Federal Real Property: Actions Needed to Address Long-standing	 
and Complex Problems (01-OCT-03, GAO-04-119T).			 
                                                                 
The federal government faces longstanding problems with excess	 
and underutilized real property, deteriorating facilities,	 
unreliable real property data, and costly space. These problems  
have multibillion-dollar cost implications and can seriously	 
jeopardize agencies' missions. In addition, 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-04-119T					        
    ACCNO:   A08634						        
  TITLE:     Federal Real Property: Actions Needed to Address	      
Long-standing and Complex Problems				 
     DATE:   10/01/2003 
  SUBJECT:   Congressional/executive relations			 
	     Federal property					 
	     Federal property management			 
	     Financial management				 
	     Real property					 
	     Strategic planning 				 

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GAO-04-119T

United States General Accounting Office

GAO Testimony

Before the Committee on Governmental Affairs, United States Senate

For Release on Delivery

Expected at 9:30 a.m. EDT FEDERAL REAL

Wednesday, October 1, 2003

PROPERTY

          Actions Needed to Address Long-standing and Complex Problems

Statement of David M. Walker Comptroller General of the United States

GAO-04-119T

Highlights of GAO-04-119T, a testimony before the Committee on
Governmental Affairs, United States Senate

The federal government faces long-standing problems with excess and
underutilized real property, deteriorating facilities, unreliable real
property data, and costly space. These problems have multibillion-dollar
cost implications and can seriously jeopardize agencies' missions. In
addition, 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 GAO has previously made.
There is a need for a comprehensive and integrated transformation strategy
that could identify how to realign real property and dispose of unneeded
assets; address repair and restoration needs; develop reliable data;
reduce the reliance on costly leasing; and protect assets from terrorism.

An independent commission or governmentwide task force may be needed to
develop this strategy, and legislative actions are needed to provide
agencies with tools and incentives to help them address the problems. If
resulting actions address the problems, agencies will be better able to
recover asset values, reduce operating costs, improve facility conditions,
enhance security, and achieve mission effectiveness.

www.gao.gov/cgi-bin/getrpt?GAO-04-119T.

To view the full product, click on the link above. For more information,
contact Bernard Ungar at (202) 512-2834 or [email protected].

October 2003

FEDERAL REAL PROPERTY

Actions Needed to Address Long-standing and Complex Problems

Government data show that 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 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, and the cost and challenge of
protecting these assets against potential terrorism.

Given the persistence of these problems and related obstacles, we
designated federal real property as a new high-risk area in January 2003.
Resolving these problems will require high-level attention and effective
leadership by both Congress and the administration. Also, 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
budget-related 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 incentives and tools they need to achieve better outcomes. This
would also foster a more businesslike real property environment and
provide for greater accountability.

Madam 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

Data from the General Services Administration (GSA) show that over 30
agencies control hundreds of thousands of real property assets worldwide,
including facilities and land. According to the U.S. government's
financial statements for fiscal year 2002, 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

1U.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.

2Under 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.

costly leasing instead of ownership to meet new space needs, 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 and an independent commission or
governmentwide task force may be needed to develop the strategy. This
strategy should reflect lessons learned and leading practices of public
and private organizations. In addition to the strategy, it is critical
that all key stakeholders-Congress, the Office of Management and Budget
(OMB), and real property-holding agencies-continue to work diligently on
efforts already planned and under way that are intended to promote better
real property capital decisionmaking. These include assessing
infrastructure and human capital needs and examining viable funding
options.

If actions resulting from the transformation strategy and other efforts
address the long-standing problems and are effectively implemented,
agencies will be better able to recover asset values, reduce operating
costs, improve facility conditions, enhance security and safety, recruit
and retain employees, and achieve mission effectiveness. Realigning the
government's real property, taking into consideration 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

  The Federal Real Property Environment

3This value does not include stewardship assets, which are not reported on
the government's balance sheet as of September 30, 2002. These assets
include wilderness areas, scenic river systems, monuments, 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.

