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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

June 2011: 

Defense Infrastructure: 

The Enhanced Use Lease Program Requires Management Attention: 

GAO-11-574: 

GAO Highlights: 

Highlights of GAO-11-574, a report to congressional committees. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

What GAO Recommends: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-11-574] or key 
components. For more information, contact Brian J. Lepore, at (202) 
512-4523 or leporeb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Certain Army and Air Force EULs Did Not Comply with Some Statutory 
Requirements: 

Army and Air Force Expectations for Some EULs Were Not Realized: 

The Services' Management of the EUL Program Includes Weaknesses in 
Internal Controls and Guidance: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Enhanced Use Leases by Service as of September 30, 2010: 

Appendix III: GAO's Legal Opinion regarding the Picatinny Arsenal EUL: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Military Services' EULs as of September 30, 2010: 

Table 2: Summary of the Services' Consideration of Three Section 2667 
Provisions: 

Table 3: EUL Program Administration Costs and Consideration Received 
for Fiscal Years 2006 through 2010: 

Table 4: EULs by Service as of September 30, 2010: 

Figures: 

Figure 1: Photographs of the EUL Project at Fort Sam Houston, Texas: 

Figure 2: Photographs of the EUL Project at Picatinny Arsenal, New 
Jersey: 

Figure 3: The Exterior and Interior of the Defense Non-Tactical 
Generator and Rail Equipment Center at Hill Air Force Base, Utah: 

Abbreviations: 

BRAC: base realignment and closure 

DOD: Department of Defense 

EUL: enhanced use lease 

FMV: fair market value: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

June 30, 2011: 

Congressional Committees: 

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.[Footnote 1] To address these challenges, DOD has pursued a 
multipart strategy involving base realignment and closure (BRAC), 
housing privatization, and demolition of facilities that are no longer 
needed. In addition, DOD has also pursued a strategy of leasing 
underused real property to gain additional resources for the 
maintenance and repair of existing facilities or the construction of 
new facilities. For example, subject to provisions contained in 
section 2667 of Title 10, U.S. Code, the secretaries of the military 
departments have the authority to lease nonexcess real property 
[Footnote 2] under the control of the respective departments in 
exchange for cash or in-kind consideration that is not less than the 
fair market value (FMV) of the lease interest.[Footnote 3] Among other 
things, in-kind consideration accepted with respect to a lease under 
this section can include the maintenance of existing facilities or the 
construction of new facilities. 

The military services have long used the authority under section 2667 
to enter into short-term leases[Footnote 4] of military property for 
such uses as farming, grazing, and cellular towers, and in turn 
received cash consideration. The services have also used the authority 
contained in the statute to enter into more complex leases that the 
services refer to as enhanced use leases (EUL).[Footnote 5] EULs 
generally provide for in-kind consideration, and 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. 

According to the military services, EULs offer significant 
opportunities to reduce infrastructure costs. Over the terms of some 
EULs, the services have estimated that they would receive in-kind 
consideration valued at hundreds of millions of dollars that would be 
used to improve installation facilities. As of the end of fiscal year 
2010, the services reported that 17 EULs were in place--the 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.[Footnote 
6] 

In its report accompanying H.R. 5136, National Defense Authorization 
Act for Fiscal Year 2011, the House Committee on Armed Services 
identified potential issues concerning the EUL program and directed 
that we perform a review of the program, including the extent to which 
the authorities in section 2667 have been used and expected benefits 
have been realized.[Footnote 7] In response, this report (1) assesses 
the extent to which selected EULs complied with section 2667,[Footnote 
8] (2) determines to what extent the services' expectations for their 
EULs have been realized, and (3) evaluates the services' management of 
the EUL program. 

To address these areas, we reviewed statutory requirements; examined 
military service policies, instructions, and other guidance related to 
ensuring statutory compliance; and interviewed officials from the 
Office of the Secretary of Defense, the Army, the Navy, and the Air 
Force to discuss efforts to ensure compliance. While we reviewed 
information on all 17 EULs in place at the end of fiscal year 2010, to 
specifically assess EUL compliance with statutory requirements, we 
selected 9 of the 17 EULs for detailed case study review. The EULs 
were selected nonrandomly to include 3 from each service and a range 
of lease purposes, estimated financial benefits, and geographic 
locations[Footnote 9]. In each case study, we obtained, reviewed, and 
compared the lease agreements and related documentation with statutory 
requirements in place at the time the respective agreements were 
signed, as well as applicable case law, to assess compliance. To 
determine the realization of service EUL expectations, we summarized 
EUL program status information obtained from the services, including 
data on each EUL's estimated and actual development time frames and 
financial benefits received through September 30, 2010. For the nine 
EUL case studies, we obtained and reviewed more detailed information 
on how the services initially estimated expected EUL financial 
benefits and how the expected benefits compared with actual benefits 
obtained to date and, in cases where expected benefits were not 
realized, explored the reasons why. Further, we reviewed the services' 
policies, guidance, and practices for managing the EUL program and, 
for the nine case studies, examined how the services documented 
fulfillment of certain section 2667 provisions, provided for the 
receipt of the FMV of the leased property, and considered whether 
leased property might be needed for military purposes over the lease 
term. Finally, we compared the services' EUL program administration 
costs with EUL consideration received through September 30, 2010, and 
reviewed how the services monitored program administration costs in 
relation to program benefits. 

We conducted this performance audit from May 2010 to June 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. Further 
details on our scope and methodology can be found in appendix I. 

Background: 

Section 2667 of Title 10 provides authority to secretaries of the 
military departments to lease nonexcess real property[Footnote 10] 
under the control of the respective departments, subject to several 
provisions.[Footnote 11] For example, such leases must be considered 
by the respective secretary to be advantageous to the United States 
and include terms that the respective secretary considers will promote 
the national defense or be in the public interest. In addition, each 
lease may not be for more than 5 years, unless the secretary concerned 
determines that a lease for a longer period will promote the national 
defense or be in the public interest; shall permit the secretary to 
revoke the lease at any time, unless the secretary determines that the 
omission of such a provision will promote the national defense or be 
in the public interest; shall provide for the payment (in cash or in 
kind) by the lessee of consideration in an amount that is not less 
than the FMV of the lease interest, as determined by the secretary; 
[Footnote 12] and shall 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. 

Concerning lease consideration, section 2667 provides that if the 
consideration is to be cash, then the cash payments must be deposited 
into a special account in the U.S. Treasury and may only be used in 
such amounts as provided in appropriations acts.[Footnote 13] Also, 
once these amounts are appropriated, section 2667 provides that the 
installation where the leased property is located receive at least 50 
percent of that consideration and that the appropriated cash may be 
used for specific enumerated purposes relating to real property 
construction, maintenance services, lease of facilities, or payment of 
utility services. In the event that consideration for the lease is to 
be in kind, then section 2667 provides a nonexhaustive set of examples 
of acceptable forms of in-kind consideration that includes the 
maintenance, protection, alteration, repair, improvement, or 
restoration of property or facilities; the construction of new 
facilities; and the provision of facilities, utility services, or real 
property maintenance services. 

The military services have long used the authority under section 2667 
to enter into short-term leases of military property for such uses as 
farming, grazing, and cellular towers, and in turn received cash 
consideration. According to the services, they had about 3,000 such 
leases, which generated about $20.8 million in cash consideration in 
fiscal year 2010. The services have also used the authority contained 
in section 2667 to enter into more complex leases that the services 
refer to as EULs. Although the authorizing statute, section 2667, does 
not use "enhanced use lease" to differentiate leases executed pursuant 
to this authority, the services generally distinguish an EUL from a 
normal outlease on the basis of scope, process, term, and 
consideration. For example, according to the services, EULs generally 
involve larger amounts of property, generally undergo a more detailed 
evaluation and review before approval and greater oversight after 
approval, often are executed for longer periods of time (such as 25 to 
50 years), and generally focus on in-kind, rather than cash, 
consideration. Each service has issued policy guidance for 
implementing EULs using the authority provided by section 2667. 

EUL Program Management: 

In general, EUL program management includes those activities involved 
with the identification, evaluation, and justification of potential 
EULs; the solicitation and selection of the EUL developer; lease 
negotiation; and lease administration to include oversight of in-kind 
services. The Office of the Secretary of Defense has overall 
responsibility and oversight of DOD real property and establishes 
overarching guidance and procedures for the management of DOD real 
property. However, because section 2667 provides authority to the 
military service secretaries to lease real or personal property, 
subject to the provisions contained in the section, the military 
departments have direct responsibility for implementing leases under 
section 2667. In the Army, the authority to execute EULs was delegated 
to the Deputy Assistant Secretary of the Army (Installations and 
Housing), and certain responsibilities for executing the Army EUL 
program have been further delegated to the U.S. Army Corps of 
Engineers. In the Navy, the authority to establish and supervise 
execution of Navy policies and procedures relating to the use of real 
property and real estate contracting actions (including EULs) has been 
delegated to the Deputy Assistant Secretary of the Navy (Energy, 
Installations, and Environment), and real estate contracting authority 
for the Navy EUL program has been delegated to the Naval Facilities 
Engineering Command. In the Air Force, overall responsibility for the 
execution of initial EUL transaction documents and leases has been 
delegated to the Assistant Secretary of the Air Force (Installations, 
Environment and Logistics), and responsibility for executing 
additional leases pursuant to section 2667 has been delegated to the 
Air Force Real Property Agency. 

Services' EUL Program: 

At the end of fiscal year 2010, the Army, the Navy, and the Air Force 
reported that a total of 17 EULs were in place and that 37 additional 
EULs were in various phases of review or negotiation for possible 
future implementation. Table 1 breaks down this information by 
service, and appendix II identifies and provides details on each of 
the 17 EULs. 

Table 1: Military Services' EULs as of September 30, 2010: 

Service: Army; 
In place: 7; 
Under consideration: 14. 

Service: Navy; 
In place: 5; 
Under consideration: 10. 

Service: Air Force; 
In place: 5; 
Under consideration: 13. 

Service: Total; 
In place: 17; 
Under consideration: 37. 

Sources: Army, Navy, and Air Force. 

[End of table] 

As shown in table 1, the Army reported 7 EULs in place[Footnote 14] 
and 14 EULs under consideration[Footnote 15] at the end of fiscal year 
2010. Many of the Army's EULs were long-term leases that called for 
the development of leased land, which would be rented to private 
sector entities for profit. Army officials stated that many of the 
leases provided for the Army to receive a share of the net rental 
income as compensation in the form of in-kind services for the 
maintenance or improvement of installation facilities. The three Army 
EULs in our case studies, which were composed of several different 
leases and other legal documents, follow: 

* Fort Sam Houston EUL.[Footnote 16] In June 2001, the Army entered 
into three 50-year lease agreements at Fort Sam Houston, Texas. 
[Footnote 17] According to the Army, the overall purpose of the EUL 
was to lease three large, deteriorated, vacant buildings situated on 
the installation to a private developer who would renovate the 
buildings as office space and then sublease the space to private 
sector tenants for profit. As consideration, the Army was to receive a 
share of the development's net rental income. Such revenue was to be 
deposited into an escrow account in order to fund future work projects 
on installation facilities.[Footnote 18] Army officials stated that 
the EUL also benefited the Army by eliminating Army costs associated 
with maintaining the old buildings. 

* Picatinny Arsenal EUL. In September 2006, the Army entered into a 
master agreement with a private developer at Picatinny Arsenal, New 
Jersey. The master agreement does not lease any property[Footnote 19] 
but instead is an agreement to later enter into separate leases with 
the lessee to incrementally develop 13 different parcels of property, 
which consists of 100,000 square feet of existing facility space in 
four buildings and about 120 acres of land.[Footnote 20] The master 
agreement makes the majority of the parcels available for lease at the 
lessee's sole discretion, in any order and at any time of the lessee's 
choosing.[Footnote 21] The Army's expectation was that the developer 
would renovate or replace the existing buildings and build and rent 
laboratory, administrative, educational, and light manufacturing space 
as part of a research campus on up to 120 acres, which would in turn 
be leased to private sector tenants for profit. As consideration, the 
Army would receive certain up-front payments upon the execution of 
leases for the various parcels, and would also receive a share of the 
net rental income generated by the developed property. Both the up-
front payments and the revenue share were to be deposited into an 
escrow account, from which funds could be disbursed as cash or to pay 
for in-kind projects at the installation. At the time of our review, 
the Army had entered into two separate site lease agreements with the 
lessee with 50-year terms--one concurrently with the master agreement 
and the other in August 2007. 

* Aberdeen Proving Ground EUL. In September 2006, the Army entered 
into a master agreement at Aberdeen Proving Ground, Maryland. The 
master agreement does not lease any property[Footnote 22] but instead 
is an agreement to later enter into separate leases with the lessee to 
incrementally develop 416 acres of Army land. In turn, the lessee was 
expected to construct buildings for an office and technology 
park.[Footnote 23] As consideration, the EUL called for the lessee to 
pay the Army rent on completed buildings and the rent would be 
deposited into an escrow account, from which funds would be disbursed 
as cash or to pay for in-kind projects at the installation. At the 
time of our review, the Army had entered into eight separate site 
lease agreements with 50-year terms. 

Table 1 also shows that the Navy reported 5 EULs in place and 10 EULs 
under consideration at the end of fiscal year 2010. Most of the Navy's 
EULs involved leases of Navy property that the lessee used without 
further development, such as the leasing of Navy-owned land to a 
private company for off-loading and storing automobiles. According to 
the Navy, the leases typically provided for the Navy to receive rent 
as consideration for the leased property in the form of in-kind 
services for the maintenance or improvement of installation 
facilities. The Navy EULs in our case studies did not provide for 
consideration to be deposited in an escrow account, from which funds 
could be disbursed to pay for in-kind services. Rather, upon 
satisfactory completion of in-kind services, the rental payment value 
due would be credited by an amount equal to the cost of the in-kind 
services. The three Navy EULs in our case studies follow: 

* Naval Base Point Loma EUL. In October 2005, the Navy entered into a 
5-year lease agreement at Naval Base Point Loma, California. According 
to the Navy, the overall purpose of the EUL was to lease about 432,000 
square feet of industrial and storage space in a Navy-owned building 
to a private sector company, which planned to use the property to 
assemble rocket propulsion fuel tanks in fulfillment of military 
contracts.[Footnote 24] The EUL required the lessee to pay rent to the 
Navy in five consecutive, annual payments; but at the option and sole 
discretion of the Navy, the annual rental payment could be offset by 
the costs of accomplishing in-kind services.[Footnote 25] Upon 
satisfactory completion of in-kind services, the annual rental payment 
due would be credited by an amount equal to the cost of the services. 
Thus far, all of the consideration the Navy has received under this 
EUL has been in the form of in-kind services, such as performing roof 
repairs and modernizing restrooms at the leased building. 

* Naval Base Ventura County EUL. In March 2007, the Navy entered into 
a 5-year lease agreement at Naval Base Ventura County, California. 
According to the Navy, the overall purpose of the EUL was to lease 
over 100 acres of Navy land to a private sector company, which planned 
to use the property to off-load and store automobiles. As 
consideration, the Navy would receive annual rent; but at the sole 
option of the Navy, the annual rent could be offset by the cost of 
accomplishing in-kind services. Thus far, all of the consideration the 
Navy has received under this EUL has been in the form of in-kind 
services, such as performing road and pavement repairs at the 
installation. 

