Defense Infrastructure:

The Enhanced Use Lease Program Requires Management Attention

GAO-11-574: Published: Jun 30, 2011. Publicly Released: Jun 30, 2011.

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To help address challenges associated with deteriorating facilities and underused property, the Department of Defense (DOD) has pursued a strategy that includes leasing underused real property to gain additional resources for improving installation facilities. Section 2667 of Title 10, U.S. Code, provides authority to the military departments to lease nonexcess real property, subject to several provisions, in exchange for cash or in-kind consideration. According to the military services, some leases, referred to as enhanced use leases (EUL), are more complex with long terms and could provide hundreds of millions of dollars for in-kind services to improve installation facilities. A committee report accompanying the 2011 defense authorization directed GAO to review the EUL program. This report (1) assesses the extent to which selected EULs complied with section 2667 of Title 10, U.S. Code; (2) determines to what extent the services' expectations for their EULs have been realized; and (3) evaluates the services' management of the EUL program. GAO reviewed information on the services' 17 EULs in place at the end of fiscal year 2010 and selected 9 for detailed case study.

One of the Army EULs included in the GAO case studies did not comply with the EUL authorizing statute, section 2667 of Title 10, U.S. Code. In March 2011, GAO issued a legal opinion finding that certain terms and conditions of the legal documents comprising the Army's Picatinny Arsenal EUL violated section 2667(e) and the miscellaneous receipts statute by failing to require that cash consideration be deposited into the appropriate account of the U.S. Treasury. Instead, the cash was deposited into an escrow account at a local credit union. Also, while no two EULs are identical, GAO found that the two other Army and the three Air Force case study EULs included some terms and conditions similar to those that were found to be problematic by the legal opinion, which raised questions about the extent to which such EULs also comply with the statutory requirements. Moreover, beyond those issues addressed in the legal opinion, GAO found that three Army and one Air Force case study EULs did not comply with another provision in section 2667, which requires that each lease executed pursuant to section 2667 provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated. The services' expectations for EUL development timeframes and financial benefits were not realized in two Army and one Air Force EULs included in the GAO case studies largely because, according to the services, the recent economic downturn caused EUL development plans to significantly slow down or to be placed on hold. To illustrate, in the Fort Sam Houston EUL that was signed in 2001, only two of the three large deteriorated buildings included in the lease have been renovated, and the Army now estimates that EUL consideration will be about 22 percent less than was originally estimated. Moreover, in this case, the Army, rather than private sector tenants as was originally planned, has rented most of the EUL space that has been renovated. Thus, Army officials stated that nearly all of the estimated future consideration is now expected to be the result of the Army getting back a portion of the rent that the Army pays to the EUL developer. The services' management of the EUL program included weaknesses related to internal controls and program guidance. First, because the services generally lacked documentation showing how certain provisions contained in the authorizing statute were addressed, it was not clear to what extent the services addressed each provision before entering into the leases. Second, in some EUL cases, it was not clear how and to what extent the services ensured the receipt of the fair market value of the lease interest, as required by the authorizing statute. Third, some EULs included property that was being used or might be needed by the military over the lease term, which could result in increased costs to relocate military activities or increased potential costs, if a lease had to be terminated early to permit the military to regain control of the property. Fourth, the services were not regularly monitoring EUL program administration costs, as called for by internal control standards, to help ensure that costs were in line with program benefits. GAO recommends that DOD take several actions to address EUL statutory compliance issues and EUL management weaknesses. DOD agreed with all of GAO's recommendations.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should review all EULs for terms and conditions similar to those that our legal opinion concluded were inconsistent with applicable statutes; determine whether steps are needed to help ensure that the EULs are in compliance with applicable statutes; and, if so, then implement these steps.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: DOD stated that the Army will review all its EULs executed to date and will amend lease terms and conditions as necessary in order to comply with applicable statutes. The Army will also ensure that the amended lease terms and conditions are appropriately incorporated in documentation of future EULs. As of April 2012, the Army has reviewed all executed EULs and determined that several EULs require negotiation with lessees to amend existing leases and should be completed within a year. In addition, an Army Policy and Procedures Guide for EULs will be finalized within six months. On March 21, 2013, the Army released guidance titled "Program and Financial Policy and Procedures for Enhanced Use Leasing of Real Property on Army Installations."

