Military Base Closures: Questions Concerning the Proposed Sale of Housing
at Mather Air Force Base (Letter Report, 10/08/98, GAO/NSIAD-99-13).

Pursuant to a congressional request, GAO reviewed the proposed
negotiated sale of 1,271 surplus family housing units at Mather Air
Force Base, California, to the Sacramento Housing and Redevelopment
Agency (SHRA), focusing on whether: (1) the Air Force's attempts to
obtain competition satisfy requirements of section 203(e)(3)(H) of the
Federal Property Act to obtain such competition as is feasible under the
circumstances; (2) the disposal at Mather meets the test of a public
benefit given that SHRA plans to transfer ownership immediately to a
private developer; (3) the Air Force, contrary to General Services
Administration (GSA) policy and applicable laws, disclosed the appraised
value of the family housing property to prospective purchasers; (4) the
Air Force allowed a developer's representatives to participate in
negotiations between the Air Force and SHRA; and (5) there is evidence
that the property has a higher fair market value than the proposed sale
price.

GAO noted that: (1) the Air Force's decision to pursue a negotiated sale
with SHRA rather than compete the sale pubically was made early on and
was documented in the Air Force's 1993 official record of decision
regarding the disposal of the Mather property; (2) the SHRA, as the
authorized representative of Sacramento County, was the only
governmental entity authorized to deal with the Air Force and to express
an interest in acquiring the Mather housing; (3) under these
circumstances, competition was not possible and, therefore, the Air
Force satisfied the requirement of the Federal Property Act to obtain
such competition as is feasible under the circumstances; (4) applicable
law and regulation do not define public benefit; (5) in the Mather case,
the proposed public benefit was the sale of at least 30 percent of the
housing units to low- or moderate-income families and the creation of a
stable home ownership community; (6) available documents indicate that
neither the Air Force nor GSA, which was assisting in the sale,
questioned this proposed public benefit as a reasonable basis for
conducting a negotiated sale; (7) moreover, SHRA has entered into an
agreement with a private developer (who was selected competitively and
will obtain ownership of the property) that establishes conditions
designed to protect and promote this public benefit; (8) SHRA further
agreed to accept and require the developer to adhere to both an excess
profits clause and a windfall profits clause; (9) GSA policy, but not
law, prohibits the disclosure of the government's appraisal because
disclosure makes it more difficult for the government to negotiate a
higher price; (10) records and discussions with the parties involved
indicate that the Air Force disclosed the value of the property in the
first GSA-approved appraisal; (11) SHRA's appraisal was much lower; (12)
this difference caused prolonged negotiations and disagreements over the
value of the property; (13) a representative of the developer did
participate as a partner of SHRA in negotiations with the Air Force;
(14) though not inconsistent with law or regulation, this action is
contrary to the policy in GSA's Excess and Surplus Real Property
Handbook; (15) there is no concrete evidence that the property has a
higher fair market value than the proposed selling price; (16) the
proposed selling price matches the appraised value of the most recent
GSA-approved appraisal; and (17) according to SHRA and its developer,
the sale price is reasonable because there is substantial financial risk
in developing the property.

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

 REPORTNUM:  NSIAD-99-13
     TITLE:  Military Base Closures: Questions Concerning the Proposed 
             Sale of Housing at Mather Air Force Base
      DATE:  10/08/98
   SUBJECT:  Property disposal
             Air Force bases
             Surplus federal property
             Fair market value
             Community development
             Real estate sales
             Base closures
             Federal/state relations
             Military housing
             Appraisals
IDENTIFIER:  Sacramento (CA)
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Government Management,
Information, and Technology, Committee on Government Reform and
Oversight, House of Representatives

October 1998

MILITARY BASE CLOSURES - QUESTIONS
CONCERNING THE PROPOSED SALE OF
HOUSING AT MATHER AIR FORCE BASE

GAO/NSIAD-99-13

Military Base Closures

(709340)


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

  AFBCA - Air Force Base Conversion Agency
  BRAC - Base Realignment and Closure
  DOD - Department of Defense
  GSA - General Services Administration
  LRA - Local Redevelopment Authority
  SHRA - Sacramento Housing and Redevelopment Agency

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


B-280226

October 8, 1998

The Honorable Stephen Horn
Chairman, Subcommittee on Government Management,
 Information, and Technology
Committee on Government Reform and Oversight
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we review the proposed
negotiated sale of 1,271 surplus family housing units at Mather Air
Force Base, California, to the Sacramento Housing and Redevelopment
Agency (SHRA).  Specifically, you asked whether

  -- the Air Force's attempts to obtain competition satisfy
     requirements of section 203(e)(3)(H) of the Federal Property Act
     to obtain "such competition as is feasible under the
     circumstances";\1

  -- the disposal at Mather meets the test of a public benefit given
     that SHRA plans to transfer ownership immediately to a private
     developer;

  -- the Air Force, contrary to General Services Administration (GSA)
     policy and applicable laws, disclosed the appraised value of the
     family housing property to prospective purchasers;

  -- the Air Force allowed a developer's representatives to
     participate in negotiations between the Air Force and SHRA; and

  -- there is evidence that the property has a higher fair market
     value than the proposed sale price. 

