Military Housing Privatization Initiative: Background and Issues

Order Code RL31039

CRS Report for Congress

Received through the CRS Web

Military Housing Privatization Initiative:

Background and Issues

July 2, 2001

nae redacted

Analyst in National Defense

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Military Housing Privatization Initiative:

Background and Issues

Summary

This report describes the Military Housing Privatization Initiative (MHPI), a

pilot program authorized by Congress in 1996 to encourage privately-funded

development of housing for use by members of the U.S. Military Services (including

the Army, Navy, Marine Corps, and Air Force). The quality of housing available to

members of the Military Services is considered one of the most important

components (along with pay and quality of workplace) in defining the military’s

“quality of life,” directly influencing the ability of the Military Services to retain

personnel on active duty.

As part of the Department of Defense (DOD) effort to address its housing

problems by a self-imposed deadline of 2010, the MHPI uses private sector

alternatives to military housing construction, “leveraging” appropriated funds by

providing federal supports to commercial real estate developers. Congress

temporarily granted DOD 12 of these risk-reducing authorities, including the ability

to convey or lease public property to private enterprise, to guarantee minimum

occupancy rates, or to offer direct loans to real estate developers. While the Office

of the Secretary of Defense retains general oversight and approval authority, the

individual Military Services are responsible for the execution of projects on military

installations.

The MHPI was originally authorized for five years, but few contracts were

awarded. Despite its slow start, Congress has expressed confidence in the program

and recently reauthorized it through December 31, 2004. The pace at which

privatization contracts are being awarded has accelerated. While the MHPI has been

applied only to family housing, DOD intends to expand it to include barracks and

military dormitories.

Issues for Congress in its oversight of the program include the following. One

issue is how to assess the program and its effectiveness. This is a difficult task,

because both the problem of deteriorating housing and the solution of MHPI are

complex. Family Housing Master Plans, expected to lay out in detail how each

Service will resolve its housing deficiencies over the next decade, will be submitted

to Congress soon and are expected to establish the benchmarks necessary for

program assessment. DOD operates 300,000 military family housing units, but the

ten MHPI projects currently under contract include only 6,900 of them, or less than

2.3% of the total. The MHPI alone cannot be a “silver bullet” remedy to substandard

housing. Nevertheless, it can be assessed for its ability to provide cost-effective,

quality housing quickly, and its use could be expanded. A second issue is: what are

the alternative means of providing quarters for military personnel and their families?

Domestic military housing is created through three methods: access to the civilian

housing market, traditional military construction using appropriated funds, and

MHPI development. More than 66% of Service members stationed within the United

States use commercial housing. MHPI housing currently under contract or in

solicitation accounts for less than 20% of the remainder, with military construction

supplying the rest. DOD intends to resolve its housing shortfalls through a

combination of those three alternatives.

Contents

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Military Housing as a Quality of Life Issue . . . . . . . . . . . . . . . . . . . . . . . . . 2

Three Key Military Housing Construction / Private Sector Initiatives . . . . . 3

Wherry Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Capehart Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 801 and 802 Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Military Housing Privatization

Initiative Described . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The MHPI “Toolbox” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

MHPI Background and Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The MHPI Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Importance of “Budget Scoring” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

List of Figures

Figure 1. Military Housing Privatization Projects, May 2001 . . . . . . . . . . . . . . . 8

Figure 2. Project Financing Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

List of Tables

Table 1. Alternative Authorizations Ranked by Impact on Budget . . . . . . . . . . 12

Table 2. Military Housing Privatization Initiative Project Status . . . . . . . . . . . 16

Military Housing Privatization Initiative:

Background and Issues

Background

During the past four decades, housing for military personnel and their families

has been a relatively low priority component of military construction. After a rapid

expansion of what was then considered modern and up-to-date accommodations

throughout the1950s and the early 1960s, the effort devoted to the construction and

the upkeep of military housing did not keep up with the effects of natural

deterioration and changing societal definitions of adequate housing. The decrease

in quality of housing has accelerated since the end of the Cold War as a result of the

uncertainties of base closures, both at home and overseas, and shrinking defense

budgets, which have encouraged the channeling of construction funds into projects

more directly related to operational readiness. As a result, the Department of

Defense (DOD) estimates that 180,000 of the 300,000 military family units that it

owns and operates no longer meet its standards for adequate housing.

Approximately one-third of military families live in government-owned housing

(the remainder live in privately owned or rented accommodations). Of these, DOD

has determined that more than half do not meet its current housing standards with

regard to living space, amenities, etc.1 The Department has calculated that, by using

its traditional methods of contracting and construction, 30 years and $16 billion

would be needed to resolve its family housing shortfall.

Historically, DOD has used a combination of two methods to house active duty

personnel and their families. The principal method has been reliance on the

commercial housing supply near military installations, and Congress has provided

members with a cash allowance to defray part of the cost. The secondary method,

intended for those locations where local housing is extraordinarily expensive or

unavailable, has been to lodge members and their families in quarters built with

appropriated funds on military reservations.

In 1996, a third method was provided to DOD by Congress. This report

examines the Military Housing Privatization Initiative (MHPI), a collection of twelve

temporary “alternative authorizations” (as they are termed in the relevant legislation)

intended for the speedy creation of quality military housing through the leveraging

1

Some Members of Congress have complained that construction planning by the Pentagon,

and insufficient funding, have made it difficult for Congress to ensure that military

construction meets priority programs such as family housing. For more information on

military construction, see CRS Report RL30510, Appropriations for FY2001: Military

Construction, by (name r edacted),

one of a series of annual appropriations-related

reports produced by the CRS.