  The Federal Government Has Many Assets it Does Not Need

available governmentwide data from 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
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 and faces serious security challenges. 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. 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. Furthermore, changes in the overall domestic
security environment have presented an additional range of challenges to
real property management that must be addressed.

4U.S. General Services Administration, Federal Real Property Profile, as
of September 30, 2002 (Washington, D.C.).

5For 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.

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. Various factors may significantly reduce the need for
real property held by USPS. These factors include new technologies,
additional delivery options, and the opportunity for greater use of
partnerships and retail colocation arrangements. A July 2003 Presidential
Commission report on USPS stated, among other things, that USPS had vacant
and underutilized facilities that had little, if any, value to the
modern-day delivery of the nation's mail.7 According to testimony by the
Co-Chair of the Commission, rightsizing of the postal network would be
crucial to USPS's transformation into a modern, 21st century institution8.

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 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

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

7President's Commission on the United States Postal Service, Embracing the
Future: Making the Tough Choices to Preserve Universal Mail Service
(Washington, D.C.: July 31, 2003).

8Statement of James A. Johnson, before the Senate Committee on
Governmental Affairs, U.S. Postal Service: What Can Be Done to Ensure Its
Future Viability? (Washington, D.C.: Sept. 17, 2003).

maintain each year.9 Costs associated with excess DOE facilities,
primarily for security and maintenance, exceed $70 million annually.10 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 in government. 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, redeveloped, or used in a
public-private partnership.

Appendix I discusses some examples of vacant, highly visible properties
that are in the federal inventory- the former main VA hospital building at
the Milwaukee, Wisconsin, health facility campus; St. Elizabeths Hospital
in Washington, D.C.; and the former main post office building in downtown
Chicago, Illinois. These examples demonstrate the range of challenges
agencies face in disposing of unneeded property.

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:

9U.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).

10DOE Office of the Inspector General, Disposition of the Department's
Excess Facilities, DOE/IG-0550 (Washington, D.C.: Apr. 3, 2002).

  The Federal Portfolio Is in an Alarming State of Deterioration

o  	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.11

o  	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, Yellowstone
National Park, and Mount Rushmore, just to name a few.

o  	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 to cost about $4 billion.12 More recently, in

August 2002, we reported that this estimated backlog of identified repair
and alteration needs was up to $5.7 billion.13

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.

o  	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.14 Too little funding to
adequately maintain facilities is also aggravated by DOD's acknowledged
retention of facilities in excess of its needs. Furthermore, the
information that the

11U.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).

12U.S. General Accounting Office, Federal Buildings: Billions Are Needed
for Repairs and Alterations, GAO/GGD-00-98 (Washington, D.C.: Mar. 30,
2000).

13U.S. General Accounting Office, Financial Condition of Federal Buildings
Owned by the General Services Administration, GAO-02-854R (Washington,
D.C.: Aug. 8, 2002).

14U.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).

services have on facility conditions is not consistent, 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 National Guard and Reserve
facilities.15

o  In March 2003, we reported that many of the primary office buildings at

overseas embassies and consulates were in poor condition.16 In 2002, State
estimated that its repair backlog was $736 million. In addition, the
primary office buildings at more than half of the posts do 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 of the problems caused by the delays.17 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

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

16U.S. General Accounting Office, Overseas Presence: Conditions of
Overseas Diplomatic Facilities, GAO-03-557T (Washington, D.C.: Mar. 20,
2003).

17U.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).

  Key Decisionmakers Lack Reliable and Useful Data on Real Property Assets

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 sources 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.18 GSA agreed with our findings and has revamped this database
and produced a new report on the federal inventory, as of September 30,
2002.19 We have not evaluated GSA's revamped database and related report.

In addition to problems with the worldwide inventory, real property data
contained in the financial statements of the U.S. government have been
problematic.20 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 2002.21 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

18U.S. General Accounting Office, Federal Real Property: Better
Governmentwide Data Needed for Strategic Decisionmaking, GAO-02-342
(Washington, D.C.: Apr. 16, 2002).