On June 22, 1998, we briefed you and Representative Richard W.  Pombo
on the results of our work.  This report summarizes the information
we provided at the June 22 briefing. 


--------------------
\1 The Federal Property Act refers to the Federal Property and
Administrative Services Act of 1949, as amended.  Section
203(e)(3)(H) is codified at 40 U.S.C.  484(e)(3)(H). 


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

The decision to close Mather Air Force Base, located near Sacramento,
California, was made during the 1988 base realignment and closure
(BRAC) round, but the actual closure occurred in September 1993. 
Since then, the Air Force has been working with Sacramento County and
with other local interests to dispose of property it considers
surplus to the needs of the federal government.  The 1,271 housing
units at Mather have been vacant since 1993 and are in varying
degrees of disrepair. 

In 1996 we expressed concern about the amount of time that was being
taken to dispose of excess BRAC property and specifically cited the
Mather housing as an example.  We recommended that the Secretary of
Defense establish reasonable time frames for concluding negotiated
sales of surplus real property and that when practical, the services
rent unoccupied surplus housing and other facilities as a means of
preserving property pending final disposition.  Situations such as
that encountered at Mather reinforce the need for actions by the
Department of Defense (DOD) and the services along the lines we
previously recommended.\2


--------------------
\2 Military Bases:  Update on the Status of Bases Closed in 1988,
1991, and 1993 (GAO/NSIAD-96-149, Aug.  6, 1996). 


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

During the long period of time it took to complete the Mather housing
sale, the property deteriorated and lost value.  Nevertheless, the
Air Force acted within existing authority in negotiating the proposed
sale, and the sale price matches the latest appraisal approved by the
GSA.\3 Following is a summary of our findings: 

  -- The Air Force's decision to pursue a negotiated sale with SHRA
     rather than compete the sale publicly was made early on and was
     documented in the Air Force's 1993 official record of decision
     regarding the disposal of the Mather property.  The SHRA, as the
     authorized representative of Sacramento County,\4 was the only
     governmental entity authorized to deal with the Air Force and to
     express an interest in acquiring the Mather housing.  Under
     these circumstances, competition was not possible and,
     therefore, the Air Force satisfied the requirement of the
     Federal Property Act to obtain "such competition as is feasible
     under the circumstances."

  -- Applicable law and regulation do not define public benefit.  In
     the Mather case, the proposed public benefit was the sale of at
     least 30 percent of the housing units to low- or moderate-income
     families and the creation of a stable home ownership community. 
     Available documents indicate that neither the Air Force nor GSA,
     which was assisting in the sale, questioned this proposed public
     benefit as a reasonable basis for conducting a negotiated sale. 
     Moreover, SHRA has entered into an agreement with a private
     developer (who was selected competitively and will obtain
     ownership of the property) that establishes conditions designed
     to protect and promote this public benefit.  SHRA further agreed
     to accept and require the developer to adhere to both an excess
     profits clause and a windfall profits clause. 

  -- GSA policy, but not law, prohibits the disclosure of the
     government's appraisal because disclosure makes it more
     difficult for the government to negotiate a higher price. 
     Records and discussions with the parties involved indicate that
     the Air Force disclosed the value of the property in the first
     GSA-approved appraisal.  On the other hand, SHRA's appraisal was
     much lower.  This difference caused prolonged negotiations and
     disagreements over the value of the property. 

  -- A representative of the developer did participate as a partner
     of SHRA in negotiations with the Air Force.  Though not
     inconsistent with law or regulation, this action is contrary to
     the policy in GSA's Excess and Surplus Real Property Handbook. 
     On the basis of GSA advice, the Air Force initially objected to
     the representative's participation in negotiations but
     ultimately allowed it.  SHRA officials said that they considered
     it appropriate for the representative of the developer to
     participate because he was representing the joint interests of
     SHRA and the developer. 

  -- There is no concrete evidence that the property has a higher
     fair market value than the proposed selling price.  The proposed
     selling price matches the appraised value of the most recent
     GSA-approved appraisal.  While other private developers contend
     that a previously proposed public sale would have brought a
     higher price, this sale was not completed, and it is unknown
     what private developers would bid for the property in its
     current condition.  According to SHRA and its developer, the
     sale price is reasonable because there is substantial financial
     risk in developing the property. 

Appendix I gives a history of the negotiations between the Air Force
and SHRA.  Appendix II gives more detailed answers to the questions
we addressed.  Appendix III gives a complete description of our scope
and methodology. 


--------------------
\3 GSA is responsible for administering the Federal Property Act,
which governs the sale of surplus government property. 

\4 Sacramento County had been designated as the local redevelopment
authority in conjunction with the closure of Mather under the BRAC
process. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :3

We provided opportunities for DOD, GSA, and SHRA to review and
comment on a draft of this report.  Written comments were provided by
DOD and GSA and are included in appendixes IV and V, respectively. 
SHRA provided oral comments. 