CRS-2

of appropriated funds with private investment. DOD believes that a significant

increase in the military housing allowance, a continuation of traditional construction,

and expanded use of the MHPI will eliminate housing inadequacies by 2010.

The MHPI is not the first instance where the Congress has sought to leverage

public appropriations in the creation of military housing, as explained below. Still,

it stands out for the authority and flexibility in execution granted to the Department

of Defense to engage in long-term contractual relationships with the private sector.

MHPI was created as a five-year pilot project. Initial progress in creating new and

refurbished housing was slow, and last year Congress extended the project’s life

through December 31, 2004. There are currently ten separate projects under contract

across the United States encompassing some 6,900 housing units. Another 11

projects (adding more than 19,300 additional housing units) are in solicitation with

private developers, with 25 additional projects in planning. There is no ceiling set

on the number of units expected to be built or reconditioned under the MHPI.

Military Housing as a Quality of Life Issue

Housing is a core component of the military quality of life matrix. In recent

testimony before the House Appropriations Committee’s Subcommittee on Military

Construction (March 8, 2001), each of the senior enlisted members of the Military

Services (the Sergeant Major of the Army, the Master Chief Petty Officer of the

Navy, the Sergeant Major of the Marine Corps, and the Chief Master Sergeant of the

Air Force) discussed the issues that their soldiers, sailors, airmen, and Marines

believe are most important to their military careers and to their decisions to remain

on active duty or leave the Service.

Common to all Services were concerns with compensation (including basic pay

and the Basic Allowance for Housing, or BAH), quality of housing, and quality of

environment in the workplace. BAH and quality of housing are closely intertwined.

DOD can house approximately one-third of its military families in governmentowned units on military reservations. Those living off-base, either by choice or

because of insufficient local government housing supply, pay commercial rates for

utilities, such as water and sewer services, and rents or mortgages on their

residences. Current BAH rates cover 81.2% of the average rental cost of DODstandard accommodation, leaving the remaining 18.8% to be drawn from the

member’s basic pay. Supporters of increased BAH funding argue that an increase

sufficient to cover 100% of off-base housing costs would not only eliminate

perceptions of inequity, but would ease the demand for on-base quarters by

permitting more Service members to afford civilian housing.2

Throughout their testimony mentioned above, these senior enlisted members

stressed that, with a large portion of the volunteer military force supporting families

(approximately 70% of military personnel are married), the quality of life afforded

those left at home has a direct and dramatic effect on the numbers and quality of

those who decide to remain for a full 20-plus year active duty career. This, in turn,

2

A more detailed discussion of the budgetary impact of BAH adjustment, see Congressional

Budget Office, Budget Options for National Defense, March 2000, ch. 4 (available through

the CBO web site at [http://www.cbo.gov ]).

CRS-3

can affect the experience, level of training, and ability the Services bring to bear on

the missions they are assigned. Therefore, it is argued, the quality of military

housing has a direct bearing on the retention of a proficient, capable volunteer career

military force.

The MHPI is not the first attempt by Congress to create modern family

dwellings quickly. Nor is it the first time that Congress has encouraged DOD to

partner with private industry. At least three separate approaches were tried during

the Cold War, with varying degrees of success.

Three Key Military Housing Construction / Private Sector

Initiatives

Wherry Housing.3 In 1949, Congress passed P.L. 81-221, which was

intended to bring private homebuilders into the rental housing market for military

personnel without requiring the use of military construction funding. As it was first

implemented, the Military Services were allowed to solicit plans for housing from

private builders. From those submitted, a Service chose the builder whose plan was

deemed most suitable for the particular military facility. The builder arranged

private financing and constructed homes on Government-controlled land for rental

to military personnel.

Later, in order to make the process more competitive, the program was changed

so that a Service would contract with private architect-engineers for a standard set

of housing plans at a designated military facility. Armed with these, the Services

applied to the Federal Housing Administration (FHA) for an “appraisal and

eligibility statement” that established a maximum insurable mortgage, effectively

setting the high-end valuation for an individual housing unit. The Service then

solicited bids for the project, which would be located on Government-owned or

controlled land, from private housing developers. The lowest bidder was awarded

a “certificate of need” which was used to apply to the FHA for mortgage insurance.

Because private enterprise was, in essence, being issued a “license” to respond

to a demonstrated market need using privately financed (albeit FHA-insured)

housing, the developer retained title to the resulting real property and rented housing

to individual Service members. The Wherry program supplied the greater portion

of new military family housing constructed through the early 1950s, but

congressional concerns with “windfall” profits accruing to private developers led to

its effective termination in 1955.

Capehart Housing.4 Like Wherry housing, Capehart housing was built on

Government-controlled land, exempting it from local building regulations. Unlike

Wherry housing, where title to the resulting property remained with the private

developer and individual Service members made rental payments to the owner,

3

Wherry housing is named for Senator Kenneth Spicer Wherry of Nebraska, a World War I

Navy veteran who sponsored the original bill.

4

Capehart housing was sponsored by Senator Homer E. Capehart of Indiana, a World War

I Army veteran.

CRS-4

Capehart housing was built using private financing, but title was turned over to the

Federal Government upon the completion of construction.

In Wherry housing, individual members retained their housing allowances and

paid rent to the private project manager, who was responsible for paying the project’s

mortgage. Capehart housing was Government-owned, and members living there

forfeited their entire housing allowances. DOD then made a single mortgage

payment for a Capehart project to the private mortgager. By the early 1960s, DOD

had constructed approximately 115,000 Capehart housing units. The last

authorization for Capehart housing was made for Fiscal Year 1962.

