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

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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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