The Assistant Secretary of the Air Force (Manpower, Reserve Affairs,
Installations and Environment), in responding for the DOD, concurred
with a draft of this report without further comment.  The
Commissioner of GSA did not indicate either agreement or disagreement
with the report but did reiterate GSA's perspective on a variety of
issues involving negotiated versus public sales, public benefit, pass
through sales, public release of appraisal information, and impact of
prolonged negotiations on sales value.  These issues are discussed in
our report.  Nevertheless, we have included GSA's comments and our
evaluation of them in appendix V.  SHRA representatives generally
agreed with the report but provided some technical clarifications,
which have been incorporated where appropriate. 


---------------------------------------------------------- Letter :3.1

We are sending copies of this report to the Chairmen of the Senate
Committees on Appropriations and on Armed Services and of the House
Committees on Appropriations and on National Security; the
Secretaries of Defense and the Air Force; and the Director of the
Office of Management and Budget.  We are also providing a copy of
this report to Representative Richard W.  Pombo.  We will make copies
available to others on request. 

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix VI. 

Sincerely yours,

David R.  Warren, Director
Defense Management Issues


HISTORY OF NEGOTIATIONS OVER
MATHER HOUSING
=========================================================== Appendix I

Composed of 5,716 acres and 970,000 square feet of buildings and
auxiliary facilities, Mather Air Force Base included a 11,300-foot
runway and a parallel 6,100-foot runway, 4 aircraft hangars, office
and industrial structures, 18 dormitory buildings, an 18-hole golf
course, parkland, and 1,271 single-family housing units.  Since the
base was closed in September 1993, most of this property has already
been transferred to civilian ownership or use through sale or lease
arrangements.  The major exception involved the 1,271 family housing
units, which have been the subject of lengthy negotiations. 


   FEDERAL PROPERTY DISPOSAL
   REQUIREMENTS
--------------------------------------------------------- Appendix I:1

Surplus federal government real estate is not automatically sold to
the highest bidder at a public sale.  Rather, the Federal Property
Act specifies a screening process for exploring the transfer of the
property to states or local governments for specified public benefit
purposes such as education, public health, recreation, airports,
wildlife conservation, and historic monuments.  Any property
remaining after these transfers may be disposed of through public
sales or, in specified instances, through negotiation procedures.  In
addition, 1993 amendments to the base realignment and closure (BRAC)
legislation authorize the transfer of surplus real property at less
than full market value to local redevelopment authorities (LRA) under
economic development conveyances for economic development and job
creation purposes.\1 The Air Force used a number of these authorities
to dispose of various parcels or real property on Mather Air Force
Base.  For example, the airport and schools were transferred to
Sacramento County through no-cost, public benefit conveyances.  Other
parcels, like the family housing units, golf course, and chapels,
were sold through either public or negotiated sales.  Sacramento
County was the LRA responsible for Mather Air Force Base. 


--------------------
\1 A local redevelopment authority is an entity established by state
or local governments and recognized by the Secretary of Defense.  In
the context of BRAC, it is the entity responsible for developing or
directing implementation of a reuse plan for the closed or realigned
military base or installation. 


   NEGOTIATED SALE
--------------------------------------------------------- Appendix I:2

Proposals for reusing the Mather properties, the related
environmental impact analyses, and public comments on the proposals
were documented in the Mather Air Force Base Environmental Impact
Statement prepared by the Air Force.\2 For Mather, the approved
statement specifically envisioned a negotiated sale of the housing
units to the local housing authority. 

Sacramento County designated some county agencies to conduct reuse
planning of some Mather parcels and to serve as its representative in
dealing with the Air Force.  For example, the Sacramento Housing and
Redevelopment Agency (SHRA) was the only agency authorized to
represent Sacramento County in efforts to acquire the Mather family
housing units.  Because it wanted to provide low cost housing, SHRA
asked the Air Force to convey the property to the county through a
negotiated sale. 

The Air Force agreed to conduct a negotiated sale subject to the
Federal Property Act, which requires that the property be sold for
its fair market value.  This decision, along with disposal decisions
for other Mather properties, was documented in the Air Force's March
31, 1993, Record of Decision concerning planned disposal of the
property.  Subsequently, the Air Force Base Conversion Agency
(AFBCA)\3 and SHRA began negotiations that continued through late
1994.  The two sides failed to reach agreement primarily because they
differed on the fair market value of the property. 


--------------------
\2 An environmental impact statement is required by the National
Environmental Policy Act of 1969, as amended, 42 U.S.C.  4321 et seq. 
A Record of Decision summarizes the statement and documents the final
agency decision. 

\3 The Air Force Base Conversion Agency was created by the Air Force
to manage the disposal of BRAC-related property.  The Agency is
responsible for ensuring that purchasers or lessees of BRAC
properties comply with contract provisions such as those limiting
excess profits and windfall profits.  When we completed our
fieldwork, the Agency was in the process of developing an automated
portfolio management system to help it carry out these
responsibilities for many parcels of BRAC property it has sold or
leased. 


