    Public-Private Partnerships: Key Elements of Federal Building and
    Facility Partnerships (Letter Report, 02/03/99, GAO/GGD-99-23).

    Pursuant to a congressional request, GAO reviewed the key elements of
    partnerships between the federal government and the private sector that
    were formed to help the government acquire and operate federal real
    estate and facilities more efficiently and effectively, focusing on the
    experiences of six federal partnerships formed by the:  (1) National
    Park Service; (2) Department of Veterans Affairs (VA); and (3) Postal
    Service (USPS).

    GAO noted that: (1) there was a catalyst for change that led each of the
    three agencies to form a partnership with the private sector; (2) for
    example, community pressure and fiscal constraints were the catalyst in
    the two Park Service projects GAO reviewed, in which the Park Service
    decided to enter into public-private partnerships mainly to obtain
    partners that could finance needed preservation efforts; (3) for all six
    projects GAO reviewed, Congress enacted legislation that provided a
    statutory basis for the agency to enter into the partnership and keep
    the revenues it received from that partnership; (4) the agencies GAO
    reviewed also told GAO that they established organizational structures
    and acquired the necessary expertise to interact with private-sector
    partners to ensure effective partnership implementation; (5) for
    example, VA established an Office of Asset and Enterprise Development to
    promote the partnership concept within VA, design and implement
    public-private partnership projects, and be a single point of contact
    with VA's private-sector partners; (6) the office was staffed, VA
    officials said, with professionals experienced in portfolio management,
    architecture, civil engineering, and contracting; (7) in all six
    projects reviewed, asset management officials used business plans or
    similar documents to make informed decisions and protect the
    government's interests; (8) according to USPS officials, the development
    and execution of a business plan, which included information about the
    division of risks and responsibilities between USPS and its
    private-sector partner, was critical to its success in implementing its
    large-scale real estate development projects; (9) for each of the
    projects reviewed, business plans were drafted jointly between the
    public- and private-sector parties to help ensure close involvement of
    both parties in the design and implementation of the project; (10)
    support from project stakeholders was an important factor in developing
    and implementing the public-private partnerships; and (11) in all of the
    projects reviewed, agencies had the support of the local community and
    other stakeholders to create the partnership.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GGD-99-23
         TITLE:  Public-Private Partnerships: Key Elements of Federal
                 Building and Facility Partnerships
          DATE:  02/03/99
       SUBJECT:  Federal property management
                 Real property acquisition
                 Interagency relations
                 Joint ventures
                 Private sector practices
                 Federal facilities
                 Historic preservation

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    gg99023 PUBLIC- PRIVATE PARTNERSHIPS

    Key Elements of Federal Building and Facility Partnerships

    United States General Accounting Office

    GAO Report to the Honorable Stephen Horn Committee on Government
    Reform

    House of Representatives

    February 1999

    GAO/GGD-99-23

    February 1999   GAO/GGD-99-23

    United States General Accounting Office Washington, D. C. 20548

    General Government Division

    B-278675

    Page 1 GAO/GGD-99-23 Key Elements of Federal Building and Facility
    Partnerships

    GAO February 3, 1999 The Honorable Stephen Horn Committee on
    Government Reform House of Representatives

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

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

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

    You asked us to identify the key elements of partnerships between
    the federal government and the private sector that were formed to
    help the

    1 See Budget Issues: Budgeting for Capital (GAO/T-AIMD-98-99,
    March 6, 1998). 2 Federal Real Property: Key Acquisition and
    Management Obstacles (GAO/T-GGD-93-42, July 27, 1993). 3 See, for
    example, Executive Order 12893, Principles for Federal
    Infrastructure Investments, January 26, 1994; and Executive Order
    12803, Infrastructure Privatization, April 30, 1992.

    B-278675 Page 2 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

    B-278675 Page 3 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    Note: The sequence in which these key elements occurred during
    implementation varied by project. a Business plans may identify
    issues that require legislative action.

    Source: GAO analysis of selected federal building and facility
    public- private partnerships.

