Military Housing Privatization:

DOD Faces New Challenges Due to Significant Growth at Some Installations and Recent Turmoil in the Financial Markets

GAO-09-352: Published: May 15, 2009. Publicly Released: May 15, 2009.

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In response to challenges the Department of Defense (DOD) was facing to repair, renovate, and construct military family housing, Congress enacted the Military Housing Privatization Initiative in 1996. The initiative enables DOD to leverage private sector resources to construct or renovate family housing. As of March 2009, DOD had awarded 94 projects and attracted over $22 billion in private financing. DOD plans to privatize 98 percent of its domestic family housing through 2012. Since GAO's last housing privatization report in 2006, major force structure initiatives have placed new demands on DOD for housing. GAO was asked to assess (1) the progress of DOD's housing privatization program, (2) the occupancy rates of the housing projects, (3) the impact of various force structure initiatives and DOD's efforts to mitigate any challenges, and (4) the effect of financial market turmoil on some projects. To perform this work, GAO visited 13 installations with privatization projects; analyzed project performance data; and interviewed DOD officials, real estate consultants, and private developers.

DOD has made significant progress since 1996 to remove inadequate family housing from DOD's inventory by transferring these homes to developers, but it will be several more years before all of these inadequate houses are either replaced or renovated. Developers had replaced or renovated about 67 percent of the inadequate privatized housing as of February 2009. While about 70 percent of military housing privatization projects are exceeding DOD's expected occupancy rate of 90 percent, each service has some projects below this rate. Some privatization projects with occupancy rates below 90 percent are challenged to generate enough revenue to fund construction, make debt payments, and set aside funds for recapitalization, which could negatively affect the condition and attractiveness of privatized homes and make it harder to compete with other homes in the community. Base realignment and closure actions, overseas rebasing, Army modularity, and grow-the-force initiatives are challenging DOD's ability to provide family housing at some installations, and the services are taking steps to mitigate the challenge. Among other measures, Army developed an approach where an already awarded project is retrofitted with a new or another already awarded project. Once retrofitted, Army's total investment in the developer carrying out the projects must stay below a certain percentage of the capital costs of both projects combined, not a percentage of each project separately. This practice often results in DOD investing additional funds towards retrofitted projects. The House Appropriations Committee directed DOD to report on the status of each privatization project underway on a semiannual basis. However, DOD's most recent semiannual report did not include information on the retrofitting model it is using for certain projects. Including information on the changed status of privatized projects in DOD's report would assist congressional oversight of the program. Several factors related to turmoil in the financial markets have reduced available funds for project construction, resulting in more renovations relative to new construction and reduced amenities at some newly awarded projects. First, higher interest rates in bond financing have increased the cost of some projects. Second, due to the diminished value of bond insurance, developers are having to set aside project funds to increase assurances the debt is repaid but that reduces available funds for construction. Third, financial turmoil has resulted in lower rates of return on invested funds. Consequently, as more homes are renovated given effects of today's financial markets, more recapitalization funds could be required. In H.R. Conf. Rep. No. 110-424, the conference committee expressed interest in monitoring developers' contributions to recapitalization accounts in DOD's semiannual report. However, information these effects have had on housing privatization projects was not included in DOD's most recent report. By including this information in its semiannual report, DOD could provide defense committees with a more current view of the financial market effects on these privatized projects.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In May of 2009, we reported that although DOD was taking several measures to ensure adequate family housing exists at its installations, it needed to include an explanation of each "retrofitted" project and provide information on DOD's total investment in these retrofitted projects in its semiannual status report to Congress. Army had developed a retrofitting model where an already awarded housing project is retrofitted with a new or another already awarded housing project, thus allowing Army to invest additional funds in these housing projects. As such, on February 1, 2010, DOD provided Congress an explanation of the retrofitting model and information on the amount of additional cash investment provided to these specific retrofitted housing projects in its semiannual report on privatization. As a result, Congress is in a better position to maintain oversight of the Military Housing Privatization program. Thus, DOD the intent of our recommendation has been met.

    Recommendation: For Congress to maintain oversight of the Military Housing Privatization Initiative program, the Secretary of Defense should direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to include, for each project that is retrofitted, an explanation of this practice and information on DOD's total investment in the retrofitted project in its semiannual status report to the congressional defense committees.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In May 2009, we recommended that DOD include information in its semiannual report to the congressional defense committees on the effects current conditions in the financial markets were having on military housing privatization projects. As a direct result of our recommendation, OSD most recent semiannual status report provided to Congress in February 2010 now includes more detailed information on financial performance of ongoing projects as well as the effects of current financial markets on new projects. For example, OSD included in its report to Congress information on the impact of financial market forces beyond the control of private developers or the military services, changes in rates of return on invested capital, and credit ratings such as recent downgrades given turbulence in the credit market. Consequently, Congress is better informed about the financial market factors that could affect the privatized military family.

    Recommendation: To better inform Congress about the financial market factors that could affect the privatized military family housing program's financial health and to enhance congressional oversight, the Secretary of Defense should direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to include information in its semiannual report to the congressional defense committees on the effects current conditions in the financial markets are having on housing privatization projects.

    Agency Affected: Department of Defense

 

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