MARCH 1997
REPORT TO CONGRESS

ON THE FIRST YEAR OF THE HOUSING REVITALIZATION INITIATIVE

INTRODUCTION
The 1996 National Defense Authorization Act provided the Department of Defense with significant new tools to attract private sector capital to speed the revitalization of military housing. To implement this new approach to military housing, DoD created a joint Housing Revitalization Support Office (HRSO). HRSO, working with the Military Departments, had a productive first year. Six projects were initiated involving over 4,000 family housing units. This report describes the accomplishments of the first year of this important new initiative. It outlines the Department's policies and procedures, the first six projects, the plans for the second year, and, finally, conditions for the future success of this important quality of life initiative.

DOD'S HOUSING PROBLEM
DoD maintains over 300,000 military family housing units of which approximately 200,000 require renovation or replacement. Completing this work via our traditional military construction approach would cost an estimated $20 billion and take 30-40 years. Additionally, DoD maintains over 400,000 unaccompanied housing (barracks) spaces, 62% of which seriously need repair. The estimated cost for this work using the traditional approach is $9 billion.

FY 1996 AUTHORITIES
On February 11, 1996, President Clinton signed the 1996 National Defense Authorization Act into law. Title XXVII, Subtitle A, provided for the creation of a Military Housing Privatization Initiative. This Initiative provides DoD with a variety of authorities to obtain private sector financing, expertise, and management to revitalize military housing. The new authorities permit:

1. Guarantees, both for loans and rental occupancy
2. Conveyance or lease of existing property and facilities
3. Differential payments to supplement Service members housing allowances (BAQ/VHA)
4. Investments, both limited partnerships and stock/bond ownership
5. Direct Loans

These new authorities are provided for a five-year test period. They can be used individually, or in combination.

IMPLEMENTING THE AUTHORITIES
To implement this new program, the Secretary of Defense created a joint Housing Revitalization Support Office (HRSO). The office is staffed with 16 full-time housing and real estate experts from each of the Services and the Office of the Secretary of Defense, augmented with consultant support. During its first year of operations, HRSO established the policies and procedures necessary to implement the initiative. Specifically, HRSO issued guidance to define how to take projects from inception to completion. It developed a comprehensive pro forma to help screen the financial feasibility of projects at potential privatization sites. It established protocols for the collection of site-specific data, as well as criteria for identifying those sites where the authorities could be used most effectively. And, it contracted with expert consultants to assist in the complex and unfamiliar task of commercial real estate development and finance. Collectively, these procedures were designed to develop deals that would be attractive to the private sector and achieve best value for the government.

The privatization process starts with the base, major command and Military Department reviewing and validating housing requirements that have potential to be worked using privatization. HRSO involvement starts when the Military Department nominates a site for consideration. The site must have a significant housing deficit or have housing that needs revitalization. The Military Department also identifies a potential funding source, either funding associated with an existing military construction project or the Family Housing Improvement Fund.

Together, a joint HRSO/Military Department team visits the site to evaluate the feasibility of privatization and to recommend which specific authorities would be best suited to the circumstances of the particular location. If the Military Department and Office of the Secretary of Defense approve the project for development, an on-site Industry Forum is organized to obtain input from the private sector on the potential structure of the project. The Department then prepares a Request For Proposal (RFP) and, as required under the Act, notifies Congress of its intent to proceed with the project. After a 30 day wait, the RFP is issued. Congress receives a second notification 30 days prior to transfer of funds into the Family Housing Improvement Fund and contract award.

The Department has worked aggressively to increase awareness and understanding of this program in both the commercial real estate and financial communities. We are addressing industry associations, national conferences and local industry forums for each project. We are also reaching out electronically via the HRSO Internet Home Page (http://www.acq.osd.mil/iai/hrso). Interest in the program has been high - the home page, for example, has been receiving over 200 hits per day.

A year ago, the Department stated that this process would require a significant cultural change in adjusting to private sector practices. The many site visits jointly conducted by the HRSO and the military departments have made notable progress in achieving that change. The military departments have gained greater experience in identifying potential candidates, and our installation commanders have developed a better understanding of the program. Enthusiasm for the program is high throughout the Department.