The construction of newer, larger Capehart units tended to draw tenants away

from nearby Wherry housing. In 1957, the Services began purchasing the

approximately 84,000 privately held Wherry units. Thus, both Wherry and Capehart

housing eventually came under common administration and today are usually

mentioned together as Capehart/Wherry.

Section 801 and 802 Housing. These sections of Title VIII of the Military

Construction Authorization Act of 1984 (P.L. 98-115) attempted to encourage the

provision of privately constructed housing to military personnel by authorizing the

Service secretaries to enter into contracts for the lease of facilities on or near military

installations (Section 801, essentially a build-to-lease guarantee to a local property

developer), or to enter into agreements to occupy rental housing near military

installations (Section 802, a rent guarantee to encourage the erection of rental

property). The impact these arrangements had on Service budgets quickly

discouraged their use (see “The Importance of ‘Budget Scoring’” below).

The Military Housing Privatization

Initiative Described

Both Wherry and Capehart construction programs and the use of Section

801/802 arrangements ended within a few years of their initiation. Although each

attempted a different approach to providing housing and leveraging appropriated

funds, none offered more than very limited options for increasing the quantity and

quality of the housing offered to the families of active duty military personnel.

In 1996, Congress and DOD tried something very different. The Military

Housing Privatization Initiative (MHPI) was devised to give the Department of

Defense the ability to entice private investment by encouraging it to act like private

enterprise. As businesses can be creative to take advantage of local real estate

market conditions in customizing development projects, the MHPI was designed to

give similar flexibility to DOD. This was intended as a step away from the perceived

one-size-fits-all mentality of the earlier programs.

The MHPI “Toolbox”

The MHPI includes twelve separate temporary authorities that revive some of

the provisions of the earlier construction programs and add to them, while permitting

CRS-5

their selective use where they can be most advantageous. These “alternative

authorizations” include:

1. Conveyance of real property: The Government may transfer title of

Federal property to private ownership.

2. Relaxation of Federal specifications for housing construction: Builders

are allowed to construct housing in accordance with local building codes.

3. Inclusion of ancillary support facilities: Bids for contracts may

incorporate additional amenities, such as child care centers and dining

facilities, to enhance the attractiveness of the basic housing.

4. Payment of rent by allotment: Landlords may receive payment of rents

through automatic electronic fund transfer from the appropriate Federal

disbursing facility, guaranteeing cash flow.

5. Loan guarantee: The Government may guarantee up to 80% of the

private sector loans arranged by the property developer.

6. Direct loan: The Government may make a loan directly to a contractor.

7. Differential Lease Payment (DLP): The Government may agree to pay

a differential between the BAH paid to Service members and local market

rents.

8. Investment (Joint Venture): The Government may take an equity stake

in a housing construction enterprise.

9. Interim leases: The Government may lease private housing units while

awaiting the completion of a project.

10. Assignment of Service members: Service personnel may be assigned

to housing in a particular project that they may otherwise not choose to

occupy (tenant guarantee).

11. Build to lease: The Government may contract for the private

construction of a housing project, then lease its units (similar to Section

801 programs).

12. Rental guarantee: The Government may guarantee a minimal

occupancy rate or rental income for a housing project (similar to the

Section 802 program).

MHPI Background and Implementation

The Military Housing Privatization Initiative was created in Section 2801 of the

National Defense Authorization Act for 1996 (P.L. 104-106) as a five-year pilot

program within a 10-year plan to resolve the general military housing problem.

Through the use of its “alternative authorizations,” Congress intended to improve

CRS-6

military housing quickly and economically by leveraging the federal investment by

encouraging private investment.

Originally, the MHPI was centralized within the Department of Defense under

the Office of the Secretary of Defense (OSD). Because of the complexity inherent

in this new approach to military housing construction, the unfamiliarity of DOD

contracting personnel with these kinds of negotiations, and new legal, financial, and

budget issues that appeared as the program got underway, progress in the negotiation

of contracts and in beginning construction was notably slower than originally

envisioned. The first project award, known as NAS Corpus Christi / Kingsville I

(Texas) for 404 units, was consummated in July of 1996. The second, termed

Everett I (Washington) and encompassing 185 housing units, was awarded in March

of 1997.

This experience contributed to a 1997 decision by DOD to extend its original

housing solution target date of 2006 by four years to 2010. In addition, a 1998 GAO

report faulted the cost analysis methodology used by DOD, indicated that actual

savings would be considerably less than the Services claimed, and suggested that

more effective use could be made of existing private market housing near military

installations.5 By the end of August 1998, more than three years into the five-year

program, only three projects (the two cited above and another at Lackland Air Force

Base, Texas, for 420 units) had been awarded contracts.

In October of 1998, the Secretary of Defense devolved operational

responsibility for MHPI to the individual Services, with oversight and final approval

authority vested in the OSD Office of Competitive Sourcing and Privatization.6

Between the Lackland award and the approach of the end of the initial MHPI

authorization in late 2000, only one additional project, Ft. Carson for 2,663 units,

was finalized. A follow-up GAO report released in March of 2000 concluded that,

because none of the contracted projects had yet been brought into full operation,

there was little empirical data by which to assess whether the MHPI would achieve

its goal of eliminating inadequate military housing more economically and faster

than possible through the use of traditional construction practices.7

The program was set to expire during February 2001. Congressional concern

with a perceived lack of results became apparent as expiration approached. The

House Appropriations Committee Subcommittee on Military Construction, in its

report on the Military Construction Appropriations Bill for Fiscal Year 2001, noted:

The Department of Defense intends to privatize approximately 40,000 housing

units by December 2001. While the Committee supports the extension of the

authority for this program, it continues to believe this is a pilot program. It is the

5

See General Accounting Office, Military Housing: Privatization Off to a Slow Start and

Continued Management Attention Needed (GAO/NSIAD-98-178), July 1998.