* Naval Base San Diego EUL. In August 2008, the Navy entered into a 30-
year lease agreement at Naval Base San Diego, California. According to 
the Navy, the overall purpose of the EUL was to lease about 4.8 acres 
of Navy land and one Navy-owned building situated on the land to a 
private sector company, which planned to use the property to assist in 
the construction of ships under a contract with the Navy. As 
consideration, the EUL provided for rental payments, but in lieu of 
cash payments, the lessee would provide in-kind consideration in the 
form of maintenance, repair, improvement, and construction of new 
facilities. Specifically, the EUL required the lessee to perform the 
in-kind services at its own expense, and in exchange, the Navy would 
provide a rent credit for the actual cost incurred against the annual 
rent. Thus far, all of the consideration the Navy has received under 
this EUL has been in the form of in-kind services. 

Table 1 further shows that the Air Force reported 5 EULs in place and 
13 EULs under consideration at the end of fiscal year 2010.[Footnote 
26] Air Force officials stated that Air Force EULs generally were long-
term leases that included various arrangements from relatively 
straightforward leases of land in exchange for rent payments as 
consideration to one more complex lease that called for the 
development of leased land, which would be rented to private sector 
tenants with the Air Force receiving a consideration payment when the 
EUL was signed and also receiving a share of the development's net 
rental income as compensation. According to Air Force officials, the 
Air Force EULs generally called for consideration to be received in 
the form of in-kind services for the maintenance or improvement of 
installation facilities. The three Air Force EULs in our case studies 
follow: 

* Eglin Air Force Base. In October 2006, the Air Force entered into a 
30-year lease agreement at Eglin Air Force Base, Florida. According to 
the Air Force, the overall purpose of the EUL was to lease 255.5 acres 
of land to a Florida county government, which planned to use the 
property to construct a new wastewater treatment plant and disposal 
system. As consideration, the Air Force would receive rent to be 
deposited into an escrow account and disbursed as cash or to pay for 
in-kind projects performed on installation facilities. 

* Eglin Air Force Base. In July 2007, the Air Force entered into a 25- 
year lease agreement at Eglin Air Force Base, Florida. According to 
the Air Force, the overall purpose of the EUL was to lease 130.8 acres 
of land to a Florida county government, which planned to use the 
property to operate and maintain an existing airport terminal and 
rental car services. As consideration, the Air Force would receive 
rent to be deposited into an escrow account and disbursed as cash or 
to pay for in-kind projects performed on installation facilities. 

* Hill Air Force Base. In August 2008, the Air Force entered into a 
master development agreement with a private developer at Hill Air 
Force Base, Utah. The master development agreement does not lease any 
property. Instead, the agreement explains that the EUL site consists 
of 499 acres[Footnote 27] that will be outleased incrementally through 
individual site leases and sets forth the general terms, conditions, 
and rights under which the Air Force and the developer may later 
execute these site leases. The developer was expected to construct 
commercial facilities for rent to private sector tenants for profit. 
As consideration for the EUL, the Air Force received an up-front 
payment from the developer when the master development agreement was 
signed.[Footnote 28] The Air Force also expects to receive a share of 
the development's net rental revenues from developed property, which 
is to be placed in a special account outside the U.S. Treasury and 
used to fund in-kind services at the installation.[Footnote 29] 
Additionally, grants from the State of Utah were anticipated to be 
disbursed to the developer for acceptable state purposes--such highway 
improvements and infrastructure development--that may facilitate and 
benefit the Hill Air Force Base EUL. At the same time that the Air 
Force entered into the master development agreement, the Air Force 
also entered into a master lease, which grants to the developer 
certain limited property rights for a 50-year term, including entry, 
planning and constructing certain utility systems and infrastructure 
necessary to support development of the anticipated site leases. At 
the time of our review, the Air Force had entered into one 50-year 
site lease.[Footnote 30] 

Certain Army and Air Force EULs Did Not Comply with Some Statutory 
Requirements: 

One of the Army EULs included in our case studies did not comply with 
some requirements contained in the EUL authorizing statute, section 
2667 of Title 10. On March 30, 2011, GAO issued a legal opinion 
finding that certain terms and conditions of the legal documents 
comprising the Army's Picatinny Arsenal EUL violated subsection 
2667(e), which requires that cash consideration be deposited into the 
U.S. Treasury, and certain other statutes (see appendix III). Also, 
while no two EULs are identical, we found that the other five Army and 
Air Force case study EULs included some terms and conditions similar 
to those that were found to be problematic by the legal opinion, which 
raises questions about the extent to which such EULs comply with the 
statutory requirements. In addition, beyond those issues addressed in 
the legal opinion, we found that the three Army case study EULs and 
one Air Force case study EUL did not fully comply with another 
provision in section 2667 that requires that each lease executed 
pursuant to section 2667 provide for lease renegotiation if taxes are 
imposed on leased property. We did not find similar legal issues in 
the three Navy EUL case studies. Unless the Army and the Air Force 
review their EULs and take steps, if needed, to ensure compliance with 
applicable statutes, then uncertainty will continue to exist as to 
whether the services' EULs meet all statutory requirements. 

Legal Opinion Addressed Certain Compliance Issues: 

On March 30, 2011, we issued a legal opinion in which we concluded 
that certain terms and conditions of the legal documents comprising 
the Army's Picatinny Arsenal EUL failed to comply with subsection 
2667(e) of Title 10 and the miscellaneous receipts statute by failing 
to require that cash consideration be deposited into the appropriate 
account of the U.S. Treasury.[Footnote 31] Further, the opinion found 
that the Picatinny Arsenal EUL violated the Antideficiency Act by 
including a clause in the escrow agreement whereby the government 
indemnified the escrow account agent against all liabilities arising 
under the escrow agreement. A summary of the legal opinion follows: 

* First, the opinion concluded that certain terms and conditions of 
the Picatinny Arsenal EUL did not comply with section 2667. Section 
2667 specifies that consideration for a lease executed under this 
authority must come in one of two forms--cash payments or in-kind 
consideration--and subsection 2667(e) requires that cash payments be 
deposited into a special account in the U.S. Treasury and are 
available to the Secretary concerned only to the extent provided in 
appropriations acts. However, the applicable legal documents 
comprising the Picatinny Arsenal EUL provided that rent consideration 
from the lessee be deposited into an escrow account--specifically, 
deposited into an individual interest-bearing account at a local 
credit union. The legal documents further provide that such escrowed 
funds may be disbursed either to a third-party contractor as payment 
for services rendered or directly as a cash payment to the Army. At 
the time of our visit to Picatinny Arsenal in July 2010, about $1.5 
million of escrowed funds had been disbursed to pay third-party 
contractors for construction, repairs or similar work performed on 
property under the control of the Secretary. The opinion found that 
the terms and conditions of the legal documents comprising the 
Picatinny Arsenal EUL indicated that the Army had control over the 
disposition of the escrow funds which, except for the payment of 
expenses of the escrow agent, are used solely for the benefit of the 
Army. Therefore, the opinion concluded that the Picatinny Arsenal EUL 
violated section 2667 by effectively receiving cash, not in-kind, 
consideration, and depositing such proceeds into an escrow account 
instead of the special account in the U.S. Treasury for such purposes 
as required by subsection 2667(e). 

* Second, the opinion concluded that certain terms and conditions of 
the Picatinny Arsenal EUL did not comply with the miscellaneous 
receipts statute. The miscellaneous receipts statute provides that an 
official or agent of the government receiving money for the government 
from any source shall deposit the money in the U.S. Treasury as soon 
as practicable without deduction for any charge or claim.[Footnote 32] 
However, as discussed above, the applicable legal documents comprising 
the Picatinny Arsenal EUL provided that rent consideration from the 
lessee be deposited into an escrow account at a local credit union. 
The opinion found that the escrowed funds constituted "money for the 
government" and that the Army's failure to immediately deposit the 
consideration received for the Picatinny Arsenal EUL into the 
appropriate account in the U.S. Treasury was a violation of the 
miscellaneous receipts statute. 

* Third, the opinion concluded that an indemnification provision in 
the escrow agreement for the Picatinny Arsenal EUL, whereby the 
government agreed to indemnify the escrow agent against all 
liabilities, violated the Antideficiency Act. The Antideficiency Act 
prohibits agencies from spending, or committing themselves to 
spending, in advance of or in excess of appropriations, unless 
specifically authorized by law.[Footnote 33] Once it has been 
determined that there has been a violation of the Antideficiency Act, 
the agency head must report immediately to the President and Congress 
all relevant facts and provide a statement of actions taken, and must 
also transmit a copy of each report to the Comptroller General. 
[Footnote 34] The opinion concluded that the open-ended 
indemnification provision constituted a violation of the 
Antideficiency Act. Further, the opinion noted that although the Army 
subsequently cured the violation by amending the escrow agreement to 
delete the indemnification provision,[Footnote 35] a report of the 
violation is still required. 

The legal opinion recommended three actions. First, with respect to 
the section 2667 and miscellaneous receipts violation, the opinion 
recommended that the Army transfer the balance of the escrow funds to 
the appropriate account in the Treasury, and with respect to the 
escrow funds that have been expended to date, the Army adjust its 
accounts by transferring funds from an Army account available to pay 
for services to property under the control of the Secretary to the 
appropriate account in the Treasury. Further, the opinion noted that 
if the Army finds it lacks sufficient budget authority to adjust its 
accounts, it should report a violation of the Antideficiency Act. 
Second, with respect to the indemnification provision in the original 
escrow agreement, the opinion encouraged the Army to make the 
necessary report as soon as possible. Third, the opinion stated that 
to the extent that the Army has entered into EULs on substantially 
similar terms and conditions as the Picatinny Arsenal EUL, the Army 
should take the same corrective action. 

Provisions Similar to Those Addressed in the Legal Opinion Existed in 
Other EULs: 

While no two EULs are identical, we found that the five other Army and 
Air Force EULs in our case study review required that some or all cash 
consideration received pursuant to the EUL be deposited into an escrow 
account and not the U.S. Treasury before being disbursed from the 
escrow account to pay for in-kind construction and maintenance 
projects, which raises questions about the extent to which such EULs 
comply with section 2667 and the miscellaneous receipts statute. 
[Footnote 36] For example, the Aberdeen Proving Ground EUL, the Fort 
Sam Houston EUL, the Hill Air Force Base EUL, and the two Eglin Air 
Force Base EULs provide for some or all consideration received 
pursuant to the EUL to be first deposited into an escrow, or similar, 
account and not the U.S. Treasury.[Footnote 37] In addition, although 
not included in our EUL case studies, the escrow agreements executed 
by the Army in connection with the EUL at Yuma Proving Ground, 
Arizona, and the EUL at Fort Detrick, Maryland, contained 
indemnification provisions similar to the indemnification provision in 
the Picatinny Arsenal EUL that was discussed in our legal opinion. The 
Army took similar action with respect to these indemnification 
provisions as it did with the Picatinny Arsenal EUL provision by 
amending the escrow agreements to delete the indemnification 
provision.[Footnote 38] Thus, the indemnification provisions that were 
present in the Yuma Proving Ground EUL and the Fort Detrick EUL raise 
questions about the extent to which such EULs complied with the 
Antideficiency Act and the associated reporting requirements. 

Additional Compliance Issues Existed in Some EULs: 

Beyond those issues addressed in the legal opinion, we found that the 
legal documents executed in several Army and Air Force EULs in our 
case study review failed to include a provision providing 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.[Footnote 39] Specifically, all of the Army EULs in our 
case study and one of the Air Force EULs in our case study executed 
pursuant to section 2667 contained at least one lease that either 
failed to address what would happen should the leased property be 
later made taxable by state or local governments under an act of 
Congress or otherwise did not provide for lease renegotiation in 
accordance with section 2667. For example, the Eglin Air Force Base 
Wastewater EUL contained no provision addressing what would happen 
should the leased property later become taxable. In the Fort Sam 
Houston EUL, each of the four leases requires the lessee to pay any 
and all taxes imposed, while the two site leases executed as part of 
the Picatinny Arsenal EUL and two of the eight site leases executed as 
part of the Aberdeen Proving Ground EUL require the lessee to pay 
taxes imposed by the state and permit the lessee to reduce the amount 
of rent payable to the Army by the amount of any taxes on the leased 
property. By failing to include the required tax provision, these 
legal documents were not in compliance with the section 2667 
requirement. 

Army and Air Force Expectations for Some EULs Were Not Realized: 

The services' expectations for EUL development time frames and 
financial benefits were not realized in two Army EULs and one Air 
Force EUL included in our case studies, and some received markedly 
less consideration to date than initially estimated. Service 
expectations for the remaining two Air Force and three Navy EUL case 
studies were generally realized, and for the remaining Army EUL case 
study, we could not clearly determine whether development time frame 
expectations were realized because the Army did not prepare detailed 
development plans that established clear time frame expectations for 
the project.[Footnote 40] According to the services, the recent 
economic downturn caused development plans for several EULs to 
significantly slow down or to be placed on hold. As a result, 
buildings were not constructed or renovated as planned and were not 
rented to private sector tenants as planned. Thus, projected rental 
revenues and the services' expected share of these revenues did not 
materialize. 

Army and Air Force Expectations for EUL Development Time Frames and 
Financial Benefits Were Not Realized in Some Cases: 

We found that expected development time frames and financial benefits 
were not realized in two of the Army and one of the Air Force EULs we 
reviewed. For example, when the first site leases for the Fort Sam 
Houston EUL were signed in 2001, the Army expected that the developer 
would renovate the three large, deteriorated buildings included in the 
lease for use as office space and then sublease the space to private 
sector tenants for profit. Initially, the Army expected that it would 
receive about $253 million in in-kind consideration over the 50-year 
lease term from its share of the project's net rental revenue. 
However, the project has not been developed as expected. Specifically, 
the lessee has renovated only two of the three deteriorated buildings, 
[Footnote 41] and according to Army officials, nearly all of the EUL 
office space is rented to the Army rather than to private sector 
tenants. This occurred for two reasons. First, after the terrorist 
attacks of September 11, 2001, access to the installation became 
restricted, which increased the complexity of renting space to private 
sector tenants. Second, the Army made several decisions after the 
lease was signed to relocate Army organizations to Fort Sam Houston, 
which resulted in a significant increase in the need for Army office 
space at the installation. Even if the Army had wanted to terminate 
one or all of the EUL leases because of these changes, none of the 
leases included a clause to permit the government to terminate the 
lease for convenience. At the time of our visit in August 2010, the 
Army estimated that EUL consideration over 50 years would total about 
$198 million, or about 22 percent less than was originally expected. 
Moreover, rather than resulting from the Army's share of rental 
revenues from private sector tenants, 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 developer for using EUL office space. Figure 1 
contains photographs of property included in the Fort Sam Houston EUL, 
including views of one of the renovated buildings, the building that 
has not been renovated, and a newly constructed office building on 
leased land. 

Figure 1: Photographs of the EUL Project at Fort Sam Houston, Texas: 

[Refer to PDF for image: 4 photographs] 

Source: GAO. 