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should review all EULs for terms and conditions similar to those that our legal opinion concluded were inconsistent with applicable statutes; determine whether steps are needed to help ensure that the EULs are in compliance with applicable statutes; and, if so, then implement these steps.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Closed - Implemented

    Comments: DOD stated that the Air Force will review all its EULs executed to date and will amend lease terms and conditions as necessary in order to comply with applicable statutes. The Air Force will also ensure that the amended lease terms and conditions are appropriately incorporated in documentation of future EULs. As of April 2012, the Air Force has reviewed all executed EULs and determined that several EULs require negotiation with lessees to amend existing leases and should be completed within a year. In addition, amendments and new Air Force documentation for EULs were approved on October 5, 2011 (updated on July 2013), which address concerns of GAO's recommendations.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should take steps to ensure that all EULs provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated, as required by subsection 2667(f) of Title 10, U.S. Code.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Open

    Comments: DOD stated that the Air Force will amend its existing EULs as needed and will incorporate the required provision in future EUL legal instruments. As of April 2012, all the Air Force EULs requiring this provision have been amended or are in negotiation with the Lessees for inclusion. The Air Force amended Lease No. AFMC-EG-1-06-001 (Eglin AFB Wastewater Treatment Plant EUL) to include the statutory language. The Air Force intends to amend four Fort Sam Houston EULs to include the required language and the required language will be incorporated into future EUL legal instruments. In March 2012, Joint Base San Antonio-Fort Sam Houston EULs with the recommended language was provided to the Lessee, Orion Partners, Inc. In October 2012, Orion provided an email response stating they could not accept the amended tax language. As of January 2013, the Air Force had requested a formal response. In addition, as of July 2013, DOD stated that the Air Force had reviewed the Falcon Hill EUL and determined that the tax language was in the original Site Development Lease attached to the Master Development Agreement dated August 11, 2008.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should review and clarify guidance describing how the FMV of the lease interest should be determined and how the receipt of fair market value (FMV) can be best ensured.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Closed - Implemented

    Comments: (Rec 6) DOD concurred with this recommendation. The Air Force will revise its process for establishing Fair Market Value (FMV) and prepare appropriate guidance. The Air Force shall develop guidance that establishes procedures to verify that in-kind consideration received is not less than the FMV of the leasehold. As of April 2012, the Air Force has prepared a draft policy guidance for establishing and receiving FMV, which is awaiting the signature of the Assistant Secretary of the Air Force (IG&E). On May 21, 2012, the Air Force issued policy providing guidance for establishing and receiving FMV.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns,the Secretaries of the Army, the Navy, and the Air Force should issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: (Rec 7) DOD concurred with this recommendation. The Army will issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations. As of April 2012, the Army plans to require certification of all section 2667 provisions in its Policy and Procedures Guide. As of January 2013, the Army guidance was anticipated to be promulgated by the end of January 2013. On March 21, 2013, the Army released guidance titled "Program and Financial Policy and Procedures for Enhanced Use Leasing of Real Property on Army Installations", and paragraph 3-5 prescribes the policies and procedures to comply with 10 USC provisions prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns,the Secretaries of the Army, the Navy, and the Air Force should issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Closed - Implemented

