Overseas Real Estate: Inaction on Proposals to Sell High-Value Property
in Tokyo (Letter Report, 04/07/95, GAO/NSIAD-95-73).

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

 REPORTNUM:  NSIAD-95-73
     TITLE:  Overseas Real Estate: Inaction on Proposals to Sell 
             High-Value Property in Tokyo
      DATE:  04/07/95
   SUBJECT:  Real estate leases
             Property disposal
             Federal property management
             Housing
             Americans employed abroad
             Embassies
             Interagency relations
             Real estate sales
             Budget authority
             Property depreciation
IDENTIFIER:  Tokyo (Japan)
             Dept. of State Mitsui Compound (Japan)
             
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Cover
================================================================ COVER


Report to Congressional Committees

April 1995

OVERSEAS REAL ESTATE - INACTION ON
PROPOSALS TO SELL HIGH-VALUE
PROPERTY IN TOKYO

GAO/NSIAD-95-73

Overseas Real Estate

(711068)


Abbreviations
=============================================================== ABBREV

  FBO - Foreign Buildings Operations
  ABC - About the child

Letter
=============================================================== LETTER


B-259697

April 7, 1995

The Honorable Phil Gramm
Chairman
The Honorable Ernest F.  Hollings
Ranking Minority Member
Subcommittee on Commerce, Justice,
 State, and Judiciary
Committee on Appropriations
United States Senate

The Honorable Harold Rogers
Chairman
The Honorable Alan B.  Mollohan
Ranking Minority Member
Subcommittee on Commerce, Justice,
 State, and Judiciary
Committee on Appropriations
House of Representatives

The Honorable Karen L.  Thurman
Ranking Minority Member
Subcommittee on National Security, International
 Affairs, and Criminal Justice
Committee on Government Reform and Oversight
House of Representatives

As part of our focus on high risk areas within the federal
government, we have been reviewing the Department of State's
management of government-owned real property overseas.  This report
contains our observations on (1) prior proposals to dispose of some
U.S.  properties in Tokyo, Japan, (2) the reasons the proposals were
not implemented, and (3) actions that should be taken at the current
time.  We are providing this report because of the potential budget
implications that selling, leasing, or better utilizing Tokyo
properties could have.  We plan to report later on State's efforts to
identify real estate at other locations that does not meet U.S. 
government needs and to improve management of its overseas real
property programs. 



   BACKGROUND
------------------------------------------------------------ Letter :1

In Tokyo, State owns residences for the Ambassador and the Deputy
Chief of Mission; a 12-acre property called the Mitsui compound,
which has townhouses and apartments for staff housing; and the main
chancery building for most of the embassy's offices.  About 3 acres
of the Mitsui compound are undeveloped, except for a tennis court,
playground, and a water receiving and distribution facility. 
Treasury owns and manages a residence, known as the Treasury House,
for the financial attache (the top ranking representative from the
Department of the Treasury). 

Real estate values in Tokyo experienced dramatic increases during the
1980s.  A State consultant reported that residential land appreciated
by an average of 30.7 percent each year; the embassy's information
showed a surge of 57 percent in 1987.  In a March 1991 report, a
contractor appraised the Mitsui compound at $3.3 billion, the Deputy
Chief of Mission residence at $92 million, and the Treasury House at
$15.1 million.  These appraised values were based primarily on the
value of the land itself. 

According to embassy information, property values peaked about 1990
and have since declined.  Residential land prices have declined about
30 percent since 1990, according to embassy information based on
Japanese government reports.  Some embassy officials surmised that
the decline may be greater than that. 

State's Office of Foreign Buildings Operations (FBO) is responsible
for managing State's Tokyo properties as part of its worldwide
management responsibilities.  State owns, at more than 200 locations
around the world, about 3,000 properties used for offices, housing,
and other purposes, which it values at about $12 billion.  FBO can
sell, lease, and exchange property that is not needed for government
purposes and use the proceeds for such purposes as acquiring other
facilities.  FBO, in conjunction with the embassies, is responsible
for determining embassies' needs for facilities, comparing those
needs with what is available, and obtaining or disposing of property
and facilities. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The U.S.  government has been slow to take advantage of opportunities
to sell or lease some of its high value real estate in Tokyo. 
Studies in 1988 and 1991 identified several options for selling or
leasing some property and better using the remainder.  These options
included (1) selling the Treasury House; (2) selling the Deputy Chief
of Mission residence and providing housing on the Mitsui compound;
and (3) selling or leasing the 3-acre undeveloped portion of the
Mitsui compound valued at $795 million, constructing additional
housing on the remainder of the compound, which would reduce
government lease costs for employees not housed on the compound, and
improving other facilities. 