Note: The photograph at the top left of the graphic shows the front 
view of a renovated building; the photograph at the top right shows a 
rear view of same renovated building; the photograph at the bottom 
left shows an office building constructed by the developer on land 
included in the lease; and the photograph on the bottom right shows a 
deteriorated, vacant building included in the lease that has not been 
renovated. 

[End of figure] 

The Picatinny Arsenal EUL is the second EUL where expectations were 
not realized. When the master agreement for the Picatinny Arsenal EUL 
was signed in 2006, the Army anticipated that by October 2007 the 
developer would have renovated or replaced the four Picatinny Arsenal 
buildings included in the lease plan to provide 100,000 square feet of 
new or renovated office space that would be rented to private sector 
tenants for profit. Also, by May 2008, the Army anticipated that the 
developer would have constructed and rented to private sector tenants 
about 150,000 square feet of office space on vacant land included in 
the lease plan. Further, the Army initially estimated that it would 
receive about $500 million in total in-kind consideration over the 
term of the EUL, of which about $7.4 million in in-kind consideration 
from developer payments and the Army's share of net rental revenues 
would have been received by the end of 2010. However, the project has 
not been developed as expected and the expected financial benefits 
have not been realized. At the time of our visit in July 2010, about 
27,500 square feet of office space, or about 89 percent less than the 
amount initially expected, had been developed and about 16,200 square 
feet of this space was rented to private sector tenants. Also, through 
the end of 2010, the Army had received $1.7 million in consideration 
for the lease, or 77 percent less than the amount initially expected, 
and the entire amount was paid by the developer when the first site 
lease was signed in 2006. According to Army officials, the project has 
not met expectations because of the economic downturn and it is not 
clear how much additional consideration will be obtained over the 
remaining lease term. The leases do not include a provision requiring 
minimal consideration payments to the Army in the event that the 
property was not developed as expected, and none of the leases contain 
a termination for convenience clause in the event that the Army 
desired to terminate the lease before the end of the EUL term. Figure 
2 shows photographs of buildings covered by the Picatinny Arsenal EUL. 

Figure 2: Photographs of the EUL Project at Picatinny Arsenal, New 
Jersey: 

[Refer to PDF for image: 2 photographs] 

Source: U.S. Army Corps of Engineers. 

Note: Photograph on left shows the newly constructed 27,500-square-
foot office building and the photograph on the right shows a vacant 
leased building that has been internally gutted but not yet renovated. 

[End of figure] 

The Hill Air Force Base EUL is the third EUL where expectations were 
not yet realized. When the Hill Air Force Base master agreement was 
signed in 2008, the Air Force estimated that in addition to $10 
million in developer paid consideration, the Air Force would receive 
about $385 million in in-kind facility improvements as consideration 
from its share of the project's net rental revenue over the EUL term. 
The Air Force also anticipated that about $75 million in public funds 
from tax increment financing proceeds and public grants from the State 
of Utah would be provided to help support infrastructure improvements 
near military installations. Further, by the end of 2010, the Air 
Force estimated that the developer would have begun construction of at 
least seven commercial buildings and that four of these buildings 
would be completed, leased to private sector tenants, and generating 
net rental income from which the Air Force would be receiving a share 
as consideration. However, the project has not been developed as 
expected largely, according to Air Force officials, because of the 
economic slowdown. At the time of our visit in August 2010, 
construction had not begun on any commercial buildings,[Footnote 42] 
and the only lease consideration actually received by the Air Force 
was about $2.5 million, which the developer paid when the master lease 
agreement was signed in 2008.[Footnote 43] Also, of the projected $75 
million in public funding, the Air Force originally estimated that $45 
million would be available to benefit the project by the end of fiscal 
year 2010. However, at the end of fiscal year 2010, about $10 million 
in state grants had been made toward military installation 
infrastructure improvements--$35 million less than estimated--and of 
this amount, about $800,000 had been used to pay for the design of two 
facilities at Hill Air Force Base. The balance of the state funds was 
held by a state-created military installation development authority. 
Installation officials stated that they remained optimistic that the 
project would eventually develop as envisioned. 

Although not one of our case studies, the EUL at Kirtland Air Force 
Base, New Mexico, also illustrates missed expectations. When the 
Kirtland Air Force Base EUL was signed in 2005, the Air Force expected 
that the lessee would develop the 8.3 acre property by constructing 
and subleasing office, research, and education facilities. Over the 50-
year lease, the Air Force estimated that it would receive about $2.7 
million in lease consideration from annual ground rent payments and 
additional rent payments as the planned facilities were completed. 
However, from the time the lease was signed in 2005 through December 
2010, Air Force officials stated that the Air Force received no 
consideration for the lease--the lessee made no ground rent payments 
to the Air Force and no facilities were constructed to generate 
additional rent. In December 2010, the Air Force terminated the lease 
because of lessee default. 

The Services' Management of the EUL Program Includes Weaknesses in 
Internal Controls and Guidance: 

Our review of the services' management of the EUL program identified 
several weaknesses related to internal controls and program guidance. 
First, because the services generally lacked methodologies, analyses, 
or other documentation showing how certain provisions contained in the 
authorizing statute, section 2667 of Title 10, were addressed, it is 
not clear to what extent the services systematically considered and 
assessed each provision before entering into the leases. Second, while 
the statute leaves the determination of FMV to secretarial discretion 
and thus a particular methodology for determining FMV is not required, 
we found cases where it is not clear how and to what extent the 
services provided for the receipt of consideration in an amount that 
is not less than the FMV of the lease interest. Third, some EULs 
included property that was being used by the military or might be 
needed for military purposes over the lease term, which could result 
in increased costs to relocate military activities or increased 
potential government costs in the event a service had to terminate a 
lease to regain use of the property. Fourth, the services have not 
regularly monitored EUL program administration costs to help ensure 
that the costs are in line with program benefits. 

The Services Lack Documentation That Certain Statutory Requirements 
Were Met: 

In the nine EUL case studies we reviewed, we found that the services 
generally lacked methodologies, analyses, or other documentation 
showing that certain provisions contained in section 2667 were 
addressed prior to entering into the leases. Among other things, 
section 2667 requires that each lease does not include excess 
property. This determination is particularly important given that some 
EULs include terms of 50 years or more and in view of recent emphasis 
on the disposal of excess or underused federal property as a cost 
savings measure. Other section 2667 provisions require that a lease 
may not be for a term in excess of 5 years, unless the secretary 
concerned determines that the lease will promote the national defense 
or be in the public interest, and that each lease permit the service 
to revoke the lease at any time, unless the secretary concerned 
determines that omission of such a provision will promote the national 
defense or be in the public interest. These determinations are left to 
secretarial discretion and supporting analyses or documentation 
evidencing the determinations is not specifically required by law. 
Nevertheless, internal control standards call for the documentation of 
management decisions and our review found that the services lacked 
guidance on how to make the determinations and document them. Without 
such evidence, it is not clear to what extent the services 
systematically considered and assessed each requirement to ensure that 
each was met prior to entering into the leases. 

In most cases, the services lacked supporting analyses or other 
specific documentation to show how the excess property determination 
was made. For example, five of the nine EULs in our case studies 
provided declarative statements in the lease documents that the 
property included in the lease was not excess property, and four EULs 
were silent on the matter. Similarly, concerning the secretarial 
determinations that leases exceeding 5 years would promote the 
national defense or be in the public interest, six of the seven EULs 
in our case studies with terms exceeding 5 years provided declarative 
statements that the leases promoted the national defense or were in 
the public interest, and the remaining EUL was silent on the issue. 
However, in most cases the services did not have analyses or 
documentation to support the determinations. Service officials 
explained that the declarative statements alone in some cases 
constituted the totality of the documentation of the secretary's 
determination. 

Further, seven of the nine EULs in our case studies did not include 
terms permitting the government to revoke the lease at any time. 
According to some service officials, the primary reason for the 
omission is that at least for those EULs that call for property 
development, the lessee normally seeks commercial loans to aid in the 
development and commercial lenders would not lend money for a project 
that might be terminated before the lender was able to recover the 
loan. Thus, the services often omit from their EULs a clause 
permitting lease termination at the government's convenience. However, 
the statute requires a determination that the omission would promote 
the national defense or be in the public interest. We found that six 
of the seven EULs without the clause included a declarative statement 
that the omission would promote the national defense or be in the 
public interest and the remaining EUL was silent on the matter. Yet in 
all seven cases the services lacked analyses or documentation showing 
how the secretary determined that the omission would promote the 
national defense or be in the public interest. 

Table 2 summarizes our analysis of the services' consideration of 
these three section 2667 provisions. 

Table 2: Summary of the Services' Consideration of Three Section 2667 
Provisions: 

EUL location: Fort Sam Houston; 
Excess property: 
Did lease state that the property was not excess?[A]: No; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: No; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: No; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Picatinny Arsenal; 
Excess property: 
Did lease state that the property was not excess?[A]: No; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Aberdeen Proving Ground; 
Excess property: 
Did lease state that the property was not excess?[A]: No; 
Did the service have documentation showing how this secretarial 
determination was made? Yes; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Naval Base San Diego; 
Excess property: 
Did lease state that the property was not excess?[A]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes[D]; 
Did the service have documentation showing how this secretarial 
determination was made? No[D]. 

EUL location: Naval Base Point Loma; 
Excess property: 
Did lease state that the property was not excess?[A]: No; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: N/A[E]; 
Did the service have documentation showing how this secretarial 
determination was made? N/A[E]; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: N/A[E]; 
Did the service have documentation showing how this secretarial 
determination was made? N/A[E]. 

EUL location: Naval Base Ventura County; 
Excess property: 
Did lease state that the property was not excess?[A]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: N/A[E]; 
Did the service have documentation showing how this secretarial 
determination was made? N/A[E]; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: N/A[E]; 
Did the service have documentation showing how this secretarial 
determination was made? N/A[E]. 

EUL location: Hill Air Force Base; 
Excess property: 
Did lease state that the property was not excess?[A]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? Yes; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Eglin Air Force Base (Waste-water); 
Excess property: 
Did lease state that the property was not excess?[A]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Eglin Air Force Base (Airport); 
Excess property: 
Did lease state that the property was not excess?[A]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If lease term exceeded 5 years: 
Did lease state that the longer term would promote the national 
defense or be in the public interest?[B]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No; 
If government termination for convenience clause was omitted: 
Did lease state that the omission will promote the national defense or 
be in the public interest?[C]: Yes; 
Did the service have documentation showing how this secretarial 
determination was made? No. 

EUL location: Summary; 
Excess property: Did lease state that the property was not excess?[A]: 
5 Yes; 4 No; 
Excess property: Did the service have documentation showing how this 
secretarial determination was made? 2 Yes; 7 No; 
If lease term exceeded 5 years: Did lease state that the longer term 
would promote the national defense or be in the public interest?[B]: 6 
Yes; 1 No; 2 N/A; 
If lease term exceeded 5 years: Did the service have documentation 
showing how this secretarial determination was made? 7 No; 2 N/A; 
If government termination for convenience clause was omitted: Did 
lease state that the omission will promote the national defense or be 
in the public interest?[C]: 6 Yes; 1 No; 2 N/A; 
If government termination for convenience clause was omitted: Did the 
service have documentation showing how this secretarial determination 
was made? 7 No; 2 N/A. 

Source: GAO analysis of EUL documentation provided by the Army, Navy, 
and Air Force. 

[A] Section 2667 does not require that leases executed under this 
section state that the property is not excess. 

[B] Section 2667 does not require that leases executed under this 
section with a term longer than 5 years state that a longer term would 
promote the national defense or be in the public interest. 

[C] Section 2667 does not require that leases executed under this 
section that omit a provision permitting the government to terminate 
the lease at any time state that the omission will promote the 
national defense or be in the public interest. 

[D] While this EUL does not contain a clause permitting the Navy to 
terminate at any time, it does permit the Navy to terminate the lease 
in the event that the property is required for federal use, or if the 
lessee's use of the property is not consistent with federal program 
purposes. 

[E] Not applicable (N/A) because lease did not exceed 5 years or lease 
did not omit a government termination for convenience clause. 

[End of table] 

It Is Not Clear How and to What Extent the Army's and the Air Force's 
EULs Provided for the Receipt of Fair Market Value: 

How and to what extent the Army's and the Air Force's EULs provide for 
the receipt of the FMV of the leased property, as required by section 
2667, is unclear. Section 2667 requires that each lease provide for 
the payment (in cash or in kind) by the lessee of consideration in an 
amount that is not less than the FMV of the lease interest, as 
determined by the service secretary. While the statute leaves the 
determination of FMV to secretarial discretion, and thus a particular 
methodology for determining FMV is not required, we found cases where 
receipt of FMV was questionable largely because service guidance for 
determining and ensuring the receipt of FMV for proposed EULs was not 
always clear. Specifically, as illustrated below, we found one Army 
case where receipt of FMV cannot be ensured because the FMV of leased 
property was not determined; two Air Force cases where the agreed-to 
amount of lease consideration was below at least one appraisal of the 
value of the leased property; and other cases where the receipt of FMV 
depended on the service receiving a share of the net rental revenues 
from a project's development, which could potentially result in FMV 
not being obtained in the future. 

First, the Army did not appraise about 39 of the approximately 41 
acres of land included in the Fort Sam Houston EUL. The three 2001 
site leases comprising the Fort Sam Houston EUL initially included 
three primary old, deteriorated buildings and associated land that was 
used mostly for parking. According to the Army, about 36 acres of land 
was included in these original leases. To determine the FMV of the 
property, the Army used an appraisal that determined that the FMV of 
several buildings was $1.00 per year because of their poor condition. 
However, in determining the FMV of the land, an appraisal was 
conducted for only 2 acres--not the 36 total acres included in the 
original leases. Also, Army officials stated that the Army and the 
lessee subsequently agreed in 2008 to add several acres of Fort Sam 
Houston land to the EUL in exchange for the lessee returning to the 
Army some land associated with two of the old buildings' parking lots. 
The Army wanted to build a lodging facility on the land that had been 
included in the original lease. Although Army officials stated that 
the exchange resulted in a net increase of the total amount of Army 
land included in the EUL by about 5 acres, the Army did not determine 
the FMV of the additional land, which the lessee subsequently used as 
the site for constructing a new office building. Without a 
determination of the FMV of the land included in the Fort Sam Houston 
EUL, the Army cannot ensure that the FMV of this property will be 
obtained over the remaining term of the EUL. 