6

7

The office’s web site is located at [http://www.acq.osd.mil/installation/hrso/].

See General Accounting Office, Military Housing: Continued Concerns in Implementing

the Privatization Initiative (GAO/NSAID-00-71), March 2000.

CRS-7

Committee’s intent that several projects need to be completed to review the

success of this program prior to privatizing additional housing units.8

Contracts for five additional MHPI projects were concluded between September

and December of 2000 (Robins (Georgia) and Dyess (Texas) Air Force Bases, MCB

Camp Pendleton I (California) and Kingsville II (Texas), and Everett II

(Washington), adding more than 2,200 housing units), to bring the program to a total

of ten contract awards and more than 6,900 housing units.

Additional congressional interest was indicated in the conference report on the

Floyd Spence National Defense Authorization Act for Fiscal Year 2001. Contract

award for the MHPI project at Patrick Air Force Base, Florida, had originally been

anticipated for August of 2000. The Air Force had expressed an interest in partnering

with a single private firm for the study of solicitations in this and future

undertakings, leading to questions about the apparent competitiveness of any

subsequent awards. The Act’s conference report stated that:

The conferees note the innovative approaches undertaken by the Service

secretaries in execution of the alternative authorities for the acquisition and

improvement of military housing. The conferees remain strongly supportive of

these authorities and believe competition in the private marketplace has resulted

in a number of successful procurements after an early period of difficulty in

program implementation. While supportive of a variety of innovative options to

construct and acquire military housing under these authorities, the conferees were

concerned that a methodology considered by the Secretary of the Air Force in the

determination of the awardee of the housing privatization project at Patrick Air

Force Base, Florida, appeared to be noncompetitive and to delegate the selection

process to the private sector. The conferees are aware that the Secretary has

subsequently directed a change in the solicitation process. The conferees reiterate

that the use of competitive procedures should apply when exercising the

alternative authorities for the acquisition and improvement of military housing,

regardless of the process that may be used.9

The Act, as subsequently enacted, extended the life of the MHPI until

December 31, 2004. In addition, the Military Construction Appropriation Act for

Fiscal Year 2001 (P.L. 106-246) directed each of the four Services to submit to the

appropriate committees of the Congress not later than July 1, 2001, a Family

Housing Master Plan to demonstrate how they intended to meet the DOD 2010

housing goal using a combination of traditional construction, operation and

maintenance support, and privatization initiative proposals.10 The Initiative remains

open-ended, having no established ceiling on the number of projects or units, but as

of this writing it encompasses 46 separate projects and more than 54,700 units in

various stages of planning, solicitation, and execution (see Figure 1 on the next

page).

8

H.Rept. 106-614 on HR 4425.

9

H.Rept. 106-945 on HR 5408.

10

These plans are to include, at a minimum, projected life cycle costs for family housing

construction, Basic Allowance for Housing (BAH), operation and maintenance, other

associated costs, and a time line for housing completions for each year. See H.Rept. 106-710

accompanying HR 4425.

CRS-8

Figure 1. Military Housing Privatization Projects, May 2001

The MHPI Process

Central features of the MHPI are its flexibility and its decentralized execution.

However, projects tend to follow the same general progression.

First, the need for additional housing at an installation, either through the

renovation of exiting housing or construction of new dwellings, is established by a

site review and feasibility study conducted by the appropriate Service. This

examination includes an evaluation of the local private housing market and a costbenefit comparison between the use of an MHPI package and traditional construction

methods. The results are briefed to the OSD Office of Competitive Sourcing and

Privatization. If the concept is judged adequate, it is approved and the Service is

authorized to develop an appropriate solicitation proposal. Congress is notified

before the completed solicitation is issued to private industry. Congress is again

notified when the successful solicitation response is selected and before a contract

is awarded.

There are two approaches to solicitation used in MHPI projects. The Navy

(where the program is referred to as “public private venture”) and Air Force

(“housing privatization”) issue detailed Requests for Proposals to the construction

industry.11 Navy and Air Force projects currently underway or contemplated range

in scope from 80 units in the Hampton Roads area of Virginia to more than 3,200

around San Diego, California. Contractors who satisfy the Services that they can

11

Service housing privatization web sites are: Army [http://www.il.hq.af.mil/ile/ilei.html];

Navy [http://www.hsgnavfac.com/ppv/]; and Air Force [http://www.il.hq.af.mil/ile/ilei.html].

CRS-9

successfully complete the project respond with equally detailed project proposals,

and selection is made from among them. The Army (under its “Residential

Community Initiative”) uses a Request for Qualifications process by which it screens

and selects a “development partner” to undertake privatization work for an entire

installation. The Army and its private partner then create a development concept (a

“Community Development and Management Plan”, or CDMP) for the project. Army

proposals range from approximately 1,700 units at the Presidio of Monterey, in

California, to more than 6,000 units at Ft. Bragg, North Carolina.