The Treasury Department does not have explicit authority to retain
proceeds from real estate sales.  Thus, if Treasury sells the
Treasury House, the proceeds must be returned to general receipts of
the Treasury and would not be available for obligation by Treasury
without new authority from the Congress.  Treasury, therefore, has
been negotiating to turn the property over to State, which has
authority to use the proceeds from the sale of property, in return
for concessions from State.  However, interagency squabbles on such
concessions have caused delays.  In the meantime, the value of the
land has decreased, and the residence has been allowed to deteriorate
to the point that it cannot be occupied.  As of August 1994, it was
estimated that this unused property could be sold for $5 million. 

Because the embassy strongly opposed the sale of the Deputy Chief of
Mission residence, State rejected two FBO proposals to sell the
property, even though the property is less than half an acre and was
valued at about $92 million. 

State has no plans to sell or lease portions of the Mitsui compound
for several reasons.  First, State is concerned that, despite
legislation permitting it to retain the sales proceeds, it would not
be allowed to retain proceeds of such a large amount--roughly twice
the entire annual appropriation for overseas real property worldwide. 
Second, the embassy opposed the sale, and State was unwilling to
proceed without embassy agreement.  Third, the decline in real estate
values since 1991 has decreased the potential sales proceeds. 

Parochial interests governed past decisions by the embassy, State,
and Treasury rather than the overall best interests of the U.S. 
government.  Therefore, the U.S.  government missed its opportunity
to sell while property values were high.  The value of U.S. 
properties is still significant, and opportunities remain for sale,
lease, or consolidation of facilities on the Mitsui compound. 
Millions of dollars in potential sales proceeds and in lease costs
hinge upon agency actions. 

Although State did two major studies of real estate in Tokyo, it has
not prepared a comprehensive plan for managing the Tokyo property in
a cost-effective manner.  The need for such a comprehensive plan is
set forth in State's own policy directive and previous congressional
and GAO reports. 


   STUDIES RECOMMENDED DISPOSAL
   ACTIONS
------------------------------------------------------------ Letter :3

FBO contracted for two major studies of government-owned property in
Tokyo to determine its highest and best use.\1 The studies completed
in January 1988 and March 1991, respectively, covered the Treasury
House, the Deputy Chief of Mission residence, and the Mitsui
compound.\2

  The purpose of the January 1988 study was to assess the value of,
     and develop an appropriate strategy for, the properties.  The
     study considered the market value of land and replacement costs
     for buildings and suggested the highest and best use under
     different zoning or redevelopment alternatives. 

  The March 1991 study was to assess the value and propose an
     appropriate strategy for the highest and best use of U.S. 
     government property in Tokyo over the next 20 years, considering
     appraisals, market data, and applicable Japanese laws and
     regulations. 

Both reports presented several options for meeting the Tokyo
embassy's current and future needs and for generating proceeds of
several hundred million dollars.  In addition to selling the Treasury
House, the Deputy Chief of Mission residence, and the undeveloped
portion of the Mitsui compound, the studies suggested several other
options. 

  Sell the portion of the Mitsui compound containing 14 townhouses,
     Marine guard quarters, basketball court, and domestic employee
     quarters.  A cliff or sharp break in the contour of the ground
     forms a natural separation of this area from the rest of the
     compound.  (The land occupied by the Marine guard quarters,
     basketball court, and domestic employee quarters was valued at
     $145 million.  It costs about $55,000 a year to maintain the
     domestic employee quarters.)

  Undertake a joint venture with private enterprise to develop
     portions of the Mitsui compound, such as the governments of
     Canada and Australia have done with their compounds.  The
     Canadians retained title to their existing chancery site and
     developed it with help from a Japanese firm.  In exchange for a
     no-income lease of surplus space on the lower floors of a new
     building, the Canadians received a new chancery on the upper
     floors, a temporary chancery, and a staff housing complex at no
     capital cost to the Canadian government.  After 30 years, or if
     the developer recoups his costs before then, the surplus space
     reverts to the Canadians.  The Australians sold a portion of the
     site they owned and with the proceeds built, on the remaining
     portion, a new chancery, a new Ambassador residence, and a staff
     housing complex.  They also had a significant amount of proceeds
     left over for other purposes. 