Second, for two of the three Air Force EULs in our case studies, the 
Air Force had appraisals completed to help determine the value of the 
property that was to be leased. Ultimately, the Air Force relied upon 
negotiations with the lessee, rather than the appraisals, to determine 
the FMV of the property, and in both cases, the Air Force accepted a 
negotiated amount of consideration that was less than the appraised 
value of the property. According to the Air Force, although it uses 
property appraisals as a guide for determining FMV, a property's 
actual FMV is the price a willing buyer could reasonably expect to pay 
a willing seller in a competitive market to acquire the property. Yet, 
in at least these two EUL cases, the Air Force's negotiations did not 
take place in a competitive market because the Air Force only 
negotiated with one party to determine the amount of consideration 
accepted for the lease interest. To illustrate, the Air Force hired a 
company to review two appraisals with differing estimates of the value 
of the property included in one Eglin Air Force Base EUL, referred to 
as the Okaloosa County Regional Airport EUL, and to provide its 
perspective on the value of the property. The company estimated that 
the FMV of the property was $1,274,000 annually. After negotiations 
with one party, the lessee, the Air Force agreed to accept $318,000 
annually as consideration.[Footnote 44] Thus, the negotiated amount 
was $956,000, or 75 percent, less per year than the appraised value of 
the property. As another example, at the request of the Air Force, the 
U.S. Army Corps of Engineers performed an appraisal on about 256 acres 
of land included in the other Eglin Air Force Base EUL, referred to as 
the Arbennie Pritchett Water Reclamation Facility EUL. The appraisal 
estimated that the FMV of the leased property was $513,000 annually. 
After negotiations with one party, the lessee, the Air Force agreed to 
accept $325,000 annually as consideration.[Footnote 45] Thus, in this 
case, the negotiated amount was $188,000, or 37 percent, less per year 
than the appraised value of the property. Such cases raise questions 
about the extent to which the EULs will provide for receipt of the FMV 
of the lease interest. 

Third, we found that FMV, as determined by the secretary concerned, 
might not be obtained in some EULs because of the terms contained in 
the lease agreements. For example, providing for the receipt of FMV 
can be problematic in EULs where, in accordance with lease terms, the 
receipt of FMV depends on the service receiving a share of the net 
rental revenues from a project's development rather than receiving 
agreed-to rent payments or sufficient up-front cash payments that 
match or exceed the FMV. In such cases, if project development does 
not occur as expected, then project rental revenues--and thus the 
service's share of the rental revenues--also would not materialize as 
expected and the FMV of the lease interest might not be obtained. To 
illustrate, in the Picatinny Arsenal case, the Army determined that 
the FMV of the property that had been leased to the developer at the 
time of our visit in July 2010 was $1,850,000. The Army received 
$1,700,000 from the lessee when the first site lease was signed. 
However, obtaining the balance of the FMV depends on the Army 
receiving a share of net rental revenues, and because the project has 
not been developed as expected, the Army had not received any share of 
net rental revenues at the time of our visit. 

Some EULs Included Property That Was Being Used by the Military or Had 
Potential for Being Needed by the Military over the Lease Term: 

Because of the cost to relocate military activities or the increased 
potential financial liability to the government if a service had to 
terminate a lease to regain use of leased property, it would appear 
imprudent for economic reasons for the services to lease property 
needed for military purposes. Yet, as illustrated below, we found 
cases where the military was using property included in the EUL and 
cases where there appeared to be reasonable potential that property 
included in the EUL might be needed for military purposes over the 
lease term, particularly in cases where the leased property was 
located in the interior, rather than at the perimeter, of an 
installation. As a result, the government apparently will incur 
increased relocation costs in one case and in other cases increased 
potential for future costs in the event that the service has to 
terminate a lease to regain use of the property. In 2008, after many 
of the leases in our case studies were signed, the Congress added a 
provision to section 2667 requiring that property to be leased must 
not for the time be needed for public use. However, we found that the 
services lacked guidance on the analyses and documentation needed to 
show that property to be leased is not needed for public use. Without 
such documentation, it will not be clear that the new provision will 
be met prior to entering into future leases. 

For example, the master development agreement and master lease for the 
Hill Air Force Base EUL included property being used by the Defense 
Non-Tactical Generator and Rail Equipment Center, a DOD depot-level 
maintenance activity. The master development agreement obligates the 
Air Force to maintain and deliver the project site "free of tenants." 
As such, the Air Force told the center that it would not be renewing 
the permit that allowed the center to operate on Air Force land and 
that the center would have to relocate. However, according to the 
Army, which manages the center, funds were not available to pay for 
the relocation, which was estimated to cost from about $37 million to 
$45 million. Because the legal agreements that the Air Force signed 
obligate the Air Force to maintain and deliver the project site "free 
of tenants," Air Force officials stated that if the center does not 
relocate, the lessee could sue the Air Force for $41 million in 
damages.[Footnote 46] The issue was not resolved at the time we 
completed our review. Figure 3 shows photographs of the Defense Non- 
Tactical Generator and Rail Equipment Center at Hill Air Force Base. 

Figure 3: The Exterior and Interior of the Defense Non-Tactical 
Generator and Rail Equipment Center at Hill Air Force Base, Utah: 

[Refer to PDF for image: 4 photographs] 

Source: GAO. 

[End of figure] 

As another example, when the first three site leases for the Fort Sam 
Houston EUL were signed in 2001, Army officials stated that the 
installation had no apparent need for the three large, deteriorated 
buildings and the associated land included in the lease. Still, given 
that the property was located in the interior of the installation 
surrounded by other Army buildings and activities, it would appear 
that there was a reasonable probability that the Army might have a 
need for the property over the 50-year lease term. As noted 
previously, shortly after the three original leases were signed in 
2001, the Army relocated several Army organizations to Fort Sam 
Houston, which created a significant demand for office space. Because 
other office space on the installation was not readily available, Army 
officials stated that the Army leased back from the developer nearly 
all of the space in the EUL buildings that had been renovated. During 
our visit to Fort Sam Houston in August 2010, installation officials 
stated that the installation continued to have a need for office space 
and that the officials had considered terminating a portion of the EUL 
to regain control of the one large building that the developer had not 
renovated so that the Army could renovate the building for its use. 
However, the officials stated that the Army most likely would not 
pursue this option because the lease did not include a termination for 
convenience clause, and therefore early termination could be very 
costly to the Army. Instead, installation officials stated that the 
Army was in the process of converting an old barracks building at the 
installation into office space for Army use. In another instance 
involving property included in the EUL, in 2008, the Army needed some 
of the land included in the EUL to build a new lodging facility. In 
this instance, Army officials stated that the Army was able to regain 
use of the needed property through a land exchange by amending the 
lease. However, Army officials stated that the exchange resulted in a 
net increase of about 5 acres in the total amount of Army land 
included in the EUL. 

The Services Have Not Regularly Monitored EUL Program Administration 
Costs: 

We 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 for the federal government, 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.[Footnote 47] 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, our 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, our 
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. As shown in table 3, 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. 

Table 3: EUL Program Administration Costs and Consideration Received 
for Fiscal Years 2006 through 2010: 

Service: Army; 
EUL program administration costs: Personnel: $4.2 million; 
EUL program administration costs: Consultants: $2.0 million; 
EUL program administration costs: Total: $6.1 million; 
Consideration received: $20.0 million; 
Net benefit--consideration less costs: $13.9 million; 
Costs as a percentage of consideration: 31%. 

Service: Navy; 
EUL program administration costs: Personnel: $4.7 million; 
EUL program administration costs: Consultants: $8.9 million; 
EUL program administration costs: Total: $13.5 million; 
Consideration received: $44.1 million; 
Net benefit--consideration less costs: $30.6 million; 
Costs as a percentage of consideration: 31%. 

Service: Air Force; 
EUL program administration costs: Personnel: $6.4 million; 
EUL program administration costs: Consultants: $33.9 million; 
EUL program administration costs: Total: $40.3 million; 
Consideration received: $29.9 million; 
Net benefit--consideration less costs: ($10.4 million); 
Costs as a percentage of consideration: 135%. 

Service: Total; 
EUL program administration costs: Personnel: $15.3 million; 
EUL program administration costs: Consultants: $44.7 million; 
EUL program administration costs: Total: $60.0 million; 
Consideration received: $94.0 million; 
Net benefit--consideration less costs: $34.0 million; 
Costs as a percentage of consideration: 64%. 

Source: GAO analysis of data provided by the Army, Navy, and Air Force. 

Notes: Our analysis of EUL program administration costs included the 
costs of service personnel and service consultants used to help 
administer the program each year. For the cost of service personnel, 
we first obtained information from each service on the number of full-
time equivalent personnel used to help administer the EUL program each 
year for fiscal years 2006 through 2010. We then estimated the annual 
personnel costs by multiplying the numbers provided by services by the 
average cost per person, including benefits, according to annual DOD 
budget documents. For the costs of service consultants, we obtained 
and used the amounts that each service reported as the amounts paid 
for consultant support for the EUL program each year during fiscal 
years 2006 through 2010. Some totals in the table do not sum correctly 
because of rounding. 

[End of table] 

It is important to note that many of the EULs have long terms and 
consideration received in the future might significantly increase the 
net benefits from the program. In particular, Army and Air Force 
officials expressed expectations of greater EUL consideration in the 
future. 

Conclusions: 

EULs offer the military services opportunities to reduce 
infrastructure costs by leasing nonexcess, underused military real 
property in exchange for cash or in-kind consideration that can be 
used to maintain or construct military facilities. However, the Army 
and the Air Force did not ensure that certain EULs were in compliance 
with some requirements contained in the EUL authorizing statute, 
section 2667 of Title 10, and similar compliance issues may exist in 
other EULs. Unless the Army and the Air Force review their EULs and 
take steps, as needed, to ensure that all EULs are in compliance with 
applicable statutes, then uncertainty will continue to exist as to 
whether the services' EULs meet all statutory requirements. However, 
an amendment to a lease must be negotiated and agreed to by the 
parties to the lease and thus may involve some costs. In addition, the 
services' management of the EUL program contains weaknesses related to 
internal controls and program guidance. First, unless the services 
issue guidance on how to determine and document that certain section 
2667 provisions were addressed, it will not be clear how and to what 
extent the services systematically considered and assessed each 
provision to ensure that each was met prior to entering into the 
leases. Second, without additional guidance on how the FMV of the 
lease interest should be determined and how the receipt of FMV can be 
best ensured, it will not be clear how and to what extent the 
services' EULs provide for the receipt of the FMV of the leased 
property. Third, section 2667 now requires that property to be leased 
must not be needed for public use during the lease term. However, 
unless guidance is issued on the analyses or documentation needed to 
ensure compliance with this requirement, future EULs could include 
property that might be needed for military purposes over the lease 
term, thus increasing potential government financial liabilities. 
Fourth, unless the services regularly monitor and analyze their EUL 
program administration costs, the services will have less assurance 
that program costs are in proportion with program benefits. 

Recommendations for Executive Action: 

We are making six recommendations to address EUL statutory compliance 
issues and EUL program management concerns. Specifically, we are 
recommending that the Secretaries of the Army and the Air Force take 
the following three actions: 

* 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. 

* 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. 

* Review and clarify guidance describing how the FMV of the lease 
interest should be determined and how the receipt of FMV can be best 
ensured. 

We also recommend that the Secretaries of the Army, the Navy, and the 
Air Force take the following three actions: 

* 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. 

* 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. 

* Develop procedures to regularly monitor and analyze EUL program 
administration costs to help ensure that the costs are in line with 
program benefits. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, DOD stated that it 
concurred with all of our recommendations and that the military 
services were taking appropriate measures to comply with the 
recommendations. However, DOD did not provide time frames for 
completing the planned actions to implement the recommendations. DOD's 
comments are reprinted in appendix IV. 

DOD concurred with our recommendation to 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. DOD stated that the 
Army and Air Force will review all their EULs executed to date and 
will amend lease terms and conditions as necessary in order to comply 
with applicable statutes. In addition, DOD proffered its view that the 
use of an escrow agreement as part of a EUL transaction represents a 
reasoned and permissible exercise of agency discretion to implement 
its statutory authority to collect in-kind consideration from a lessee 
through use of a commonly used legal instrument that provides 
substantial protection of U.S. financial interests. As the facts in 
the Picatinny Arsenal EUL demonstrated, the Army received a payment of 
cash and did not deposit it in the appropriate account in the U.S. 
Treasury as required by law. Instead, such consideration was deposited 
into an escrow account in satisfaction of the lessee's rent 
obligations, and the Army used these funds as if they were permissible 
in-kind consideration. Several provisions in the Picatinny Arsenal EUL 
and its associated legal documents indicated that the Army owned the 
funds in the escrow account. For example, the lessee was not obligated 
to provide any additional in-kind consideration beyond the funds 
deposited in the escrow account, escrow funds could only be used with 
the Army's consent, the lessee had no rights to the escrow funds, no 
in-kind deliverables were specified, and any interest earned in escrow 
was earned by the Army for income tax purposes. We would emphasize 
that simply calling a cash payment "in-kind services" does not make it 
so. As a consequence, the Army violated section 2667, violated the 
miscellaneous receipts statute, and augmented its appropriations. In 
its comments, DOD also stated that the department does not read either 
our report or our legal opinion as prohibiting the use of escrow 
agreements in connection with EUL transactions, provided the terms of 
those escrow agreements do not amount to constructive receipt of funds 
in the escrow agreement by the government. As we stated in our legal 
opinion, the opinion pertains primarily to the Picatinny Arsenal EUL 
and its associated legal documents. However, to the extent other EULs 
are on substantially similar terms as the Picatinny Arsenal EUL, our 
conclusions in the legal opinion apply to those EULs as well, hence 
our recommendation, with which DOD concurred and said that it would 
implement. 

DOD also concurred with our recommendation that the Army and the Air 
Force 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. DOD stated that the services will amend their existing EULs as 
needed and will incorporate the required provision in future EUL legal 
instruments. 

In response to our recommendation that the Army and the Air Force 
review and clarify guidance describing how the FMV of the lease 
interest should be determined and how the receipt of FMV can best be 
ensured, DOD concurred. DOD stated that the Army and Air Force will 
revise their processes for establishing the FMV and prepare 
appropriate guidance, which will also establish procedures to verify 
that in-kind consideration received is not less than the FMV of the 
leasehold. 

DOD also concurred with our recommendation that the Army, the Navy, 
and the Air Force 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. DOD did not provide specific details for 
implementing the recommendation. 

Concerning our recommendation that the services 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, DOD concurred and stated that all 
three services will issue and update their EUL guidance on the 
analyses or documentation needed to establish that leases executed do 
not include property needed for public use. While concurring with the 
recommendation, DOD also stated that it disagreed with our use of the 
Fort Sam Houston EUL as an example of military property that was 
leased when there was a reasonable probability that the Army might 
have a need for the property in the future. DOD stated that the 
combination of circumstances that occurred after lease execution, 
including the terrorist attacks of September 11, 2001, and consequent 
effects on base access and Army space requirements, could not have 
been reasonably foreseen. We agree that the specific events that 
occurred after lease execution might not have been reasonably 
foreseen. However, our point is that the leased property was located 
in the interior of the installation surrounded by other Army buildings 
and activities and that over the 50-year lease time frame, there was a 
reasonable probability that the Army might develop a need for the 
property, regardless of the specific events that might create a need. 
At a minimum, the Army could have anticipated that a requirement for 
the property or a portion of the property might arise and mitigated 
the potential consequences by including a termination for convenience 
clause or other appropriate provisions in the EUL. 

Finally, DOD concurred with our recommendation that the services 
develop procedures to regularly monitor and analyze EUL program 
administration costs to help ensure that the costs are in line with 
program benefits. DOD stated that the Army will revise its EUL 
guidance to require standardization of EUL accounting and reporting of 
program costs and benefits and that the Air Force is developing 
methodology for baselining and tracking project and program 
administrative costs and rates of return to better enable the Air 
Force to forecast and monitor the effectiveness of the EUL program. 
DOD also stated that it expected administrative costs to decline in 
the future through the use of standardized documents and processes and 
that some EULs have benefits other than rental consideration that 
should be considered when comparing program costs and benefits. 

