MARCH 10, 1998


STATEMENT BY:
JOHN B. GOODMAN
Deputy Under Secretary of Defense
(Industrial Affairs and Installations)

BEFORE THE SUBCOMMITTEE ON
MILITARY CONSTRUCTION
OF THE HOUSE APPROPRIATIONS COMMITTEE

MARCH 12, 1998
&
BEFORE THE SUBCOMMITTEE ON
MILITARY INSTALLATIONS AND FACILITIES
OF THE HOUSE NATIONAL SECURITY COMMITTEE


INTRODUCTION
Mr. Chairman and distinguished members of the Subcommittee, thank you for this opportunity to update you on the status of our Military Housing Privatization Initiative. Quality of life for our military personnel and their families continues to be of utmost importance in attracting and retaining the high quality personnel who make our armed services the envy of the world. Secretary Cohen's Defense Reform Initiative identifies housing as a critical element of that quality of life and our housing privatization initiative is a cornerstone of our efforts to improve living conditions for our personnel.

The Department of Defense has completed a successful second year in the implementation of the Military Housing Privatization Initiative (MHPI). During this year, we worked diligently to refine the most efficient uses of the authorities provided by the Congress to improve the quality of housing for our military families. This report describes the progress made in the second year of this important initiative. It also discusses how this initiative fits in the Department's overall housing goals and describes the keys to future success.

DOD'S HOUSING PROBLEM
Last year, the Department of Defense set a critical goal for the Military Services to eliminate all inadequate housing by 2010. The challenge is significant: Approximately 200,000 of DoD's domestic housing units are inadequate. Fixing this problem using traditional military construction alone would cost as much as $20 billion and take over 30 years. To meet our 2010 goal, the Military Services have begun to prepare detailed installation-by-installation plans. These plans will describe the condition of the housing at each installation and delineate how various tools and approaches – including privatization – will be used collectively to meet the 2010 objective.

FY 1996 AUTHORITIES
The Military Housing Privatization Initiative legislation provides a range of important authorities:

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
4. Investments, both limited partnerships and stock/bond ownership
5. Direct Loans

PROJECTS COMPLETED

Naval Air Station Corpus Christi, Texas
In May 1997, military families from Naval Station Ingleside, Naval Air Station Kingsville and Naval Station Corpus Christi started moving into two new townhouse complexes. This project – a limited partnership agreement with Landmark Organization Inc. of Austin, Texas – built 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 government construction approach would have yielded one fourth the number of units.) These complexes offer quality affordable rental housing with amenities such as swimming pools, soccer and baseball fields, and basketball courts. All units have been completed with sailors being given first preference to rent at specified rates which are below that of comparable housing in the local community. At the end of the ten year partnership, the Navy will receive one-third of the net value and will be repaid its equity share. The authorities allow the money to be redeposited into the Family Housing Improvement Fund (FHIF) for use on future privatization projects.

Naval Station Everett, Washington
A second Navy Limited Partnership project was completed in the summer of 1997. The units are now occupied by enlisted personnel from Naval Station Everett. For this project, the Navy contributed $5.9 million to facilitate the development of approximately 185 units of off-base family housing. The developer provided the remainder of the total project cost of approximately $19 million. As is the case with the Corpus Christi project, sailors are given first preference to rent at rates that are set below that of comparable housing in the community and the Navy's share of the equity and proceeds is available for future projects at the end of the ten year partnership. An added feature of this project is that the military occupants have the option to purchase their units, at below market prices, starting in the last five years of the partnership.

PROJECTS IN PROCUREMENT

Fort Carson, Colorado
On February 10, 1998, the Department notified Congress of our intent to transfer $15.82 million of family housing construction funds into the FHIF and to award the contract for the Army's project at Fort Carson. This project is the first to use a number of our new authorities, including a loan guarantee and transfer of existing government units. The developer is responsible for the construction, maintenance and management of 840 new single and multifamily structures and the phased revitalization, maintenance and management of the 1824 existing housing units on base at Fort Carson – a total of over 2600 units. Rent for these units is set at the soldier's housing allowance and will be paid to the developer via an allotment. The developer 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 Army will 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.

Lackland Air Force Base, Texas
The procurement for Lackland Air Force Base is in its final stages with best and final offers expected in late March of 1998. This project requires the developer to construct, manage, and maintain 420 family housing units located on base. Rent for these units is set at the airman's housing allowance and will be paid to the developer by an allotment. The installation is offering to outlease 96 acres of land for a period of up to 50 years. The request for proposals (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 limited loan guarantee, as well as a direct second mortgage. This project is expected to provide the first use of our direct loan authority.