Our first year involved more than just laying the programmatic foundations for housing privatization; we have been actively testing the new tools. One year ago, we anticipated that our first year efforts would likely encompass about 2000 housing units. In fact, the six projects currently under review, out for competition, or now under construction, have doubled that number, involving over 4000 units of family housing. As expected, these projects raised many unanticipated issues as they moved through the process. The revolutionary nature of these projects required working through many legal issues related to the Federal Acquisition Regulations and Federal Property Regulations. Some completely new instruments, such as base closure guarantees, raised complicated questions regarding trigger mechanisms and budget implications of government liability. As with any complex program, the devil is in the details and we will continue resolving these issues as they arise. In the meantime, we will ensure these lessons-learned make the next projects easier and faster. The next section summarizes those first six projects.

FIRST YEAR PROJECTS

Naval Air Station Corpus Christi, Texas
On December 12, 1996, the groundbreaking ceremony took place for the Department's first project. This project - a limited partnership agreement with Landmark Organization Inc. of Austin, Texas - was initiated under FY 1995 authority, which only allowed for limited partnerships. The partnership will build 404 units of off-base family housing at a cost of approximately $30 million. The Navy's total equity contribution is $9.5 million with the developer financing the rest. (Spending the same amount of money using the traditional MilCon approach would have yielded one-fourth the number of units.) Enlisted personnel from Naval Station Ingleside, Naval Air Station Kingsville and Naval Station Corpus Christi will be able to take advantage of these new townhouse complexes, which offer quality affordable rental housing with amenities such as swimming pools, soccer and baseball fields, and basketball courts. The units will be ready for occupancy during the summer of 1997. At the end of the partnership, the Navy will receive one-third of the net value and will be repaid its equity contribution of $9.5 million. The authorities allow $9.5 million equity contribution to then be redeposited into the Family Housing Improvement fund for use on future privatization projects.

Naval Station Everett, Washington
A second Navy Limited Partnership project, also initiated under the FY 1995 authority is at Naval Station Everett in Washington State. For this project, the Navy will contribute $5.9 million to facilitate the development of approximately 185 units of off-base family housing. The developer will be responsible for the remainder of the total project cost of approximately $19 million. The successful bidder will develop, maintain and operate the family housing and will make units available to military families at rents approximately equal to allowances for E-5 Service members. The preferred term of the contract is 10 years and is currently under final negotiation. Notification of intent to award was sent to Congress on February 13, 1997.

Fort Carson, Colorado
The first Request for Proposal (RFP) to be issued using the FY1996 authorities is for the Army's project at Fort Carson, Colorado Springs, Colorado. This RFP, issued on December 24, 1996, calls for the construction, maintenance and management of 840 new single and multifamily structures and the phased revitalization, maintenance and management of 1824 existing housing units on-base at Fort Carson - a total of over 2600 units. The successful offeror will also maintain unoccupied and public areas associated with the housing community; construct and maintain associated new roads and infrastructure; and undertake any required reinvestments or improvements in community areas, such as green areas, parks, picnic areas, and day care centers. The Government will make available or outlease land for both the new and existing units and convey title to the existing structures. The contract is set for a period of 50 years, with a renewable option of 25 years. Proposals for the Fort Carson project are due April 29, 1997. This project uses a number of our new authorities, including a loan guarantee for base closure, deployment, and downsizing; outleasing of government land; and transfer of existing government units.

Lackland Air Force Base, Texas
The RFP for Lackland Air Force Base in San Antonio, Texas, was issued February 11, 1997. The requirement for this privatization effort is 420 family housing units to be constructed by the successful offeror and located on base. The installation is offering to outlease 96 acres of land for a period of up to 50 years. The developer will own, operate, maintain and manage the housing units and will provide for associated infrastructure, such as new roads. The RFP also requires the developer to demolish 272 substandard housing units currently on a portion of the property to be outleased. Additionally the RFP notes that the government is willing to offer a direct second mortgage, as well as a base closure, deployment and downsizing guarantee. This project will test some of the same authorities as Fort Carson, such as outleasing of land and mortgage guarantees. It is also the first use of our direct loan authority.