We are sending copies of this report to the Secretary of Defense; the 
Secretaries of the Army, the Navy, and the Air Force; and the 
Commandant of the Marine Corps. The report also is available at no 
charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-4523 or leporeb@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix V. 

Signed by: 

Brian J. Lepore: 
Director, Defense Capabilities and Management: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C.W. Bill Young: 
Chairman: 
The Honorable Norman D. Dicks: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess the extent to which enhanced use leases (EUL) selected for 
our case study complied with section 2667 of Title 10, U.S. Code, we 
reviewed the statute's legislative history; examined the statute's 
provisions; and obtained and assessed the military services' guidance, 
policies, instructions, and practices for ensuring compliance with the 
statute. We also interviewed officials from the Office of the 
Secretary of Defense, the Army, the Navy, and the Air Force to discuss 
the EUL program and service efforts to ensure that each EUL complies 
with the provisions contained in section 2667. While we reviewed 
information on all 17 EULs in place at the end of fiscal year 2010, to 
specifically assess EUL compliance with statutory requirements, we 
selected 9 of the 17 EULs for detailed case study review. The EULs 
were selected nonrandomly to include 3 from each service and a range 
of lease purposes, estimated financial benefits, and geographic 
locations.[Footnote 48] We judgmentally selected these EULs because 
they represented each of the military services and were located in 
several different geographic locations. In each case study, we 
obtained, reviewed, and compared the lease agreements and related 
documentation with the statutory requirements in place at the time the 
respective agreements were signed, as well as applicable case law, to 
assess compliance. Also, at each installation visited, we discussed 
with installation officials the policies, procedures, and practices 
used for implementing the EULs and ensuring compliance with section 
2667. Further, for those areas where we identified questions regarding 
compliance, we asked each service's general counsel's office for a 
legal response to our questions, which we considered as part of our 
review. On March 30, 2011, on the basis of information developed 
during our review, GAO issued a legal opinion on the terms and 
conditions of the legal documents comprising the Picatinny Arsenal 
EUL. The legal opinion supplements our audit report. 

To determine to what extent the services' expectations for their EULs 
have been realized, we obtained and summarized EUL program information 
from the services, including information on each EUL's estimated and 
actual development time frames and financial benefits received through 
September 30, 2010. For the nine EUL case studies, we obtained and 
reviewed more detailed information on how the services initially 
estimated expected EUL development time frames and financial benefits 
and how actual EUL development progress and financial benefits through 
September 2010 compared to expectations. We mostly relied on the 
services for the accuracy of the information on EUL development time 
frames and financial benefits, although we corroborated the 
information based on our review of EUL legal documentation and escrow 
account records. In the case studies where the expected development 
time frames and financial benefits were not realized, we discussed the 
reasons why with officials at service headquarters and at the 
installations where the EULs were located. Further, we observed EUL 
property and, when applicable, development progress at most 
installations where the case study EULs were located. 

To evaluate the services' management of the EUL program, we reviewed 
and considered Department of Defense and military service guidance, 
policies, instructions, and practices for managing the EUL program in 
view of federal internal control standards. We also interviewed 
officials from the Office of the Secretary of Defense; Army, Navy, and 
Air Force headquarters; the U.S. Army Corps of Engineers; the Naval 
Facilities Command; and the Air Force Real Property Agency to discuss 
the implementation and management of the EUL program. We specifically 
discussed with these officials how and to what extent they document 
various secretarial determinations required by section 2667--that the 
lease does not include excess property; that the lease may not be for 
more than 5 years unless the service secretary determines that a 
longer term will promote the national defense or be in the public 
interest; and that the lease include a provision permitting the 
service to revoke the lease at any time, unless the secretary 
determines that omission of such a provision will promote the national 
defense or be in the public interest. In addition, for the nine case 
studies, we determined how the service determined and provided for the 
receipt of the fair market value of the lease interest and reviewed 
how the leased property was used before the lease was signed. We also 
discussed with service officials the potential that the leased 
property might be needed for military purposes during the lease term. 
Further, we discussed with service officials how and to what extent 
they monitor EUL program administration costs, and we obtained and 
compared each service's EUL program administration costs, including 
the costs of service personnel and consultants used to administer the 
program, during fiscal years 2006 through 2010, with the total amount 
of consideration received from each service's EULs through fiscal year 
2010. 

We conducted this performance audit from May 2010 to June 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Enhanced Use Leases by Service as of September 30, 2010: 

As shown in table 4, the services reported that 17 enhanced use leases 
(EUL) were in place as of September 30, 2010--the Army reported 7, the 
Navy reported 5, and the Air Force reported 5. 

Table 4: EULs by Service as of September 30, 2010: 

Count: 1; 
Service: Army; 
Location: Aberdeen Proving Ground, Maryland; 
Year first lease signed: 2006; 
Term in years[A]: 50+; 
Leased property: 416 acres; 
Expected use of leased property: Site for office park development. 

Count: 2; 
Service: Army; 
Location: Fort Detrick, Maryland; 
Year first lease signed: 2006; 
Term in years[A]: 36.5; 
Leased property: 10 acres; 
Expected use of leased property: Site for utilities plant construction. 

Count: 3; 
Service: Army; 
Location: Fort Leonard Wood, Missouri; 
Year first lease signed: 2001; 
Term in years[A]: 33; 
Leased property: 52 acres; 
Expected use of leased property: Site for business center development. 

Count: 4; 
Service: Army; 
Location: Fort Sam Houston, Texas[B]; 
Year first lease signed: 2001; 
Term in years[A]: 50-55; 
Leased property: 41 acres and 3 primary buildings; 
Expected use of leased property: Renovation and construction of office 
space. 

Count: 5; 
Service: Army; 
Location: Picatinny Arsenal, New Jersey; 
Year first lease signed: 2006; 
Term in years[A]: 50+; 
Leased property: Up to 4 buildings and 120 acres; 
Expected use of leased property: Renovation of office space and 
development of a research park. 

Count: 6; 
Service: Army; 
Location: Redstone Arsenal, Alabama; 
Year first lease signed: 2009; 
Term in years[A]: 50; 
Leased property: 468 acres; 
Expected use of leased property: Site for office and research center 
development. 

Count: 7; 
Service: Army; 
Location: Yuma Proving Ground, Arizona; 
Year first lease signed: 2007; 
Term in years[A]: 50; 
Leased property: 2,500 acres; 
Expected use of leased property: Site for construction of vehicle test 
track. 

Count: 8; 
Service: Navy; 
Location: Moanalua, Hawaii; 
Year first lease signed: 2004; 
Term in years[A]: 40; 
Leased property: 15 acres; 
Expected use of leased property: Site for commercial center 
development. 

Count: 9; 
Service: Navy; 
Location: Naval Air Station Key West, Florida; 
Year first lease signed: 2003; 
Term in years[A]: 5; 
Leased property: Ship docking pier; 
Expected use of leased property: Commercial cruise ship docking 
facility. 

Count: 10; 
Service: Navy; 
Location: Naval Base Point Loma, California; 
Year first lease signed: 2005; 
Term in years[A]: 5; 
Leased property: 432,000 square feet in building and storage space; 
Expected use of leased property: Industrial space for assembly of 
rocket propulsion fuel tanks. 

Count: 11; 
Service: Navy; 
Location: Naval Base San Diego, California; 
Year first lease signed: 2008; 
Term in years[A]: 30; 
Leased property: 4.8 acres and 1 building; 
Expected use of leased property: Industrial space to aid in ship 
construction. 

Count: 12; 
Service: Navy; 
Location: Naval Base Ventura County, California; 
Year first lease signed: 2007; 
Term in years[A]: 5; 
Leased property: Over 100 acres; 
Expected use of leased property: Site to off-load and store imported 
automobiles. 

Count: 13; 
Service: Air Force; 
Location: Eglin Air Force Base, Florida; 
Year first lease signed: 2006; 
Term in years[A]: 30; 
Leased property: 255.5 acres; 
Expected use of leased property: Site for a wastewater treatment plant 
and sewage disposal field. 

Count: 14; 
Service: Air Force; 
Location: Eglin Air Force Base, Florida; 
Year first lease signed: 2007; 
Term in years[A]: 25; 
Leased property: 130.8 acres; 
Expected use of leased property: Site for an airport terminal and 
rental car services. 

Count: 15; 
Service: Air Force; 
Location: Hill Air Force Base, Utah; 
Year first lease signed: 2008; 
Term in years[A]: 50+; 
Leased property: 499 acres; 
Expected use of leased property: Site for office and commercial center 
development. 

Count: 16; 
Service: Air Force; 
Location: Kirtland Air Force Base, New Mexico[C]; 
Year first lease signed: 2005; 
Term in years[A]: 50; 
Leased property: 8.3 acres; 
Expected use of leased property: Site for office and research center 
development. 

Count: 17; 
Service: Air Force; 
Location: Nellis Air Force Base, Nevada; 
Year first lease signed: 2008; 
Term in years[A]: 50; 
Leased property: 41 acres; 
Expected use of leased property: Site for a wastewater treatment 
facility. 

Source: GAO analysis of data provided by the Army, Navy, and Air Force. 

[A] Some leases include provisions and options that could result in 
extending the term by many years. 

[B] On October 1, 2010, as a result of the 2005 Defense Base Closure 
and Realignment Commission recommendation that DOD establish 12 joint 
bases by consolidating the management and support of 26 separate 
installations, Fort Sam Houston, Lackland Air Force Base, and Randolph 
Air Force Base became Joint Base San Antonio. With the implementation 
of this joint basing action, the Air Force became responsible for 
installation support at the joint base, including the administration 
of the Fort Sam Houston EUL. 

[C] The Air Force terminated the Kirtland EUL on December 23, 2010, 
because of lessee default. 

[End of table] 

[End of section] 

Appendix III: GAO's Legal Opinion regarding the Picatinny Arsenal EUL: 

United States Government Accountability Office: 
Washington, DC 20548: 

B-321387: 

March 30, 2011: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. "Buck" McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C.W. Bill Young: 
Chairman: 
The Honorable Norman D. Dicks: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

Subject: Department of the Army—Escrow Accounts and the Miscellaneous 
Receipts Statute: 

The House Committee on Armed Services Report accompanying H.R. 5136, the
National Defense Authorization Act for Fiscal Year 2011, 111th Cong. 
(2010), directs GAO to report to the Defense Committees of Congress on 
the Department of Defense's implementation of 10 U.S.C. § 2667 by the 
execution of enhanced use leases (EULs). H.R. Rep. No. 111-491, at 508 
(2010). In the course of our review, we identified legal issues 
concerning the Department of the Army's use of escrow accounts and 
indemnification agreements provided for in EULs. This opinion 
addresses those aspects of the Army's implementation of 10 U.S.C. § 
2667. 

Section 2667(a) authorizes each Secretary of the armed forces to lease 
non-excess real property[Footnote 1] that is under the control of the 
Secretary concerned and that is not currently needed for public use, 
provided the lease satisfies certain statutory criteria. 10 U.S.C. § 
2667(a). The Army employs the term, "enhanced use lease," to describe 
leases executed under the authority of 10 U.S.C. § 2667(a) and that 
require the payment of an annual rental consideration meeting or 
exceeding certain statutory thresholds that trigger congressional 
reporting requirements. See 10 U.S.C. §§ 2662, 2667(c)(4). Such 
enhanced use leases also tend to be long-term (30 years or more) with 
a large scope and scale of development. 

During the course of GAO's review, we examined individual EULs 
executed by the Army with respect to property located at three Army 
installations: Picatinny Army Arsenal, NJ; Aberdeen Proving Ground, 
MD; and Fort Sam Houston, TX. Our review of the legal documents 
comprising the Picatinny EUL raised questions about the compliance of 
the EUL with 10 U.S.C. § 2667, as well as with the Antideficiency Act,
31 U.S.C. § 1341, and the miscellaneous receipts statute, 31 U.S.C. § 
3302(b). We agreed with your staff to deliver a separate legal opinion 
addressing these issues. 

As discussed in more detail below, we conclude that the Picatinny EUL 
(as defined below) does not comply with 10 U.S.C. § 2667. 
Specifically, the Army received cash consideration for the Picatinny 
EUL, and did not deposit it in the special account of the Treasury as 
required by 10 U.S.C. § 2667(e)(1)(C). By diverting the cash to an 
escrow account under the control of the Army rather than depositing 
such amount in the special account, the Army violated the 
miscellaneous receipts statute, 31 U.S.C. § 3302(b), and by spending 
such funds the Army improperly augmented its appropriations. In 
addition, the indemnification provision in an escrow agreement 
(subsequently removed by amendment) was a violation of the 
Antideficiency Act warranting the filing of a report in accordance 
with 31 U.S.C. § 1351. While this opinion pertains primarily to the 
Picatinny EUL and the ancillary documents executed in connection 
therewith, to the extent the EULs for the other Army installations are 
on substantially similar terms as the Picatinny EUL, our conclusions 
here apply to those EULs as well.[Footnote 2] 

Background: 

Statutory Framework: 

Each Secretary of the armed forces may lease certain non-excess real 
property in exchange for cash or in-kind consideration. 10 U.S.C. §§ 
2667(a), (b)(4)-(5). All money rentals received pursuant to leases 
entered into under 10 U.S.C. § 2667(a) must be deposited into a 
special account in the Treasury established for the Secretary 
concerned. 10 U.S.C. § 2667(e)(1)(A)(i). The cash consideration 
deposited in the special account is available to the Secretary 
concerned only to the extent provided in appropriations acts and for 
specific enumerated purposes relating to real property construction, 
maintenance services, lease of facilities, or payment of utility 
services. 10 U.S.C. § 2667(e)(1)(c). Conversely, if "in-kind" 
consideration is received, such consideration may be accepted at any 
property or facilities under the control, and for the benefit, of the 
Secretary concerned that are selected for that purpose. 10 U.S.C.
§ 2667(c)(2). 

Picatinny Enhanced Use Lease Agreement and Related Escrow Agreement: 

The Army entered into a Master Agreement to Lease For Enhanced Use 
Lease, Research Development and Engineering Command Armaments Research,
Development and Engineering Center Picatinny Arsenal, New Jersey, with 
InSitech Inc., lessee, on September 26, 2006 (Master Agreement). The 
property subject to the Master Agreement consists of 100,000 square 
feet of existing facility space, as well as 120 acres of land that is 
to be developed into a million square feet of administrative, 
laboratory, and light manufacturing space (Project Site). The Master 
Agreement provides that the Project Site will be leased in incremental 
portions as separate parcels pursuant to separate site leases. The 
site leases and the Master Agreement are collectively referred to 
herein as the Picatinny EUL. Each parcel is to be developed pursuant 
to plans approved by the Secretary of the Army and subject to the 
terms and conditions provided in each site lease. 

