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GAO-02-790R: 

United States General Accounting Office: 
Washington, DC 20548: 

July 11, 2002: 

The Honorable Christopher Shays: 
Chairman: 
Subcommittee on National Security, Veterans Affairs, and International 
Relations: 
Committee on Government Reform: 
House of Representatives: 

Subject: Current Law Limits the State Department’s Authority to Manage 
Certain Overseas Properties Cost Effectively: 

Dear Mr. Chairman: 

The Department of State is the central manager for real estate at U.S. 
embassies and consulates and has the statutory authority to sell 
properties and use the sales proceeds to acquire and maintain other 
overseas properties. Section 738 in the fiscal year 2001 Agriculture 
Appropriations Act prohibits State from selling residences purchased to 
house agricultural attachés without approval from the Foreign 
Agricultural Service (FAS) and requires the department to use the 
proceeds from such sales to purchase residences for these attachés. 
[Footnote 1] Legislation currently before the Congress would repeal 
section 738. [Footnote 2] 

At your request, this report discusses the effect of section 738 on 
State’s management of overseas properties. We examined this issue as 
part of our review of the Department of State’s performance in 
identifying and selling unneeded overseas real estate. [Footnote 3] In 
conducting this assignment, we interviewed officials and analyzed 
records at the Department of State, FAS, and the Office of Management 
and Budget (OMB). 

Results in Brief: 

Section 738 limits the Department of State’s authority to implement 
cost-effective decisions about sales of unneeded overseas property and 
the use of sales proceeds. 

Because of section 738’s restrictions, State has delayed two property 
sales valued at nearly $4 million that appear to be in the government’s 
best interests. FAS is concerned that if section 738 is repealed, 
selling these properties will result in increased costs for FAS since 
it would have to lease housing for attachés who previously lived rent-
free in government-owned housing. State acknowledges that this could 
occur but says its financial analysis shows that selling the houses 
benefits the government as a whole. Although section 738 applies only 
to residences purchased for agricultural attachés, OMB and State are 
concerned that it could lead to fragmented and less cost-effective 
management of overseas property if other agencies seek similar 
treatment for their senior representatives. In our view, section
738’s restrictions do not appear to be in the government’s best 
interests. 

This report suggests that the Congress may wish to consider repealing 
section 738. State officials, commenting on a draft of this report, 
said they agreed with the report’s information and conclusions 
regarding the negative effects of section 738 on overseas property 
management. FAS officials reiterated their view that repealing section 
738 could result in increased costs for FAS. We believe that if the 
section’s repeal and sale of residences used by agricultural attachés 
increases FAS costs, the Department of Agriculture can request that the 
Congress consider providing additional funds for FAS operations. 

Background: 

The Foreign Buildings Act of 1926, as amended, authorizes the Secretary 
of State to sell overseas properties that are used to support 
diplomatic and consular operations in foreign countries. [Footnote 4] 
The Department of State manages about 3,500 government-owned 
properties—including embassy and consular office buildings, housing, and
land—at more than 220 overseas locations. The law authorizes the 
Secretary to use the proceeds from the sale of overseas properties to 
acquire and maintain other overseas properties and requires the 
Secretary to report such transactions to the Congress with the 
department’s annual budget estimates. The Secretary has delegated this 
authority to State’s Bureau of Overseas Buildings Operations. [Footnote 
5] 

Over the years, as a result of congressional and OMB actions, overseas 
property management has been consolidated under State. [Footnote 6] In 
1978, the Congress endorsed State as the single manager for overseas 
property and asked OMB to prepare a proposal for implementing this 
concept. [Footnote 7] In 1979, OMB issued a report that supported the 
concept of single management and acquisition planning for overseas
property under State. [Footnote 8] OMB noted that the Congress was 
strengthening and broadening State’s existing role as the central 
manager for overseas property. In 1990, the Congress directed State to 
establish and implement a uniform housing policy for agencies’ overseas 
personnel. [Footnote 9] Resulting new overseas housing regulations, 
issued in 1991 and 1992 with the agreement of the foreign affairs 
agencies [Footnote 10] and the Department of Defense, reinforced 
State’s authority to act as the single manager for overseas property. 
These authorities show that the Congress and the executive branch had 
intended that State should manage overseas property in a consolidated,
integrated manner and that doing so would be in the government’s best 
interests. We have supported this concept since the 1960s because it is 
more effective, efficient, and economical than having multiple property 
managers. [Footnote 11] 