    Comments: (Rec 9) DOD concurred with this recommendation. The Air Force will issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations. As of April 2012, the Air Force EUL playbook is being revised to meet section 2667 provisions. As of January 2013, the Air Force had estimated that the guidance was to be completed on December 31, 2012. As of July 2013, the Air Force had available a template memorandaum issued by the Installation Wing comander that determines that the requirements of 10 USC 2667 (a), which covers secretarial determinations and the basis for the determinations, are met.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should issue guidance on the analyses or documentation needed to show that future leases executed under section 2667 do not include property needed for public use, as is now required by section 2667.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: (Rec 10) DOD concurred with this recommendation. The Army will issue and update its EUL guidance on the analyses or documentation needed to establish that leases executed do not include property needed for public use. As of April 2012, the Army plans to require that a EUL is not needed for public use in its Policy and Procedures Guide. As of January 2013, the Army guidance was anticipated to be promulgated by January 2013. On March 21, 2013, the Army released guidance titled "Program and Financial Policy and Procedures for Enhanced Use Leasing of Real Property on Army Installations", and paragraph 3-5 prescribes the policies and procedures to comply with 10 USC provisions prior to entering into an EUL, including the required analyses or documentation to show that future leases executed do not include property needed for public use.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should issue guidance on the analyses or documentation needed to show that future leases executed under section 2667 do not include property needed for public use, as is now required by section 2667.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Closed - Implemented

    Comments: (Rec 12) DOD concurred with this recommendation. The Air Force will issue and update its EUL guidance on the analyses or documentation needed to establish that leases executed do not include property needed for public use. As of April 2012, the Air Force EUL playbook is being revised to state that a memorandum will be issued that will serve as the documented basis for the Secretarial determination that the property is not needed for public use. As of January 2013, the Air Force had estimated it was to be completed by December 31, 2012. As of July 2013, the Air Force had available a template memorandaum issued by the Installation Wing comander that determines that the requirements of 10 USC 2667, which covers analyses or documentation to shows that future leases do not include property needed for public use, are met.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should develop procedures to regularly monitor and analyze EUL program administration costs to help ensure that the costs are in line with program benefits.

    Agency Affected: Department of Defense: Department of the Air Force

    Status: Closed - Implemented

    Comments: (Rec 15) DOD concurred with this recommendation. The Air Force has tracked direct project costs from the inception of the EUL program, and is developing methodology for base-lining and tracking project and program administrative costs and rates of return. Expected costs and returns will be measured against actual costs and returns over a quarterly time period to better enable the Air Force to forecast and monitor the effectiveness of the EUL program. As of July 2013, the Air Force implemented quarterly monitoring and reporting of executed EULs. Also, the Air Force had developed costs estimating and tracking tools to track EULS from concept development through execution and lease sustainment, such as a Return on Investment and Net Present Value worksheet methodology for estimating indirect EUL project execution costs.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should develop procedures to regularly monitor and analyze EUL program administration costs to help ensure that the costs are in line with program benefits.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: (Rec 14) DOD concurred with this recommendation. As of April 2012, the Navy is also reviewing guidance to require monitoring and reporting on EUL performance, to be completed by September 30, 2012. As of January 2013, the Navy instruction was scheduled for completion on January 31, 2013. As of July 2013, DOD stated that the updated Navy instruction, which will include instructions governing the out-leasing of Navy property and guidance and requirements for documenting steps taken to comply with 10 USC 2667 provisions, continues to undergo final review and formatting prior to clearance for signature. The Navy anticipated having the guidance issued by July 31, 2013, but as of August 9, DOD does not have any further information on this guidance.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should review and clarify guidance describing how the FMV of the lease interest should be determined and how the receipt of fair market value (FMV) can be best ensured.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: (Rec 5)DOD concurred with this recommendation. The Army will revise its process for establishing Fair Market Value (FMV) and prepare appropriate guidance. The Army intends to include a requirement that the leasehold interest be informed by appraisals as well as competitive pricing obtained through open market solicitations. Additionally, the Army shall develop guidance that establishes procedures to verify that in-kind consideration received is not less than the FMV of the leasehold. As of April 2012, the Army is preparing a Policy and Procedures Guide that includes a requirement for asset valuation in accordance with specified industry standards to determine FMV of the lease interest, and should be finalized within six months. As of January 2013, the Army's draft Program and Financial Policy and Procedures for EUL includes a requirement for asset valuation in accordance with specified industry standards to determine FMV of the lease interest, and assigning responsibility during on-going lease administration for monitoring compliance with the statutory FMV requirement (including re-appraisals of FMV as necessary) over the life of the lease. On March 21, 2013, the Army released guidance titled "Program and Financial Policy and Procedures for Enhanced Use Leasing of Real Property on Army Installations," para. 3-1.d and 3-3.f, describes the Army's procedures for establishingand receiving FMV.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army and the Air Force should take steps to ensure that all EULs provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated, as required by subsection 2667(f) of Title 10, U.S. Code.

