    Federal Real Property: Executive and Legislative Actions Needed
    to Address Long-standing and Complex Problems (05-JUN-03,
    GAO-03-839T).

    Long-standing problems with excess and underutilized real
    property, deteriorating facilities, unreliable real property
    data, and costly space challenges are shared by several agencies.
    These factors have multibillion-dollar cost implications and can
    seriously jeopardize agencies' missions. Federal agencies face
    many challenges securing real property due to the threat of
    terrorism. This testimony discusses long-standing, complex
    problems in the federal real property area and what actions are
    needed to address them.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-03-839T
        ACCNO:   A07069
      TITLE:     Federal Real Property: Executive and Legislative Actions
    Needed to Address Long-standing and Complex Problems
         DATE:   06/05/2003
      SUBJECT:   Federal property
    	     Federal property management
    	     Financial management
    	     Internal controls
    	     Real property
    	     Strategic planning

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    GAO-03-839T

    Testimony Before the Committee on Government Reform, House of
    Representatives

    United States General Accounting Office

    GAO For Release on Delivery Expected at 10: 00 a. m. EDT June 5, 2003
    FEDERAL REAL

    PROPERTY Executive and Legislative Actions Needed to Address Long-
    standing and Complex Problems

    Statement of Bernard L. Ungar Director, Physical Infrastructure Issues

    GAO- 03- 839T

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

    Resolving these problems will require high- level attention and effective
    leadership by both Congress and the administration. Also, because of the
    breadth and complexity of the issues, the long- standing nature of the
    problems, and the intense debate that will likely ensue, current
    structures and processes may not be adequate to address the problems.
    Thus, as we have reported, there is a need for a comprehensive, integrated
    transformation strategy for real property that will focus on some of the
    underlying causes that contribute to these problems, such as competing
    stakeholder interests in real property decisions; various legal and
    budgetrelated disincentives to businesslike outcomes; inadequate capital
    planning and the lack of governmentwide focus on real property issues. It
    is equally important that Congress and the administration work together to
    develop

    and enact needed reform legislation to give real property- holding
    agencies the tools they need to achieve better outcomes. This would also
    foster a more businesslike real property environment and provide for
    greater accountability for real property stewardship. Long- standing
    problems with

    excess and underutilized real property, deteriorating facilities,
    unreliable real property data, and costly space challenges are shared by
    several agencies. These factors

    have multibillion- dollar cost implications and can seriously jeopardize
    agencies* missions. Federal agencies face many challenges securing real
    property

    due to the threat of terrorism. This testimony discusses long- standing,
    complex problems in the federal real property area and what actions

    are needed to address them. This testimony discusses recommendations that
    we have previously made in GAO reports. Generally, there is a need for a
    comprehensive and integrated real property transformation strategy

    that could identify how best to realign federal real property and dispose
    of unneeded assets; address significant real property repair and
    restoration needs; develop reliable, useful real

    property data; resolve the problem of heavy reliance on costly leasing;
    and minimize the impact of terrorism on real property.

    An independent commission or governmentwide task force may be needed to
    develop this strategy and legislative actions are needed to provide
    agencies with tools* such as retaining a portion of disposal proceeds* to
    help them address the problems. www. gao. gov/ cgi- bin/ getrpt? GAO- 03-
    839T. To view the full product, including the scope

    and methodology, click on the link above. For more information, contact
    Bernard Ungar at (202) 512- 4232 or ungarb@ gao. gov. Highlights of GAO-
    03- 839T, a testimony

    before the Committee on Government Reform, House of Representatives June
    5, 2003

    FEDERAL REAL PROPERTY

    Executive and Legislative Actions Needed to Address Long- standing and
    Complex Problems

    The Vacant L. Mendel Rivers Federal Building, Charleston, S. C. Source:
    Ernst and Young.

    The U. S. Patent and Trademark Office (PTO) Construction Project in
    Alexandria, VA (February 2003) Source: PTO.

    Page 1 GAO- 03- 839T

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

    needs to be done to address them. Summary Over 30 agencies control
    hundreds of thousands of real property assets

    worldwide, including facilities and land. These assets are worth hundreds
    of billions of dollars. Unfortunately, much of this vast, valuable
    portfolio reflects an infrastructure based on the business model and
    technological environment of the 1950s. Many of the assets are no longer
    effectively

    aligned with, or responsive to, agencies* changing missions and are
    therefore no longer needed. Further, many assets are in an alarming state
    of deterioration; agencies estimate that restoration and repair needs are
    in the tens of billions of dollars. Compounding these problems are the
    lack of reliable governmentwide data for strategic asset management, a
    heavy reliance on costly leasing instead of ownership to meet new space
    needs,

    1 U. S. General Accounting Office, High- Risk Series: Federal Real
    Property, GAO- 03- 122 (Washington, D. C.; Jan. 2003); the report on real
    property is a companion to GAO*s 2003 high- risk update, U. S. General
    Accounting Office, High- Risk Series: An Update, GAO- 03- 119 (Washington,
    D. C.: Jan. 2003); these reports are intended to help the new Congress
    focus its attention on the most important issues and challenges facing the
    federal government. 2 Under a public- private partnership, a contractual
    arrangement is formed between public

    and private sector partners that can include a variety of activities that
    involve the private sector in the development, financing, ownership, and
    operation of a public facility or service. In the case of real property,
    the federal government typically would contribute the property and a
    private sector entity contributes financial capital and borrowing ability
    to redevelop or renovate the property.