  Construct additional housing on the Mitsui compound for other
     agencies' employees, thereby saving the U.S.  government the
     annual lease costs, which exceed $4 million a year.  (Embassy
     officials oppose this option because they want to control the
     number of U.S.  personnel in Tokyo and they believe that
     providing free housing on the Mitsui compound for all other
     agencies' employees would create incentives for agencies to
     increase their staff levels.)

The following sections discuss the Treasury House, the Deputy Chief
of Mission residence, and the Mitsui compound. 


--------------------
\1 The 1991 study report defined highest and best use as that use
that will, over a period of time, preserve the utility of the
property and produce a net return that, when capitalized, will
produce the highest value. 

\2 The chancery, which State built on land leased in perpetuity, and
the Ambassador residence were not included in the studies.  The
Ambassador residence was constructed in the 1930s and has historical
significance to the United States as well as to Japan.  It is located
on the original site that was granted to the U.S.  Legation by Japan
in the late 1880s for the U.S.  official mission.  The residence is
undergoing a major renovation, which is expected to be completed by
May 1995, at a cost of about $8 million. 


      TREASURY HOUSE
---------------------------------------------------------- Letter :3.1

State and Treasury have agreed for some time that the Treasury House
should be sold.  However, they have been unable to agree on how to
implement the sale.  Failure to expeditiously implement the sale may
have cost the U.S.  government as much as $18 million in lost revenue
and additional appropriations. 

In 1964, the Treasury Department bought the Treasury House for
$150,000.  It is a single family, 3-bedroom house on a one-tenth-acre
lot.  The house needs extensive renovation, which was estimated to
cost about $150,000 in 1992, and has not been occupied since May 1994
because of its deteriorated condition.  The January 1988 study valued
the property at $10.3 million; the March 1991 study at $15.1 million. 
By August 1994, the appraised value had dropped to $5 million. 

Since the 1991 Tokyo property study, State and Treasury have been
considering transferring control of the property to State, which
wanted to use the sales proceeds to renovate the Ambassador
residence.  After much back and forth between State and Treasury, the
two agencies made the following formal proposals regarding the
transfer of the property to State and the benefits State would
provide Treasury in exchange: 

  In January 1993, State proposed that Treasury transfer custody of
     the property to State in return for housing on the Mitsui
     compound for the financial attache and three staff.  However, if
     any of the three staff could not be provided housing, Treasury
     would have to lease alternative housing.  (Until this time, the
     financial attache had used the Treasury House.  Other Treasury
     staff as well as staff from other agencies had shared available
     housing on the Mitsui compound after the needs of the foreign
     affairs agencies had been met.  As of September 1994, one
     Treasury employee was housed on Mitsui, and two others were in
     leased housing, which cost about $93,000 and $84,000 annually.)

  In April 1993, Treasury made a counterproposal that would have
     provided a return on investment to Treasury of about $700,000
     annually for 20 years, including (1) the value of housing for
     four employees on the Mitsui compound ($325,000); (2) the
     salaries and benefits of two foreign service nationals
     ($250,000); and foreign affairs administrative support costs
     ($100,000).  Additionally, State would guarantee housing on
     Mitsui for the Treasury employees.  (Housing Treasury staff on
     Mitsui would save Treasury money, but other agencies would have
     to lease more facilities off the compound.)

  In June 1993, State rejected the counterproposal and said State
     "cannot guarantee housing units nor will it compensate Treasury
     for administrative expenses and foreign service nationals'
     salaries since these benefits bear no relation to housing
     allocation."

These positions may seem to be reasonable from the perspective of the
individual agencies, but they have not been in the best interests of
the U.S.  government and the American taxpayer.  The appraised value
of the property decreased by $10 million from 1991 to 1994, and FBO
used about $8 million in appropriated funds in lieu of the potential
sales proceeds to renovate the Ambassador residence. 

In July and August 1994, just before the results of the last
appraisal were available, Treasury officials told us the property
should be sold, and FBO officials told us that the sale of the
residence should be imminent.  However, the appraisal of $5 million
in August 1994, compared with the previous appraisal of $15 million,
apparently has further delayed action on the property.  In October
1994, an FBO official said that FBO was pondering a further course of
action.  In December 1994, a Treasury official said there still was
no agreement with State. 