19U.S. General Services Administration, Federal Real Property Profile as
of September 30, 2002 (Washington, D.C.).

20The 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.

21U.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).

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.

  Reliance on Costly Leasing

As a general rule, building ownership options through construction or
purchase are the least expensive ways to meet agencies' long-term and
recurring requirements for space. Lease-purchases-under which 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.22 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 million more than construction.23 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

22In an operating lease, the government makes periodic lease payments over
the specified length of the lease in exchange for the use of the property.

23U.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).

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 estimated legal
obligation related to the 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.24 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 policy requirement for full "up-front funding"
permits disclosure of the full costs to which the government is being
committed, the budget scorekeeping rules allow costly operating 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.25
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-would be to allow agencies to establish

24According to the scoring rules (OMB Circular A-11, app. B), in cases
where the operating lease does not have a cancellation clause or is not
paid for with federal funds that are self-insuring, budget authority to
cover the total costs expected over the life of the lease is to be scored
in the first year of the lease.

25U.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).

  Security Against Terrorism Is an Overarching Concern

capital acquisition funds to pursue ownership where it is advantageous,
from an economic perspective. 26 To date, none of these options have 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 or economically rational 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 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 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

26U.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).

personnel assigned on a daily basis.27 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.28 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 ISC.
More recently, we testified on security conditions of overseas diplomatic
facilities.29 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. government
employees may be more 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.
GSA may often be responsible for protecting facilities that house these
critical assets.30 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.

27U.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).

28U.S. General Accounting Office, Homeland Security: A Risk Management
Approach Can Guide Preparedness Effort, GAO-02-208T (Washington, D.C.:
Oct. 31, 2001).

29GAO-03-557T.

30U.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.

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).31 The Federal Protective Service, which was part
of GSA and which was responsible for protecting federal agencies under
GSA's jurisdiction, was among those agencies whose functions and personnel
were transferred to DHS. Accordingly, DHS became responsible for
protecting buildings, grounds, and property owned, occupied, or secured by
the federal government that are under GSA's jurisdiction. In addition, the
act provided DHS with authority to protect the buildings, grounds, and
property of any other agency whose functions were transferred to DHS 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
ISC's lack of progress in fulfilling its responsibilities should be taken
into account in establishing this new department.32

31P.L. 107-296; 116 Stat. 2135 (2002).

32U.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).

  Various Efforts Initiated, but Real Property Problems Persist Due to Factors
  that Require High-Level Attention

Although the federal government faces significant, long-standing problems
in the real property area, it is important to give Congress, 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 108th Congress (H.R. 2548 and H.R. 257333) are aimed at
enhancing real property management. H.R. 2548 would provide GSA with
enhanced asset management tools, including the use of public-private
partnerships for itself and other landholding agencies. This bill also
provides incentives for better property management, such as allowing
agencies to retain funds generated from the property to pay expenses
associated with the property and fund other capital needs. In addition,
the bill contains provisions aimed at improving real property data,
establishing senior real property managers at agencies, developing asset
management principles, and identifying specific conditions under which GSA
can enter into real property partnerships with the private sector. H.R.
2573 would provide GSA with the authority to enter into public-private
partnerships for itself and other landholding agencies. In July 2001, we
reported that public-private partnership authority could be an important
management tool to address problems in deteriorating federal buildings,
but further study of this tool was needed.34 Appendix II summarizes this
report and discusses two examples of public-private partnership
opportunities. In August 2003, we also reported on other methods agencies
are using to finance federal capital in addition to public-private
partnerships, such as incremental funding, real property swaps, and
outleases.35 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

33The Federal Property Asset Management Reform Act of 2003 and the Public
Private Partnership Act of 2003, respectively.

34U.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).

35U.S. General Accounting Office, Budget Issues: Alternative Approaches to
Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).