   APPRAISALS AND NEGOTIATIONS
--------------------------------------------------------- Appendix I:3

Four Mather property appraisals were completed between May 1993 and
August 1995.  The first was approved by the General Services
Administration (GSA).  The second, completed in September 1993, was
funded by SHRA to support its negotiations with the Air Force.  A
third appraisal was completed in September 1994 after the Air Force
and SHRA continued to disagree over the property's value and the
assumptions used in making the appraisals.  Disagreements centered on
the amount of time that it would take for the housing units to be
renovated and sold to the community (known as the absorption period),
contractor fees, and average unit sale price.  The third appraisal
was jointly funded by SHRA and the Air Force.  A fourth appraisal,
approved by GSA, was completed in August 1995 and became the basis
for the ultimate agreement on the sale price. 

Between the first and third appraisals, the Air Force reduced its
asking price by about 50 percent, while SHRA's offer remained firm. 
Consequently, AFBCA terminated negotiations with SHRA and in January
1995 asked GSA to dispose of the housing units via a public sale. 
GSA advertised the property in late February 1995, asking interested
parties to submit sealed bids by April 18, 1995. 

The day before bids were to be opened, the Federal District Court in
San Francisco issued a temporary restraining order halting the public
sale.  The restraining order was issued because:  (1) interested
bidders had not had enough time to prepare their bids and (2)
providers for the homeless had not been given the opportunity to
request the property through a public benefit conveyance.  According
to GSA officials, at least seven bidders were interested in the
property--two bids had been received by mail and on April 18, 1995,
at least five additional bids were brought to GSA by either bidders
or couriers.  GSA returned the two bids unopened and did not accept
the other five. 

Before the temporary restraining order was resolved, the Air Force
decided to cancel the public sale and reopen negotiations with SHRA. 
Due to this cancellation, the litigation was dismissed and the
restraining order was declared moot in August 1995.  After the fourth
appraisal was made in August 1995, the Deputy Assistant Secretary
(Installations) of the Air Force took over negotiations with SHRA.\4
Agreement was soon reached on price, but other details took longer to
negotiate.  The Air Force and SHRA finally reached agreement on the
sale terms in August 1997.  SHRA signed the agreement and gave the
Air Force until August 30, 1998, to obtain approval for the sale. 
Following the completion of our work, we were notified by the Air
Force that it had signed an acceptance of sale on July 10, 1998, and
that it would transfer title of the family housing units to
Sacramento County on September 14, 1998. 

Because of the continued deterioration of the housing units, SHRA and
its development partner now question the economic viability of
rehabilitating the units.  They point out that, as directed by the
Sacramento County Board of Supervisors, they had always intended to
demolish the 414 duplexes and replace them with single-family homes. 
They now believe that many of the remaining single-family units might
also have to be demolished and replaced.  This decision will be made
on a unit-by-unit basis, depending on whether renovation or
demolition and reconstruction is more economical. 


--------------------
\4 The Deputy Assistant Secretary said he assumed responsibility for
negotiations because of the poor relationship that had developed
between AFBCA and SHRA. 


DETAILED ANSWERS TO QUESTIONS ON
THE PROPOSED NEGOTIATED SALE OF
MATHER FAMILY HOUSING
========================================================== Appendix II

Question 1:  Did the Air Force's attempts to obtain competition
satisfy requirements of section 203(e)(3)(H) of the Federal Property
Act to obtain such competition as is feasible under the
circumstances? 

The Federal Property Act generally requires that federal agencies
dispose of surplus real property by formally advertising for bids and
selling to the responsible bidder that offers the best price to the
government.  The act identifies exceptions, however, where agencies
can dispose of real property through negotiations.  One such
exception is the disposal to states, territories, possessions, or
their political subdivisions for a public benefit purpose.  Although
the act still requires the disposal agency to obtain "such
competition as is feasible under the circumstances," SHRA was the
only authorized political entity with which negotiations could be
held and the only one to express an interest in the Mather property. 
Under these circumstances, competition was not possible and the
statute's mandate was met. 

When the Air Force canceled negotiations with SHRA in early 1995, it
did attempt to hold a public sale.  According to GSA officials who
were helping the Air Force with the disposal process, the decision to
move to a competitive sale was probably a good one.  Negotiations had
broken down, and it did not appear that the Air Force and SHRA could
reach an agreement.  Their only criticism was that the Air Force
should have made the decision sooner rather than after 16 months of
negotiations.  It is GSA policy to dispose of excess property as
expeditiously as possible, and its general practice is to hold a
public sale within 1 or 2 months if it is unable to negotiate an
acceptable agreement.  Holding surplus property longer than that, in
GSA's opinion, is not in the best interest of the government and only
serves to increase holding costs and problems such as those found at
Mather.  GSA officials also questioned the wisdom of the Air Force's
decision to reopen negotiations with SHRA given its previous
experience. 

Choosing between a public or a negotiated sale involves a trade-off
between different public policy objectives.  Public sales are
generally faster and may foster competition that can maximize the
government's return on the property.  Negotiated sales usually take
longer to complete, may be noncompetitive, and may not maximize the
government's return.  Yet they help maximize the interests of
communities affected by base closures by responding to the
communities' desired plans for the property. 

