State Department: Millions of Dollars Could Be Generated by Selling
Unneeded Overseas Real Estate (Testimony, 06/27/96, GAO/T-NSIAD-96-195).

GAO discussed the State Department's management of more than $10 billion
in U.S. overseas real estate. GAO noted that: (1) State has made
substantial progress in correcting its real estate management problems,
but State's retention of unused or excess property remains a problem;
(2) State's list of potential real estate sales properties is
incomplete; (3) State has not expeditiously disposed of closed
properties or established an effective process for identifying and
selling unneeded overseas property; (4) State and the embassies are
unable to settle excess property issues because of the parties'
parochial interests and the lack of incentives to sell excess property;
and (5) State does not have a system to account for sales proceeds and
ensure that they are spent for high-priority needs.

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

 REPORTNUM:  T-NSIAD-96-195
     TITLE:  State Department: Millions of Dollars Could Be Generated by 
             Selling Unneeded Overseas Real Estate
      DATE:  06/27/96
   SUBJECT:  Surplus federal property
             Embassies
             Property disposal
             Real estate sales
             Federal agency accounting systems
             Federal property management
             Advisory committees
             Government facilities
             Fair market value
             Real property
IDENTIFIER:  Singapore
             Zanzibar (Tanzania)
             Alexandria (Egypt)
             Nassau (Bahamas)
             Dakar (Senegal)
             Rabat (Morocco)
             Hamilton (Bermuda)
             Buenos Aires (Argentina)
             Prague (Czech Federal Republic)
             Budapest (Hungary)
             Tokyo (Japan)
             Brasilia (Brazil)
             
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Cover
================================================================ COVER


Before the Subcommittee on International Operations and Human Rights,
Committee on International Relations, House of Representatives

For Release on Delivery
Expected at
2:30 p.m.  EDT
Thursday, June 27, 1996

STATE DEPARTMENT - MILLIONS OF
DOLLARS COULD BE GENERATED BY
SELLING UNNEEDED OVERSEAS REAL
ESTATE

Statement of Benjamin F.  Nelson, Director, International Relations
and Trade Issues, National Security and International Affairs
Division

GAO/T-NSIAD-96-195

GAO/NSIAD-96-195T


(711211)


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

  FBO - x
  GAO - x

============================================================ Chapter 0

Mr.  Chairman, Members of the Subcommittee: 

I am pleased to be here today to discuss our report on the Department
of State's management of more than $10 billion in U.S.-owned real
estate at over 200 locations overseas.\1 State's management of
overseas real property, through its Office of Foreign Buildings
Operations (FBO), has been criticized since the early 1960s.  In the
early 1990s, we put overseas real property on our list of federal
programs most vulnerable to waste and mismanagement.\2 State, to its
credit, has since made substantial progress in improving its
management through actions such as assigning skilled maintenance
professionals to overseas posts and establishing maintenance
assistance centers.  In view of that progress, we removed real
property from our high-risk list in February 1995.\3

However, we also told State that it should closely monitor this area. 
One remaining problem was State's retention of unused or excess
property. 


--------------------
\1 Overseas Real Estate:  Millions of Dollars Could Be Generated by
Selling Unneeded Real Estate (GAO/NSIAD-96-36, Apr.  23, 1996). 

\2 High-Risk Series:  Management of Overseas Real Property
(GAO/HR-93-15, Dec.  1992). 

\3 High-Risk Series:  Quick Reference Guide (GAO/HR-95-2, Feb. 
1995). 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:1

Our current work indicates that State has not established an
effective process for identifying and selling unneeded overseas real
estate.  Decisions concerning the sale of excess and unneeded
property have often been delayed for years, largely because of
parochial interests among the parties involved.  As a result, State
has a large inventory of excess real estate that could generate
substantial revenue and reduce its budget requirements. 

As of October 1995, State had listed over 100 overseas properties
valued at $467 million for potential sale.  However, we identified
other properties worth millions of dollars not on the list that
appear excess to State's needs or that have a questionable value.  We
cannot state with any certainty the actual amount of real estate that
could be sold because of weaknesses in State's identification
process.  State does not have a systematic way of determining whether
property is excess or too expensive to maintain. 

State's current process for identifying and selling unneeded property
requires the weighing of multiple factors presented by different
groups with competing interests.  As a result, FBO and the embassies
are sometimes unable to expeditiously (1) reach agreement on
properties to sell, (2) move forward on sales, and (3) determine the
appropriate use of proceeds.  State officials attribute many delays
to resistance from host governments and the need to weigh this and
other factors against the economic benefits of selling property. 
Unfortunately, resolving these considerations often delays potential
sales for years. 