Since 1997, State has increased efforts to identify and sell unneeded 
overseas real estate in response to congressional direction and our 
recommendations. [Footnote 12] As part of this effort, State sold two 
residences occupied by agricultural attachés for about $855,000 and 
proposed selling three others for more than $4 million. [Footnote 13] 
FAS argued that these properties were purchased to house its attachés; 
and consequently, FAS should have a say in approving the sales and in 
determining how the sales proceeds should be used. As a result, FAS 
sought and the Congress enacted legislation that requires State to 
obtain FAS approval to sell residences purchased to house agricultural 
attachés. Additionally, State must use the proceeds from such sales to
acquire other suitable residences for agricultural attachés (not 
necessarily at the same post), and FAS has the right to occupy these 
properties permanently. According to FAS, State manages 13 properties 
purchased for agricultural attachés. 

Section 738 Limits State’s Authority to Make Cost-Effective Decisions 
on Certain Properties: 

Section 738 of the fiscal year 2001 Agriculture Appropriations Act 
limits State’s authority to sell unneeded property by making sales 
decisions contingent on FAS approval. Proposed sales of residences in 
Cairo, Egypt, and Vienna, Austria, illustrate the potential 
limitations. Although selling these properties appears to be in the U.S.
government’s best interests, State has postponed these sales because of 
concerns about section 738. In October 1998, the State Inspector 
General reported that the Cairo and Vienna residences were larger than 
housing standards allow, were underutilized, and should be sold. 
According to State records, the Cairo residence is a 4,200-square-foot, 
[Footnote 14] two-level house with four bedrooms, three bathrooms, two 
living rooms, a dining room, two kitchens, a sunroom, a breakfast room, 
and terraces. The Vienna residence is a 3,500-square-foot, [Footnote 
15] three-story villa with six bedrooms, three bathrooms, a terrace, 
breakfast room, basement, and garage. These residences are larger than 
the housing standards allow. [Footnote 16] Figures 1 and 2 show 
photographs of the Cairo and Vienna residences. 

Figure 1: Cairo Residence (side view): 

[See PDF for image] 

This figure is a photograph of the Cairo Residence (side view). 

Source: GAO. 

[End of figure] 

Figure 2: Vienna Residence (rear view): 

[See PDF for image] 

This figure is a photograph of the Vienna Residence (rear view). 

Source: Department of State. 

[End of figure] 

State financial analyses suggest that selling the Cairo and Vienna 
residences would yield net benefits for the government of at least $2.1 
million. [Footnote 17] In addition, using a measure of investment 
performance, State determined that selling the two residences was a 
substantially more efficient use of government resources than continued
ownership. [Footnote 18] In February 2001, FAS informed State that it 
approved the sale of the Vienna residence on condition that the sales 
proceeds were used to purchase a replacement residence in Vienna and 
new residences for agricultural attachés at two other posts. [Footnote 
19] Because FAS’s proposed use of the proceeds would not address the 
government’s highest priority overseas property needs, State officials 
decided to postpone the Vienna sale pending repeal of section 738. 
State subsequently postponed the Cairo sale for the same reason. 

State and OMB believe that the sales proceeds should be used to meet the
government’s highest priority needs. According to its long-range 
facilities plan, State seeks to reinvest sales proceeds where there is 
the greatest need or the most opportunity to reduce government 
operating costs. This plan notes that, in recent years, most sales 
proceeds have been earmarked for specific capital construction 
projects, such as building secure embassies. In future years, State 
plans to use sales proceeds to purchase additional residential housing. 
Within this broad priority, State plans to direct these proceeds to 
several objectives: (1) buying residential properties in locations that 
offer the greatest rent savings to contain leasing costs, (2) buying
earthquake resistant residential properties in seismic areas to address 
safety issues, and (3) buying key diplomatic properties. Although we 
did not assess State’s priorities or use of proceeds from property 
sales, its approach is consistent with recommendations we made in 1996 
regarding using sales proceeds for the highest priority overseas 
facility needs. [Footnote 20] 

FAS believes that the sales proceeds should be used to purchase 
replacement and additional residences for agricultural attachés—not to 
purchase properties according to State’s priorities. FAS said that past 
sales had displaced two of its attachés from government-owned housing, 
forcing it to pay about $400,000 over the past 5 years to lease 
replacement residences. FAS is concerned about having to cut its program
budgets to fund additional leases for replacement housing. In addition, 
FAS complained that it had insufficient advance notice of the proposed 
sales and had difficulty freeing up funds to pay for replacement 
housing for displaced attachés. 

