Market Pressures

ebbie Stocker can pass dozens of antebellum buildings on a stroll through historic downtown Charleston, S.C. But the one that catches her eye-and breaks her heart-is the L. Mendel Rivers Federal Building, an ordinary, seven-story structure that sits vacant, waiting for the wrecking ball.

The building was damaged in September 1999 when Hurricane Floyd hit town, exposing asbestos that contaminated the offices inside. Since then it has sat empty, costing taxpayers an estimated $300,000 a year to maintain, according to Signet Partners, a Denver-based real estate services firm. That alone is enough to irritate Stocker, a commercial real estate investor whose instinct is to get the most return on a property. But the building also happens to sit on more than two acres of prime real estate in downtown Charleston, making it a "dynamite" site for development in her view, if Uncle Sam could just get his act together.

"It blows my mind that the federal government doesn't say how can we get the most benefit from owning this property," she says. In theory, that shouldn't be hard. The government could bring in a private firm to develop the property and share in the profits. It could even get a new federal building in the process. The Charleston city government has pulled off similar public-private deals. "The city finally figured it out. And the federal government ought to get on the stick and figure it out," says Stocker.

In the small town of Johnson City, Tenn., more than 375 miles northwest of Charleston, it has. Here, officials at the Veterans Affairs Department's James H. Quillen Medical Center tout their new $17.5 million power plant, built with private funds and with no guarantee that the VA would ever buy a watt of electricity from the operator, Evansville, Ind.-based Energy Systems Group. The medical center expects to save $11.5 million through improvements in energy efficiency included in the deal, and the center gets a cut of the plant's energy sales to non-VA customers.

Welcome to the world of federal property management, where special laws, arcane budget rules, and a little managerial chutzpah can mean the difference between cutting-edge property deals and textbook examples of government waste. The VA can form a joint venture to build a new power plant because it has special legal authority to enter into public-private partnerships, while GSA-which owns the Charleston building-does not. Under current law, GSA must sell the L. Mendel Rivers building and request budget funds for a new building; it cannot develop the site with a private sector partner.

Inconsistent laws are just one hurdle agencies must clear to prevent wasteful property management. Many agencies- including some of those profiled in this year's Federal Performance Report- have poor systems for tracking the status and condition of their physical assets and weak controls over the assets themselves. These shortfalls can lead to the appearance of criminal behavior, such as the November revelation that the Internal Revenue Service had lost more than 2,300 computers over the past three years. Worse, in February, news reports showed that the Army's Fort Detrick, Md., was unable to account for 27 samples of anthrax and other pathogens in the early 1990s. The samples were inactive and harmless, but the incident underscored the dire consequences of weak inventory controls. Officials know even less about the overall federal inventory. For example, no one knows how many buildings sit empty because there is no governmentwide tally of vacant federal facilities.

Poor information might help explain why physical assets and property are no-shows in the strategic plans of many agencies. While the Office of Management and Budget's Capital Programming Guide requires agencies to add capital assets to the strategic planning process, the guide has caught on at some agencies better than others. The Coast Guard and Federal Aviation Administration link assets to their strategic goals, but the Immigration and Naturalization Service has no comprehensive capital asset plan. The State Department's Bureau of Overseas Buildings Operations, which maintains a $12 billion portfolio of assets around the world, finished its first capital plan just last year.

Agencies have been slow to adopt more efficient property management practices in part because Congress and the executive branch have not made them a priority. With the exception of the 1996 Clinger-Cohen Act, which provided guidance for IT acquisitions, the major government reform laws of the 1990s came and went without addressing property management. While chief financial officers and chief information officers are now tenured members of the federal executive club, these officials have no counterparts in the field of real property management. Property management is not one of the Bush administration's five government reform priorities, and OMB has no plans to grade performance in this area.