Though relatively few projects have reached the point of contract award,

patterns of Service-specific contracting practices have emerged. Army projects tend

to focus on the revitalization of existing housing stocks. The Air Force appears to

favor the inclusion of the conveyance of Federal land in projects under its

administration. The Navy appears to prefer engaging private developers in joint

ventures (see Table 1 in this report).

The Importance of “Budget Scoring”

Budget scoring (or “scorekeeping”) is the percentage of dollar value, from 0%

to 100%, of a project’s cost that must be allocated to an agency’s budget in a given

fiscal year. Therefore, if a project cost of $1 million is scored at 10%, then $100,000

of the agency’s budget authority for that year must be used to cover the assessment.

A score of 100% would mean that all $1 million would have to be covered by the

agency’s budget authority in the designated year.

Each of the authorities created for the MHPI has an associated budget score (see

Table 1). The scoring used for the MHPI was drafted to comply with the Credit

Reform Act of 1990 and the Budget Enforcement Act of 1990 (both laws were

included within the Omnibus Budget Reconciliation Act of 1990 [P.L. 101-508]), as

interpreted by Office of Management and Budget (OMB) Circular A-11 and specific

MHPI Guidelines issued by the OMB on June 25, 1997.12

Budget impact of the use of various authorities ranges from none (such as the

conveyance of non-revenue producing land or existing housing units to private

developers or payment of rents by disbursing allotments),13 through moderate

(provision of a loan guarantee is scored at between 4% and 7% of the loan amount,

while a direct loan to a contractor must be scored at 30% to 70%),14 to high

12

The June 25, 1997, OMB scoring guidelines remain in effect only for first 20 projects that

use MHPI authorities. They will be then be adjusted to incorporate any lessons learned.

13

Because base land and existing housing units produce no revenue stream, and therefore

have no impact on budget surpluses and deficits, “pay-as-you-go” provisions of the Budget

Enforcement Act require that conveyance be scored at 0%, regardless of the market value

of such real property.

14

This scoring is calculated based on the Government’s “degree of exposure,” or the

statistical probability that a default on the project by the private contractor will have a

financial impact on the federal deficit.

CRS-10

(guaranteeing a minimum tenant occupancy rate to MHPI housing requires that the

Net Present Value of the annual BAH for that number of tenants be assigned).15

Because of budget scoring, the MHPI tool or tools selected for employment in

any given housing project have a significant influence on its budgetary impact. The

amount of budgetary authority that must be allocated to a project is a direct function

of those alternative authorizations, either singly or in combination, that are used.

Figure 2 demonstrates alternative options for the use of authorities to fund a

hypothetical MHPI project and their budgetary impact.

Figure 2. Project Financing Example

In this example, a hypothetical housing project requires capitalization of $40

million in order to build 400 new family units. The private real estate developer

selected by DOD to construct and manage the housing invests $4 million of his own

money (private developer equity) and is able to arrange an additional $30 million in

mortgage financing through private banks. In order to complete the necessary

15

Net Present Value is a financial term defined as “the present value of the expected future

cash flows minus the cost.” In this case, it amounts to the value today of all the monthly

payments to be made on the housing unit in the future minus the value today of the money

expected to be received when the unit is sold.

CRS-11

funding for the project, the Department of Defense commits itself to cover the

remaining $6 million value. This example presents four different ways that this can

be accomplished using MHPI authorities, illustrating four very different effects on

the DOD budget.

Option 1 in Figure 2 is a direct loan from the Federal Government to the

developer. Under budget scoring rules, the $6 million loan is scored at 50 %, and $3

million must be allocated to the project from the annual DOD budget.

Option 2 consists of conveying $6 million of market-value military family

housing and land to the developer for his own use, perhaps as collateral for

additional private financing for the project. Although this represents the loss of real

property to the Federal inventory, it has no effect on the size of the Federal budget

deficit, and budget scoring rules establish its impact on the DOD budget at $0.

Therefore, no budget authority need be allocated to the project from the annual DOD

budget.

Option 3 offers Differential Lease Payments (DLP), direct cash rent subsidies,

to the developer to make up the difference between what Service members would

pay (the amount of their BAH) and local market rents for equivalent housing.

Because this increases the commercial value of the project above that of straight

BAH payments, the contractor may be able to secure better terms for his private

funding. Budget scoring requires that the Net Present Value (NPV) of DLP be

allocated against the DOD budget. In this example, the calculation incurs a $5

million budgetary burden.

Option 4 illustrates the Government taking a $6 million equity (entering into

a partnership) in the development project. Budget scoring rules require that an

investment of this type be scored at 100 %.

Therefore, four different alternative authorities used to cover the same

$6 million development gap in a construction project can have four different impacts

on the DOD budget. In creating a real MHPI project, these authorities can use singly

or in any combination.

Table 1 arranges the twelve alternative authorities in ascending order of budget

impact and indicates those authorities used in the nine MHPI projects for which

contracts have been awarded.