State acknowledged that FAS may have to lease replacement residences if 
section 738 is repealed and the two residences are sold. However, 
financial analyses of the proposed sales considered these costs in 
determining that they were cost effective for the government. State 
also acknowledged that unanticipated sales could cause short-term 
budgetary disruptions. As a result, in June 2001, assuming repeal of 
section 738, State offered to pay for leasing replacement housing until 
FAS could build these costs into its budget in cases where State 
disposed of the properties with less than 2 years’ advance notice. In 
January 2002, FAS responded that, before agreeing to any sales, it 
would require State to provide appropriate government-owned replacement 
housing within 2 years and expect State to make every effort to ensure 
that sales did not affect FAS’s budget. FAS’s letter did not address 
the repeal of section 738. In April 2002, FAS officials told us they 
were reluctant to accept State’s offer because it did not address the 
long-term budgetary effect of the sales and allowed State to retain 
control over the use of the sales proceeds. 

According to State, if section 738 remained in effect, it could be a 
complicating factor in the future sale of a compound in downtown 
Bangkok that could be worth as much as $50 million. In 1998, the State 
Inspector General reported that the compound—a 15-acre wooded site 
located in a prime commercial area that contains five executive 
residences (one occupied by the agricultural attaché) and several other 
facilities— was underutilized and should be sold. Before the 1997 Asian 
financial crisis, State had planned to sell the compound and use the 
proceeds to finance the construction of new facilities at the post, 
including housing for more than 200 embassy families that would reduce 
post lease costs by about $73 million over 10 years. Recognizing the 
changed economic conditions, State reported that further study is 
needed to determine the appropriate time to sell the compound and the 
appropriate use of the sales proceeds. 

State and OMB Support Repealing Section 738; FAS Opposes Its Repeal: 

State and OMB support legislation currently before the Congress that 
would repeal section 738. [Footnote 21] They argue that its 
restrictions on State’s authority seriously weaken centralized 
management of overseas properties because they essentially establish a
separate executive housing program for FAS and subordinate 
governmentwide priorities to agency priorities. For example, FAS could 
disapprove the sale of oversize or high-value residences purchased for 
agricultural attachés while State was selling residences purchased for 
ambassadors, deputy chiefs of mission, consuls general, and senior 
representatives of other foreign affairs agencies. State reported that, 
between 1997 and 2002, it sold 17 executive residences for about $38 
million and is planning to sell 15 additional residences for $20 
million. [Footnote 22] Additionally, State and OMB pointed out that 
other foreign affairs agencies and Defense have experienced
budgetary effects from the sale of such residences. In these cases, 
agencies must weigh housing costs in deciding whether to station their 
employees overseas. State and OMB are also concerned that unless 
section 738 is repealed, other agencies may seek similar legislation, 
leading to more fragmented property management and unequal and 
uneconomical housing policies at taxpayer expense. 

FAS opposes repealing section 738. FAS argues that section 738 maintains
Agriculture’s entitlement to residences purchased to house its 
attachés. FAS believes that repealing section 738 would allow State to 
ignore what FAS believes was the Congress’ intent in providing funds to 
purchase these residences, while imposing substantial budgetary costs 
on FAS. 