Marine Corps Base (MCB) Camp Pendleton, California
Marine Corps Logistics Base (MCLB), Albany, Georgia

Both of these sites have been approved for RFP development and are in work by the Marine Corps. The general parameters of the projects are as follows:

Camp Pendleton's requirement is for the development, maintenance and management of 204 new single and multifamily housing structures and the phased renovations, maintenance and management of 512 existing housing units. All units will be on-base in this project.

MCLB Albany's requirement is for the development of approximately 150 family housing units on base. Because this project does not have a MilCon appropriation, it will be funded through the divestiture of 419 family housing units which are located in an off-base enclave called Boyett Village. Proceeds of this divestiture will be used to leverage the development, construction and management of privately owned housing which will be rented to military personnel at their housing allowance rate. It is envisioned that this privately owned housing project will be built on government owned land under a long term lease arrangement.

SPEEDING UP THE PROGRAM
In developing candidate sites for FY 1997, the military departments were instructed to evaluate both family housing and barracks, to increase the number of candidate projects, and the number of units in each project. Projects to date have generally been sized below an installation's full housing need. Since the costs to bring a project to completion do not increase significantly with size, larger projects are more cost effective than smaller ones. Increasing the size of projects would also raise the total number of housing units that could be constructed or revitalized through the program. Our goal is to double the number of units planned for construction and revitalization -- from the 4,000 in FY 1996 to 8,000 units in FY 1997.

While we continue to conduct aggressive outreach to the private sector, we are also working to institute lessons learned from our first projects. We have active training programs to increase the knowledge of privatization among all DoD personnel involved in housing programs. Combining lessons learned with increased training, we expect to significantly decrease the time involved at each step of the process. For example our first site visit evaluations took anywhere from three to five months to complete, whereas our most recent was completed in one month. Likewise, we expect to reduce RFP development from the six months required for Ft. Carson and Lackland AFB down to three months for future projects.

FY 1997 SITE NOMINATIONS
In FY 1997, The Services have nominated 42 additional sites as potential privatization candidates. The HRSO has been working with the Services to evaluate these sites and to date has completed s 8 site reports. Recommendations for privatization for these sites are currently being developed by the Military Departments. (A list of these sites can be found if you go back to our front page and click on number 2. Military Department Site Nomination List.)

STATUS OF FUNDS
The Family Housing Improvement Fund was established with an initial appropriation of $22 million. In FY 1996, the Department used about $3 million of our appropriated money for administrative costs including contract support to develop a methodology for applying the new authorities. Additionally $9.5 million was used to fund the Corpus Christi project, and approximately another $1 million to fund development of the Ft. Carson and MCLB Albany RFPs. The FY 1997 Defense Authorization Act authorized appropriations that enable the Department to use the HRSO authorities to improve unaccompanied personnel housing as well as family housing. In FY 1997, the Department received a $25 million appropriation for the Family Housing Improvement Fund and a $5 million appropriation for the Unaccompanied Housing Improvement Fund. The statutory notification and reporting requirements will provide the Congress oversight, at key steps, as the Department proceeds with the Military Housing Privatization Initiative.

CONDITIONS FOR SUCCESS
The Department's actions to date have been oriented toward two key objectives: first, to test and expand our use of these new authorities, and second, to ensure that the appropriate steps are taken to manage the program wisely. To improve the quality of life for our soldiers, sailors, airmen, and marines, we must move forward expeditiously. At the same time, we must not be willing to accept any deal. Our initial round of projects will be important in increasing interest and support in both the private sector and DoD. That is why it is important to make sure we get them right. We are working hard to address some remaining issues. In particular, we are continuing to work with the Office of Management and Budget on how our projects are to be scored. We must also continue to leverage our available military construction funds. The original goal of this program was to solve our housing problem in 10 years instead of 30 years. To accomplish this objective, we must leverage our programmed MilCon and free the savings to revitalize our inadequate housing.

Although the learning curve has been steep, we have made significant progress toward the privatization of military housing in our first year. We plan to accelerate our program over the coming year and expect to demonstrate the viability of this initiative in support of permanent codification of these authorities. By expanding our efforts, we expect to test more authorities in a wider range of markets. We now have solid examples to follow in putting together upcoming projects that will help build a portfolio of successes to bring before the Congress a year from now. This promises to be an exciting year in housing privatization.