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:

o  	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.

o  	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
economically rational and 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 are precluded from entering into such arrangements.36 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-

36When 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).

makes it challenging for agencies to dispose of unneeded property.

o  	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
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,37 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,
agencies are not required to use the guidance. 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.

o  	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. A strategic
focus on real property would be rooted in having the appropriate
incentives in place; ensuring transparency in the government's actions;
and fostering a higher level of accountability to stakeholders, including
taxpayers. 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

                                A Transformation

                               Strategy Is Needed

government at significant risk in this area. Real property problems
related to unneeded property and the need for realignment, deteriorating
conditions, unreliable data, costly space, and security concerns have
multibillion-dollar cost implications and can seriously jeopardize mission

37U.S. General Accounting Office, Executive Guide: Leading Practices in
Capital Decision-Making, GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).

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 an
independent commission or governmentwide task force may be needed to
develop this strategy. Such a strategy, based on input from agencies, the
private sector, and other interested groups, could comprehensively address
these long-standing problems with specific proposals on how best to

o  	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;

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

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

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

o  	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

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

o  	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;

o  	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;

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

o  	ensuring credible, rational, 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,
recruit and retain employees, and achieve mission effectiveness.

In addition to developing a transformation strategy, it is critical that
all the key stakeholders in government-Congress, OMB, and real
property-holding agencies-continue to work diligently on the efforts
planned and already under way that are intended to promote better real
property capital decisionmaking, such as enacting reform legislation,
assessing infrastructure and human capital needs, and examining viable
funding options. Congress and the administration could work together to
develop and enact reform legislation to give real property-holding
agencies the tools they need to achieve better outcomes, foster a more
businesslike real property environment, and provide for greater
accountability for real property stewardship. These tools could include,
where appropriate, the ability to retain a portion of the proceeds from
disposal and the use of public-private partnerships in cases where they
represent the best economic value to the government. Congress and the
administration could

also elevate the importance of real property in policy debates and
recognize the impact that real property decisions have on agencies'
missions. Solving the problems in this area will undeniably require a
reconsideration of funding priorities at a time when budget constraints
will be pervasive. However, experimenting with creative financing tools
where they provide the best economic value for the government and
allocating sufficient funding will likely result in long-term benefits.

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

Madam 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.

Contacts and 	For further information on this testimony, please contact
Bernard L. Ungar on (202) 512-2834 or at [email protected]. Key contributions
to this

Acknowledgments 	testimony were made by Kevin Bailey, Christine Bonham,
Casey Brown, John Brummett, Maria Edelstein, Anne Kidd, Mark Little, Susan
Michal-Smith, David Sausville, and Gerald Stankosky.

Appendix I: Examples of Vacant Federal Property

Three examples of vacant, highly visible federal properties are the former
main Department of Veterans Affairs (VA) hospital building in Milwaukee,
Wisconsin; St. Elizabeths Hospital in Washington, D.C.; and the former
main post office building in downtown Chicago, Illinois.

Former Main VA Hospital Building in Milwaukee, Wisconsin

A VA-owned building at a health care facility campus in Milwaukee,
Wisconsin is an example of a long-held vacant federal property. This
134,000 square foot building, which is shown in figure 1, has been vacant
for about 14 years. The building had been used as the campus's main
hospital but was vacated in 1989 primarily because a new main hospital was
built on the campus. VA officials told us that in June 1999, a consulting
firm-Economic Research Associates-issued a study in which it identified
various options for VA to consider in trying to enhance the use of various
vacant and underutilized buildings on the Milwaukee campus, including the
former main hospital building.38 On the basis of the study's results, VA
officials have told us that a substantial investment of capital would in
all likelihood be needed to convert this building for alternate use. For
example, to convert the building for use as housing for the elderly, the
study estimated that about $8.4 million to $9.3 million would be needed.
VA officials also mentioned that various organizations, such as the
Salvation Army and the Knights of Columbus, expressed some interest in
leasing the building; but thus far, VA has not received any firm offers
from these organizations. VA officials told us that in fiscal year 2001,
VA incurred about $348,000 in maintenance costs for this building, which
included such expenses as utilities, pest management, and security. Also,
the officials said that VA currently has no alternate use or disposal
plans for this building. However, VA officials have told us that updated
information on the planned disposal of its vacant and underutilized
property would in all likelihood be available after the Secretary of
Veterans Affairs approves the results of the Capital Asset Realignment for
Enhanced Services process, expected after December 2003.