    Page 2 GAO- 03- 839T

    and the cost and challenge of protecting these assets against potential
    terrorism.

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

    The federal real property environment has many stakeholders and involves a
    vast and diverse portfolio of assets that are used for a wide variety of
    missions. Real property is generally defined as facilities; land; and
    anything constructed on, growing on, or attached to land. The U. S.
    government*s fiscal year 2002 financial statements show an acquisition
    cost of more than $335 billion for real property assets held by the
    federal government on September 30, 2002. 3 In terms of facilities, the
    latest available governmentwide data from the General Services
    Administration (GSA) indicated that, as of September 30, 2002, the federal
    government owned and leased approximately 3.4 billion square feet of
    building floor area worldwide. 4 The Department of Defense (DOD), U. S.
    Postal Service (USPS), GSA, and the Department of Veterans Affairs (VA)
    hold the majority of the owned facility space.

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

    3 This value does not include stewardship assets, which are not reported
    on the government*s balance sheet. These assets include wilderness areas,
    scenic river systems, monuments, defense facilities (including military
    bases), and national defense assets. Also,

    real property data contained in the financial statements of the U. S.
    government have been problematic. As discussed in more detail later, we
    were unable to express an opinion on the U. S. government*s consolidated
    financial statements for fiscal year 2002. 4 U. S. General Services
    Administration, Federal Real Property Profile, as of September 30, 2002
    (Washington, D. C.). The Federal Real Property Environment

    Page 3 GAO- 03- 839T

    and Administrative Services Act of 1949, as amended (Property Act), and
    the Public Buildings Act of 1959, as amended, are the laws that generally
    apply to real property held by federal agencies; and GSA is responsible
    for

    the acts* implementation. 5 Agencies are subject to these acts, unless
    they are specifically exempted from them, and some agencies may also have
    their own statutory authority related to real property. Agencies must also

    comply with numerous other laws related to real property. Despite
    significant changes in the size and mission needs of the federal
    government in recent years, the federal portfolio of real property assets
    in many ways still largely reflects the business model and technological
    environment of the 1950s. In the last decade alone, the federal government
    has reduced its workforce by several hundred thousand personnel, and
    several federal agencies have had major mission changes. With these

    personnel reductions and mission changes, the need for existing space,
    including general- purpose office space, has declined overall and
    necessitated the need for different kinds of space. At the same time,
    technological advances have changed workplace needs, and many of the older
    buildings are not configured to accommodate new technologies. Furthermore,
    the advent of electronic government is starting to change how the public
    interacts with the federal government. These changes will have significant
    implications for the type and location of property needed

    in the 21st century. One reason the government has many unneeded assets is
    that some of the major real property- holding agencies have undergone
    significant mission shifts that have affected their real property needs.
    For example, after the Cold War, DOD*s force structure was reduced by 36
    percent. Despite four

    rounds of base closures, DOD projects that it still has considerably more
    property than it needs. The National Defense Authorization Act for Fiscal
    Year 2002, 6 which became law in December 2001, gave DOD the authority for
    another round of base realignments and military installation closures in
    2005. In the mid- 1990s, VA began shifting its role from being a
    traditional hospital- based provider of medical services to an integrated
    delivery system that emphasizes a full continuum of care with a
    significant

    5 For the Property Act, see 40 U. S. C. S: 101 et. seq.; the Property Act
    excludes certain types of property, such as public domain assets and land
    reserved or dedicated for national forest or national park purposes; for
    the Public Buildings Act, see 40 U. S. C. S: 3301 et. seq.

    6 P. L. 107- 107, 115 Stat. 1012, 1342 (2001). The Federal

    Government Has Many Assets It Does Not Need

    Page 4 GAO- 03- 839T

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

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

    confidence. It also can have a negative impact on local economies if the
    property is occupying a valuable location and is not used for other
    purposes, sold, or used in a public- private partnership.

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

    7 U. S. General Accounting Office, VA Health Care: Challenges Facing VA in
    Developing an Asset Realignment Process, GAO/ T- HEHS- 99- 173
    (Washington, D. C.: July 22, 1999). 8 DOE Office of the Inspector General,
    Disposition of the Department*s Excess Facilities,

    DOE/ IG- 0550 (Washington, D. C.: Apr. 3, 2002).

