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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