CRS-12

Table 1. Alternative Authorizations Ranked by Impact on Budget

Authority

Description

Benefit

Budget Scoringa

Where Usedb

Lackland (AF)

Ft. Carson (A)

Robins (AF)

Camp Pendleton I (NMC)

Kingsville II (NMC)

Elmendorf (AF)

Lackland (AF)

Ft. Carson (A)

Everett I (NMC)

Corpus Christi (NMC)

Lackland (AF)

Ft. Carson (A)

Everett I (NMC)

Corpus Christi (NMC)

Lackland (AF)

Ft. Carson (A)

Conveyance

or Lease of

Land or Units

Transfer of

ownership

Secure private

financing,

immediate cash

flow

None - 0% of land

valuec

Unit Size &

Type

Build to local

codes

None

Ancillary

Support

Facilities

Permit

supporting

amenities

locally

compatible,

cost-effective

construction

Enhance project

attractiveness

Payment by

Allotment

Guaranteed cash

stream

None

Loan

Guarantees

Guarantee of

private sector

loan

Minimize rent

payment

uncertainty

Lower interest

rate, ensure

financing

Direct Loan

Direct loan to

contractor

Below-market

financing

Moderate - 30% 70% of loan

amounte

Differential

Lease

Payments

(DLP)

Investment

(Joint

Venture)

Pay difference

between BAH

and market rents

Leverages

private

financing

Moderate to High NPV of DLP over

contract life

Equity

investment

Partnership

interest

Moderate to High 100% of cash

equity

Interim

Leases

Government

lease of other

units until project

conveyed

Members

assigned housing

in project

Enables

immediate

occupancy

Moderate to High NPV of lease

payments during

interim

High - NPV of

BAH

Contract

construction,

lease units

Guarantee of

occupancy or

rental income

Central

payment by

DOD (801-like)

Enhances

financing

(802-like)

Assignment of

Members

(Tenant

Guarantee)

Build to

Lease

Rental

Guarantee

Forces above

market

occupancy rate

None

Low - 4% - 7% of

loan amountd

Lackland (AF)

Ft. Carson (A)

Robins (AF)

Elmendorf (AF)

Lackland (AF)

Robins (AF)

Dyess (AF)

Camp Pendleton I (NMC)

Kingsville II (NMC)

Elmendorf (AF)

Everett I (NMC)

Everett II (NMC)

Corpus Christi (NMC)

Everett I (NMC)

Everett II (NMC)

Corpus Christi (NMC)

Kingsville II (NMC)

High - NPV lease

payments

High - NPV rental

payments

a. Scoring in accordance with the Credit Reform Act and Budget Enforcement Act of 1990 (both part of the

Omnibus Budget Reconciliation Act of 1990 [PL101-508]), OMB Circular A-11, and OMB MHPI

Guidelines of June 25, 1997.

b. Project parent Service indicated by letters: AF=Air Force, NMC=Navy/Marine Corps, A=Army.

c. Because base land usually produces no revenue stream, and thereby has no impact on budget surpluses

and deficits, “pay-as-you-go” provisions of the Budget Enforcement Act require that it be scored at 0%.

d. Scores for private source loan guarantees are calculated based on the degree of “exposure,” or probability

of default by the project’s contractor under severely constrained conditions such as base closure.

e. Scores for DOD direct loans are calculated using the difference between the interest rate negotiated

between the Service and contractor weighted by the probability of contractor default.

CRS-13

In this table, individual projects appear under several different authorities,

indicating that the “toolbox” approach is, in fact, being used to configure

solicitations to local real estate market conditions. However, it is noticeable that the

projects principally make use of authorities of low or moderate budget scoring, while

none applies authorities where the budget scoring is assessed as high. The largest

single MHPI awarded to date (the 2,663 Army units at Ft. Carson, Colorado),

combines five different authorities. Four of these have 0% budget scoring, while the

fifth (loan guarantee) is rated low. The four projects that use authorities of moderate

to high budget scoring (Navy developments at Everett I and II, Corpus Christi, and

Kingsville II) cover a combined total of 1,027 units. This suggests that the system

of budget scoring, combined with project size, may influence the combination of

incentives offered to private developers in the course of solicitation development.

For the status and history of all planned and awarded MHPI projects, see

Table 2 at the end of this report.

Issues for Congress

The creation of military housing has been compared to a three-legged stool. The

first leg is the use of privately owned property in the local civilian housing market.

Service members not housed in government-provided quarters are given an

appropriated addition to their basic pay, in the form of a housing allowance, which

they use to help pay for rented apartments or purchased homes. The second leg is

traditional construction where quarters are built by private contractors on military

reservations to military specifications and paid for out of appropriated military

construction funds. The third leg is the construction of housing using a combination

of public and private capital. As this pilot project explores many different ways in

which public assets, such as existing housing, land, or funds, can be combined with

private investment to create and operate public-private ventures to fill the housing

needs of military members and their families, a number of questions arise of possible

interest to Congress in exercising oversight of the program.

What Are the Prospects for the MHPI over the Short and the Long Terms?

The MHPI was expected to generate a significant number of housing units

quickly and at minimal cost in appropriated funds. As became apparent during

congressional consideration of the program’s reauthorization, this has not yet been

the case. The MHPI represents a dramatic revision in the way military housing is

created, and the Department of Defense and the individual Services have had to

create and adopt new ways of “doing business.” This learning process is expected to

continue throughout the program. The steepness of this “learning curve” offers

partial explanation why the original five-year authorization period passed without

the completion of significant numbers of new housing, and why the rate at which

contracts have been awarded has recently accelerated. Projects begun between 1996

and 1999 included more than 3,600 housing units. During the subsequent 15 months,

this number almost doubled.

Nevertheless, despite MHPI’s accelerated rate of development, housing, once

it has been created, must be managed and maintained, and the Department and

Services will have to learn additional skills. The leasing of land to private enterprise,

CRS-14

the loans made and guaranteed, and the commitments to joint ventures, may extend

for up to a half-century. The know-how needed to effectively manage the complex

mixture of public, public-private, and private housing likely to arise from the MHPI

may prove to be as challenging to master as the original contracting. Private

developers have been screened for their willingness to provide enduring project

supervision, and provisions have been written into contracts to encourage adequate

funding of continued operation and maintenance. Assessing both public and private

management, with respect to the quality of life afforded to the Service member, cost

to the taxpayer, long-term governmental liability, and sanctions imposed for

nonperformance, may require years or decades.