38 Economic Research Associates, Report for Enhanced-Use Options, Zablocki
VA Medical Center, Milwaukee, Wisconsin, Submitted to Department of
Veterans Affairs, ERA Project Number: 12460 (Apr. 1998; Re-Issue June
1999).

  Figure 1: The Former Main VA Hospital Building at the Milwaukee, Wisconsin,
                             Health Facility Campus

                                  Source: VA.

St. Elizabeths Hospital, Washington, D.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 would need to
be addressed in order for the property to be disposed of or transferred to
another federal agency.39

In the last year, the General Services Administration (GSA), the District
of Columbia (the District), HHS, and various public interest groups have

39U.S. General Accounting Office, St. Elizabeths Hospital: Real Property
Issues Related to the West Campus, GAO-01-434 (Washington, D.C.: Apr. 16,
2001).

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.40 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
representatives 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.

40Urban Land Institute, An Advisory Services Panel Report: Saint.
Elizabeths Campus, Washington, D.C. (Washington, D.C.: May 2002).

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

The former Chicago main post office building 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

                    Note: Photograph taken in January 2001.

Former Chicago Main Post Office

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 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.

      Figure 3: The Former Main Post Office in Downtown Chicago, Illinois

Appendix II: Use of Public-Private Partnerships to Redevelop Federal Property

Under a public-private partnership, a contractual arrangement is formed
between public and private sector partners that can include a variety of
activities that involve the private sector in the development, financing,
ownership, and operation of a public facility or service. In the case of
real property, the federal government typically would contribute the
property and a private sector entity contributes financial capital and
borrowing ability to redevelop or renovate the property. Public-private
partnerships can be a viable option for redeveloping obsolete federal
property if they provide the best economic value for the government,
compared with other options, such as federal financing through
appropriations or sale of the property. However, most agencies are
precluded from entering into such arrangements. The Department of Defense
(DOD), Department of Veterans Affairs (VA), and U.S. Postal Service
(USPS), however, have this authority. Proposed real property reform
legislation in the 108th Congress (H.R. 2548 and H.R. 257341) is aimed at
enhancing real property management. H.R. 2548 would provide GSA with
enhanced asset management tools, including the use of public-private
partnerships for itself and other landholding agencies. This bill also
provides incentives for better property management, such as allowing
agencies to retain funds generated through the use of the management tools
to pay expenses associated with the property and fund other capital needs.
H.R. 2573 would provide GSA with the authority to enter into
public-private partnerships for itself and other landholding agencies.

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 2001,42 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)43 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. This comparison would need to be made to determine
which financing option offers the best economic value for the government.

41The Federal Property Asset Management Reform Act of 2003 and the Public
Private Partnership Act of 2003, respectively.

42GAO-01-906.

43IRR 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.

IRS Service Center, Andover, Massachusetts

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, Massachusetts and an office building in Portland, Oregon 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
properties because GSA continues to lack authority to enter into such
arrangements. In August 2003, we also reported on other methods agencies
are using to finance federal capital in addition to public-private
partnerships, such as incremental funding, real property swaps, and
outleases.44

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
on 37 acres that is in need of capital repairs. At the time of our review,
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:

o  	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 the rear of the site to allow for security and a phased development
of the rest of the site.

o  	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.

o  	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, Massachusetts.

44U.S. General Accounting Office, Budget Issues: Alternative Approaches to
Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).

              Figure 4: IRS Service Center, Andover, Massachusetts

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, Oregon, 511 Building

Figure 5: 511 Building, Portland, Oregon

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 with the returns under
a partnership arrangement.

(543050)

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