The Treasury property is not owned by State, it was not paid for with
State funds, and it does not currently fall under the purview of
State's legal authority to sell and use the proceeds for acquiring
other facilities.  Treasury, which paid for the property, no longer
wants it; it is neither occupying nor maintaining the property in a
usable condition; and it does not have explicit legal authority to
retain the proceeds from the sale of the property.  Our review
indicated that the proper course of action is for Treasury to
promptly dispose of the unneeded property and return the funds
generated from the sale to general receipts of the U.S.  treasury. 
Treasury could transfer control of the property to State, and State
could sell it and use the proceeds, but because of the current fiscal
conditions, we believe the proceeds should go to general receipts. 


      DEPUTY CHIEF OF MISSION
      RESIDENCE
---------------------------------------------------------- Letter :3.2

The 1991 study appraised the property which contains the Deputy Chief
of Mission residence at $92 million and estimated that it would cost
$3.8 million to build a replacement residence on the Mitsui compound. 
State bought the residence in 1950 for $89,000.  It was constructed
in the 1930s and is not considered to be architecturally significant
or an historic building.  It contains 9,100 square feet and is on a
.45-acre lot.  The residence was renovated in 1990 at a cost of $1.9
million. 

   Figure 1:  The Deputy Chief of
   Mission Residence

   (See figure in printed
   edition.)

State management in Washington, D.C., rejected a proposal after the
1988 study to sell the residence because of embassy opposition.  The
1988 study valued the property at about $70 million and estimated
that the residence could be replaced for $2.4 million.  After this
study, FBO proposed selling the residence and using the proceeds for
building a replacement residence, renovating the Ambassador
residence, and funding critical shortages in FBO's capital
construction program.  State documents show that the embassy and
State's East Asian and Pacific Affairs Bureau opposed the proposal
because "it would degrade the representational posture of the Deputy
Chief of Mission." Consequently, the Secretary of State disapproved
the proposal. 

Consideration of selling the residence was again dropped after the
1991 study because of embassy opposition.  In a March 1991 meeting
between FBO and embassy officials regarding the 1991 study options,
including the Mitsui compound, the embassy maintained that the
residence was too valuable an asset to embassy operations to dispose
of, an acceptable alternative residence was not available, and it was
needed to house the Ambassador during renovation of the Ambassador
residence.  (Renovation is expected to be completed by May 1995.) The
embassy's objections did not address the study options to provide a
residence for the Deputy Chief of Mission on the Mitsui compound and
retain use of the current residence for 5 years for the Ambassador. 
Immediately after this meeting, FBO relented on proposals to sell the
residence, but continued to push options relating to the Mitsui
compound. 

During our September 1994 visit to the embassy, the Ambassador and
the Deputy Chief opposed selling the residence.  Reasons given
included its use for representational purposes and a matter of U.S. 
presence, image, and symbolism with the Japanese.  There are
currently no plans to sell the property even though the sales
proceeds should be substantial and the operating costs are high. 
(For 1994, the estimated operating costs are over $255,000, compared
with an average operating cost of $27,300 for the housing units on
the Mitsui compound.) If the property were sold, representational
functions could be carried out at a residence either on the Mitsui
compound or elsewhere. 


      MITSUI COMPOUND
---------------------------------------------------------- Letter :3.3

The 1988 study appraised the Mitsui compound at $2.1 billion. 
According to the study, the compound is one of the largest and most
valuable parcels of residential land in single ownership in Central
Tokyo.  The 1991 study appraised it at $3.3 billion.  Both studies
pointed out that the compound was only about 40 percent developed. 
Figure 2 shows the compound and surrounding area, and figure 3
identifies various features of the compound. 

   Figure 2:  The Mitsui Compound
   and Surrounding Area

   (See figure in printed
   edition.)

   Figure 3:  Features of the
   Mitsui Compound

   (See figure in printed
   edition.)

State bought the 12-acre Mitsui site in 1950 for about $122,000.  The
property was developed in 1952; in the early 1980s, it was
comprehensively redeveloped into a housing compound, as well as
support and recreation facilities.  Two groups of townhouses and 3
high-rise apartment buildings on the compound contain 173 housing
units.  Also, there are two low-rise buildings for Marine-guard
housing and a similar one for domestic-employee housing on one
boundary. 