    Agency Affected: Department of Defense: Department of the Army

    Status: Open

    Comments: (Rec 3) DOD concurred with this recommendation. DOD stated that the Army will amend its existing EULs as needed and will incorporate the required provision in future EUL legal instruments. As of April 2012, all the Army EULs requiring this provision have been amended or are in negotiation with the Lessees for inclusion. The Army expects the latter amendments to be completed within one year. The Policy and Procedures Guide for Army EULs will require this language for future EULs. As of July 2013, 4 of the 7 Army EULs have been amended to include language recommended by GAO. The Army anticipated having completed action on the remaining three by July 31, 2013, but as of August 9, DOD does not have any further information on actions taken.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns,the Secretaries of the Army, the Navy, and the Air Force should issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: (Rec 8) DOD concurred with this recommendation. The Navy will issue guidance on how to determine and document that section 2667 provisions were met prior to entering into an EUL, including the required secretarial determinations and the basis for the determinations. As of April 2012, the Navy is developing a new EUL Energy Audit and Cogeneration Playbook that will provide new standard operating procedures to address each GAO recommendation, and is expected to be completed by September 30, 2012. As of January 2013, the Navy instruction was scheduled for completion on January 31, 2013. As of July 2013, DOD stated that the updated Navy instruction, which will include instructions governing the outleasing of Navy property and guidance and requirements for documenting steps taken to comply with 10 USC 2667 provisions, continues to undergo final review and formatting prior to clearance for signature. The Navy anticipated having the guidance issued by July 31, 2013, but as of August 9, DOD does not have any further information on this guidance.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should issue guidance on the analyses or documentation needed to show that future leases executed under section 2667 do not include property needed for public use, as is now required by section 2667.

    Agency Affected: Department of Defense: Department of the Navy

    Status: Open

    Comments: (Rec 11) DOD concurred with this recommendation. The Navy will issue and update its EUL guidance on the analyses or documentation needed to establish that leases executed do not include property needed for public use. As of April 2012, the Navy is reviewing Navy instructions governing real estate actions to include a determination that the property is not needed for a public use, and the expected completion date is September 30, 2012. As of January 2013, the Navy instruction was scheduled for completion on January 31, 2013. As of July 2013, DOD stated that the updated Navy instruction, which will include instructions governing the outleasing of Navy property and guidance and requirements for documenting steps taken to comply with 10 USC 2667 provisions, continues to undergo final review and formatting prior to clearance for signature. The Navy anticipated having the guidance issued by July 31, 2013, but as of August 9, DOD does not have any further information on this guidance.

    Recommendation: To address EUL statutory compliance issues and EUL program management concerns, the Secretaries of the Army, the Navy, and the Air Force should develop procedures to regularly monitor and analyze EUL program administration costs to help ensure that the costs are in line with program benefits.

    Agency Affected: Department of Defense: Department of the Army

    Status: Closed - Implemented

    Comments: (Rec 13) DOD concurred with this recommendation. The Army has instituted quarterly reviews of the EUL program. Within this existing process, the Army will revise its EUL guidance to require standardization of EUL accounting and reporting of program costs and benefits, including benefits that may not be part of the rental consideration. As of April 2012, the Army is reviewing draft guidance requiring monitoring and reporting on EUL performance, and developing standardized accounting mechanisms for EULs, which should both be completed within six months. As of January 2013, the Army guidance was anticipated to be promulgated by January 1, 2013. On March 21, 2013, the Army released guidance titled "Program and Financial Policy and Procedures for Enhanced Use Leasing of Real Property on Army Installations", and paragraph 2-5 and 3-6 prescribes guidance on monitoring and analyzing EUL program administrative costs and benefits.

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