    Page 5 GAO- 03- 839T

    Restoration, repair, and maintenance backlogs in federal facilities are
    significant and reflect the federal government*s ineffective stewardship
    over its valuable and historic portfolio of real property assets. The
    state of deterioration is alarming because of the magnitude of the repair
    backlog*

    current estimates show that tens of billions of dollars will be needed to
    restore these assets and make them fully functional. This problem has
    accelerated in recent years because much of the federal portfolio was
    constructed over 50 years ago, and these assets are reaching the end of
    their useful lives. As with the problems related to underutilized or
    excess property, the challenges of addressing facility deterioration are
    also prevalent at major real property- holding agencies. For example:

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

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

     GSA has struggled over the years to meet the repair and alteration
    requirements identified at its buildings. In March 2000, we reported that
    GSA data showed that over half of GSA*s approximately 1,700 buildings
    needed repairs estimated at about $4 billion. 10 More recently, in August
    2002, we reported that this estimated backlog of identified repair and
    alteration needs was up to $5.7 billion. 11 9 U. S. Department of Defense,
    Report to Congress: Identification of the Requirements to

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

    Is in an Alarming State of Deterioration

    Page 6 GAO- 03- 839T

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

     In February 2003, we reported that although the amount of money the
    active forces have spent on facility maintenance had increased recently,
    DOD and service officials said that these amounts had not been sufficient
    to halt the deterioration of facilities. 12 Too little funding to
    adequately maintain facilities is also aggravated by DOD*s acknowledged
    retention of facilities in excess of its needs. Furthermore, there is a
    lack of consistency

    in the services* information on facility conditions, making it difficult
    for Congress, DOD, and the services to direct funds to facilities where
    they are most needed and to accurately gauge facility conditions. And,
    although DOD has a strategic plan for facilities, it lacks comprehensive
    information on the specific actions, time frames, responsibilities, and
    funding needed to reach its goals. In May 2003, we also reported on a
    similar problem with Guard and Reserve facilities. 13  In March 2003, we
    reported that many of the primary office buildings at

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

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

    alterations may escalate because of inflation and increases in the
    severity 12 U. S. General Accounting Office, Defense Infrastructure:
    Changes in Funding Priorities and Strategic Planning Needed to Improve the
    Condition of Military Facilities,

    GAO- 03- 274 (Washington, D. C.: Feb. 19, 2003). 13 U. S. General
    Accounting Office, Defense Infrastructure: Changes in Funding Priorities
    and Management Processes Needed to Improve Condition and Reduce Costs of
    Guard and Reserve Facilities, GAO- 03- 516 (Washington, D. C.: May15,
    2003).

    14 U. S. General Accounting Office, Overseas Presence: Conditions of
    Overseas Diplomatic Facilities, GAO- 03- 557T (Washington, D. C.: Mar. 20,
    2003).

    Page 7 GAO- 03- 839T

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

    Compounding the problems with excess and deteriorated property is the lack
    of reliable and useful real property data that are needed for strategic
    decisionmaking. GSA*s worldwide inventory database and related reports are
    the only central source of descriptive data on the makeup of the real
    property inventory, such as property address, square footage, acquisition

    date, and property type. However, in April 2002, we reported that the
    worldwide inventory contained data that were unreliable and of limited
    usefulness. 16 GSA agreed with our findings and has recently revamped this
    database and produced a new report on the federal inventory, as of
    September 30, 2002. 17 In addition to problems with the worldwide
    inventory, real property data

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

    2002 (Washington, D. C.). Key Decisionmakers Lack Reliable and

    Useful Data on Real Property Assets

    Page 8 GAO- 03- 839T

    problematic. 18 In April 2003, we reported that* for the sixth consecutive
    year* we were unable to express an opinion on the U. S. government*s
    consolidated financial statements for fiscal year 2002. 19 We have
    reported that because the government lacked complete and reliable
    information to support asset holdings* including real property* it could
    not satisfactorily determine that all assets were included in the
    financial statements, verify that certain reported assets actually
    existed, or substantiate the amounts at which they were valued. Aside from
    the problematic financial data, some of the major real property- holding
    agencies* including DOD, State, GSA, and Interior* have faced challenges
    in developing quality management data on their real property assets. The
    problems at these agencies are discussed in more detail in our high- risk

    report. As a general rule, building ownership options through construction
    or purchase are the least expensive ways to meet agencies* long- term
    requirements for space. Lease- purchases* where payments are spread out

    over time and ownership of the asset is eventually transferred to the
    government* are generally more expensive than purchase or construction but
    are generally less costly than using ordinary operating

    leases to meet long- term space needs. 20 However, over the last decade,
    we have reported that GSA* as the central leasing agent for most agencies*
    relies heavily on operating leases to meet new long- term needs because it
    lacks funds to pursue ownership. In 1999, we reported that for nine major

    operating lease acquisitions that GSA had proposed, construction would
    have been the least- cost option in eight cases and would have saved an
    estimated $126 million. Lease- purchase would have saved an estimated $107
    million, compared with operating leases but would have cost $19

    18 The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the
    Government Management Reform Act, required the annual preparation and
    audit of individual financial statements for the federal government*s 24
    major agencies. The Department of the Treasury was also required to
    compile consolidated financial statements for the U. S. government
    annually, which we audit.