The Master Agreement sets forth the terms and conditions under which 
the Army and the lessee will enter into each site lease. The Master 
Agreement contemplates that each site lease will be on substantially 
the same terms and conditions. To the extent there is a conflict 
between the provisions of the Master Agreement and a particular site 
lease, the site lease will control. As of October 19, 2010, the Army 
had entered into two site leases under the Master Agreement. Site 
Lease 1 was executed on September 26, 2006.[Footnote 3] Site Lease 2 
was executed on August 14, 2007.[Footnote 4] 

Under the terms of the Master Agreement, the aggregate cash 
consideration to be paid by the lessee for all parcels leased under 
Site Lease 1 and Site Lease 2 is as follows (collectively, Rent 
Consideration): 

"(1) A one-time, lump-sum payment of $1.7 million dollars (up-front 
payment), which was paid upon execution of Site Lease 1:[Footnote 5] 

(2) An aggregate annual rent based on operating revenues earned by the 
lessee from the leased property and calculated according to a pre-
determined formula provided in the Master Agreement and each site 
lease;[Footnote 6] and; 

(3) Supplemental rent of up to $850,000 per year."[Footnote 7] 

See Master Agreement, ¶¶ 1.6.3, 1.6.11, 1.6.12. 

The Master Agreement characterizes the Rent Consideration as "funds 
for in-kind service use" and provides that "it is the intent of the 
parties that the rent may be collected in cash or as in-kind 
consideration as authorized by [10 U.S.C. §] 2667." Master Agreement, 
¶ 1.6.14. The lessee is required to deposit the Rent Consideration 
into an individual interest bearing escrow account at Picatinny 
Federal Credit Union, which acts as the escrow agent. Upon depositing 
the Rent Consideration into the escrow account, the lessee "shall have 
satisfied its obligation with respect to the rent payable [under 
Master Agreement and each site lease], it being understood that [the] 
lessee shall have no obligation to provide any other and/or additional 
in-kind consideration." Master Agreement, ¶ 1.6.14; Site Lease 1, ¶ 
4(e)(i); Site Lease 2, ¶ 4(e)(i). 

The up-front payment was deposited into the escrow account. The escrow 
account is in the name of the lessee and the Army. Picatinny Federal 
Credit Union Account Statements for Oct. 2009 and Nov. 2009. The 
escrow funds are subject to the terms and conditions of an Escrow 
Agreement among the Army, the lessee and the escrow agent (Escrow 
Agreement). No annual rent or supplemental rent had been paid to the 
Army as of November 10, 2010.[Footnote 8] Any interest or proceeds 
generated by the escrow funds are deemed to be income to Army for 
income tax purposes. Escrow Agreement, ¶ 3(a). The Army disclaims any 
ownership in the escrow account, but claims a secured interest in the 
escrow funds. Escrow Agreement, Recital D. Further, as described in 
more detail below, the Army exerts control over the escrow account and 
the escrow funds are utilized for the benefit of the Army. 

The Escrow Agreement provides that once the Rent Consideration is 
deposited into the escrow account by the lessee (or its sublessee): 
(1) such payment "shall constitute in-kind consideration payments" by 
the lessee; (2) such payment is to be credited against the total rent 
owed by the lessee; and (3) the lessee "shall have no rights" in or to 
the escrow funds held in or disbursed from the escrow account. Escrow 
Agreement, ¶ 2 (emphasis added). The escrow agent may disburse escrow 
funds either—(1) to a third-party contractor as payment for services 
rendered by such contractor to property under the control of the 
Secretary pursuant to a statement of work approved by the Army, or (2) 
directly as a cash payment to the Army. Escrow Agreement, ¶ 5. 

The Escrow Agreement provides for a multi-step process for the 
disbursement of escrow funds to third-party contractors as payment for 
services.[Footnote 9] Escrow Agreement, ¶ 6. First, the Army delivers 
to the lessee an "in-kind service request" in the form of a statement 
of work. The lessee then selects and contracts with a third party to 
complete the statement of work. Upon completion of the work by the 
third-party contractor, Army employees from Picatinny's Department of 
Public Works inspect the work and notify the lessee whether the work 
has been satisfactorily completed. If so, the lessee directs the 
escrow agent to disburse funds from the escrow account sufficient to 
pay the third-party contractor. 

As of June 2010, $1,474,635.04 of the escrow funds has been disbursed 
to pay for various services performed on property under the control of 
the Secretary. Army Written Responses to GAO Written Questions, dated 
Jun. 29, 2010, at 6. In addition, we understand that as of such date, 
Picatinny's Department of Public Works had initiated two other service 
requests that are anticipated to cost $248,000. Id. at 7. 

At the time of execution, the Escrow Agreement included an 
indemnification provision that stated that the Army and the lessee 
"jointly and severally agree to indemnify and hold the escrow agent 
harmless from and against any and all liabilities, causes of action, 
claims, demands, judgments, damages, costs and expenses (including 
reasonable attorneys fees and expenses) that may arise out of or in 
connection with the escrow agent's good faith acceptance of or 
performance of its duties and obligations under this Escrow 
Agreement." Escrow Agreement, ¶ 3(i). On July 2, 2009, the parties 
modified the Escrow Agreement to delete the indemnification provision. 

Discussion: 

The Army asserts that the "cash payment for in-kind service use" it 
received as Rent Consideration constitutes in-kind consideration under 
10 U.S.C. § 2667(b)(4). We disagree. The Army has, in fact, received 
cash consideration for the Picatinny EUL and under section 2667 is 
required to deposit such amounts in a special account in the Treasury 
established for such purpose. The cash consideration was deposited in 
an escrow account rather that the designated account in the Treasury. 
We will first discuss the implications of the Army's actions under 
section 2667 and the miscellaneous receipts statute. Next, we will 
discuss the indemnification provision contained in the Escrow 
Agreement and the Antideficiency Act. 

The Picatinny EUL and Section 2667: 

Section 2667(b) of title 10 enumerates the statutory criteria that a 
lease executed under 10 U.S.C. § 2667(a) must satisfy. Of relevance 
here is subparagraph (4), which requires that the lease "... provide 
for the payment (in cash or in kind) by the lessee of consideration in 
an amount not less than the fair market value of the lease interest, 
as determined by the Secretary." 10 U.S.C. § 2667(b)(4) (emphasis 
added). The term "payment in kind" is not defined in section 2667; 
however, acceptable forms of in-kind consideration are described in 10 
U.S.C. §§ 2667(b)(5), 2667(c)(1)-(2). Those subparagraphs provide as 
follows: 

(b) Conditions on leases. A lease under subsection [10 U.S.C. § 
2667(a)]: 

(5) may provide, notwithstanding section 1302 of title 40 or any other 
provision of law, for the alteration, repair, or improvement, by the 
lessee, of the property leased as the payment of part or all of the 
consideration for the lease; 

(c) Types of in-kind consideration. (1) In addition to any in-kind 
consideration accepted under subsection (b)(5), in-kind consideration 
accepted with respect to a lease under this section may include the 
following: 

(A) Maintenance, protection, alteration, repair, improvement, or 
restoration (including environmental restoration) of property or 
facilities under the control of the Secretary concerned. 

(B) Construction of new facilities for the Secretary concerned. 

(C) Provision of facilities for use by the Secretary concerned. 

(D) Provision or payment of utility services for the Secretary 
concerned. 

(E) Provision of real property maintenance services for the
Secretary concerned. 

(F) Provision of such other services relating to activities that will
occur on the leased property as the Secretary concerned considers 
appropriate. 

(2) In-kind consideration under paragraph (1) may be accepted at any 
property or facilities under the control of the Secretary concerned 
that are selected for that purpose by the Secretary concerned. 

10 U.S.C. §§ 2667(b)(5), 2667(c)(1)-(2). 

The non-exhaustive list of permissible in-kind consideration provided 
in the foregoing subparagraphs is consistent with the common 
definition of "payment in kind," namely, the "payment for goods and 
services made in the form of other goods and services, not cash or 
other forms of money." Barron's Dictionary of Finance and Investment 
Terms 506 (6th ed. 2003). When Congress does not specifically define 
the terms that it uses in a statute, courts often turn to common 
dictionaries to find the plain, ordinary meaning of a word or phrase. 
See, e.g., Mallard v. United States District Court, 490 U.S. 296,301 
(1989); B-302973, Oct. 6,2004, at 4-5. While a common dictionary 
meaning is a helpful aid as we interpret the meaning of the phrase 
"payment in kind," we also must interpret the language so that "the 
statutory scheme is coherent and consistent .... The plainness or 
ambiguity of statutory language is determined by reference to the 
language itself, the specific context in which that language is used, 
and the broader context of the statute as a whole." Robinson v. Shell 
Oil Co., 519 U.S. 337, 340-41 (1997) (internal quotation marks and 
citations omitted); B-318897, Mar. 18, 2010, at 2. 

Sections 2667(b)(5) and 2667(c)(1)-(2) are key in discerning the 
coherent, consistent meaning that Congress intended. These 
subparagraphs illustrate that the in-kind consideration contemplated 
by section 2667(b)(4) includes the provision of a service or property. 
With the exception of the "provision or payment of utility services," 
each example of in-kind consideration detailed by these subparagraphs 
describes a specific deliverable related to the provision of a service 
to a property under the control of the Secretary (for example, 
"maintenance, protection, alteration, repair,  improvement, or 
restoration ... of property or facilities") or the provision of a real
property facility (for example, "provision of facilities for use by 
the Secretary concerned"). 10 U.S.C. §§ 2667(b)(5), 2667(c)(1)-(2). 

Where Congress permits the acceptance of funds without requiring their 
deposit in the special account in the Treasury, the statute is 
explicit. See, e.g., 10 U.S.C. §§ 2667(c)(1)(D), 2667(e)(1)(B), 
2667(e)(3)-(5). Subparagraph (c)(1)(D) permits either the provision of 
utility services or the payment of utility services for the Secretary 
concerned. All other types of in-kind services enumerated in section 
2667(c)(1) are for the provision of services. 10 U.S.C. § 2667(c)(1) 
(emphasis added). Section 2667(e)(1)(B) specifies additional instances 
where cash payments received by the Secretary under a lease need not 
be deposited in the special account. For example, money rentals 
received for a lease under section 2667 for agricultural or grazing 
purposes of land may be retained by the Secretary concerned and 
expended in such amounts as the Secretary considers necessary to cover 
the administrative expenses of leasing for such purposes. 10 U.S.C. §§ 
2667(e)(1)(B)(ii), 2667(e)(3). 

The Army asserts that the use of an escrow account is permissible 
under 10 U.S.C. § 2667 as long as the account does not alter the 
lessee's responsibility to provide in-kind services using the escrow 
funds. Army Legal Letter, at 9. However, other than the deposit of the 
Rent Consideration into the escrow account, neither the Master
Agreement, Site Lease 1, Site Lease 2, nor the Escrow Agreement 
specify any in-kind deliverables to be provided by the lessee to 
property under the control of the Secretary. Rather, the Master 
Agreement, Site Lease 1, and Site Lease 2 specify that upon depositing 
the required cash payments into the escrow account, the lessee has
"no obligation to provide any other and/or additional in-kind 
consideration." Master Agreement, ¶ 1.6.14; Site Lease 1, ¶ 4(e)(i); 
Site Lease 2, ¶ 4(e)(i). In fact, under the lease terms, a third-party 
contractor will provide in-kind services only if the Secretary of the 
Army so opts at some point in the future. Escrow Agreement, ¶ 5. 
Escrow funds may be disbursed either: (1) as a payment to a third-
party contractor for services rendered pursuant to a statement of work 
issued by the Army or (2) as a direct cash payment to the Army. Once 
the Rent Consideration is deposited into the escrow account, the 
lessee has no rights to escrow funds. In fact, for income tax 
purposes, any interest earned is earned by the Army, another incidence 
of ownership. 

The fact that the Rent Consideration, paid in cash, may ultimately be 
used to compensate third-party contractors that provide to the Army 
the types of services that are permissible under 10 U.S.C. § 
2667(c)(1) does not change the essential nature of the transaction: 
the Army has granted a leasehold interest in the Project Site in 
exchange for cash consideration. The cash consideration has been 
deposited into the escrow account in satisfaction of the lessee's rent 
obligations under the lease instead of being deposited in the special 
account in the Treasury called for by 10 U.S.C. § 2667(e). Such 
diversion of cash payments is not authorized by 10 U.S.C. § 2667. 

The escrow account into which the Army deposited (or caused to be 
deposited) the up-front payment is similar to the trust at issue in 
Motor Coach Industries v. Dole, 725 F.2d 958 (4th Cir. 1984).[Footnote 
10] In Motor Coach Industries, the FAA and the airlines servicing 
Dulles International Airport entered into an "interwoven set of 
agreements" designed to fund the purchase of buses for airport ground 
transportation. Id. at 961. FAA agreed to waive certain fees it 
normally charged the airlines for services the FAA provided at the 
airport, in exchange for the airlines establishing a trust at a 
national bank and funding that trust with a "per passenger fee" based 
on an FAA-approved formula. Id. FAA monitored the accuracy of the 
airlines' payments to the trust and performed most of the 
administrative duties associated with the collection of the fee.
Id. Although the airlines were the settlors of the trust, the court 
found that "the FAA maintained firm control over vital aspects of the 
trust." Id. "The [t]rust's resources were dedicated to the objective 
of primary importance to the agency—securing suitable buses for Dulles 
Airport." Id. No expenditures from the trust could be made without FAA 
authorization. Id. at 962. Considering these facts, the court observed 
that "the FAA's hand was visible in all critical aspects of the Trust—
its creation, its funding, and its administration." Id. at 965. The 
court also noted that while the airlines were the settlors of the 
trust and made contributions from their own revenues, "there is every 
indication that their role was nominal." Id. Thus, the court found 
that the trust moneys were public money.[Footnote 11] 

The roles of the Army and the lessee here are analogous to those of 
FAA and the airlines, respectively, in Motor Coach Industries. The 
escrow funds represent payment in full by the lessee of the Rent 
Consideration. The lessee has no right to the escrow funds. Rather, 
the escrow funds may be disbursed only in the manner determined by the 
Secretary. Thus, the Army has control over the disposition of the 
escrow funds which, except for the payment of expenses of the escrow 
agent, are used solely for the benefit of the Army. See, e.g., 
Scheduled Airlines Traffic Offices v. Dept. of Defense, 87 F.3d 
1356,1361-62 (D.C. Cir. 1996) (finding that concession fees paid by 
travel agents into a "Morale Fund" in consideration for government 
resources, that is, the right to occupy agency office space and to 
serve as the exclusive on-site travel agent, was "money for the 
government" and violated the miscellaneous receipts statute). Despite 
the Army's disclaimer of ownership of the escrow account, there is no 
question that the escrow funds are cash consideration for the 
Picatinny EUL and constitute "money for the government." Under section 
2667, these funds must be deposited in the designated special account 
in the Treasury. 10 U.S.C. § 2667 (e)(1). 

The Miscellaneous Receipts Statute: 

Under the miscellaneous receipts statute, "an official or agent of the 
Government receiving money for the Government from any source shall 
deposit the money in the Treasury as soon as practicable without 
deduction for any charge or claim." 31 U.S.C. § 3302(b) (emphasis 
added). As explained above, the cash payment is, in fact, "money for 
the government." The requirement for deposit "as soon as practicable 
without deduction for any charge or claim" applies whether the correct 
account for deposit is in the general fund of the Treasury or where, 
as here, the money must be deposited into a specific fund in the 
Treasury. B-318274, Dec. 23, 2010; B-72105, Nov. 7,1963. Therefore, 
the miscellaneous receipts statute required the Army to immediately 
deposit the proceeds of the Picatinny EUL into the appropriate account 
in the Treasury. B-307137, July 12, 2006; B-300248, Jan. 15,2004. 