Conclusions: 

Section 738’s restrictions on the sales of residences purchased for 
agricultural attachés do not appear to be in the government’s best 
interests. As the single manager for overseas property, State is 
responsible for implementing cost-effective decisions about the sale of 
unneeded overseas real estate and using sales proceeds for the 
government’s highest priorities. However, for residences purchased to 
house agricultural attachés, implementation of State’s decisions is 
contingent on FAS approval and priorities. Although its analysis shows 
that selling the Vienna and Cairo residences would be financially 
advantageous to the government, State does not plan to proceed with 
these sales if section 738 remains in force. We recognize that, if 
section 738 is repealed, selling these residences may affect FAS’s 
budget. However, FAS’s budgetary concerns need to be weighed against 
the government’s overall benefits from these sales—which include 
disposing of unneeded property and reinvesting the proceeds where they 
provide the greatest return. In addition, the restrictions weaken 
efforts to improve management of the government’s overseas properties 
and conflict with congressional and executive branch efforts to 
establish State as the single real property manager. 

Matter for Congressional Consideration: 

In light of our findings, Congress may wish to consider repealing 
section 738 of the fiscal year 2001 Agriculture Appropriations Act. 

Agency Comments and Our Evaluation: 

State officials, commenting on a draft of this report, said the report 
fairly and accurately represents their positions on the negative 
effects of section 738 and the reasons they support its repeal. They 
said it is in the government’s interest to have a single property 
manager with the authority to sell unneeded properties and reinvest the 
proceeds where they will produce the greatest benefits. State officials 
reiterated their concern that, by according FAS special treatment, 
section 738 threatens the centralized management of overseas property 
and is unfair to the staff of other foreign affairs agencies and 
Defense. 

FAS officials reiterated their concern that repealing section 738 could 
result in additional annual lease costs for FAS and that FAS would need 
additional budget resources to maintain its current level of services 
overseas. FAS officials also questioned whether section 738 would 
fragment overseas property management, stating that only Defense was in 
a position to assert similar claims to overseas housing. 

We continue to believe that, in considering whether to repeal section 
738, budgetary concerns need to be weighed against the government’s 
interests in selling these residences and maintaining a single property 
manager with the authority to sell unneeded properties and reinvest the 
proceeds where they will produce the greatest benefits. If the 
section’s repeal and subsequent property sales increase FAS costs, 
Agriculture can request that the Congress consider providing more funds 
for FAS operations. Additionally, we agree with State that section 738 
accords FAS preferential treatment and that other foreign affairs 
agencies and Defense will likely seek similar treatment for their 
overseas executives. We believe this would weaken centralized overseas 
property management, which we have long supported because it is more 
effective, efficient, and economical than a noncentralized approach. 

Scope and Methodology: 

To determine the effect of section 738 on State’s management of 
overseas property, we analyzed applicable laws, regulations, and 
guidance that provide State’s authority to sell properties and use the 
proceeds. Key laws, regulations, and guidance include the Foreign 
Buildings Act, section 738 of the fiscal year 2001 Agriculture Foreign 
Affairs Manual. We also examined past GAO and State Inspector General
reports on overseas property management. We analyzed State and FAS 
records that summarized their assessment of the effect of section 738 
on State’s authority to buy and sell overseas properties and act as the 
single manager for overseas property. We discussed section 738’s effect 
with appropriate State, FAS, and OMB officials. We examined State’s 
rationale for selling the properties in Cairo, Vienna, and other 
locations, including State’s financial analyses of the proposed sales, 
OMB guidance on evaluating asset sales, and State’s fiscal year 2002 to 
2007 long-range overseas buildings plan. We did not assess the accuracy 
or reliability of the property appraisals or other underlying data used 
in State’s analyses or the priorities and objectives in its long-range 
plan. 

We conducted this review from April to July 2002 in accordance with 
generally accepted government auditing standards. 

We are sending copies of this report to other interested congressional 
committees, the Secretaries of Agriculture and State, the FAS Director, 
State’s Director of Overseas Buildings Operations, OMB, and other 
interested parties. Copies will be made available to others on request. 
In addition, this report will be available at no charge on our Web site 
at [hyperlink, http://www.gao.gov]. 

If you have any questions about this report, please contact me at 202-
512-4128 or by e-mail at fordj@gao.gov. John Brummet, Michael Rohrback, 
Ed Kennedy, Richard Seldin, Janey Cohen, and Stephanie Robinson made 
major contributions to this report. 

Sincerely yours, 

Signed by: 

Jess T. Ford: 
Director, International Affairs and Trade: 

[End of correspondence] 

Footnotes: 

[1] P.L. 106-387, section 738, 114 stat. 1549A-34. 