Question 2:  Does the disposal at Mather meet the test of a public
benefit that is uniquely available in a negotiated disposal to a
public body, given that SHRA plans to immediately transfer ownership
to a private developer? 

Negotiated sales to public entities are considered "only when the
disposal agency has made a determination that a public benefit will
result from the negotiated sale which would not be realized from a
competitive sale disposal."\1 Negotiated disposal procedures also
allow a public entity to purchase surplus property free from
competition with private enterprise.  Applicable law and regulation
do not define public benefit.  Further, although the term public
benefit is cited in the Federal Property Act's implementing
regulation and Department of Defense guidance, neither of them define
the term. 

In justifying a negotiated sale, SHRA's letter to the Air Force in
November 1992 identified the public benefit objectives of providing
home ownership opportunities for lower-income families and creating a
stable home ownership community.  Under SHRA's proposal, 30 percent
(382) of the housing units would be sold to low-income, first-time
home buyers.  Low-income households are defined as those earning no
more than 80 percent of the area's median income.  In Sacramento, at
the time SHRA outlined the expected public benefit, 80 percent of the
medium income was $31,750 for a family of four.  One-third of the
low-income houses, or 10 percent of all the units, would be sold to
families earning no more than 70 percent of the median income, or
$27,790 for a family of four. 

SHRA said that its goal of creating a stable home ownership community
can best be achieved if the homes are occupied by their owners.  SHRA
fears that extreme deterioration of the Mather housing units might
result if they were sold to individual developers and subsequently
rented.  Under this scenario, according to SHRA officials, the
housing area could quickly deteriorate and require financial
assistance to combat problems such as vandalism, illegal drug use,
and other crimes.  To guard against this, SHRA plans to require its
development partner to promote owner occupancy of the units. 

While GSA officials do not have a definition of what constitutes a
public benefit, they did state that when a public benefit is
determined and property is transferred to a state or local
government, ownership usually remains with the governmental entity
until the public benefit is realized.  In Mather, SHRA intends to
transfer ownership of the housing units to a private developer (for
the same price paid to the Air Force) as soon as it receives title
from the Air Force.  This type of pass-through arrangement is
contrary to GSA policy primarily because it passes ownership to
entities not eligible to acquire the property through a negotiated
sale.  The concern is that a government entity could negotiate an
unreasonably low price for a property and transfer it to a private
entity that subsequently reaps exorbitant or windfall profits.  This
concern is somewhat allayed in this instance because SHRA plans to
take action, by agreement and otherwise, to prevent the developer
from obtaining excess or windfall profits for a 6-year period, bind
the developer to continue the public purposes until all units are
sold, and retain control over contractor activities. 

Despite registering concern about the pass-through arrangement, Air
Force officials said they accepted it for three reasons.  First, SHRA
had to acquire and develop the Mather housing units without cost to
the county because Sacramento County would not finance the purchase
and development cost on its own.  Thus, SHRA had to forge a
partnership with someone who would provide financing but still be
bound by the county's public benefit goals.  If the Air Force were to
negotiate an agreement with SHRA, accepting this partnership was a
prerequisite.  Second, SHRA selected the contractor competitively,
thus giving the Air Force some assurance that the contractor and the
county were independent of one another.  Finally, SHRA agreed to
accept and enforce on the developer both an excess profits clause and
a windfall profits clause.  According to the Air Force, the excess
profits clause requires SHRA and the developer to return to the Air
Force all profits in excess of allowable costs during the first 3
years.  The windfall profits clause covers the following 3 years and
requires the return to the government of 60 percent of any windfall
profits. 

Because of the documented lack of low- and moderate-income housing in
Sacramento County, neither the Air Force nor GSA questioned the
proposed public benefit as a reasonable basis for conducting a
negotiated sale.  Both agreed that the Air Force complied with the
regulatory requirement when it accepted SHRA's proposal.  According
to GSA officials, this acceptance implies that the Air Force had
decided that a negotiated sale was necessary to achieve the public
benefit. 

Developers who intended to bid on the property during the proposed
public sale had a different perspective.  On the basis of the
expected selling price of the housing units (between $65,000 and
$86,000 per unit), the three developers we interviewed said that most
of the Mather housing would be targeted to low- and moderate-income
families and that it would be easy for any developer to meet the
30-percent goal.  These developers said they were willing to bid more
for the property than SHRA was offering at the time of the public
sale and would adhere to any low- or moderate-income goals the county
might have.  Whether they would have done so can never be known with
certainty.  There are no official records of the bids because when
the temporary restraining order was issued, GSA returned the unopened
bids it had received and did not accept others.  Furthermore, the
government's invitation for bids would not require the successful
bidder to comply with SHRA's public benefit goals because public
sales, according to GSA officials, do not place limitations or
restrictions on the use of property.  SHRA also pointed out that it
had included certain public benefit goals in the partnership
agreement that it could not have imposed on a private developer.  One
of these goals is a provision for a good faith effort to contract
with minority firms.  Another is an obligation to keep SHRA informed
of applications for home purchase from public housing and Section 8
housing tenants and to market to those tenants.\2

Question 3:  Did the Air Force, contrary to GSA policy and applicable
laws, disclose the appraised value of the family housing property to
prospective purchasers? 

