Defense Infrastructure
The Enhanced Use Lease Program Requires Management Attention Gao ID: GAO-11-574 June 30, 2011To help address challenges associated with deteriorating facilities and underused property, the Department of Defense (DOD) has pursued a strategy that includes leasing underused real property to gain additional resources for improving installation facilities. Section 2667 of Title 10, U.S. Code, provides authority to the military departments to lease nonexcess real property, subject to several provisions, in exchange for cash or in-kind consideration. According to the military services, some leases, referred to as enhanced use leases (EUL), are more complex with long terms and could provide hundreds of millions of dollars for in-kind services to improve installation facilities. A committee report accompanying the 2011 defense authorization directed GAO to review the EUL program. This report (1) assesses the extent to which selected EULs complied with section 2667 of Title 10, U.S. Code; (2) determines to what extent the services' expectations for their EULs have been realized; and (3) evaluates the services' management of the EUL program. GAO reviewed information on the services' 17 EULs in place at the end of fiscal year 2010 and selected 9 for detailed case study.
One of the Army EULs included in the GAO case studies did not comply with the EUL authorizing statute, section 2667 of Title 10, U.S. Code. In March 2011, GAO issued a legal opinion finding that certain terms and conditions of the legal documents comprising the Army's Picatinny Arsenal EUL violated section 2667(e) and the miscellaneous receipts statute by failing to require that cash consideration be deposited into the appropriate account of the U.S. Treasury. Instead, the cash was deposited into an escrow account at a local credit union. Also, while no two EULs are identical, GAO found that the two other Army and the three Air Force case study EULs included some terms and conditions similar to those that were found to be problematic by the legal opinion, which raised questions about the extent to which such EULs also comply with the statutory requirements. Moreover, beyond those issues addressed in the legal opinion, GAO found that three Army and one Air Force case study EULs did not comply with another provision in section 2667, which requires that each lease executed pursuant to section 2667 provide that if and to the extent that the leased property is later made taxable by state or local governments under an act of Congress, the lease shall be renegotiated. The services' expectations for EUL development timeframes and financial benefits were not realized in two Army and one Air Force EULs included in the GAO case studies largely because, according to the services, the recent economic downturn caused EUL development plans to significantly slow down or to be placed on hold. To illustrate, in the Fort Sam Houston EUL that was signed in 2001, only two of the three large deteriorated buildings included in the lease have been renovated, and the Army now estimates that EUL consideration will be about 22 percent less than was originally estimated. Moreover, in this case, the Army, rather than private sector tenants as was originally planned, has rented most of the EUL space that has been renovated. Thus, Army officials stated that nearly all of the estimated future consideration is now expected to be the result of the Army getting back a portion of the rent that the Army pays to the EUL developer. The services' management of the EUL program included weaknesses related to internal controls and program guidance. First, because the services generally lacked documentation showing how certain provisions contained in the authorizing statute were addressed, it was not clear to what extent the services addressed each provision before entering into the leases. Second, in some EUL cases, it was not clear how and to what extent the services ensured the receipt of the fair market value of the lease interest, as required by the authorizing statute. Third, some EULs included property that was being used or might be needed by the military over the lease term, which could result in increased costs to relocate military activities or increased potential costs, if a lease had to be terminated early to permit the military to regain control of the property. Fourth, the services were not regularly monitoring EUL program administration costs, as called for by internal control standards, to help ensure that costs were in line with program benefits. GAO recommends that DOD take several actions to address EUL statutory compliance issues and EUL management weaknesses. DOD agreed with all of GAO's recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Brian J. Lepore Team: Government Accountability Office: Defense Capabilities and Management Phone: (202) 512-4523GAO-11-574, Defense Infrastructure: The Enhanced Use Lease Program Requires Management Attention
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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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