship is to transfer a
                         thing of value to the state, local government, or other recipient to carry out
                         a public purpose of support or stimulation authorized by law of the United
                         States and (2) substantial involvement is expected between the executive
                         agency and the state, local government, or other recipient in carrying out
                         the activity contemplated in the agreement.

Equity                   Equity is the difference between the fair market value of the property and
                         the amount still owed on its mortgage.

Fee Simple               A fee simple is an absolute and unqualified estate providing the owner with
                         all incidence of ownership, including the unconditional power of
                         disposition.

Franchising              Under the franchising of external services, the government grants a
                         concession or privilege to a private sector entity to conduct business in a
                         particular market or geographical area—for example, operating
                         concession stands, hotels, and other services provided in certain national
                         parks. The government may regulate the service level or price, but users of
                         the service pay the provider directly.

Ground Lease             A ground lease is a lease for the use and occupancy of land only, usually
                         for a long period of time. It is also called a land lease.

Lease                    A lease is a written agreement between the property owner and a tenant
                         that stipulates the conditions under which the tenant may possess the real
                         estate for a specified period of time and rent.




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                                   Glossary




Operating Lease                    An operating lease is a type of lease, normally involving equipment,
                                   whereby the contract is written for considerably less than the life of the
                                   equipment and the lessor handles all maintenance and servicing. Also
                                   called service leases, operating leases are the opposite of capital leases,
                                   whereby the lessee acquires essentially all the economic benefits and risks
                                   of ownership.

Partnership                        A partnership is a legal relationship existing between two or more entities
                                   contractually associated as joint principals in a business.

Public-Private Partnership         Under a public-private partnership, sometimes referred to as a public-
                                   private venture, a contractual arrangement is formed between public and
                                   private sector partners. These arrangements typically involve a
                                   government agency contracting with a private partner to renovate,
                                   construct, operate, maintain, and/or manage a facility or system in part, or
                                   in whole, that provides a public service. Under these arrangements, the
                                   agency may retain ownership of the public facility or system, but the
                                   private party generally invests its own capital to design and develop the
                                   properties. Typically, each partner shares in income resulting from the
                                   partnership. Such a venture, although a contractual arrangement, differs
                                   from typical service contracting in that the private sector partner usually
                                   makes a substantial cash, at-risk, equity investment in the project, and the
                                   public sector gains access to new revenue or service delivery capacity
                                   without having to pay the private sector partner.

Request for Proposals (RFP)        An RFP is an announcement, often by a government agency, of a
                                   willingness to consider proposals for the performance of a specified
                                   project or program component. A request for proposals is often issued
                                   when proposals for a specific research project are being sought.

Request for Qualifications (RFQ)   An RFQ is a procurement tool routinely used by state and local
                                   governments and the private sector to select partners in major systems
                                   acquisitions, mainly those involving real estate development transactions.
                                   This approach differs from the traditional request for proposals approach
                                   in that it places a lot of emphasis on the actual qualifications of the
                                   potential contractor—his or her track record—rather than how well the
                                   potential contractor responds to detailed project specifications and
                                   requirements.

Sublease                           A sublease is an arrangement whereby a lessee leases the property to a
                                   different end user while the lessor maintains ownership. Under such an
                                   agreement the lessee retains all of its obligations under the lease.




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