GSA's Excess and Surplus Real Property Handbook (June 29, 1994)
states that the government's appraisal information should not be
disclosed.  Disclosure, however, is not contrary to law.  According
to GSA officials, keeping the appraised value confidential is a
common-sense negotiating technique that helps the government maintain
its negotiating position.  Because the appraised fair market value is
the minimum the government can accept during negotiations, disclosing
the information limits the government's ability to negotiate the
highest possible price for the property. 

The first of the four appraisals (completed in May 1993) was the
basis for AFBCA's initial negotiations with SHRA.  SHRA officials
told us that SHRA did not have access to this appraisal.  Documents
show, however, that soon after negotiations began, AFBCA officials
made statements that allowed SHRA to compute the appraisal's
estimated fair market value for the housing units.  GSA officials who
were helping AFBCA in the negotiations confirmed that AFBCA officials
indirectly disclosed the appraised fair market value during the first
negotiation session with SHRA. 

Later, when negotiations began to stall, AFBCA officials disclosed
the property's appraised fair market value in a letter to SHRA.  The
two sides also discussed the assumptions and methodologies used in
the initial appraisal, including the planned selling prices of the
housing units, absorption rates, and financing costs.  This was done
so that both parties could better understand the differences between
their negotiating positions and to help reach agreement on the
selling price. 

The fourth and last appraisal (completed in August 1995) was carried
out because regulations require that real estate negotiations be
based on appraisals not more than 9 months old.  When negotiations
reopened in July 1995, the original GSA-approved appraisal was 2
years old.  Officials in the Office of the Deputy Assistant Secretary
of the Air Force for Installations (which had taken over negotiations
with SHRA) and at SHRA stated that SHRA did not have access to this
appraisal.  Likewise, we found no evidence in the files that
indicated the Air Force disclosed the appraised fair market value of
the property to SHRA or other parties outside the Air Force.\3

Question 4:  Did the Air Force allow a developer's representative to
participate in negotiations between the Air Force and SHRA? 

GSA's Excess and Surplus Real Property Handbook states that no
representative of developers, contractors, or congressional staff
should be allowed to participate in negotiations of property sales,
not even as an observer.  According to the GSA officials we
contacted, a negotiated sale is supposed to be made to a public
entity for a public purpose.  Having a representative of a private
developer present during negotiations changes the nature of the
negotiations and blurs the distinction between a public sale and a
negotiated sale.  Usually, too much emphasis is placed on the
potential profit associated with the sale. 

Air Force officials involved in the negotiations clearly did not
adhere to this policy.  A lawyer hired by Mather Housing Company,
LLC, a California limited liability company that was SHRA's private
development partner, participated in most of the negotiating sessions
for the Mather housing units.  GSA officials advised AFBCA against
this practice early in the negotiations.  In May 1993, AFBCA also
wrote to the lawyer informing him that he should not participate in
negotiations, that his participation was inappropriate, and that any
hint that AFBCA was negotiating with a private party might subject
the AFBCA to justified criticism.  However, from documentation in
AFBCA files and statements made by Air Force and GSA officials, the
developer's representative continued to participate in negotiating
sessions after the letter was sent. 

SHRA officials acknowledged that the agency had no formal agreement
with the lawyer in question.  Nevertheless, documentation indicates
that SHRA thought it was appropriate for him to participate in
negotiations because he was representing the interests of the
partnership between SHRA and Mather Housing Company, LLC.  These
officials explained that SHRA went through a competitive process to
select Mather Housing Company, LLC, as its partner and that the
partnership is formalized by an agreement that lays out its
objectives, mutual promises, representations, and terms.  A key
aspect of this agreement is that SHRA would transfer ownership of the
housing units to Mather Housing Company, LLC, subject to conditions
designed to protect and promote the public benefit for which the
property was acquired. 

The Air Force official that handled negotiations for the Deputy
Assistant Secretary of the Air Force (Installations) said that when
negotiations resumed with SHRA in 1995, it was clear that the lawyer
was representing the private developer.  The official stressed,
however, that because of the special relationship between SHRA and
the developer, the lawyer's presence was needed to reach a final
agreement.  Without his presence, the meetings would have been
repeatedly adjourned while SHRA representatives conferred with the
lawyer outside the meeting room.  The developer's lawyer, the
official added, was only providing advice, and negotiations were
clearly between the Air Force and SHRA. 

Question 5:  Is there evidence that suggests the property has a
higher fair market value than the proposed sale price? 

It appears that the Air Force has obtained fair market value for the
property.  According to section 203(e)(3)(H) of the Federal Property
Act and implementing regulations, the Air Force cannot sell the
housing units through a negotiated sale for less than their fair
market value as determined by an approved appraisal.  As discussed
previously, two GSA-approved appraisals were carried out in May 1993
and in August 1995.  The Air Force agreed to sell the housing units
to SHRA for the appraised value in the second appraisal. 