    Figure 1: Key Elements of Public- Private Partnerships

    B-278675 Page 4 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    B-278675 Page 5 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

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

    B-278675 Page 6 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

    B-278675 Page 7 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships Projects and related agencies Type Brief
    description of projects

    Department of the Interior, National Park Service

    1. Fort Mason Foundation, San Francisco, CA, 1976, extended in
    1984.

    2. Thoreau Center at the Presidio, San Francisco, CA, 1995.

    Cooperative agreement to develop/ operate (20 years) Lease/
    develop/ operate (55 years)

    These two urban parks were once military bases and contain many
    historic but deteriorating structures. In each instance, the Park
    Service contracted with a private sector partner to obtain funding
    to restore historic structures while keeping the park in public
    use. The partners rent the restored structures to nonprofit
    tenants.

    Department of Veterans Affairs

    3. VA Regional Office, Houston, TX, 1993. a

    4. Cold Spring Medical Facility, Indianapolis, IN, 1995. a

    Design/ build/ operate (35 years)

    Lease/ develop/ operate (35 years)

    VA used statutory authority to enter into revenuegenerating leases
    for both projects. In Texas, a private developer constructed a VA
    regional office building on VA's medical campus. VA then leased
    land to the developer on the medical campus. The developer
    constructed buildings on the land and rents space in them to
    commercial businesses. VA must approve the buildings' tenants. In
    Indiana, the state leased underutilized land and facilities from
    VA to use as a psychiatric care facility. The leasing revenue that
    VA receives from both sites is to be used to fund veterans
    programs.

    U. S. Postal Service

    5. Grand Central Station Post Office, New York, NY, 1987.

    6. Rincon Center Post Office, San Francisco, CA, 1985.

    Lease/ develop/ operate (99 years)

    Lease/ develop/ operate (65 years)

    In both cities, the Postal Service owned an outdated, historic
    building in a highly desirable downtown location. It leased each
    property to private developers who built a commercial building
    adjacent to and/ or on top of the historic structure. The Postal
    Service earns revenue from its lease with the developer, and the
    developer earns revenue from renting out commercial space in the
    new and historic buildings.

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

    Table 1: Public- Private Partnership Projects We Reviewed

    B-278675 Page 8 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Methodology

    B-278675 Page 9 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

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

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

    B-278675 Page 10 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

    B-278675 Page 11 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

    B-278675 Page 12 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

    For all six projects, the legislation enabling the partnership was
    either project specific (i. e., for a single, identified project)
    or was broader in scope without identifying any one project. The
    Park Service project at the Presidio is an example of legislation
    that was project or site specific. In 1993, Congress authorized
    the Secretary of the Interior through Public Law 103- 175 to lease
    the former Letterman hospital complex, including what is known now
    as the Thoreau Center at the Presidio, and to retain the proceeds
    from such a lease for the preservation, restoration, operation,
    maintenance, and other related expenses incurred with Presidio
    properties.

    A 1991 law that enabled VA to engage in partnerships 7 is an
    example of authorization that is broader in scope. The two VA
    projects we reviewed were undertaken using this authority. In
    1991, Congress enacted legislation authorizing the Secretary of VA
    to enter into long- term agreements called Enhanced- Use Leases
    (EUL). The enhanced- use leasing concept is a revenue- generating
    approach to asset management. Some of the basic elements of the
    EUL authority follow.

     The lease allows for non- VA uses or activities on VA property in
    the form of services, activities, or facility development provided
    that such uses or activities are not inconsistent with VA's
    mission.

     The lease's overall objective must enhance VA's mission or
    program.

     In return for the lease, VA may obtain any combination of
    monetary consideration, services, facilities, or other benefits
    from the operation of the non- VA uses so long as the benefit is
    determined by the VA Secretary to be fair consideration.