Additionally, we believe that the process for using and accounting
for sales proceeds needs to be improved.  State sold $53 million in
real estate during fiscal year 1995.  However, it did not routinely
use the sales proceeds for State's highest priority real property
needs.  U.S.  embassies involved in sales are usually given first
priority in using sales proceeds.  FBO believes that embassies will
not cooperate in identifying excess properties unless they receive
first consideration on how to use the proceeds.  Further, State did
not account separately for the use of the sales proceeds, making it
difficult to verify the actual use of the funds. 

Because of the strong interests embassies have in retaining their
real estate and using the sales proceeds, external political
pressures, and difficulties in resolving disputes, we believe that
the Secretary of State should appoint an independent panel to decide
which properties should be sold.  In establishing this panel,
consideration should be given to appointing representatives from
State's Office of the Inspector General and Bureau of Finance and
Management Policy as well as private sector representatives with real
estate expertise.  We believe the reasons for retaining any property
should be weighed against the financial interests of the State
Department and the U.S.  government. 

I would now like to describe more fully some of the more critical
weaknesses in State's system.  Let me begin with the property sales
list. 


   ADDITIONAL PROPERTY COULD BE
   LISTED FOR POTENTIAL SALE
---------------------------------------------------------- Chapter 0:2

Both State's October 1994 list and a second list submitted to the
Office of Management and Budget in 1995 had about 100 properties
listed for potential sale.  Properties on the 1994 list were valued
at $250 million.  One year later, State added high-value
properties--including four in Singapore, Paris, and Bangkok--to its
list, bringing the total value of properties available for sale to
$467 million. 

However, State holds other properties that it could potentially sell
that were not on these lists.  Some of the properties we identified
were worth millions of dollars.  These include (1) properties that
have been retained at closed posts, including Zanzibar, Tanzania; and
Alexandria, Egypt; (2) properties that are vacant, unneeded, or
unsuitable for the purposes for which they were acquired, including
some in Nassau, the Bahamas; Dakar, Senegal; and Rabat, Morocco; and
(3) high-value properties that are over sized or not needed in
Hamilton, Bermuda; Buenos Aires, Argentina; Prague, the Czech
Republic; and Budapest, Hungary. 

State has often been slow in taking action to dispose of property at
closed posts. 

  -- In Zanzibar, the consulate general residence has been kept and
     used predominantly for recreational purposes even though the
     consulate closed 17 years ago.  According to State's Inspector
     General, the property was used 36 nights for representational
     purposes and 122 nights for recreational purposes in 1994. 
     Renovation costs have exceeded $130,000, and maintenance and
     salary costs relating to the property exceeded $30,000 in 1994. 
     Reportedly, there are several hotels in the area that could meet
     State's requirements. 

  -- The consulate general residence in Alexandria, valued at over $1
     million, remains in FBO's inventory 3 years after the consulate
     closed, in part because State officials hoped that the post
     would be reopened.  State has retained the property because it
     was ideal for representational purposes.  The house, occupied by
     a representative of the U.S.  Information Agency, was used to
     host 14 mostly academic and cultural events in 1995.  State's
     Inspector General has questioned such retention, describing the
     situation regarding this property as an "apparent lack of
     concern for the financial loss being incurred by the U.S. 
     government."

In Nassau, State did not act to sell an unneeded 11-acre site
originally intended for construction of a new embassy.  The need to
dispose of it was recognized in 1993.  In response to our work, State
has now added Nassau to its disposal list, obtained updated
appraisals, and outlined steps for sale of the property.  The
property is valued at $1 million. 

In Hamilton, Bermuda, State owns an expensive-to-maintain residence,
known as Chelston, for the consul general.  In April 1994, the post
estimated that the property was worth over $12 million.  An FBO
survey in February 1993 disclosed that the residence needed $240,000
in major repairs.  Annual operational and maintenance costs for this
residence were reported in excess of $100,000.  The 10,000
square-foot main house is part of a 14-acre beachfront estate. 
State's Inspector General has repeatedly recommended selling the
property and, in a September 1993 report, stated that "at a time of
continual budget constraints, the Department cannot afford the luxury
of maintaining this ostentatious piece of property." State responded
that the government of Bermuda opposed the sale and has taken no
further action on the matter. 

State also did not take full advantage of opportunities to sell
properties in Tokyo that are valued at millions of dollars.  In April
1995, we reported that the Treasury Department owned a residence
(formerly used by the Treasury financial attache) that had
deteriorated and was no longer usable.\4 It was estimated that the
house could have sold for $15 million in 1991.  However, Treasury and
State could not reach agreement on its sale, and by 1994 the
estimated value of the property had decreased to $5 million.  We
recommended that Treasury sell the property and deposit the proceeds
in the general fund of the Treasury.  In May 1996, Treasury
negotiated a transfer of the property to State in return for free
housing on the Mitsui compound for Treasury employees.  The residence
is now on State's list of property for potential sale.  We also
recommended that State sell the Deputy Chief of Mission residence.\5
State did not agree with our position believing that the residence
plays an important role in bilateral relations with Japan and that
cost considerations should not be the sole determinant in whether to
sell the residence.  We believe the merits of this argument could be
best assessed by an independent panel. 