Instead, the Army caused the up-front payment to be deposited into the 
escrow account. With this action, the Army violated the miscellaneous 
receipts statute and, when it expended the funds, it improperly 
augmented its appropriation.[Footnote 12] See B-307137 (finding that 
the Department of Energy used uranium sales proceeds (and earnings on 
those proceeds) in violation of the miscellaneous receipts statute, 
which resulted in DOE unlawfully augmenting its appropriations when it 
directed its agent to receive, retain, and use proceeds from the sale 
of government assets to compensate the agent for expenses it incurred 
on behalf of the government); B-265727, July 19, 1996 (finding that 
SEC violated the miscellaneous receipts statute and improperly 
augmented its appropriations, by subleasing space and arranging for 
the sublessee to make its payments directly to the landlord). To 
remedy the situation, the Army must deposit the proceeds from the 
Picatinny EUL into the appropriate account in the Treasury. 

Unfortunately, the Army has expended substantially all of the Rent 
Consideration with a minimal balance remaining in the escrow account. 
The Army did not have the authority to use the Rent Consideration to 
pay for services performed on property under the control of the 
Secretary. In doing so, the Army augmented its appropriation. The Army 
should adjust its accounts by transferring funds from an Army account 
available to pay for services to property under the control of the
Secretary to the appropriate account in the Treasury. If the Army 
finds that it lacks sufficient budget authority to cover the 
adjustment, it should report a violation of the Antideficiency Act in 
accordance with 31 U.S.C. § 1351. 

The Indemnification Provision and the Antideficiency Act: 

Prior to its amendment in July 2009, the Escrow Agreement contained a 
provision pursuant to which the Army expressly agreed to indemnify the 
escrow agent against all liabilities. Such an open-ended 
indemnification provision commits the government to potentially 
unlimited liability and violates the Antideficiency Act, 31 U.S.C. § 
1341. See, e.g., B-260063, June 30, 1995. Once it is determined there 
has been a violation of 31 U.S.C. § 1341, the agency head "shall 
report immediately to the President and Congress all relevant facts 
and a statement of actions taken." 31 U.S.C. §1351. In addition, the 
heads of executive branch agencies shall also transmit "[a] copy of 
each report ... to the Comptroller General on the same date the report 
is transmitted to the President and Congress." 31 U.S.C. § 1351. To 
date, GAO has not received a report from the Army regarding this 
violation. 

Conclusion: 

The Army did not comply with 10 U.S.C. § 2667 and violated the 
miscellaneous receipts statute by effectively receiving cash, not in-
kind, consideration and depositing such proceeds into an escrow 
account instead of the special account in the Treasury for such 
purpose as required by 10 U.S.C. § 2667(e)(1)(C). Simply calling a 
cash payment "in-kind services" does not make it so. The facts show 
that the Army received a payment of cash and did not deposit it in the 
appropriate account in the Treasury. Instead, the Army used the funds 
as if they were permissible in-kind consideration. As a consequence, 
the Army violated section 2667, violated the miscellaneous receipts 
statute, and augmented its appropriations. In addition, the
Army violated the Antideficiency Act upon execution of the Escrow 
Agreement, and although the Army subsequently cured the violation by 
amending the Escrow Agreement to delete the indemnification provision, 
a report of the violation is still required. 

Accordingly, the Army should transfer the balance of the escrow funds 
to the appropriate account in the Treasury. With respect to the escrow 
funds that have been expended to date, the Army should adjust its 
accounts by transferring funds from an Army account available to pay 
for services to property under the control of the Secretary to the 
appropriate account in the Treasury. If the Army finds that it lacks 
sufficient budget authority to adjust its accounts, it should report a 
violation of the Antideficiency Act in accordance with 31 U.S.C. § 
1351. In addition, with respect to the indemnification provision in 
the original Escrow Agreement, we encourage the Army to make the 
necessary report as required by 31 U.S.C. § 1351 as soon as possible. 
Finally, to the extent the Army has entered into EULs on substantially 
similar terms and conditions as the Picatinny EUL, the Army should 
take the same corrective action. 

If you have any questions, please contact Susan A. Poling, Managing 
Associate General Counsel, at (202) 512-2667, or Julia C. Matta, 
Assistant General Counsel, at (202) 512-4023. 

Sincerely yours, 

Signed by: 

Lynn H. Gibson: 
General Counsel: 

Appendix III Footnotes: 

[1] The term "excess property" means property under the control of a 
federal agency that the head of the agency determines is not required 
to meet the agency's needs or responsibilities. 40 U.S.C. § 102(3). 

[2] Our practice when issuing decisions and opinions is to obtain the 
views of the relevant agencies in order to establish a factual record 
and to establish the agencies' legal positions on the subject matter 
of the request. GAO, Procedures and Practices for Legal Decisions and 
Opinions, GAO-06-1064SP (Washington, D.C.: Sept 2006), available at 
[hyperlink, http://www.gao.gov/legal/resources.html]. The record in 
this case consists of documentation and information provided to us by 
the Department of the Army with respect to the Picatinny EUL. The 
record also includes a letter from the Deputy General Counsel, 
Department of the Army, to the Assistant General Counsel for Defense 
Capabilities and Management, GAO, dated Nov. 10, 2010 (Army Legal
Letter), providing the Army's legal views on certain terms and 
conditions of the Picatinny EUL, including the use of escrow accounts 
under 10 U.S.C. § 2667. 

[3] See Enhanced Use Lease Research Development and Engineering Command
Armaments Research, Development and Engineering Center Picatinny 
Arsenal, Picatinny, NJ between the Army and InSitech Inc. (Lease No. 
DACA31-1-06-444 for Buildings 352 and 353), Sept. 26, 2006 (Site Lease 
1). Concurrently with the execution of Site Lease 1, the lessee 
entered into a sublease with Forge Technology, LLC. Under the 
sublease, the sublessee will renovate and/or demolish the existing 
buildings leased under Site Lease 1 and construct, develop and use new 
buildings, pursuant to a site plan approved by the Secretary. Because 
the terms and conditions of the Sublease are not relevant to our 
decision here, they are not discussed in this opinion. 

[4] See Enhanced Use Lease Research Development and Engineering Command
Armaments Research, Development and Engineering Center Picatinny 
Arsenal, Picatinny, NJ between the Army and InSitech Inc. (Lease No. 
AR-E3-07-G-00355 for Building 350), August 14, 2007 (Site Lease 2). 

[5] The Master Agreement provides that as additional site leases are 
executed, the lessee is required to pay additional up-front payments. 
See Master Agreement, ¶¶ 1.6.4, 1.6.5, 1.6.7. 

[6] The lessee is required to pay an aggregate annual rent equal to a 
percentage of the Cash Flow Available for Distribution (CFAD). See 
Master Agreement, ¶ 1.6.3. CFAD is calculated at the end of each 
calendar year and is equal to the aggregate net revenue generated from 
the operation of the Existing Buildings leased under site leases, less 
(1) amounts placed in a reserve account for capital improvements and 
maintenance expenses, (2) amounts expended by the lessee for certain 
infrastructure improvements, and (3) a cumulative annual 10 percent 
return on amounts invested by the lessee in the development of the 
Project Site. See Master Agreement, at 3-4. If CFAD is zero for any 
given lease year, no annual rent is due and payable. Site Lease 1 and 
Site Lease 2 each provides for a proportional payment of the annual 
rent and the supplemental rent. Site Lease 1, ¶ 4(b), (c); Site Lease 
2, ¶ 4(b), (c). 

[7] The lessee is also obligated to make supplemental rent payments to 
the Army, provided the Lessor has generated aggregate net revenue from 
all leased existing buildings in excess of $20 million. In such 
circumstances, the lessee must pay the Army a supplemental rent of 
$850,000, less any annual rent paid for that year. 

[8] The Army explained that because the lessee has not generated 
enough operating revenue to cover its initial investment, there has 
not been any CFAD to warrant any payment of annual rent or 
supplemental rent. See supra notes 6 and 7. 

[9] The escrow funds may be used to pay a third-party contractor for 
the following services: 
"(a) Maintenance, protection, alteration, repair, improvement, or 
restoration (including environmental restoration) of property or 
facilities under the control of the Secretary; 
(b) Construction of new facilities for the Secretary; 
(c) Provision of facilities for use by the Secretary; 
(d) Facilities operation support for the Secretary; and; 
(e) Provision of such other services relating to activities that will 
occur on the leased property as the Secretary considers appropriate."
Escrow Agreement, ¶ 4. 

[10] Motor Coach Industries involved the challenge of a contract award 
by an unsuccessful competitor who asserted that the Federal Aviation 
Administration (FAA) had not followed federal procurement guidelines 
in awarding a contract for ground transportation at Dulles 
International Airport. The Fourth Circuit Court of Appeals concluded 
that the funds channeled by FAA to a trust established by the airlines 
and used to purchase ground transport buses for Dulles International 
Airport were public in character, therefore the trust, like FAA was 
subject to federal procurement guidelines, which had not been 
followed. Id. at 964-65. 

[11] The court also noted that the trust arrangement undermined the 
integrity of the congressional appropriations process, enabling the 
FAA to supplement its budget by millions of dollars without 
congressional action. Motor Coach Industries, 725 F.2d at 968. 

[12] We note that had the Rent Consideration been deposited in a 
special account in the Treasury established for the Secretary as 
required by 10 U.S.C. § 2667(e)(1)(A)(i), such amounts would be 
available to the Secretary only to the extent provided in an 
appropriation act. 10 U.S.C. § 2667(e)(1)(C). Further, the expenditure 
of such appropriated funds is subject to certain limitations. 10 
U.S.C. § 2667(e)(1)(C). For example, at least fifty percent of the 
proceeds in the special account shall be available for expenditure at 
the military installation where the proceeds are derived. 10 U.S.C. § 
2667(e)(1)(D). In addition, once appropriated, no more than $500,000 
may be expended at a single military installation until after a report 
on the proposed expenditure is submitted to the defense committees of 
Congress. 10 U.S.C. § 2667(e)(1)(E). Here, substantially all of the 
Rent Consideration received to date has been utilized for services at 
the Project Site. Such amounts may not have been available for 
expenditure at the Project Site had the Rent Consideration been 
deposited into the special account as required. 

[End of section] 

Appendix IV: Comments from the Department of Defense: 

Office of the Under Secretary Of Defense: 
Acquisition, Technology and Logistics: 
3000 Defense Pentagon: 
Washington, DC 20301-3000: 

June 8, 2011: 

Mr. Brian J. Lepore: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington. DC 20548: 

Dear Mr. Lepore: 

This is the Department of Defense (DoD) response to the GAO draft 
report 11-574, "Defense Infrastructure: The Enhanced Use Lease Program 
Requires Management Attention," dated May 9, 2011 (GAO Code 351491). 

The Department appreciates the opportunity to comment. Our detailed 
comments are enclosed. 

The Department concurs with the six recommendations and the Military 
Services are taking appropriate measures to comply with the GAO's 
recommendations. 

Sincerely, 

Signed by: 

John Conyer, for: 

Dorothy Robyn: 
Deputy Under Secretary of Defense (Installations and Environment): 

Enclosure: As stated: 

[End of letter] 

GAO Draft Report Dated May 9, 2011: 

GA0-11-574 (GAO Code 351491): 

"Defense Infrastructure: The Enhanced Used Lease Program Requires 
Management Attention: 

Department Of Defense Comments To The GAO Recommendations: 

The GAO recommends that the Secretaries of the Army and the Air Force 
take the following three actions: 

Recommendation 1: 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. 

DOD Response: Concur with comment. 

The Army and Air Force will review all their EULs executed to date and 
will amend lease terms and conditions as necessary in order to comply 
with applicable statutes. The Army and Air Force will also take action 
to ensure that the amended lease terms and conditions are a 
appropriately incorporated in their documentation of future EULs. 

As part of their review of EUL documentation, the Army and Air Force 
will examine all escrow agreements associated with lessees' obligation 
to pay in-kind consideration pursuant to 10 U.S.C. § 2667 and amend 
these documents as necessary and appropriate to clarify the lessee's 
obligation to provide in-kind consideration for the leasehold interest 
granted to the lessee by the Army and ensure that the escrow agreement 
does not amount to constructive receipt of funds in that account by 
the government. 

The DoD does not read the GAO Report and accompanying legal opinion as 
prohibiting the use of escrow agreements in connection with EUL 
transactions, provided the terms of those escrow agreements do not 
amount to constructive receipt of funds in the escrow agreement by the 
government. Accordingly, the Department contemplates that the Army and 
Air Force will continue to use appropriately drafted escrow agreements 
in those EUL transactions where the service determines that doing so 
is necessary to ensure that the lessee has the financial resources to 
provide the in-kind consideration owed the United States. In the 
Department's view, the use of an escrow agreement as part of a EUL 
transaction represents a reasoned and permissible exercise of agency 
discretion to implement its statutory authority to collect in-kind 
consideration from a lessee through use of a commonly used legal 
instrument that provides substantial protection of the United States' 
financial interests. 

Recommendation 2: 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(t) of Title 10, U.S. 
Code. 

DOD Response: Concur with comment. 

Some existing EULs already contain substantially similar language. In 
others, the provision was omitted because the lessee interest was 
already being taxed. Nonetheless, the services will amend their 
existing EULs to include GAO's recommended language: "if and to the 
extent the leased property comprising the Premises is later made 
taxable by State or local governments under an Act of Congress, this 
lease shall be renegotiated as required by subsection 2667(f) of Title 
10, U.S. Code." This language will be incorporated into future EUL 
legal instruments. 

Recommendation 3: Review and clarify guidance describing how the FMV of
the lease interest should be determined and how the receipt of FMV can 
best be ensured. 

DOD Response: Concur with comment. 

The Army and Air Force will revise their processes for establishing 
Fair Market Value (FMV) and prepare appropriate guidance. The Army 
intends to include a requirement that the fair market value (FMV) of 
the leasehold interest be informed by appraisals as well as 
competitive pricing obtained through open market solicitations. 
Additionally, the services shall develop guidance that establishes 
procedures to verify that in-kind consideration received is not less 
than the FMV of the leasehold. 

The GAO recommends that the Secretaries of the Army, the Navy, and the 
Air Force take the following three actions: 

Recommendation 4: 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. 

DOD Response: Concur. 

Recommendation 5: 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. 

DOD Response: Concur with comment. 

All three services will issue and update their EUL guidance on the 
analyses or documentation needed to establish that leases executed do 
not include property needed for public use. 

While concurring with the recommendation, the Department does not 
agree there was a reasonable probability that the Army might have a 
need for the property it leased at Fort Sam Houston, as asserted by 
the GAO in support of this recommendation. It is unlikely that the 
combination of circumstances that occurred after lease execution, 
including the terrorist attacks of September 11, 2001 and consequent 
effects on base access/security and Army space requirements, could 
have been reasonably foreseen. 