Even agencies that have mastered the capital planning drill still struggle to pay for maintenance, the first item to be shorted at budget time. At a February briefing announcing the Coast Guard's $7.2 billion budget proposal for 2003-a 20 percent increase over last year-Commandant James Loy lamented the lack of funding for Coast Guard shore facilities. "If I had my druthers, I'd pour a lot more money into the civil engineering end of our organization for shore support," he said. Even GSA, government's real estate manager, has a $5 billion maintenance backlog on buildings in its inventory.

Yet despite these obstacles, agencies may soon begin managing their assets in a more businesslike way. Congress approved GSA's request to spend $869 million on federal building repairs in fiscal 2002, a major improvement from four years ago, when GSA asked for a billion dollars to fund repairs and received $300 million. On the legislative front, the Bush administration is pushing two far-reaching legislative proposals that would give agencies new incentives and tools for property management. One would allow all landholding agencies-including GSA-to form partnerships with the private sector to redevelop federal buildings. If the measure were law, GSA could develop the L. Mendel Rivers building in Charleston with a private sector partner.

Welcome to the 21st Century

For example, consider St. Elizabeth's Hospital in Washington, D.C. Union soldiers recuperated from Civil War injuries there, and the poet Ezra Pound spent 12 years in the hospital's criminally insane unit. In 1984, the 61 buildings on the hospital's historic west campus were shut down; they are now falling apart. Basic renovations would cost $8.5 million, and the entire disposal process would cost even more for the owner of the campus, the Health and Human Services Department. Under the 1949 law, HHS would get nothing back for its efforts.

The Bush legislation, in contrast, would let agencies keep proceeds from the sale of excess real and personal property. Sarah Ball, utilization and disposal property manager at the FAA, says the measure would allow her agency to dispose of property without dipping into operating funds to pay for it. "Right now, it's quite costly for our people to shelter and maintain those items while we wait for them to go through the disposal process," she says.

The legislation, which is part of the administration's Managerial Flexibility Act (S. 1612 in the Senate), also would require each landholding agency to name real property officers and compile asset plans. Additionally, all landholding agencies would be allowed to lease underutilized property to the private sector, giving them the authority to pursue public-private deals such as VA's Johnson City project. This authority would be useful in cases where agencies could not receive appropriations to pay for capital improvements, according to GSA Administrator Stephen Perry. "There would be instances in certain markets where private sector firms might be interested in partnering with the government to invest in the upgrade of a building," he said following the unveiling of the legislation in October.

If this legislation gives agencies a carrot to upgrade their property management practices, another Bush proposal may wield the stick. To force agencies to pay for the full costs of their operations, OMB is crafting legislation that would bill federal programs for the support services and capital assets they use, as well as for any future waste cleanup their assets might require. Right now, most programs do not pay for these overhead costs, which are financed through separate budget accounts. Under the Bush measure, the budget would cover the full cost of operations for each program. But the administration would create capital acquisition funds (CAFs) at each department that would track how program managers spent their resources. When an agency wanted a new capital project, such as a new computer network, Congress could grant the CAF budget authority to purchase it. Agency programs would pay back the fund based on their use of the network each year.

First proposed by President Clinton's 1998 Commission on Capital Budgeting, the CAF concept looks promising to the General Accounting Office, which urged Congress in a Feb. 2000 report to consider it as a way to capture the full cost of capital assets (GAO/AIMD-00-57). By creating CAFs at the departmental level, the measure also corrects a bias in the budget process that makes it difficult for small agencies to finance major capital acquisitions. Federal budget rules call for full up-front funding of capital projects. As a result, big capital purchases create a spike in the budget of small agencies that appropriators are often reluctant to approve. Under the CAF model, a purchase would be made by the department CAF and then paid off by the agency over the life of the project. But this could be painful for some agencies.

"It would be the biggest thing in 20 to 30 years, because it means that every time you buy a piece of capital equipment . . . you're going to have to, out of your operating fund, pay back on an amortization schedule your capital asset fund," says James Sullivan, director of VA's capital asset policy planning and strategy service. "Put it this way: The business analysis or business judgment someone's going to have to make whenever they buy something will have implications with appropriated dollars." In theory, agencies could end up making fewer capital purchases under the proposal, Sullivan notes, since programs would have to foot the bill for such buys. The measure also would require programs to pay for existing space they don't use, which would give agencies a strong incentive to rehabilitate or dispose of vacant property.