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

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

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

    B-278675 Page 13 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

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

    Structure

    B-278675 Page 14 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

    Plans

    B-278675 Page 15 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

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

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

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

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

    Our Evaluation

    B-278675 Page 17 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

    Sincerely yours, J. Christopher Mihm Associate Director, Federal
    Management

    and Workforce Issues

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

    Contents 1 Letter 22 Appendix I Objective, Scope, and Methodology

    26 Overview of National Park Service Projects 26 The Fort Mason
    Project 27 Thoreau Center Project at the Presidio 32 Appendix II

    Department of the Interior, National Park Service

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

    Department of Veterans Affairs

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

    United States Postal Service

    56 Appendix V Major Contributors to This Report

    57 Types of Public- Private Partnerships Discussed in This

    Report 57

    Other Terms Related to Public- Private Partnerships 58 Glossary

    Table 1: Public- Private Partnership Projects We Reviewed 7 Tables
    Figure 1: Key Elements of Public- Private Partnerships 3 Figure
    II. 1: The Fort Mason Project 31 Figure II. 2: Thoreau Center
    Project at the Presidio 37 Figure III. 1: The Houston Regional
    Office Project 42 Figures

    Figure III. 2: The Cold Spring Medical Facility Project 46

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

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

    51 Figure IV. 2: The Rincon Center Project 55

    Contents Page 20 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships Abbreviations

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

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

    Appendix I Objective, Scope, and Methodology

    Page 22 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

     Consider projects identified in privatization literature and by
    public- private partnership experts as being innovative and
    projects that would be recognized as models.

     Consider projects that were ongoing or completed.

     Consider projects that they believed provided significant public
    benefit (e. g., dollars saved, revenue generated, efficiency
    gained).

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

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

    Appendix I Objective, Scope, and Methodology

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

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

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

     Department of the Interior Fort Mason Foundation project, San
    Francisco, California;

     Department of the Interior Thoreau Center at the Presidio, San
    Francisco, California;

     Department of Veterans Affairs, Houston Benefits Center project,
    Houston, Texas;

     Department of Veterans Affairs Cold Spring Medical Facility,
    Indianapolis, Indiana; 1

     U. S. Postal Service, Grand Central Station project, New York
    City, New York; and

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

     project background (year initiated/ completed, type of
    partnership, partners, and location);

    1 This partnership arrangement was a public- public partnership in
    which VA entered into a long- term leasing arrangement with the
    State of Indiana instead of a private sector entity. We chose this
    largescale project because it was often mentioned by experts we
    surveyed, and it met all of our other project selection criteria.

    Appendix I Objective, Scope, and Methodology

    Page 24 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

     participants' reason/ rationale for partnering (e. g., to satisfy
    unmet federal needs or gain access to private sector innovations);

     contractual arrangements (e. g., responsibilities of the private
    sector partner, procurement issues, innovative practices used, and
    financing arrangements);

     challenges that may have arisen and strategies employed to
    overcome them (e. g., legislation, funding);

     events, conditions, or individuals that facilitated the project's
    progress (e. g., legislative authorities or special conditions
    that allowed the projects to succeed); and

     project- reported results (e. g., cost savings, tax revenue, and
    unmet needs served).

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

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

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

    Appendix I Objective, Scope, and Methodology

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

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

    Appendix II Department of the Interior, National Park Service

    Page 26 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Overview of National Park Service Projects

    Appendix II Department of the Interior, National Park Service

    Page 27 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    The Fort Mason Project Participants

    The Form of Public- Private Cooperation

    Appendix II Department of the Interior, National Park Service

    Page 28 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Several factors facilitated the formation of a partnership between
    the Park Service and the Fort Mason Foundation. First, according
    to Park Service documents, GGNRA was financially unable to provide
    the necessary restoration or rehabilitation work for the many
    historic buildings within Background

