With a real estate portfolio of over 539,000 facilities and 28 million acres of land, the Department of Defense (DOD) has been challenged to effectively manage deteriorating facilities and underused and excess property. To address these challenges, DOD has pursued a multipart strategy involving the base realignment and closure process, housing privatization, and demolition of facilities that are no longer needed. In addition, DOD has pursued a strategy it calls enhanced use leasing, which involves leasing underused real property to gain additional resources for the maintenance and repair of existing facilities or the construction of new facilities. According to the military services, enhanced use leases (EUL) offer significant opportunities to reduce DODs infrastructure costs and could provide hundreds of millions of dollars to improve installation facilities, rather than financing these improvements through annual appropriations.
The secretaries of the military departments have authority to lease nonexcess military real property under the control of the respective departments in exchange for cash or in-kind consideration that is not less than the fair market value of the lease interest, subject to certain conditions. Some EULs involve complex agreements and long terms. For example, an EUL might provide for a 50-year lease of military land to a private developer that would be expected to construct office or other commercial buildings on the land and then rent the facilities to private sector tenants for profit. As consideration, the military might receive cash or in-kind services valued at an amount equal to a share of the net rental revenues from the developed property. As of the end of fiscal year 2010, the military services reported that 17 EULs were in placethe Army reported 7, the Navy reported 5, and the Air Force reported 5. The services also reported that 37 additional EULs were in various phases of review or negotiation for possible future implementation. However, as GAO previously reported in June 2011, the services did not always realize expected financial benefits from the EUL program.
Section 2667 of Title 10 of the United States Code provides authority to secretaries of the military departments to lease nonexcess real property under the control of the respective departments, subject to certain conditions.
10 U.S.C. § 2667.
In the enhanced use leasing context, the fair market value of the lease is determined by the appropriate departmental secretary.
GAOs detailed case studies of nine EULs found that the services management of the EUL program contains internal control weaknesses related to policies and procedures and performance monitoring. Specifically, it is not clear how and to what extent the services have ensured the receipt of the fair market value of the lease interest, as required by the authorizing statute. In addition, GAO found that the services have not regularly monitored or performed periodic analyses of EUL program administration costs. Therefore, it is unclear whether such costs are in line with the potential program benefits.
While the statute leaves the determination of fair market value to the discretion of the secretary of each military service, and thus a particular methodology for determining fair market value is not required, GAO found cases where receipt of fair market value was questionable, largely because service guidance for determining and ensuring the receipt of fair market value for proposed EULs was not clear. In implementing an internal controls framework, as outlined in GAOs Standards for Internal Control in the Federal Government, management is responsible for developing detailed policies, procedures, and practices to fit their agencys operations and to ensure that those controls are built into and are an integral part of operations. However, GAO found, in the absence of clear guidance, at least one instance where the Air Force agreed to an amount of lease consideration below one estimate of the value of the leased property. For example, in an Eglin Air Force Base EUL, referred to as the Okaloosa County Regional Airport Enhanced Use Lease, the Air Force hired a company to estimate the fair market value of the property. Although the company estimated a value of $1,274,000 annually, after negotiations with the lessee, the Air Force agreed to accept $318,000 annually as consideration. Thus, the negotiated amount was $956,000, or 75 percent, less per year than the appraised value of the property. Because the services lack clear and consistent guidance on how the fair market value of lease interest should be determined and how the receipt of the fair market value can be best ensured, it is not clear how the officials involved in this and other cases determined whether the services received the fair market value of the leased property.
In addition, GAO found that the services have not regularly monitored or performed periodic analyses of EUL program administration costs to help ensure that such costs are in line with program benefits. According to internal control standards, activities need to be established to monitor performance measures and indicators, such as analyses of data relationships, so that appropriate actions can be taken, if needed. Without regular monitoring and analysis, the services have less assurance that their EUL program administration costs are in line with program benefits. While the services have no criteria for how much they should be spending on EUL program administration costs relative to program benefits, GAOs analysis showed that EUL program administration costs ranged from 31 percent to 135 percent of the total EUL consideration received during fiscal years 2006 through 2010. Specifically, GAOs analysis of information provided by the services concluded that EUL program administration costs, including personnel and consultant costs, equaled about 31 percent of the total EUL consideration received by the Army and the Navy and about 135 percent of the total EUL consideration received by the Air Force. The Air Force spent about $10.4 million more to administer its EUL program than the amount of consideration received from its five EULs during fiscal years 2006 through 2010.
To help effectively implement the EUL program in order to maximize the potential economic benefits, GAO recommended in June 2011 that the departmental secretaries should
The information contained in this analysis is based on findings from the reports listed in the related products section. GAO reviewed statutory requirements; examined military service policies, instructions, and other guidance; and interviewed officials from the Office of the Secretary of Defense, the Army, the Navy, and the Air Force to discuss implementation of the EUL program. While GAO reviewed information on all 17 EULs in place at the end of fiscal year 2010, GAO selected 9 of the 17 EULs for detailed case study review. The EULs were selected non-randomly to include three from each service and a range of lease purposes, estimated financial benefits, and geographic locations. For the nine case studies, GAO reviewed how the services provided for the receipt of the fair market value of the leased property and how the services monitored program administration costs in relation to program benefits.
GAO provided a draft of its June 2011 report to DOD for review and comment. DOD agreed with GAOs previous recommendations and stated that the military services were taking appropriate measures to implement the recommendations. According to a DOD official, as of January 19, 2012, DOD did not have the formal status of actions taken to respond to the recommendations in GAOs report, but verified that they have begun the process of making those changes. As part of its routine audit work, GAO will track the extent to which progress has been made to address the identified actions and report to Congress.
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