Tied to the issue of long-term prospects of success for the MHPI is the

subsidiary question of accurately predicting the need for housing. Three general

variables appear enter into this calculation: Service culture, “base loading,” and local

housing availability.

Each military Service looks at the need for military housing through its own

unique cultural lens. For example, the Army places great value on its “unit

cohesion,” and one of the ways the Service pursues cohesion is to encourage its

soldiers to live in large government housing communities on military reservations.

The Navy, on the other hand, focuses its attention on cohesion at the workplace (the

ship or aviation squadron), and sailors are more likely than soldiers to prefer living

in the local civilian community away from the military installation.

“Base loading” refers to the number of military members assigned to units

stationed at a particular installation. In areas where there are many large units

assigned, such as Ft. Hood, Texas, or the Hampton Roads area of Virginia, this

number, in both absolute numbers and as a percentage of the total population, can be

quite high. It is a variable that can change in short order, dramatically altering local

military housing requirements. For example, the shifting of a single aircraft carrier

from one home port to another can force the sudden relocation of approximately

2,000 families lost to the original port area and burdening the new one. The closing

of a base can exert an even stronger influence on requirements by eliminating the

military population altogether.

Local housing availability is a variable in two dimensions – quantity and

affordability. Some military installations have been built within metropolitan areas,

or have seen large populations grow up around them. Others are placed in sparsely

populated locations where the off-base housing market is small. Where commercial

housing is plentiful, it may be beyond the means of military members to purchase or

rent. Demand for government-furnished housing will be relatively high where

outside housing either does not exist or is not affordable. Yet, where vacant civilian

housing is present in quantity, demand for government quarters can be expected to

be a function of the tradeoff between market cost and military compensation. As the

combination of basic pay and Basic Allowance for Housing rises relative to local

rent and mortgage costs, a proportionate decrease in the need for military housing

can be expected.

Taken together, these factors complicate the challenge of assessing the longterm prospects of success for the Initiative. Most analysts believe its efficacy will

CRS-15

most likely become apparent only after the passage of several years of observing

how its various projects evolve.

How Can the MHPI Be Made More Effective?

The different military cultures and the variety of different approaches possible

under the twelve temporary alternative authorities render even the definition of

“effectiveness” problematic. Nevertheless, there are two avenues that could be

pursued in gauging the influence of the MHPI on military housing.

The first of these centers on examining the impact of budget scoring on the type

of actions taken in the creation of individual MHPI projects. As indicated in

Table 1, no MHPI agreements yet finalized involve authorities scored at high budget

impact. Most undertakings are concentrated in authorities with little or no budget

impact. Nevertheless, some of these transactions, such as the conveyance to private

hands of public land or existing housing units, represent a loss to the government of

assets of real value. It may be worthwhile to consider how practices encouraged by

budget scoring may be exerting an artificial pressure on the crafting of business

agreements. OMB has already adjusted some of its scoring requirements and will

reexamine the entire budget scoring matrix when the 20th MHPI project is awarded

(10 have been launched to date).

The second approach deals with traditional military construction practices. It

is not clear whether lessons learned in the creation of MHPI projects can be applied

to standard military housing construction and maintenance. Nevertheless, experience

thus far has indicated that private building contractors enjoy relative freedom under

the MHPI to employ local building practices, materials, labor, etc., that may not be

available to them under conventional contract arrangements. This raises the issue of

whether or not to consider modifying orthodox construction procedures based upon

practices embodied in the MHPI.

If the MHPI Does Not Meet its Goals, Are There Alternatives?

The only definitive goal set by DOD is to have all military personnel and their

families adequately housed by the target date of 2010. This goal inevitably takes the

form of a supply and demand equation. The military force structure, including

authorized manpower ceilings for each Service (Army, Navy, Air Force, and Marine

Corps) and force composition within each Service (numbers of submarines vs.

aviation squadrons, infantry vs. armored division, or F-15 vs. B-2 wings) make up

the demand side. A change in any one of these factors will change the balance

between supply and demand and will affect the perception of success or failure of the

Department’s effort to meet its housing goal.

Each Service is developing its own Family Housing Master Plan, which takes

into account the need for housing at each military installation and which is expected

to be amended when ships are shifted between home ports, aircraft wings are stood

up or disestablished, or the missions of ground units (and their locations) are

changed. These Master Plans will combine traditional military, public-private, and

private commercial efforts in their attempts to hit the moving target of installationspecific housing demand. Careful, continuous study of these Master Plans, with their

CRS-16

expected cost-benefit comparisons between the three modes of housing supply,

appear to offer an opportunity to gauge whether adequate progress is being made.