    Major Facilitating or Constraining Factors

    Appendix II Department of the Interior, National Park Service

    Page 29 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

    According to Park Service officials, this partnership appears to
    be meeting the chief objective of the Park Service the
    preservation of the historic character of the lower Fort Mason
    area. The nine buildings and two piers that make up the Fort Mason
    Complex have been fully renovated and maintained over the last 22
    years at minimal cost to the Park Service. According to Foundation
    and Park Service officials, the cumulative cost to renovate and
    improve the Fort Mason area has been approximately $16.5 million.
    The Park Service estimates the government's portion of this
    expense to have been about $3.5 million and the Foundation portion
    to have been about $13 million. According to the Park Service
    officials, the agency's annual operating expenses for the project
    have been approximately $250,000. These officials stated that they
    believe that this amount is far less than what one would expect
    for such an enterprise. According to Park Service officials, the
    partnership arrangement also meets the Park Service objective to
    assist nonprofit organizations in their Reported Results

    Appendix II Department of the Interior, National Park Service

    Page 30 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    efforts to provide a broad range of cultural, educational, and
    recreational activities at little or no cost to the public.

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

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

    Appendix II Department of the Interior, National Park Service

    Page 31 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    Figure II. 1: The Fort Mason Project

    Appendix II Department of the Interior, National Park Service

    Page 32 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    7 P. L. 104- 333. Thoreau Center

    Project at the Presidio

    Participants The Form of Public- Private Cooperation

    Background

    Appendix II Department of the Interior, National Park Service

    Page 33 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    According to Park Service officials, the Park Service was
    concerned that it would not have the funds, ability, or expertise
    to finance large- scale building rehabilitation, maintenance, and
    operation of the Presidio buildings. In 1993, legislation was
    enacted authorizing the Secretary of the Interior to lease the
    Letterman Complex, 8 a 55- acre former hospital and research
    complex, within the Presidio, with over 1.2 million gross square
    feet of built space in 47 historic and nonhistoric buildings.

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

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

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

    In September 1995, the Park Service and TCP signed the lease for
    Phase I of the project, which was completed and occupied by March
    1996.

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

    Appendix II Department of the Interior, National Park Service

    Page 34 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    Exercising an option as part of the Phase I lease, the Park
    Service and TCP signed in July 1997 a Phase II lease, which was
    similar in its terms and conditions. This lease covered an
    additional eight buildings encompassing about 85,000 square feet,
    making TCP responsible for the restoration, preservation, and
    operation of a total of 12 buildings. Construction and occupancy
    of Phase II were completed in the spring of 1998. According to
    Park Service officials, each lease was preceded by a development
    agreement that spelled out specific project design and financing
    requirements and milestones that TCP had to achieve before the
    Park Service would sign the ground leases.

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

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

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

    Major Facilitating or Constraining Factors

    Appendix II Department of the Interior, National Park Service

    Page 35 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    Another major facilitating factor mentioned by Park Service
    officials was the fact that GGNRA could retain the revenues from
    the lease of the Letterman buildings. This provided the Park
    Service with the incentive to commit the time and staff needed to
    develop and participate in such a complex transaction. Finally,
    the compelling vision of the Presidio master plan and the
    attractiveness of the site were also identified by Park Service
    staff as significant factors in facilitating the partnership.

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

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

    Appendix II Department of the Interior, National Park Service

    Page 36 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    and foreign government officials, have toured the project in an
    effort to learn from the Presidio's example.

    TCP also appears to have benefited from its partnership thus far.
    As of September 1998, Park Service documents show that the Thoreau
    Center had approximately 45 subtenants, including nonprofit
    organizations such as the Energy Foundation and the Wilderness
    Society. Both Phase I and Phase II of the project are fully
    leased. These documents also indicate that the bank and private
    loans are being repaid according to schedule (approximately
    $1,040,000 annually), and the project's first stabilized year of
    occupancy and operations 1998 is expected to meet TCP's
    projections. According to Park Service officials, subtenant rents
    generate sufficient money for TCP to repay the debt and equity
    that funded the rehabilitation, provide for ongoing operations and
    maintenance of the complex, and provide rental payments to the
    Park Service.