    19 U. S. General Accounting Office, Fiscal Year 2002 U. S. Government
    Financial Statements: Sustained Leadership and Oversight Needed for
    Effective Implementation of Financial Management Reform, GAO- 03- 572T
    (Washington, D. C.: Apr. 8, 2003).

    20 In an operating lease, the government makes periodic lease payments
    over the specified length of the lease in exchange for the use of the
    property. Reliance on Costly

    Leasing

    Page 9 GAO- 03- 839T

    million more than construction. 21 A prime example of this problem was the
    Patent and Trademark Office*s long- term requirements in northern
    Virginia, where the cost of meeting this need with an operating lease was
    estimated to be $48 million more than construction and $38 million more

    than lease- purchase. In August 2001, we also reported that GSA reduced
    the term of a proposed 20- year lease for the Department of Transportation
    headquarters building to 15 years so that it could meet the definition of
    an operating lease. GSA*s fiscal year 1999 prospectus for constructing a
    new facility for this need showed the cost of construction was estimated
    to be $190 million less than an operating lease.

    Operating leases have become an attractive option in part because they
    generally look cheaper in any given year. Pursuant to the scoring rules
    adopted as a result of the Budget Enforcement Act of 1990, the budget
    authority to meet the government*s real property needs is to be scored*

    meaning recorded in the budget* in an amount equal to the government*s
    total legal commitment. For example, for lease- purchase arrangements, the
    net present value of the government*s legal obligations over the life of
    the lease contract is to be scored in the budget in the first year. For

    construction or purchase, the budget authority for the full construction
    costs or purchase price is to be scored in the first year. However, for
    many of the government*s operating leases* including GSA leases, which,
    according to GSA, account for over 70 percent of the government*s leasing
    expenditures and are self- insured in the event of cancellation* only the

    budget authority to cover the government*s commitment for an annual lease
    payment is required to be scored in the budget. 22 Given this, although
    operating leases are generally more costly over time, compared with other
    options, they add much less to a single year*s appropriation total than
    these other arrangements, making an operating lease a more attractive
    option from an annual budget perspective, particularly when funds for
    ownership are not available. Although the requirement for *up- front
    funding* permits disclosure of the full costs to which the government is
    being committed, the budget scorekeeping rules allow costly operating

    21 U. S. General Accounting Office, General Services Administration:
    Comparison of Space Acquisition Alternatives* Leasing to Lease- Purchase
    and Leasing to Construction,

    GAO/ GGD- 99- 49R (Washington, D. C.: Mar. 12, 1999). 22 According to the
    scoring rules (OMB Circular A- 11, app. B), in cases where the operating
    lease does not have a cancellation clause or is not paid for with federal
    funds that are selfinsuring,

    budget authority to cover the total costs expected over the life of the
    lease is to be scored in the first year of the lease.

    Page 10 GAO- 03- 839T

    leases to *look cheaper* in the short term and have encouraged an
    overreliance on them for satisfying long- term space needs.

    Decisionmakers have struggled with this matter since the scoring rules
    were established and the tendency for agencies to choose operating leases
    instead of ownership became apparent. We have suggested the alternative

    of scoring all operating leases up- front on the basis of the underlying
    time requirement for the space so that all options are treated equally. 23
    Although this could be a viable alternative, there would be implementation
    challenges if this were pursued, including the need to evaluate the
    validity of agencies* stated space requirements. Another option* which was
    recommended by the President*s Commission to Study Capital Budgeting in
    1999 and discussed by GAO 24 *would be to allow agencies to establish
    capital acquisition funds to pursue ownership where it is advantageous,
    from an economic perspective. To date, none of these options has been
    implemented, and debate continues among decisionmakers about what should
    be done. Finding a solution for this problem has been difficult; however,
    change is needed because the current practice of relying on costly leasing
    to meet long- term space needs results in excessive costs to taxpayers and
    does not reflect a sensible approach to capital asset management.

    Terrorism is a major threat to federally owned and leased real property
    assets, the civil servants and military personnel who work in them, and
    the public who visits them. This was evidenced by the 1995 Oklahoma City
    bombing; the 1998 embassy bombings in Africa; the September 11, 2001,
    attacks on the World Trade Center and Pentagon; and the anthrax attacks in
    the fall of 2001. Since the Oklahoma City bombing, the federal

    government has spent billions of dollars on security upgrades within the
    country and overseas. A study of federal facilities done by the Justice
    Department in 1995 resulted in minimum- security standards and an
    evaluation of security conditions in the government*s facilities. In
    October 1995, the President signed Executive Order 12977, which
    established an Interagency Security Committee (ISC) to enhance the quality
    and