Table 2. Military Housing Privatization Initiative

Project Status

Facility

Units

NAS Corpus Christi /

Kingsville I, TX

404

Jul 96

Everett I, WA

185

Mar 97

Lackland AFB, TX

420

Aug 98

Ft. Carson, CO

2,663

Sep 99

Robins AFB, GA

670

Before Jan 00

Sep 00a

Dyess AFB, TX

402

Before Jan 00

Sep 00b

MCB Camp Pendleton I, CA

712

Before Jan 00

Nov 00c

NAS Kingsville II, TX

150

Before Jan 00

Nov 00a,d

Everett II, WA

288e

Before Jan 00

Dec 00f,g

MCLB Albany, GA / Camp

Lejune, NC

100h

Before Jan 00

Jan 01f

Ft. Hood, TX

5,912i

Before Jan 00

May 01j,k

NC San Diego (Ph. I), CA

3,248

Before Jan 00

May 01l

NC New Orleans, LA

935m

Before Jan 00

Mar 01n

Ft. Lewis, WA

3,955o

Before Jan 00

Apr 01n,p

Elmendorf AFB, AK

780q

Before Jan 00

Mar 01l,r

NC South Texas, TX

661s

Before Jan 00

Jun 01n

Kirtland AFB, NM

1,164t

Jan-Jul 00

Aug 01u

Goodfellow AFB, TX

258

Jan-Jul 00

Aug 01k

Jan-Jul 00

Nov 01

Ft. Meade, MD

In Planning

Before Jan 00

3,170

Before Jan 00

NC Hampton Roads, VA

80

Jan-Jul 00

Stewart Army Subpost, NY

171v

Before Jan 00

NC Pennsylvania Regional, PA

339

Jul 00-Jan 01

Patrick AFB, FL

522x

Wright-Patterson AFB, OH

1,536

Before Jan 00

McGuire AFB / Ft. Dix, NJ

TBDz

Before Jan 00

450

Before Jan 00

Dover AFB, DE

In Solicitation

Closing/

Award

Dec 01

Jan-Jul 00

Jul 02w

Nov 02

Before Jan 00y

TBDl

CRS-17

Facility

Units

In Planning

Little Rock AFB, AR

1,535

Before Jan 00

Vandenberg AFB, CA

506

Before Jan 00

Moody AFB, GA

606aa

Before Jan 00

Offutt AFB, NE

2,415bb

Before Jan 00

Charleston AFB, SC

470cc

Before Jan 00

Hill AFB, UT

1,116

Before Jan 00

MCAS Beaufort, SC / Parris

Isle, SC / Camp Lejune, NC

1,645dd

Before Jan 00

Ft. Bragg, NC

6,066

Jan-Jul 00

Ft. Campbell, KY

5,222

Jan-Jul 00

Ft. Stewart / Hunter, GA

3,273

Jan-Jul 00

730

Jan-Jul 00

Presidio of Monterey, CA

1,713

Jan-Jul 00

NC San Diego (Ph. II), CA

TBD

Jul 00-Jan 01

MCB Camp Pendleton

(follow on), CA

TBD

Jul 00-Jan 01

MCB Kaneohe Bay, HI

TBD

Jul 00-Jan 01

NC Charleston, SC

TBD

Jul 00-Jan 01

NTC Great Lakes, IL

TBD

Jul 00-Jan 01

NS Long Island, NY

TBD

Jul 00-Jan 01

NSB New London, CT

TBD

Jul 00-Jan 01

NAS Whidbey Island, WA

TBD

Jul 00-Jan 01

Tinker AFB, OK

In Solicitation

Closing/

Award

Source: OSD Office of Competitive Sourcing and Privatization.

a

Originally scheduled for award Apr 00.

Originally scheduled for award Jul 00.

c

Originally scheduled for award Jun 00.

d

Changed from Oct 00.

e

Adjusted downward from 300 units between January and July 2000.

f

Originally scheduled for award May 00.

g

Changed from Nov 00.

h

Camp Lejune added to MCLB Albany and units adjusted downward from 114 between July 2000

and January 2001.

i

Adjusted downward from 6,631 units between July 2000 and January 2001.

j

Originally scheduled for award Sep 00.

k

Changed from Jan 01.

l

Originally scheduled for award Aug 00.

m

Adjusted upward from 763 units between January and July 2000.

n

Originally scheduled for award Dec 00.

o

Adjusted downward to 3,589 units between January and July 2000 and returned to 3,955 between

July 2000 and January 2001.

b

CRS-18

p

Changed from Mar 01.

Adjusted downward from 828 units between January and July 2000.

r

Changed from Sep 00 to May 01.

s

Adjusted downward from 812 units between January and July 2000.

t

Adjusted downward to 1,890.

u

Changed from Feb 01.

v

Adjusted downward from 200 units between July 2000 and January 2001.

w

Originally scheduled for award Nov 01.

x

Adjusted downward from 960 units between July 2000 and January 2001.

y

Moved to in-planning status between January and July 2000.

z

Adjusted upward from 900 units between January and July 2000, changed to TBD between July

2000 and January 2001.

aa

Adjusted downward from 696 units between July 2000 and January 2001.

bb

Adjusted downward from 2,580 units between July 2000 and January 2001.

cc

Adjusted downward from 488 units between July 2000 and January 2001.

dd

Camp Lejune added to MCAS Beaufort/Parris Isle and units adjusted upward from 684 units

between July 2000 and January 2001.

q

EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the

Library of Congress, charged with providing the United States Congress non-partisan advice on

issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The

reports are not classified, and Members of Congress routinely make individual reports available to

the public.

Prior to our republication, we redacted names, phone numbers and email addresses of analysts

who produced the reports. We also added this page to the report. We have not intentionally made

any other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in

the United States. Any CRS report may be reproduced and distributed in its entirety without

permission from CRS. However, as a CRS report may include copyrighted images or material from a

third party, you may need to obtain permission of the copyright holder if you wish to copy or

otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public

understanding of information that has been provided by CRS to members of Congress in

connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim

copyright on any CRS report we have republished.