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

    Appendix II Department of the Interior, National Park Service

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

    Figure II. 2: Thoreau Center Project at the Presidio

    Appendix III Department of Veterans Affairs

    Page 38 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Department of Veterans Affairs Projects

    Appendix III Department of Veterans Affairs

    Page 39 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships Public: Department of Veterans Affairs.

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

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

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

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

    Office Center Project Participants

    The Form of Public- Private Cooperation

    Background

    Appendix III Department of Veterans Affairs

    Page 40 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

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

    Constraining Factors Reported Results

    Appendix III Department of Veterans Affairs

    Page 41 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    Appendix III Department of Veterans Affairs

    Page 42 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    Figure III. 1: The Houston Regional Office Project

    Appendix III Department of Veterans Affairs

    Page 43 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships Public: Department of Veterans Affairs.

    Private: State of Indiana. 4 Officials from VA and the state of
    Indiana signed an EUL that provided for a 35- year lease of the
    Cold Spring Medical Facility to the state in return for a one-
    time direct payment of $200,000 to VA as well as a payment of $9.8
    million that was placed in a VA EUL trust. Under the trust
    agreement, VA is to use these funds to provide benefits for
    veterans residing in Indiana. However, the Secretary of Veterans
    Affairs, at his discretion, may designate the provision of
    veterans' benefits without regard to residency.

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

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

    Medical Facility Project

    Participants The Form of Public- Public Cooperation

    Background

    Appendix III Department of Veterans Affairs

    Page 44 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Constraining Factors

    Appendix III Department of Veterans Affairs

    Page 45 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    Reported Results

    Appendix III Department of Veterans Affairs

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

    Figure III. 2: The Cold Spring Medical Facility Project

    Appendix IV United States Postal Service

    Page 47 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

    States Postal Service Projects

    Appendix IV United States Postal Service

    Page 48 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

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

    Station Project Participants

    The Form of Public- Private Cooperation

    Background

    Appendix IV United States Postal Service

    Page 49 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    Constraining Factors

    Appendix IV United States Postal Service

    Page 50 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    Appendix IV United States Postal Service

    Page 51 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

    Appendix IV United States Postal Service

    Page 52 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships Public: The United States Postal Service, an
    independent establishment of

    the executive branch of the United States government.

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

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

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

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

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

    Project Participants

    The Form of Public- Private Partnership

    Background

    Appendix IV United States Postal Service

    Page 53 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

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

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

    Constraining Factors Reported Results

    Appendix IV United States Postal Service

    Page 54 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

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

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

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

    Appendix IV United States Postal Service

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

    Figure IV. 2: The Rincon Center Project

    Appendix V Major Contributors to This Report

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

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

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

    Division Staff Acknowledgements

    Glossary

    Page 57 GAO/GGD-99-23 Key Elements of Federal Building and
    Facility Partnerships

    A public partner (federal, state, or local government agency or
    authority) contracts with a private partner to provide and/ or
    maintain a specific service. Examples of the type of service
    provided include lab testing, auditing, and the collecting of
    fines and penalties. Under the private operation and maintenance
    option, the public partner retains ownership and overall
    management of the public facility or system.

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

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

    Partnerships Discussed in This Report

    Contract Services Operations and Maintenance

    Operations, Maintenance, and Management

    Design/ Build/ Operate (DBO)

    Glossary Page 58 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

    An anchor tenant is the major tenant that attracts or generates
    traffic within a commercial operation. Anchor tenants are
    strategically placed to Enhanced- Use Leasing (EUL)

    Lease/ Develop/ Operate (LDO) or Build/ Develop/ Operate (BDO)

    Lease/ Purchase Other Terms Related to Public- Private
    Partnerships

    Air Rights Anchor Tenant

    Glossary Page 59 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

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

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

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

    Cooperative Agreements Equity Fee Simple

    Franchising Ground Lease Lease

    Glossary Page 60 GAO/GGD-99-23 Key Elements of Federal Building
    and Facility Partnerships

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

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

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

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

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

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

    Partnership Public- Private Partnership

    Request for Proposals (RFP) Request for Qualifications (RFQ)

    Sublease

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