REQUEST FOR PROPOSALS READY FOR ISSUE

Marine Corps Logistics Base (MCLB), Albany, Georgia
Notification was provided to Congress on January 5, 1998 of intent to issue an RFP for a project at MCLB Albany. The successful offeror will be required to construct, manage, and maintain approximately 155 family housing units on base. This project does not have a family housing construction appropriation and 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 development of the on base housing under a long term lease arrangement.

Marine Corps Base (MCB) Camp Pendleton, California
The Department of Defense expects to provide notification of intent to issue an RFP for a project at Camp Pendleton this spring. This project requires the private developer to construct, manage, and 204 new single and multifamily housing structures. In addition, the developer will be responsible for the phased renovations, maintenance and management of 512 existing housing units. All units will be on base in this project.

REQUEST FOR PROPOSALS UNDER DEVELOPMENT

Five more projects have been approved for RFP development which is currently underway. Upon completion of the RFP, we will provide notification to Congress of our intent to issue RFP's for these projects. The locations of these projects are listed below along with the number of housing units expected to be privatized

Robins AFB, Georgia 760 units

Fort Hood, Texas 5825 units

Elmendorf AFB, Alaska 828 units

Fort Stewart, Georgia 3282 units

Fort Lewis, Washington 3956 units

PROGRAMMATIC ISSUES AND IMPROVEMENTS

Our work on housing privatization this past year was affected by two key issues: budget scoring and loan/loan guarantee documentation. For the first six months of the year, we worked with the Office of Management and Budget (OMB) to determine appropriate rules to score obligations of the government incurred by using our new authorities. The Director of OMB approved scoring guidelines in June that enable us to use our new authorities and maximize the leveraging of our scarce Milcon funds. Developing the loan and loan guarantee instruments for both the Ft. Carson and Lackland projects proved very time consuming. In particular, the Housing Revitalization Support Office (HRSO) had to work with the financial community to translate the loan guarantee concepts into actual documents that would receive favorable – i.e., investment grade -- financing. Resolution of these two issues will now enable us to move more quickly on the projects that follow. In addition, we completed a competition for consultant support to the Housing Revitalization Support Office (HRSO) so that it could increase its workload and bring creative new perspectives to the program. The HRSO also continued to refine the comprehensive pro forma used to help screen the financial viability of projects. Joint HRSO and Military Service teams have now completed visits to over 30 potential privatization sites and evaluated their financial feasibility. This process has markedly enhanced our understanding of how best to use our authorities over a large spectrum of projects and geographic locations. As with any complex program, the devil is in the details and we will continue to resolve these issues as they arise and ensure that all lessons-learned make the next projects easier and faster.

STATUS OF FUNDS

The Family Housing Improvement Fund was established in FY1996 with an initial appropriation of $22 million. In FY1997, the Department received a $25 million appropriation for the FHIF and a $5 million appropriation for the Unaccompanied Housing Improvement Fund. In the first two years, the Department used about $9 million for administrative costs including contract support. In FY1998, we anticipate administrative costs of $7 million and have requested a $7 million appropriation to the FHIF for HRSO administrative costs in FY1999. Additionally $9.5 million was used to fund the Corpus Christi project, and another $760 thousand to fund development of RFP's for the projects at Ft. Carson and MCLB Albany. The primary method of funding projects continues to be transfer of existing family housing construction funds into the Family Housing Improvement Fund. The $5.9 million cash investment for the Naval Station Everett limited partnership was funded in this manner. The statutory notification and reporting requirements will provide the Congress oversight, at key steps, as the Department increases the number of projects in the procurement process.

MOVING THE PROGRAM FORWARD

While we continue to conduct aggressive outreach to the private sector, we are also working to institute lessons learned from our first projects. In February of this year, we convened a two day seminar with all key participants of the Fort Carson privatization project attending. This face-to-face interaction helped capture all the minute details needed to provide lessons learned for our next projects. We have continued active training programs to increase the knowledge of privatization and private sector financing among all DoD personnel involved in housing privatization. Combining lessons learned with increased

training, we expect to significantly reduce the time and effort required to complete privatization projects. In the two years since enactment of this legislation, the Department has made significant progress in establishing required policies and procedures. Equally important, we have moved forward with a number of important projects – totaling about 18,000 housing units. We are paying close attention to our current projects to ensure effective implementation and expect to propose permanent legislation next year.


CONCLUSION

In closing Mr. Chairman, thank you and your Subcommittee members for giving me the time to discuss this important privatization initiative. I look forward to working with you over the next year as we refine the program and seek permanent legislation. I would be pleased to answer any questions you may have.