However, according to documentation in AFBCA files, the property had
a higher appraised value at the start of negotiations.  The estimated
fair market value in the first approved appraisal was about $21
million higher than the second.  In explaining this difference, GSA
officials told us that GSA does not certify that the appraised value
of the property is accurate.  Rather, its review and approval ensures
that an appraisal adheres to prescribed appraisal standards and
methodologies.  In this case, GSA officials said that both appraisals
adhered to GSA's standards and methodologies and had sufficient
documentation to support their assertions and assumptions. 

GSA officials explained that estimating the value of a large parcel
of property such as the Mather housing units takes 60 to 90 days;
and, according to an AFBCA official, it requires professional
judgment.  As already indicated, differences in assumptions can
result in significant differences in fair market value estimates. 
For example, appraisal analyses show the major difference between the
two appraisals is the estimate of the amount of time needed to
renovate the housing units and absorb them into the community.  The
first appraisal was based on an absorption period of 4.5 years while
the second assumed 8 years.  The longer absorption period
significantly increases project costs, which in turn reduces the
estimated fair market value of the property.  Other assumptions that
can affect the estimated fair market value concern the average retail
value and rehabilitation costs of the units, costs to replace or
improve infrastructure (i.e., roads, sidewalks, electrical
distribution lines, water and gas lines, and sewers), discount rates,
marketing and sales costs, and profits. 

We also spoke with three developers in the Sacramento and San
Francisco area who had prepared bids in anticipation of an April 1995
public sale of the housing units.  They told us they were prepared to
pay between $9 million and almost $20 million for the property at
that time.  These developers said that despite the deterioration and
vandalism that has occurred, the property is as valuable today as it
was a few years ago, primarily because the Sacramento housing market
is stronger now than it was in 1995.  If the housing units were to be
offered again for public sale, these developers claimed they could
purchase the property (for between $9 million and $20 million), make
the necessary infrastructure improvements, renovate the shells of the
housing units, and still make a reasonable profit.  They did concede,
however, that their claims would require a more detailed assessment
of the property's current condition. 

On the other hand, the second and third appraisals (not commissioned
by GSA) estimated the property's value at about $3 million to $4
million, much closer to the agreed sale price.  SHRA and Mather
Housing Company, LLC, believe these are more accurate estimates of
the property's value.  They also believe the sale price is reasonable
because there is substantial financial risk in developing the
property, especially considering the deterioration and vandalism that
has occurred, the unknowns associated with renovating the
infrastructure, and the asbestos and lead paint contamination in the
housing units.  Nevertheless, to prevent SHRA and/or Mather Housing
Company, LLC, from reaping significant profits from this project,
both are subject to the excess and windfall profits clauses discussed
earlier in this appendix. 


--------------------
\1 41 C.F.R.  101-47.304-9(c). 

\2 The Section 8 housing program is a federal rent subsidy program
operated by the Department of Housing and Urban Development in
Washington, DC. 

\3 The second and third appraisals were completely or partly funded
by SHRA.  These appraisals and their supporting documentation were
readily shared and discussed throughout the negotiations. 


SCOPE AND METHODOLOGY
========================================================= Appendix III

To respond to the Subcommittee's questions, we met with all the
parties involved in the negotiated sale of the Mather housing units,
selected developers who had expressed an interest in a public sale of
the units, and government officials responsible for administering
policies and regulations governing the disposal of federal property. 
These included

  -- the Office of the Deputy Under Secretary of Defense (Industrial
     Affairs and Installations), the Office of the Deputy Assistant
     Secretary of the Air Force (Installations), and the AFBCA,
     Arlington, Virginia;

  -- the GSA, Region 9, San Francisco, California;

  -- SHRA, Sacramento, California;

  -- Lewis Homes Management Corporation, Sacramento, California
     (representing Mather Housing Company, LLC);

  -- Law Offices of Gregory D.  Thatch, Sacramento, California;

  -- Burlingame Realty, Foster City, California;

  -- Excelsior Export Company, San Francisco, California;

  -- H.  Herbert Jackson, Attorney, Sacramento, California; and

  -- RAMCO Enterprises Corporation, Sacramento, California. 

At meetings with representatives from each of these organizations, we
discussed issues related to the sale of the Mather housing units and,
when applicable, requested documentation that supported the
statements and assertions made during the meetings.  We also reviewed
laws, regulations, and policies pertaining to negotiated and public
sales of excess government property.  At AFBCA, we obtained
documentation on the decision-making process in the disposal of
Mather Air Force Base properties.  This included documentation on the
various negotiations with SHRA, property appraisals, and analyses of
the appraisals. 

To examine the public benefits associated with the proposed sale and
whether they supported the decision to negotiate only with SHRA, we
reviewed the Mather Air Force Base Environmental Impact Statement and
the Air Force Record of Decision for disposal of Mather properties. 
We also reviewed documentation prepared by SHRA to justify a
negotiated sale of the housing units and discussed with SHRA how it
plans to ensure that the public benefit would be realized once it
resells the property to a private developer.  We requested and
obtained documentation supporting this plan. 