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

    Terrorism Is an Overarching Concern

    Page 11 GAO- 03- 839T

    effectiveness of security in nonmilitary federal facilities. Since the
    attacks on the World Trade Center and the Pentagon, the focus on security
    in federal buildings has been heightened considerably. Real property-
    holding agencies have gone on high alert and are employing such measures
    as searching vehicles that enter federal facilities, restricting parking,
    and installing concrete barricades. As the government*s security efforts
    intensify, the government will be faced with important questions regarding
    the level of security needed to adequately protect federal facilities and
    how the security community should proceed. Furthermore, the 1995 Justice
    study placed an emphasis on increasing security where large numbers of
    personnel are located. However, a risk- based approach* which GSA is using
    for the federal buildings it controls* appears to be more desirable in
    light of this new round of threats. In September 2001, we reported that
    DOD uses a risk- based approach to reduce installation vulnerabilities,
    but this approach was applied primarily to installations with 300 or more
    personnel assigned on a daily basis. 25 We recommended that DOD improve
    this approach by ensuring all critical military facilities receive a
    periodic vulnerability assessment conducted by their higher headquarters
    regardless of the number of personnel assigned. DOD concurred and began
    taking action. Since 1996, we have produced more than 60 reports and
    testimonies on the

    federal government*s efforts to combat terrorism. Several of these reports
    have recommended that the federal government use risk management as an
    important element in developing a national strategy. 26 We have also
    reported extensively on the security problems and challenges at individual
    real property- holding agencies. Our high- risk report identifies the

    problems and challenges faced by State, DOD, Interior, GSA, USPS, and the
    ISC. More recently, we testified on security conditions of overseas
    diplomatic facilities. 27 We found that State has done much over the last
    4 years to improve physical security at overseas posts by, for example,
    constructing perimeter walls, anti- ram barriers, and access controls at
    many facilities. However, even with these improvements, most office
    facilities do not meet security standards. As a result, thousands of U. S.

    25 U. S. General Accounting Office, Combating Terrorism: Actions Needed to
    Improve DOD Antiterrorism Program Implementation and Management, GAO- 01-
    909 (Washington, D. C.: Sept. 19, 2001).

    26 U. S. General Accounting Office, Homeland Security: A Risk Management
    Approach Can Guide Preparedness Effort, GAO- 02- 208T (Washington, D. C.:
    Oct. 31, 2001). 27 GAO- 03- 557T.

    Page 12 GAO- 03- 839T

    government employees may be vulnerable to terrorist attacks. Furthermore,
    our work has shown that agency coordination is critical to addressing
    security challenges. In our February 2003 report on threats to selected
    agencies* critical computer and physical infrastructures, selected
    agencies identified challenges, including coordinating security efforts
    with GSA, which may often be responsible for protecting facilities that
    house critical assets. 28 We recommended that steps be taken to complete
    the identification and analysis of their critical assets and their
    dependencies, including setting milestones, developing plans to address
    vulnerabilities, and monitoring progress.

    In addition to the clear challenges agencies will continue to face in
    securing real property assets, the security issue has an impact on the
    other problems that we have discussed. To the extent that more funding
    will be needed to increase security, funding availability for repair and
    restoration, preparing excess property for disposal, and improving real
    property data systems may be further constrained. Furthermore, real
    property managers will have to dedicate significant staff time and other
    human capital resources to security issues and thus may have less time to
    manage other problems. Another broader effect is the impact that increased
    security will have on the public*s access to government offices and other
    assets. Debate arose in the months after September 11, 2001, and continues
    to this day on the challenge of providing the proper balance between
    public access and

    security. In November 2002, legislation was enacted establishing the
    Department of Homeland Security (DHS). 29 DHS was given responsibility to
    protect buildings, grounds, and property owned, occupied, or secured by
    the federal government that were previously under the Federal Protective
    Service, which was part of GSA. In addition, the Act provided DHS with
    authority to protect the buildings, grounds, and property of any other
    agency whose functions were transferred under the Act. In September 2002,
    we reported on the implications that the creation of DHS would have on
    ISC. We concluded that the need to address the ISC*s lack

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

    29 P. L. 107- 296; 116 Stat. 2135 (2002).

    Page 13 GAO- 03- 839T

    of progress in fulfilling its responsibilities should be taken into
    account in establishing this new department. 30 Although the federal
    government faces significant, long- standing problems in the real property
    area, it is important to give Congress, Office of Management and Budget
    (OMB), GSA, and the major real property- holding agencies credit for
    proposing several reform efforts and other initiatives in recent years.
    Legislative proposals in the 107th Congress (S. 1612 31 and