All State and other foreign affairs agencies' employees, except for
the Ambassador and the Deputy Chief of Mission, are provided housing
on the Mitsui compound, and, when available, housing is provided to
employees of other agencies.  As of June 1994, other agencies were
spending about $4.5 million annually to lease 58 housing units off
the compound.  If the number of authorized personnel in Tokyo remains
static, as perceived by the Deputy Chief of Mission, then the need
for housing off the compound will continue. 

Historically, the embassy has opposed the sale or private development
of any part of the Mitsui compound because of quality-of-life
concerns and a desire to retain the land for possible future use.  In
its February 1990 comments on the then-proposed second study, the
embassy expressed concern that the concept of highest and best use
would predetermine the outcome of the study in favor of economic
benefits without adequately considering the reasons for being in
Tokyo (i.e., to represent the United States to the government of
Japan).  The embassy believed it would be, in the long term, a
serious mistake to sell any property currently owned in Japan.  In a
March 1991 meeting with FBO, the embassy remained opposed to leasing
or selling any portion of the Mitsui compound in return for
redevelopment on the remaining portion.  In April 1991, the embassy
indicated that possible future requirements include a more centrally
located trade center, a new agricultural trade office, and an
American center to house a portion of the U.S.  Information Agency
operations and perhaps other cultural establishments.\3

In June 1991, FBO prepared a conceptual proposal to sell the
undeveloped portion of the compound on an installment basis for an
estimated $750 million.  The proposal (1) indicated that the proceeds
were to be used first to redevelop the remaining portion of the
compound, such as replacing some of the existing housing units,
building 60 additional units, and increasing and modernizing the
recreation and support facilities for embassy employees and their
families; (2) estimated that $60 million annually would be available
to fund other facility requirements in the FBO's 5-year capital
facility program;\4 (3) provided for possible future requirements;
and (4) stated that the embassy concerns were accommodated. 

Also in June 1991, the Deputy Secretary approved moving forward with
planning on the proposal.  However, in late October or early November
1991, State abruptly put a "hold" on disposing of a portion of Mitsui
under the proposal.  State officials told us that the hold was done
orally.  They told us that there were various reasons for the hold,
such as declining property values and other work priorities, but
could provide no documentation stating the precise reasons.  State's
files, however, show that one reason for the hold was State's fear
that it would not be allowed to retain proceeds of this magnitude,
despite its authority to use such proceeds.  According to FBO's
Deputy Assistant Secretary, Office of Management and Budget and
congressional concurrence with the proposed use of the proceeds was
never sought. 

Notwithstanding the hold, discussions among FBO and other State
personnel of a potential sale continued into 1992.  In June 1992, the
Deputy Secretary and the Under Secretary for Management visited
Tokyo.  After this visit, the Under Secretary shifted focus from
selling a portion of the compound to doing an entrepreneurial
(lease/partnership) development of some of the perimeter lands.  No
action was ever taken.  FBO personnel indicated that other work and
the declining Tokyo real estate market were factors.  In 1993, FBO
personnel raised the issue of the Tokyo property, but dropped the
issue because of the embassy's opposition and the concerns regarding
use of sales proceeds. 

According to State and embassy officials, there are currently no
plans to develop, sell, or lease portions of the Mitsui compound. 


--------------------
\3 FBO and embassy officials have also mentioned the possibility of
moving the Foreign Service Institute's Japanese language training
school, located in Yokohama, Japan, to the Mitsui compound since the
school spends $700,000 annually in facility lease costs. 

\4 Additional unfunded new office facility requirements at that time
included new chanceries in Seoul, Managua, Bucharest, and Sofia and
housing in China, Moscow, Eastern European posts, and elsewhere. 


   COMPREHENSIVE FACILITIES
   MANAGEMENT PLAN NOT PREPARED
------------------------------------------------------------ Letter :4

In May 1991, FBO's Deputy Assistant Secretary informed us that the
Tokyo studies were a key element of FBO's strategic planning process
for overseas real property acquisition and disposal.  However, FBO
never prepared long- or short-term property management plans
identifying property for disposal or acquisition, such as recommended
in previous GAO and congressional reports and FBO's stated policy. 