The idea of exposing the full cost of federal property use has caught on at the State Department, where officials at the Bureau of Overseas Buildings Operations are pushing agencies that use State facilities in foreign countries to pay up. The department currently foots the property bill when personnel from other agencies work in State buildings overseas. Overseas Building chief Charles Williams, a retired Army Corps of Engineers general, wants agencies to pay a rental fee for each seat they occupy in State facilities, a step that would net "several hundred million dollars" to reduce State's $500 million backlog in immediate overseas maintenance needs. "The amount of work we need to do is so enormous that we have to look for better ways to do it," says Williams. "I feel you just can't go and ask Congress for appropriations." He admits the fee idea has gotten mixed reviews from State's tenant agencies. OMB, which is reviewing the fee proposal, is generally supportive, he says.

These proposals would "bring federal asset management into the 21st century," as GSA says of its proposed reform of the 1949 law. But laws alone won't convince private developers to lease underused federal property, nor will they overturn the budget rules that limit the arrangements that agencies can enter. To get the best return on their property, say those who have tried it, agencies must be willing to try radical new ways of property management. Then they should call in lawyers.

Playing the Market

LaSalle planned to build the headquarters and then lease it back to the GSA, which would act as the FDA's landlord at the site. But this approach would never make it past OMB, GSA determined, because the budget office would insist that GSA pay the full cost of the lease upfront. GSA scuttled the partnership in January 1999, prompting LaSalle to file a $61 million breach of contract lawsuit against the agency in the U.S. Court of Federal Claims. A judge dismissed part of this suit last March, and the FDA subsequently convinced Congress to fund its new headquarters. Today, architects of the deal still bristle at GSA's decision to shut it down. "Here's a classic situation where GSA said we'll never even bother, because it's not what [OMB] is looking for," says Patrick Keogh, who is president of Bostonia Government Services and consulted on the deal. "So you impute a problem to someone else when you really don't want to do new things." The White Oak project illustrates both the great promise and genuine risk of federal-private real estate partnerships. Virtually all landholding agencies have rundown or excess property that could be redeveloped by the private sector, but companies typically want a commitment that agencies will rent back the new space in return. It's this commitment that raises a red flag with OMB, which under the 1990 Budget Enforcement Act must ensure that agencies don't make long-term financial obligations that must be paid off in future years. "No federal agency can go out and mortgage its future," says Anatolij Kushnir, the former director of VA's Office of Asset Enterprise Management, who is now a partner with the law firm Patton, Boggs. "That's where OMB was pushing VA-they were saying, 'Hey, wait a second guys, we don't want you going out and entering into these long-term commitments."

Kushnir should know. Before he left in January, he ran the VA's enhanced-use leasing program, designing 22 public-private lease projects including the energy center in Johnson City, Tenn. The program started in 1991 when Congress granted VA special authority to keep revenue or in-kind services from its leases, a measure intended to help the department better manage the sprawling infrastructure of the Veterans Health Administration. VHA currently has 172 hospitals, 137 nursing homes, and 684 outpatient clinics across the country. So while the Defense Department was planning to cut costs by slashing its infrastructure through the Base Realignment and Closure (BRAC) process, the VA set out to wring more value from its existing assets.

The results are promising. Private developers have paid for a new VA regional office, a nursing home and three day care centers, among other projects, in exchange for authority to pursue commercial development on VA campuses. In addition, VA has been able to shift excess property to universities and city governments, which now pay rent to the department. These projects passed muster with OMB because the VA made no guarantee that it would lease back the new buildings after they were finished, shifting the risk to the private developer. But this also means that private developers won't be interested unless the property can attract private customers. For VA facilities located in depressed markets, the method simply doesn't work, according to VA officials. "It's all market-driven," says VA capital planning chief Sullivan.