    H. R. 3947 32 ) were aimed at improving real property data, establishing
    senior real property managers at agencies, developing asset management
    principles, and identifying specific conditions under which GSA and other
    agencies can enter into real property partnerships with the private
    sector. In July 2001, we reported that public- private partnership
    authority could be an important management tool to address problems in
    deteriorating federal buildings, but that further study of this tool was
    needed. 33 Appendix II summarizes this report and discusses two examples
    of publicprivate

    partnership opportunities. Another initiative in the National Defense
    Authorization Act for fiscal year 2002 gave DOD the authority for another
    round of base realignment and military installation closures in 2005. DOD
    officials testified that these actions could result in recurring annual
    net savings of about $3 billion. Despite these and other initiatives
    agencies have undertaken and the sincerity with which the federal real
    property community has embraced the need for reform, the problems have
    persisted and have been exacerbated by several factors that will require
    high- level attention from Congress and the administration. These factors
    include competing stakeholder interests in real property decisions;
    various legal and budget- related disincentives to businesslike outcomes;
    the need for improved capital planning; and the lack of a strategic,
    governmentwide

    focus on federal real property issues. More specifically: 30 U. S. General
    Accounting Office, Building Security: Interagency Security Committee Has
    Had Limited Success in Fulfilling Its Responsibilities, GAO- 02- 1004
    (Washington, D. C.: Sept. 17, 2002).

    31 Title III of the Managerial Flexibility Act of 2001 (2001) is entitled
    Federal Property Asset Management Reforms. 32 The Federal Property Asset
    Management Reform Act of 2002 (2002).

    33 U. S. General Accounting Office, Public- Private Partnerships: Pilot
    Program Needed to Demonstrate the Actual Benefits of Using Partnerships,
    GAO- 01- 906 (Washington, D. C.: July 25, 2001). Various Efforts

    Initiated, but Real Property Problems Persist Due to Factors that Require
    HighLevel Attention

    Page 14 GAO- 03- 839T

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

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

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

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

    Greater Management Emphasis Needed to Increase the Services* Use of
    Expanded Leasing Authority, GAO- 02- 475 (Washington, D. C.: June 6,
    2002).

    Page 15 GAO- 03- 839T

    acquisitions can result in increased long- term costs. GAO, Congress, and
    OMB have identified the need to improve federal decisionmaking regarding
    capital investment. Our Executive Guide, 35 OMB*s Capital Programming
    Guide and its revisions to Circular A- 11 have attempted to provide
    guidance to agencies for making capital investment decisions. However, the
    guidance is not required to be used by agencies. Furthermore, agencies
    have not always developed overall goals and

    strategies for implementing capital investment decisions, nor has the
    federal government generally planned or budgeted for capital assets over
    the long term.

     Lack of a Strategic, Governmentwide Focus on Real Property Issues -
    Historically, there has not been a strategic, governmentwide focus on real
    property issues among decisionmakers. Although some efforts in recent

    years have attempted to address real property issues with some limited
    success, the problems have persisted and will continue to grow in
    magnitude unless they are adequately addressed from a governmentwide
    standpoint. Resolving the long- standing problems will require high- level
    attention and effective leadership by Congress and the administration and
    a governmentwide, strategic focus on real property issues. Also, it is
    important that key stakeholders develop an effective system to measure
    results. Having quality data would be critical to evaluate the progress of
    various reforms as they evolve. The magnitude of real property- related
    problems and the complexity of

    the underlying factors that cause them to persist put the federal
    government at significant risk in this area. Real property problems
    related to unneeded property and the need for realignment; deteriorating
    conditions, unreliable data, costly space, and security concerns have
    multibillion- dollar cost implications, and can seriously jeopardize
    mission accomplishment. Because of the breadth and complexity of the
    issues

    involved, the long- standing nature of the problems, and the intense
    debate about potential solutions that will likely ensue, current
    structures and processes may not be adequate to address the problems.
    Given this, we concluded in our high- risk report that a comprehensive and
    integrated transformation strategy for federal real property is needed,
    and that an independent commission or governmentwide task force may be
    needed to develop this strategy. Such a strategy, based on input from
    agencies, the

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

    Strategy Is Needed

    Page 16 GAO- 03- 839T

    private sector, and other interested groups, could comprehensively address
    these long- standing problems with specific proposals on how best to

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

    portfolio;  ensure that reliable governmentwide and agency- specific real
    property

    data* both financial and program related* are available for informed
    decisionmaking;

     resolve the problem of heavy reliance on costly leasing; and  consider
    the impact that the threat of terrorism will have on real property needs
    and challenges, including how to balance public access with safety. To be
    effective in addressing these problems, it would be important for the
    strategy to focus on

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

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

    recognizing that real property conditions affect the federal government*s
    ability to attract and retain high- performing individuals and the
    productivity and morale of employees;

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

    Page 17 GAO- 03- 839T

    by using an investment approach, evaluate results on an ongoing basis, and
    develop long- term capital plans; and

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

    The transformation strategy should also reflect the lessons learned and
    leading practices of organizations in the public and private sectors that
    have attempted to reform their real property practices. Over the past
    decade, leading organizations in both the public and private sectors have
    been recognizing the impact that real property decisions have on their
    overall success. Better managing real property assets in the current
    environment calls for a significant departure from the traditional way of
    doing business. Solutions should not only correct the long- standing
    problems we have identified but also be responsive to and supportive of
    agencies* changing missions, security concerns, and technological needs in
    the 21st century. If actions resulting from the transformation strategy

    comprehensively address the problems and are effectively implemented,
    agencies will be better positioned to recover asset values, reduce
    operating costs, improve facility conditions, enhance safety and security,
    and achieve mission effectiveness.