In April 1989, we recommended that the Secretary of State require the
development of long- and short-term plans for systematically buying
and disposing of overseas properties.  Because real estate management
is long term and foreign service assignments are transitory, a real
estate management plan would aid in management continuity.  State
generally had not prepared long- and short-term country plans to
determine its real estate needs and how to satisfy them.  Rather,
State used a technique called "rationalization," which involved
selling high-dollar-value prime properties and purchasing cheaper
substitute properties on an ad hoc basis.\5

In April 1990, FBO established a policy requiring each post to have a
master facilities plan that matches long- and short-term requirements
with current assets to develop cost-effective alternatives for
managing real estate programs.  Although FBO said that the Tokyo
asset studies were part of its strategic planning process, FBO did
not link the studies to a complete review of post assets and a
requirements analysis, as called for in its 1990 policy on master
planning.\6

In its November 1993 report, the House Committee on Government
Operations also recommended that FBO establish long- and short-term
plans for acquiring and disposing of government-owned property.\7 We
have repeatedly reported on the overall need for such plans for a
number of years, and in our view, State's management of its most
valuable real estate in the world would have benefited from a plan. 


--------------------
\5 State Department:  Management of Overseas Real Property Needs
Improvement (GAO/NSIAD-89-116, Apr.  13, 1989). 

\6 State Department Efforts to Improve Management of Overseas Real
Property (GAO/T-NSIAD-91-40, June 20, 1991). 

\7 State Department Mismanagement of Overseas Embassies:  Corrective
Action Long Overdue, Sixth Report by the Committee on Government
Operations (H.  Rept.  103-409, Nov.  22, 1993). 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

We recommend that the Secretary of the Treasury sell the Treasury
House and deposit the proceeds in the general funds of the Treasury. 

We recommend that the Secretary of State sell the Deputy Chief of
Mission property and provide the Deputy Chief of Mission alternative
housing. 

We recommend that the Secretary of State ensure that a plan is
prepared and implemented for the Mitsui compound identifying Tokyo
embassy's current and future facilities needs and how the compound
can be used to meet those needs.  The plan should consider

  providing housing for the Deputy Chief of Mission;

  providing housing for other agencies' employees, which would save
     the U.S.  government the annual lease costs that are currently
     $4 million to $5 million;

  consolidating on the compound, to the extent feasible, other
     government facilities in Japan, such as the language training
     facility in Yokohama, which would result in savings to the U.S. 
     government; and

  exploring opportunities to sell or lease portions of the compound
     and to use the proceeds for other needs. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, State indicated that it felt
the timing is now wrong to sell the Deputy Chief of Mission property,
but the merits of such a sale should be pursued.  It also indicated
that it will work with the embassy to pursue a study of the embassy's
long-term facility needs and how best to utilize the real property
assets at the post to meet those needs.  Treasury agreed that the
Treasury House should be sold and indicated its intention to turn the
property over to State if State will agree to provide housing for
Treasury employees; otherwise, it will sell the property directly. 
State and Treasury's comments are included in their entirety in
appendixes I and II, respectively, along with our analyses. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We conducted our review from March 1994 to January 1995 in accordance
with generally accepted government auditing standards.  We
interviewed personnel from the Departments of State and the Treasury
and reviewed available files.  We visited the government-owned
facilities in Tokyo and interviewed U.S.  embassy personnel.  We also
visited the Canadian and Australian embassies in Tokyo and discussed
their management actions during the period of rising real estate
values. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to other interested
congressional committees, the Secretary of State, the Secretary of
the Treasury, and the Director of the Office of Management and
Budget.  We also will make copies available to others on request. 

Please contact me on (202) 512-4128 if you or your staffs have any
questions concerning this report.  Major contributors to this report
are John Brummet, Roy F.  Hutchens, and Frederick J.  Barrett. 

Joseph E.  Kelley
Director-in-Charge
International Affairs Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
STATE
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Department of State's letter
dated February 8, 1995. 

GAO COMMENT

1. State-funded studies recommended several viable options to
capitalize on the properties increased value, but State chose to
ignore the advice of the experts it hired.  This has cost the
taxpayers a great deal of money--enough to cover about the Foreign
Buildings Operations' (FBO) entire budget request for the next 2
years. 

2. The report recognizes Treasury's control of the Treasury House and
recommends that Treasury sell the property and return the proceeds to
general receipts.  The report lays out State's and Treasury's
inability to agree on disposal of the property.  Both State and
Treasury may feel that their independent positions were reasonable,
but the failure to reconcile these positions led to a result that was
not in the best interest of the U.S.  government, and it may have
cost the government and the taxpayer as much as $18 million. 