The Army points out that it formally documents the availability of 
property for EULs using a Report of Availability and has stated that 
it will revise applicable guidance to establish and document the basis 
for a determination that the property proposed for lease is not 
currently needed, and is not reasonably anticipated to be needed over 
the lease term, for a public use that would be incompatible with the 
proposed lease. This guidance will specifically address lease 
compatibility with existing and anticipated Army and other DoD 
missions. The Army guidance will also emphasize setting lease terms 
that are no longer than needed, consistent with project development 
and financing requirements. 

Recommendation 6: Develop procedures to regularly monitor and analyze 
EUL program administration costs to help ensure that the costs are in 
line with program benefits. 

DOD Response: Concur with comment. 

The Department notes that the EUL program, as with any innovative 
practice, has had a steep learning curve within the DoD as well as 
within the developing and lending communities. Moreover, resolving 
issues related to recent economic conditions required an inordinate 
amount of administrative time to terminate non-performing projects. 
With experience, the Department anticipates that better performing 
projects will be identified and execution and administrative costs 
will be reduced through use of standardized documents and processes. 
Further, as economic conditions stabilize and improve, developer and 
financier pools become larger and project times shorten, the 
Department anticipates that EUL projects will perform better and 
administrative costs will decline. The Department also notes that 
there are often benefits to the Department that are not included in 
the rental consideration that should be considered when comparing 
program costs and benefits. 

While the Air Force has tracked direct project costs from the 
inception of the EUL program it 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. 

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. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above Laura Durland, Assistant 
Director; Bonita Anderson; Grace Coleman; Michael J. Hanson; Katherine 
Lenane; and Gary Phillips made significant contributions to this 
report. 

[End of section] 

Related GAO Products: 

Federal Real Property: Authorities and Actions Regarding Enhanced Use 
Leases and Sale of Unneeded Real Property. [hyperlink, 
http://www.gao.gov/products/GAO-09-283R]. Washington, D.C.: February 
17, 2009. 

Federal Real Property: Progress Made in Reducing Unneeded Property, 
but VA Needs Better Information to Make Further Reductions. 
[hyperlink, http://www.gao.gov/products/GAO-08-939]. Washington, D.C.: 
September 10, 2008. 

Defense Infrastructure: Services' Use of Land Use Planning 
Authorities. [hyperlink, http://www.gao.gov/products/GAO-08-850]. 
Washington, D.C.: July 23, 2008. 

NASA: Enhanced Use Leasing Program Needs Additional Controls. 
[hyperlink, http://www.gao.gov/products/GAO-07-306R]. Washington, 
D.C.: March 1, 2007. 

Defense Infrastructure: Greater Management Emphasis Needed to Increase 
the Services' Use of Expanded Leasing Authority. [hyperlink, 
http://www.gao.gov/products/GAO-02-475]. Washington, D.C.: June 6, 
2002. 

[End of section] 

Footnotes: 

[1] Land that DOD classifies as underused or not utilized may not 
necessarily be considered excess property. Pursuant to section 102(3) 
of Title 40, U.S. Code, excess property is defined as property under 
the control of a federal agency that the head of the agency determines 
is not required to meet the agency's needs or responsibilities. 
Therefore, a parcel of DOD real property could potentially be 
underused yet still not be excess because it is required to meet 
certain DOD needs or responsibilities. For example, land at the 
perimeter of an installation may be unused but not considered excess 
because the land serves as a buffer zone between military and civilian 
activities. 

[2] While section 2667 may be used for personal property, we only 
examined leases of real property for the purposes of this report. 

[3] Hereinafter, we use "military services" to refer to the 
Secretaries of the Army, Navy, and Air Force. Further, while the 
Secretary of Defense is authorized to use this authority with respect 
to matters concerning the defense agencies, officials from the Office 
of the Secretary of Defense told us that no enhanced use leases have 
been executed by the Secretary of Defense. 

[4] The services generally consider leases with terms of 5 years or 
less to be short-term leases. For the purposes of this report, "short- 
term leases" refers to leases executed pursuant to section 2667 that 
have a term of 5 years or less. 

[5] Section 2667 does not use "enhanced use lease" to differentiate 
leases executed pursuant to this authority. 

[6] In a November 2010 memorandum, the Army cited our then ongoing 
review and suspended work on existing and developing EUL projects, 
pending completion of an internal review of the Army's EUL program 
that was to be informed by the findings and recommendations from our 
review. 

[7] Report no. 111-491. 

[8] The fact that this report does not specifically address a 
particular issue in a specific EUL or in a service's EUL program does 
not constitute tacit approval of the EUL or other aspects of the 
service's EUL program, policies, or practices, nor does it preclude 
further GAO legal analysis of such EULs and programs. 

[9] The three Army EUL case studies were located at Aberdeen Proving 
Ground, Maryland; Fort Sam Houston, Texas; and Picatinny Arsenal, New 
Jersey. The three Navy EUL case studies were located at Naval Base 
Point Loma, California; Naval Base San Diego, California; and Naval 
Base Ventura County, California. The three Air Force EUL case studies 
were located at Eglin Air Force Base, Florida (two EULs), and Hill Air 
Force Base, Utah. 

[10] See footnote 1. 

[11] The description of section 2667 provisions is not intended to be 
exhaustive, but rather includes provisions discussed in this report. 

[12] However, if a lease is for property located at a military 
installation approved for closure or realignment under a base closure 
law and the final disposition of that property is pending, the 
secretary concerned may accept consideration in an amount less than 
FMV, if the secretary determines that a public interest will be served 
as a result of the lease and the FMV is either unobtainable or not 
compatible with the public benefit. 10 U.S.C. § 2667(g)(2). 

[13] The statute provides a few specific exceptions to this rule. For 
example, money rentals received for agricultural or grazing purposes 
may be retained and spent by the secretary concerned in such amounts 
as the secretary considers necessary to cover the administrative 
expenses of leasing the land and to cover the financing of multiple-
land use management programs, and there are special rules and 
exceptions for money rentals received at a military installation 
approved for closure or realignment under a base closure law. 10 
U.S.C. § 2667(e)(3), (4), and (5). 

[14] The Army reported that it previously had two additional EULs. 
First, the Army reported that an EUL at Fort Bliss, Texas, was signed 
in 2006 and terminated by the Army in 2010 because the lessee had made 
no progress in developing the property and the lease included a 
provision that allowed the Army to terminate the lease for this 
reason. Second, the Army reported that an EUL at Walter Reed Army 
Medical Center, Washington, D.C., was signed in 2004. However, the 
center is closing as part of the 2005 BRAC process, and the Army 
expected that the lease would be transferred to the new property owner. 

[15] See footnote 6. 

[16] On October 1, 2010, as a result of the 2005 Defense Base Closure 
and Realignment Commission recommendation that DOD establish 12 joint 
bases by consolidating the management and support of 26 separate 
installations, Fort Sam Houston, Lackland Air Force Base, and Randolph 
Air Force Base became Joint Base San Antonio. With the implementation 
of this joint basing action, the Air Force became responsible for 
installation support at the joint base, including the administration 
of the Fort Sam Houston EUL. 

[17] A fourth site lease was executed in September 2007. Further, the 
terms of some of the Fort Sam Houston leases were later amended to 55 
years. 

[18] An escrow agreement is employed in three of the four Fort Sam 
Houston leases. Army officials explained that no escrow agreement was 
in place for one of the four Fort Sam Houston EULs because work had 
not begun pursuant to that site lease, and therefore no revenue was 
being generated under that site lease. 

[19] The master agreement does, however, grant the lessee certain 
rights of entry for prelease activities and access and infrastructure 
improvements. 

[20] The term of the master agreement is not explicitly specified. It 
is the Army's position that the master agreement remains in effect as 
long as any associated parcel lease remains in effect. 

[21] The lessee is not specifically required to enter into site leases 
for all of the land subject to the master agreement. Aside from the 
special rules for two buildings, the only conditions under which the 
Army may refuse to enter into a site lease with the lessee that would 
not be considered an event of default would be if the prospective use 
of the property constituted a prohibited use or was not consistent 
with the uses authorized under the master agreement. 

[22] The master agreement does, however, give the developer the right 
to construct infrastructure improvements necessary to support and 
service construction for a prospective site lease. 

[23] While the master agreement does not set out a detailed, binding 
schedule for entering into site leases or for developing the property, 
it does contain deadlines for the developer's progress. For example, 
the developer must have entered into site leases with regard to the 
entire project site by June 2029. 

[24] The lease term was extended on January 5, 2011, for a term of 3 
months effective February 1, 2011. 

[25] The EUL calls in-kind services "specific maintenance projects." 

[26] In December 2010, the Air Force terminated one of its EULs 
because of lessee default. 

[27] The Air Force planned to add approximately 51 acres to this lease 
at a later date. 

[28] The Air Force stated that a portion of the up-front consideration 
received from the developer was accepted pursuant to section 2695 of 
Title 10, U.S. Code, which permits the secretary of a military 
department to accept amounts provided by a person or entity to cover 
administrative expenses incurred by the secretary in entering into the 
transaction. 

[29] These funds are to be deposited into a "payment in-kind account." 
The Air Force, the developer, and the Military Installation 
Development Authority, an independent, nonprofit entity of the State 
of Utah, entered into an agreement related to the receipt, 
administration, accounting, and dispensation of funds in the payment 
in-kind account. Among the authority's obligations under this 
agreement is the responsibility to act as the "owner" of the payment 
in-kind account and act as trustee of the account with a fiduciary 
duty to the government to ensure that funds will be distributed and 
will only be distributed if the conditions for distribution set forth 
in the agreement are met. The Air Force has a security interest in the 
payment in-kind account. 

[30] This lease was entered into on March 27, 2009, for approximately 
7.7 acres of land. 

[31] The Comptroller General issues legal decisions to agency 
officials on questions involving the use of, and accountability for, 
public funds. A decision regarding an account of the government is 
binding on the executive branch and on the Comptroller General, but is 
not binding on a private party who, if dissatisfied, retains whatever 
recourse to the courts he or she would otherwise have had. The 
Comptroller General has no power to enforce decisions. Ultimately, 
agency officials who act contrary to Comptroller General decisions may 
have to respond to congressional appropriations and program oversight 
committees. GAO also prepares legal opinions, such as our March 30, 
2011, legal opinion referenced here, at the request of congressional 
committees or individual members of Congress on questions involving 
the use of, and accountability for, public funds. Such opinions are 
prepared in letter, rather than decision, format but have the same 
weight and effect as decisions. The March 30, 2011 legal opinion 
supplements our audit report and is reprinted in appendix III. 

[32] 31 U.S.C. § 3302(b). 

[33] 31 U.S.C. § 1341. 

[34] 31 U.S.C. § 1351. 

[35] While not discussed in our legal opinion, we understand that the 
indemnification provision was removed in response to an April 24, 2009 
memorandum by the Chief Counsel for U.S. Army Corps of Engineers. The 
memorandum stated that a similar indemnification provision included in 
an Army EUL not included in our case study review violated the 
Antideficiency Act. The memorandum advised the preparation of a "flash 
report," and concluded that all existing and pending Army EULs should 
be reviewed and, if necessary, renegotiated. 

[36] Depositing EUL cash consideration into an escrow account rather 
than the U.S. Treasury also raises questions about the disbursement 
and use of such funds from those accounts. For example, under the Fort 
Sam Houston EUL, to the extent that the deposit of consideration into 
an escrow account instead of the U.S. Treasury represented a violation 
of section 2667, payments out of that account would also be 
problematic--such as the disbursement of $223,000 that was made to the 
U.S. Army Corps of Engineers to pay for EUL program administrative 
costs. 

[37] Some of these EULs provide for a portion of the consideration 
received to be provided directly as payment for administrative costs 
pursuant to section 2695 of Title 10, U.S. Code, which permits the 
secretary of a military department to accept amounts provided by a 
person or entity to cover administrative expenses incurred by the 
secretary in entering into the transaction. For example, in the Hill 
Air Force Base EUL, while some consideration was accepted directly by 
the government pursuant to section 2695, the master development 
agreement requires the developer to deposit additional up-front 
consideration and a percentage of the net operating revenues into a 
payment in-kind account outside the U.S. Treasury. For the purposes of 
this discussion, we refer only to the EUL provisions that provide for 
the payment of some or all consideration received pursuant to the EUL 
into an escrow, or similar, account outside of the U.S. Treasury. 

[38] As in the case of the Picatinny Arsenal EUL, we understand that 
the indemnification provision was removed in response to an April 24, 
2009, memorandum from the Chief Counsel for the U.S. Army Corps of 
Engineers. 

[39] 10 U.S.C. § 2667(f). 

[40] In the Aberdeen Proving Ground EUL, the master agreement provided 
broad deadlines for development--for example, the developer must enter 
into site leases with regard to the entire project and must have 
commenced construction of improvements on the leased premises before 
June 30, 2029. While neither the master agreement nor other Army 
documents provided detailed development time frame expectations, the 
installation's EUL project manager stated that initial time frame 
expectations slipped 6 to 12 months when the original EUL developer 
filed for bankruptcy and a different developer took over the project. 

[41] Although not anticipated when the original leases were signed in 
2001, the developer constructed a new office building on Army land 
included in the EUL. 

[42] Ground breaking on the first commercial building occurred in 
October 2010, after our visit to Hill Air Force Base. 

[43] Although the EUL documents at Hill Air Force Base stated that the 
developer was making a $10 million equity investment as consideration, 
$2,548,068 was received by the Air Force when the lease was signed. 
This amount was used to pay EUL administrative costs. According to 
lease documents, the balance of the $10 million was held by the 
developer, was to accrue interest at the rate that the developer could 
borrow funds from a commercial lender, and was to be deposited into 
the EUL's payment in-kind account "as needed" over the lease term. At 
the time of our visit in August 2010, no amounts from the balance had 
been deposited in the payment in-kind account. 

[44] Lease provides for 3 percent escalation in the rental amount each 
year. 

[45] Lease provides for 2 percent escalation in the rental amount each 
year. 

[46] Given that the Air Force had not yet executed a site lease for 
the portion of the property encompassing the Defense Non-Tactical 
Generator and Rail Equipment Center, we asked the Air Force whether 
the 2008 amendment to section 2667 requiring that the property to be 
leased must not be needed for public use would prohibit the Air Force 
from entering into such a site lease. The Air Force acknowledged that 
the new amendment presents "interpretation issues" for the Air Force 
and stated that it is the Air Force's legal position that site leases 
will have to comply with the provisions in the enabling statute at the 
time that the site lease is actually executed, unless that causes the 
Air Force to default on or breach the underlying master development 
agreement or master lease. Thus, the Air Force stated that the 2008 
amendment to section 2667 does not prohibit the Air Force from 
including in a site lease a portion of the master project site that 
encompasses the Defense Non-Tactical Generator and Rail Equipment 
Center. In light of its legal position, it is unclear at this point 
how the Air Force intends to proceed with respect to the Hill Air 
Force Base EUL. 

[47] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[48] The three Army EUL case studies were located at Aberdeen Proving 
Ground, Maryland; Fort Sam Houston, Texas; and Picatinny Arsenal, New 
Jersey. The three Navy EUL case studies were located at Naval Base 
Point Loma, California; Naval Base San Diego, California; and Naval 
Base Ventura County, California. The three Air Force EUL case studies 
were located at Eglin Air Force Base, Florida (two EULs), and Hill Air 
Force Base, Utah. 

[End of section] 

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