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

    Page 18 GAO- 03- 839T

    Without effective tools; top management accountability, leadership, and
    commitment; adequate funding; and an effective system to measure results,
    long- standing real property problems will continue and likely worsen.
    However, the overall risk to the government and taxpayers could be
    substantially reduced if an effective transformation strategy is developed
    and successfully implemented, reforms are made, and propertyholding
    agencies effectively implement current and planned initiatives. Since our
    high- risk report was issued, OMB has informed us that it is taking steps
    to address the federal government*s problems in the real property area.
    Specifically, it has formed a team within OMB to determine how to approach
    the resolution of these long- standing issues. To assist OMB with its
    efforts, we have agreed to meet regularly to discuss progress and are
    providing OMB with specific suggestions on the types of actions and
    results that could be helpful in justifying the removal of real property

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

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

    Acknowledgments

    Page 19 GAO- 03- 839T Three examples of vacant, highly visible federal
    properties are the L. Mendel Rivers Federal Building in Charleston, S. C.,
    St. Elizabeths Hospital

    in Washington, D. C.; and the former main post office in downtown Chicago.

    The Charleston building, held by the General Services Administration
    (GSA), is a 7- story, 100,000- square- foot office building on just over 2
    acres (see fig. 1). The building is contaminated with asbestos and has
    been unoccupied since it sustained damage in 1999, from Hurricane Floyd.
    In July 2001, we reported that although there was a weak federal demand
    for

    space where the property is located, the property is located in a highly
    desirable location and that there was a strong potential for private
    sector demand. 1 Although the building is vacant, in fiscal year 2002, GSA
    still incurred almost $28,000 in costs related to operations and
    maintenance, such as utilities and fire protection. GSA receives a minimal
    amount of revenue by occasionally renting out the parking lot. According
    to GSA, although it may be advantageous for the government to retain the
    property, there are limited options for redevelopment; and funding has not
    been made available. Furthermore, GSA lacks authority to pursue a
    publicprivate partnership to address the needs of the property.

    Given this situation, GSA has been in discussion with the city of
    Charleston officials for the last few years to exchange the Rivers
    building for a new building. Under the proposal, the city would construct
    a 27,000 square foot building for the federal government in the historic
    downtown business area adjacent to the existing federal building-
    courthouse in exchange for the Rivers building. GSA would also get use of
    60 parking spaces in a city parking garage. Although the new building
    would be

    smaller than the Rivers building, data from GSA have shown that the
    exchange sites are of comparable value because of the new building*s
    location in the central business district where land values are high.
    According to a GSA official, as of April 2003, GSA and the city of
    Charleston developed a memorandum of understanding (MOU) that outlines the
    conditions under which the L. Mendel Rivers Building would be exchanged.
    The MOU is currently with the city of Charleston and is expected to be
    signed shortly. Figure 1 shows the vacant Charleston building and its rear
    parking lot. The federal government owns the lot on the left side where
    the tent is located.

    1 GAO- 01- 906. Appendix I: Examples of Vacant Federal Property

    L. Mendel Rivers Federal Building, Charleston, S. C.

    Page 20 GAO- 03- 839T

    Figure 1: The Vacant L. Mendel Rivers Federal Building and Parking Lot in
    Charleston, S. C.

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

    Washington, D. C.

    Page 21 GAO- 03- 839T

    would need to be addressed in order for the property to be disposed of or
    transferred to another federal agency. 2 In the last year, GSA, the
    District of Columbia (the District), HHS, and

    various public interest groups have been working to resolve the situation
    at St. Elizabeths. In May 2002, the Urban Land Institute formed an
    advisory panel that reported on several options for redeveloping the site.
    3 The panel recommended that the federal government transfer the west
    campus to the District and that the District should identify a master
    developer for the site. The panel further recommended that the master
    developer consider redeveloping the site into four campus areas without
    changing the character of the surrounding neighborhoods and without
    displacing existing residents. The panel recommended preserving the
    historic buildings through adaptive use and sensitive addition of new
    buildings. In addition to the panel, an executive steering committee and a
    working

    group, each consisting of representation from the District, HHS, GSA, and
    public interest groups, have been established and HHS and GSA have
    proceeded with a number of actions to prepare the property for disposal.
    These include preparing the property for *mothballing,* which is work done
    to minimize further deterioration of the property while the disposal
    process proceeds; determining the extent of environmental remediation
    needed; and conducting community outreach. Figure 2 shows the vacant,
    boarded- up Center Building, which opened in 1855 and served as the main

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

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

    Page 22 GAO- 03- 839T

    Figure 2: The Vacant Center Building, St. Elizabeths Hospital, District of
    Columbia

    Note: Photograph taken in January 2001.