--------------------
\4 Overseas Real Estate:  Inaction on Proposals to Sell High-Value
Property in Tokyo (GAO/NSIAD-95-73, Apr.  7, 1995). 

\5 A 1991 study appraised the property, which contains the Deputy
Chief of Mission residence, at $92 million.  A replacement residence
could have been provided for $4 million on the Mitsui compound. 


   NO SYSTEMATIC PROCESS TO
   IDENTIFY AND DISPOSE OF EXCESS
   PROPERTY
---------------------------------------------------------- Chapter 0:3

Properties on FBO's potential sales list were identified for sale
through the individual actions of embassies, FBO officials, and
State's Inspector General.  State indicated that the totality of
these actions constitutes a systematic process for identifying real
estate that should be sold.  We disagree, particularly since
embassies lack incentives to identify, report on, and sell property
unless they can use the proceeds for their own use. 

Also, in several cases embassies and FBO had protracted and costly
disagreements over whether to sell property and how to use the
proceeds.  For example, in Brasilia the embassy and FBO had a
standoff for over
2-1/2 years over whether to (1) sell vacant lots and use the proceeds
to renovate a 29-unit apartment building or (2) sell an apartment
building and other property and use the proceeds to build residences
on the vacant lots.  During this dispute, the embassy spent $580,000
annually to lease housing, while the 29 apartments remained vacant. 

The ambassador's 43,000 square-foot residence in Buenos Aires is an
example of State's lack of incentives to sell property.  The issue of
selling this property dates back to 1969.  In 1993, after a
delegation of congressional and State officials visited Argentina,
State announced it would retain and restore the $20-million
residence.  According to the Inspector General, "The residence will
continue to represent a major expense which the inspectors doubt can
be justified indefinitely if budgets continue to shrink."

FBO policy states that unresolved disputes will be submitted to
State's Assistant Secretary for Administration for further review and
discussion.  However, disputes sometimes drag on for years.  Of the
cases that we reviewed, the Assistant Secretary was involved in only
the Brasilia dispute, but only after the dispute had been ongoing for
2-1/2 years.  The problem of conflicting interests and difficulties
in agreeing on property sales is the reason we recommend that the
Secretary establish an independent panel to facilitate the
identification and disposal of excess, unusable, or uneconomical
overseas real property. 


   FBO HAS NO SYSTEM TO ACCOUNT
   FOR PROCEEDS AND ENSURE THAT
   THEY ARE SPENT FOR MOST URGENT
   NEEDS
---------------------------------------------------------- Chapter 0:4

From fiscal years 1990 to 1995, State made real estate sales totaling
$133 million.\6 FBO has not developed a procedure for routinely using
sales proceeds to meet priority worldwide requirements.  As an
incentive for embassies to agree to a sale, FBO normally gives those
embassies first consideration when determining the use of sales
proceeds.  For any sales proceeds not used in a country where the
sale occurred, FBO may use the funds to reduce its lease costs or to
acquire new property.  FBO maintains that it evaluates the legitimacy
and economic soundness of each proposal, but it does not routinely
weigh the proposal against the needs of other embassies. 

State has the authority to retain and use proceeds from real estate
sales.  State reports the use of proceeds to the Congress in its
annual budget submission.  However, the reliability of the
information is questionable because proceeds are commingled with
appropriated funds and State does not detail how the funds are
specifically used.  We note that State has recently reported that it
intends to establish a separate program activity for sales proceeds. 
This may help improve accountability for the actual use of sales
proceeds. 


--------------------
\6 This figure includes $48.8 million from the forced sale of
property in Singapore because of road construction. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

In summary, the State Department has millions of dollars invested in
overseas properties that may be unneeded or too expensive to
maintain, particularly given budget constraints.  Proper management
of State's overseas property could generate considerable revenue for
higher priority use.  As noted earlier in my testimony, we
recommended that State establish an independent panel to review and
recommend the sales of excess property.  We believe such a panel can
help effectively reduce the current inventory of property and ensure
proper management in the future.  Further, to provide a routine
process for expeditiously resolving disagreements between FBO and the
embassies, we have recommended that State prepare annual reports
identifying all excess properties whose sale FBO and the embassies
cannot agree on.  We have also recommended that State improve its
accounting and reporting on the use of sales proceeds. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to respond to any questions you may have. 


*** End of document. ***