To examine the Air Force's attempts to obtain competition and
determine whether those attempts satisfy requirements of section
203(e)(3)(H) of the Federal Property Act, we identified the
governmental entities that were authorized to negotiate with the Air
Force for the Mather housing units.  We discussed with AFBCA the
extent to which it relied on Sacramento County's plan for using or
redeveloping the Mather properties--particularly the housing units. 
We also discussed with AFBCA, GSA, and others the circumstances
surrounding AFBCA's decision to conduct a public sale and its
rationale for terminating that sale to reopen negotiations with SHRA. 

To determine whether the Air Force improperly disclosed the appraisal
to prospective purchasers of the Mather family housing property, we
questioned AFBCA officials and GSA officials about their efforts to
maintain the confidentiality of the appraisals, reviewed
correspondence pertaining to negotiations between AFBCA and SHRA, and
questioned GSA officials about the procedures they used to protect
the bids submitted for the public sale. 

To determine whether a developer's representative participated in
negotiations between the Air Force and SHRA, we reviewed
correspondence in AFBCA files and questioned Air Force, GSA, SHRA,
and Mather Housing Company officials and a private attorney.  In
particular, we inquired about the role played by the private attorney
representing Mather Housing Company, LLC. 

To determine whether there is evidence that the property has a higher
value than the current sale price, we reviewed the four appraisals
made between May 1993 and August 1995 and comparative analyses of
these appraisals made by a GSA official, the Navy's Facilities
Engineering Command, and the appraisers.  We reviewed the comparative
analyses to identify the assumptions and factors that contributed to
the differences in appraised value.  We also discussed with AFBCA
officials their decision not to insist on the value estimated in the
initial appraisal in their negotiations with SHRA. 

We also obtained from GSA the names of private developers who either
submitted a sealed bid for the property or appeared in person to
submit bids when the property was advertised for public sale.  We
attempted to contact the five developers/entities that were
interested in the property and were able to meet with three of them. 
We discussed their views on the value and marketability of the
housing units at the time of the public sale in April 1995 and again
in April 1998, the effect that deterioration and vandalism have had
on renovation cost, the expected costs of purchasing vacant property
with infrastructure in place in the Sacramento area, and the costs
and efforts needed to mitigate problems caused by the presence of
asbestos and lead-based paint.  We were not able to verify the claims
the private developers made about property values. 

Finally, we discussed with GSA officials their review and approval of
appraisals and the extent to which this review and approval verifies
the accuracy of the appraised fair market value. 

We performed our work from April to June 1998 in accordance with
generally accepted government auditing standards. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================= Appendix III




(See figure in printed edition.)Appendix V
COMMENTS FROM THE GENERAL SERVICES
ADMINISTRATION
========================================================= Appendix III

end of this appendix. 



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on GSA's letter dated September 17,
1998. 

GAO COMMENTS

1.  As our report points out, there were several bidders who had
either submitted or were ready to submit a bid when the Mather
property was offered for public sale.  Consequently, it does appear
that a sufficient competitive environment existed to support a public
sale.  We also point out, however, that the Air Force ultimately
decided to return to a negotiated sale with SHRA, which was within
its prerogative under authorities delegated by GSA.  While this
action might have resulted in a lower selling price than that which
could have been received through a public sale, it represents an
effort by the Air Force to respond to the community's plans for the
property. 

2.  Our report notes that there were questions about whether the
project's public benefits might also have been achieved through a
public sale.  The report further notes, however, that Sacramento
County has a shortage of low- and moderate-income housing, and
neither the Air Force nor GSA questioned the proposed public benefit
as a reasonable basis for negotiating solely with SHRA.  It also
points out that, according to GSA officials, public sales do not
include limitations or restrictions on the use of property. 
Therefore, a successful bidder would not be bound by SHRA's public
benefit goals. 

3.  Our report discusses the concerns with pass-through sales and
notes that they are contrary to GSA policy.  Without condoning this
action, we explain the Air Force's rationale for accepting the
arrangement and note that the Air Force imposed excess profits and
windfall profits clauses to mitigate any undue advantage accruing to
SHRA's private sector partner. 

4.  Our report notes that Air Force officials indirectly disclosed
the initial appraised fair market value of the Mather property during
negotiations with SHRA.  While this is contrary to GSA policy, we are
not sure it had a significant impact on the Air Force's negotiating
position.  In this instance, SHRA had its own appraisal of the
property, which showed a much lower fair market value.  SHRA's
reluctance to accept a higher value became the basis for prolonged
negotiations with the Air Force. 

5.  Our report notes that permitting a representative of the
developer to sit in on negotiations between SHRA and the Air Force
was contrary to guidance in GSA's Excess and Surplus Real Property
Handbook.  We point out, however, that the Air Force and SHRA
considered it appropriate in this instance because the individual
represented the interests of the partnership between SHRA and the
developer. 

6.  We agree and our report notes that the extended negotiations and
the lack of maintenance resulted in significant deterioration of the
Mather housing property and its subsequent loss of value.  We have
also previously cited the need for DOD to take steps to avoid such
situations in disposing of base closure properties. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix VI

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Barry W.  Holman
Bonita Page

CHICAGO FIELD OFFICE

James Hatcher
James Fuquay

SAN FRANCISCO FIELD OFFICE

Gary Ulrich


*** End of document. ***