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

    Office

    Page 23 GAO- 03- 839T

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

    In addition to the holding costs USPS is incurring, a deteriorating
    fac,ade will add additional repairs costs to USPS*s annual budget.
    Furthermore, deterioration of the system that funnels train exhaust up
    through eight shafts to the roof of the building is a problem that will
    have to be

    addressed. The estimated cost of repair is about $10 million and is a
    condition of the sale. According to USPS, another factor, which bears on
    the cost of redevelopment, is that the State Historic Preservation Office
    wants to impose requirements on the redevelopment of the building.
    Currently, according to USPS, these requirements will add millions of
    dollars to the redevelopment costs and the buyer and USPS are reviewing
    them. USPS said that this project is challenging because of the large

    amount of space that needs to be developed. According to USPS, a
    breakthrough in current market conditions will have to be achieved,
    together with an agreement with the city before this project can move

    forward. Figure 3 shows downtown Chicago with the vacant post office
    building highlighted.

    Page 24 GAO- 03- 839T

    Figure 3: The Former Main Post Office in Downtown Chicago

    Page 25 GAO- 03- 839T

    Under a public- private partnership, a contractual arrangement is formed
    between public and private sector partners that can include a variety of
    activities that involve the private sector in the development, financing,
    ownership, and operation of a public facility or service. In the case of
    real

    property, the federal government typically would contribute the property
    and a private sector entity contributes financial capital and borrowing
    ability to redevelop or renovate the property. Public- private
    partnerships can be a viable option for redeveloping obsolete federal
    property if they provide the best economic value for the government,
    compared with other

    options, such as federal financing through appropriations or sale of the
    property. However, most agencies are precluded from entering into such
    arrangements. DOD, VA, and USPS, however, have this authority. Proposed
    real property reform legislation in the last Congress* S. 1612 and H. R.
    3947* would have allowed most agencies to enter into such partnerships. In
    May 2002, the Congressional Budget Office concluded that the partnerships,
    like lease- purchase arrangements, should be recorded up front in the
    budget. S. 1612 and H. R. 3947 were not enacted by the 107th Congress.

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

    Building. Since we profiled these properties in 2001, GSA officials said
    that they have been unable to pursue public- private partnerships for
    these

    1 GAO- 01- 906. 2 IRR is the present value interest rate received for an
    investment consisting of payments and income that occur at regular
    periods; IRR measures the return, expressed as an interest rate, that an
    investor would earn on an investment. Appendix II: Use of Public- Private
    Partnerships to Redevelop Federal Property

    Page 26 GAO- 03- 839T

    properties because GSA continues to lack authority to enter into such
    arrangements.

    The Andover Service Center was a strong candidate for a partnership in
    terms of strong federal demand, moderate private sector interest in
    development, and strong nonfederal demand for use of the property. The
    property is a 375,000 square foot, single story, highly secured building
    that is in need of capital repairs on 37 acres. At the time of our review,
    the IRS

    was leasing about 336,000 square feet in additional space in the area. GSA
    and IRS would like to consolidate IRS*s operations, and the property would
    be desirable for the city of Andover and local developers to develop. The
    redevelopment strategy involved a partnership to develop a small office
    park consisting of six, 5- acre pads. Under this plan, the project

    could progress as follows:  Year 1: Build a new 4- story, 700,000 square
    foot IRS facility and parking

    structure for current and expiring IRS leases; the complex would be at
    rear of site to allow for security and a phased development of the rest of
    the site.

     Year 2: IRS moves into the new facility and the old building is
    demolished; the partnership constructs another 250,000 square foot federal
    office building for non- IRS expiring leases.  Years 3 and 4: Partnership
    constructs two more 250,000 square foot federal

    office buildings for compatible agency and private sector occupancy. The
    analysis of this strategy projected a 14. 4 percent lifetime IRR for the
    private partner and a 9.4 percent lifetime IRR for the government. Figure
    4 is an aerial view of the IRS Service Center in Andover, Mass. IRS
    Service Center,

    Andover, Mass.

    Page 27 GAO- 03- 839T

    Figure 4: IRS Service Center, Andover, Mass.

    The 511 building was also a strong candidate for a partnership in terms of
    strong federal demand, strong private sector interest in development, and
    moderate nonfederal demand for use of the property. The 511 building is an
    historic, 6- floor building in a desirable location between downtown

    Portland and the trendy *Pearl District* that housed offices of the
    Immigration and Naturalization Service. The property includes a parking
    lot that was sought by the city for a pedestrian mall. The redevelopment
    strategy included renovating the existing historic office building, to
    include storage use in the basement and retail or restaurant on the first
    floor. In addition, the strategy included acquiring an additional site for
    construction of a 240,000 square foot, federal office building across the
    street. This strategy projected a 15. 7 percent lifetime IRR for the
    private partner and a 12.7 percent lifetime IRR for the government. Figure
    5 shows the 511 building (building in center of the picture). Portland,
    Ore., 511

    Building

    Page 28 GAO- 03- 839T

    Figure 5: 511 Building, Portland, Ore.

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

    (543064)

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