State indicates that it has no authority to take independent action
regarding the Treasury House, but it is willing to take control of
the property, and depending on market conditions, sell it.  Under
this procedure, the proceeds would be available to State for its use. 
Because of fiscal constraints, our position is that Treasury should
sell the property and return the proceeds to general receipts.  Also,
we question State's ability to predict future market conditions.  The
U.S.  government should not continue to hold properties that are
unneeded. 

3. The report pieces together the available information from State's
files and shows the decisions made and the basis provided for those
decisions.  To the extent that factors were cited as a consideration
in the decision-making process, they are included in the report.  The
report presents the overwhelming weight given to the embassy position
in the decision-making process over the results of the State-funded
studies.  State's files show that one reason for not developing the
Mitsui compound was its concern that it would lose the use of the
proceeds. 

We have previously recommended that State develop property management
plans, and State issued a policy directive with this requirement. 
However, State never developed such a plan for Tokyo, its most
valuable property.  If it had developed such a plan, then relevant
factors and the weight assigned to them regarding the property would
be a matter of record. 

4. The report title reflects the report's message.  We made no
changes. 

5. Personnel authorizations at the embassy are approved through an
interagency process based on need.  If additional personnel are
assigned to the Tokyo embassy, then costs likely would increase. 
Lease costs of $4 million to $5 million are being incurred because
housing is not available on the Mitsui compound.  Treasury's comments
on a draft of this report (see app.  II) show that it is incurring
over $1 million annually for lease costs for employees of the Office
of International Affairs, Customs Service, and the Internal Revenue
Service. 

5. State's comment that budget constraints are not a reason to sell
the Deputy Chief of Mission residence is troubling when the entire
government is looking for ways to cut costs and find revenues. 
State's view that the residence plays a significant role in bilateral
relations with Japan raises further questions as to why State
incurred significant costs in 1988 and again in 1991 to study, among
other things, the sale or retention of this property.  One option of
the 1991 study was to provide the Deputy Chief of Mission a house
costing about $4 million on other State-owned property and to sell
the property containing the Deputy Chief of Mission residence, which
was then valued at $92 million.  As pointed out in the report, the
embassy opposed the sale because it believed the representational
posture of the Deputy Chief of Mission would be degraded.  The report
further stated that, if the property were sold, representational
functions could be carried out at a residence on the Mitsui compound
or elsewhere.  The present Deputy Chief of Mission confirmed this
during our visit.  State said it gave great weight to the embassy's
firm position to not sell the residence.  Our report acknowledges
this, but questions whether the embassy's position represents the
best interests for the U.S.  government. 

7. State has no way of knowing whether Tokyo real estate is currently
at the bottom of a "boom/bust cycle" or if the value of real estate
will go up.  The State proposal basically is to sell the Deputy Chief
of Mission residence if prices go up.  Again, we question State's
ability to assess future real estate market conditions. 

8. Embassy personnel provided information showing an estimated 1994
operating cost of $255,000 for this 9,000-square-foot residence,
whereas operating costs for Mitsui residences were $27,300. 
Representational expenses of the Deputy Chief of Mission and other
embassy personnel are paid separately and not included in the above
amounts. 

9. The report cites what happened as shown by State's files.  The
Deputy Secretary approved plans to proceed with developing the Mitsui
compound.  According to State Department documents, one reason for
State's "hold" on development efforts was its concern that it would
lose the multi-million dollar proceeds involved. 

It is not our intent to bias future studies of the use of the Mitsui
compound, but our recommendations should be considered in such a
study.  In today's environment, we believe the dollar values of the
properties should play a significant role in the outcome of such
study. 

10. We have modified the report to reflect this comment. 

11. The embassy's comment reinforces our concern for State's basis
for determining future real estate market conditions.  Embassy
officials told us that, in 1991, the prevailing view was that real
estate values could only continue to go up, but time has shown that
view was wrong.  As the report points out and State's comments
indicate, property values have declined; however, they are still
significant. 

Regarding the embassy's recollection that knowledgeable observers
believed that FBO would be "crazy" to sell real estate in Tokyo, FBO
did two studies that showed the economic feasibility of doing so, and
the Deputy Secretary approved of preparing plans for such a sale. 

12. These comments suggest that the embassy concurs with our third
recommendation. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following is GAO's comment on the Department of Treasury's letter
dated February 7, 1995. 

GAO COMMENT

1. As indicated in the report, we believe that Treasury should sell
the Treasury House and deposit the proceeds into general receipts. 
If necessary, it should use the embassy's administrative capacity to
do this. 
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