VA was able to sweeten the deal for the developer of the energy center project, Energy Systems Group. In 1997, the company was interested in the project but had trouble getting financing to build the new plant. So Kushnir and fellow VA lawyer Michael Simmons swung a deal to finance the project with municipal bonds from the community of Johnson City, Tenn. Hammering out this arrangement was the most complex part of the deal. Dr. Carl Gerber, the director of the Johnson City center and a neurosurgeon by profession, remembers pitching the project to a group of bond insurers in New York City. "These are whole different experiences for a VA director," he says. "It was a significant battle all the way along."

Observers want VA to ink more deals. Twenty-two projects in 10 years is a low number, they say, and the lengthy timeframe involved in these projects can scare off private developers. "If you have a deal with a local [VA] facility director to take over a building no longer used by VA, and you don't get a commitment back from them for a year, well that's not the time frame people are used to dealing with in the private sector," says Pat Ryan, majority staff director for the House Veterans Affairs Committee. Congress, OMB, and VA also must review each project, further prolonging the process.

Bostonia's Keogh believes the problem is more fundamental. Whenever an agency relies on legislative authority to make deals, he says, it starts looking for projects that fit the narrow criteria of the law. Government would be better off devising a novel project and then simply asking Congress to grant any needed authority. "There is no legislation that prohibits you from generating deals today," he says. VA officials say more deals are in the works and believe a reorganization of the program will give it more visibility within the department. In July, VA Secretary Anthony Principi moved the program to a new Office of Enterprise Management and ordered enhanced-use to become a standard part of the planning process. "Every time someone comes in with an investment to build a regional office or a warehouse somewhere, they're now being required to look at [partnerships] as an option," says Sullivan. Officials at VA headquarters now seek potential projects around the country, instead of waiting for regional directors to suggest them.

The Bush administration's proposed reform of the 1949 property act would give all landholding agencies a slightly weaker version of VA's partnership authority. FAA officials believe they could use it to strike property deals with city governments, and INS officials say the authority could help them find better locations in urban areas.

Simple Needs

But despite these innovations, INS officials say there is no way they can fulfill their facilities needs without more funding. The INS Baltimore district office moved into a new building in May 2000 but already is short on space. "We have already taken portions of three additional floors," says Don Crocetti, director of the Baltimore office. Crocetti has borrowed space he wasn't leasing, used old furniture, and doubled-up employees in offices to get by. Overcrowding is even worse at Border Patrol stations. The service has added more than 6,600 employees since 1995, but Congress has financed new workspace for less than 3,800 workers over the same period. "A lot of our Border Patrol stations are, because of our growth in the last seven years, extraordinarily overcrowded and no longer functional to meet current requirements," says David Yentzer, INS assistant commissioner for the Office of Administration.

Besides space shortages, INS district offices also struggle to coexist with fellow tenants, who often resent being located near a constant flow of immigrants. In the mid-1990s, the Baltimore office shared a building with several law firms and white-collar businesses. One of the law firms once stopped paying rent for a few months to protest the INS presence, arguing it lowered the value of the facility. In the long run, Crocetti believes, the agency will try to avoid sharing space with other tenants.

At the FAA, officials squeezed funds from some modernization projects to tighten security at air traffic facilities and other infrastructure after Sept. 11. Privately, officials admit there still are not enough funds to make needed improvements, especially some desired by the National Air Traffic Controllers Association, the union of air traffic controllers. The situation is similar at State's overseas facilities, some of which do not fulfill security requirements, according to Williams.

But cash-strapped agencies are in the best position to try novel partnerships, says Keogh. "The single most important thing in getting people to act aggressively is a lack of money," he says. "That is the incentive for people to try something different, not legislation."

• Do employees have sufficient equipment and facilities to effectively carry out the mission of the agency?
• To what extent does the agency track the status, availability and condition of its physical assets?
• Is the process of allocating resources for replacement, maintenance, and acquisition of new physical assets clearly related to mission success, following the Office of Management and Budget Capital Programming Guide or some similar performance-based guidance?