[2] Both the Senate and House versions of the fiscal years 2002 and 
2003 Foreign Relations Authorization Act contain language repealing 
section 738. See S. 1401, section 207, and H.R. 1646, section 205. 

[3] See U.S. General Accounting Office, State Department: Sale of 
Unneeded Property Has Increased but Further Improvements Are Necessary, 
GAO-02-590 (Washington, D.C.: June 11, 2002). 

[4] 22 U.S.C. section 300, as amended. 

[5] Prior to May 2001, this bureau was known as the Office of Foreign 
Buildings Operations. 

[6] State’s authority does not encompass overseas property under the 
control of U.S. military commanders. Additionally, the U.S. Agency for 
International Development has authority to manage property at some 
overseas locations. 

[7] See the Conference Report on the Foreign Assistance appropriations 
act for fiscal year 1979, H.R. (Conf.) 95-1754, at 13 (1978). 

[8] U.S. Office of Management and Budget, Office of Management and 
Budget Report: Single Manager Concept for Acquisition of U.S. Real 
Estate Overseas (Washington, D.C.: Jan. 1979). 

[9] P.L. 101-246, section 156, 104 Stat. 46. 

[10] The foreign affairs agencies are the Department of State, FAS, the 
U.S. and Foreign Commercial Service, and the U.S. Agency for 
International Development. 

[11] See, for example, U.S. General Accounting Office, Improvements 
Needed in the Management of Government Owned and Leased Real Property 
Overseas, B-146782 (Washington, D.C.: Sept. 30, 1969) and Some Progress 
in Improving Management of Government Owned and Leased Real Property
Overseas, B-146782 (Washington, D.C.: Mar. 28, 1974). 

[12] See U.S. General Accounting Office, Overseas Real Estate: Millions 
of Dollars Could Be Generated by Selling Unneeded Real Estate, 
GAO/NSIAD-96-36 (Washington, D.C.: Apr. 23, 1996) and GAO-02-590. 

[13] State sold residences in Rabat, Morocco, and Santiago, Chile. 
State proposed selling residences in Cairo, Egypt; Stockholm, Sweden; 
and Vienna, Austria. State has since decided not to sell the Stockholm 
residence at this time because of changed financial conditions. 

[14] The reported figure is the net living area, excluding halls, 
foyers, closets, laundry rooms, servants’ quarters, and storage. 
According to State records, the Cairo residence has a gross living area 
of about 6,700 square feet. 

[15] The reported figure is the net living area. According to State 
records, the Vienna residence has a gross living area of about 6,400 
square feet. 

[16] The Foreign Affairs Manual states that the size of housing for the 
heads of foreign affairs agencies and Defense will be based on a family 
of four. For Cairo, the housing standards allow 2,957 square feet for 
an executive family of four. For Vienna, the standards allow 2,146 
square feet. 

[17] Net financial benefits are computed by subtracting the cost of 
purchasing or leasing replacements over a 10-year period from the 
estimated value of the properties. State’s computations included the
cost of leasing replacement properties in Cairo and Vienna over 10 
years. 

[18] According to OMB Circular No. A-94, Guidelines and Discount Rates 
for Benefit-Cost Analysis of Federal Programs (Washington, D.C.: Oct. 
29, 1992), investment performance can be analyzed by comparing the 
internal rate of return of continued ownership of an asset with an 
interest rate approximating the cost of government funds. For example, 
an internal rate of return substantially below the cost of funds 
suggests that it would be in the government’s best interest to sell the 
asset. For the Cairo and Vienna properties, the internal rate of return 
for continued ownership was substantially below the government’s cost 
of funds. 

[19] These posts were Pretoria, South Africa, and Mexico City, Mexico. 
FAS also asked that State use part of the proceeds to perform 
maintenance on the residence in Stockholm. 

[20] See GAO/NSIAD-96-36. 

[21] S. 1401, section 207, and H.R. 1646, section 205. 

[22] In June 2002, we reported that over this period, State had sold a 
total of 104 overseas properties for more than $404 million and had 
identified 92 additional properties, valued at more than $180 million, 
as candidates for sale. See GAO-02-590. 

[End of section] 

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