DOD Has Made Progress in Transferring Inadequate Family Housing to Developers Although Actual Replacement Will Take Several Years

Since Congress authorized the Military Housing Privatization Initiative in  1996, DOD has made significant progress in transferring inadequate  military family housing from its inventory by privatizing these homes. However, it will be several more years before developers are able to  replace or renovate all of the inadequate houses as expected because  developers cannot complete all needed construction and renovation at  once. Developers had replaced or renovated about 67 percent of the  inadequate privatized houses as of February 2009. Although a Majority of Privatization Projects Exceed DOD’s Generally Expected Occupancy Rate, Certain Projects Are Not Meeting This Rate

While the majority of DOD’s privatization projects are exceeding DOD’s  generally expected occupancy rate of 90 percent, each service has some  projects that are not meeting this rate. As of September 2008, about   70 percent of DOD’s privatization projects were maintaining the expected  occupancy, while about 30 percent of the projects were below the 90  percent occupancy rate. These two factors have made it difficult for the project to  maintain an occupancy rate sufficient to generate enough revenue to cover  expenses. Several Defense Initiatives Are Adding to the Challenge in Providing Affordable and Adequate Housing and the Services Are Taking Steps to Mitigate That Challenge

Several ongoing defense force structure and infrastructure initiatives, such  as implementing base realignment and closure recommendations,  returning some military forces based overseas to defense installations in  the United States, converting Army units to modular brigade combat teams  under the Army modularity initiative, and increasing the size of the Army  and Marine Corps force structure, are collectively compounding the  challenge DOD faces in ensuring military servicemembers and their  families have affordable and adequate family housing. DOD officials explained that when an already awarded  project that is being carried out by one developer is retrofitted with either  a new project or another already awarded project, the Army’s total  investment in the developer carrying out the combined retrofitted projects  must stay below a certain percentage of the capital cost of both projects  combined, not a percentage of each project separately. DOD’s most recent semiannual report to the congressional defense  committees did not include information on the retrofitting model. Current Turmoil in Financial Markets Has Reduced Available Construction Funding for Some Privatization Projects

Several factors related to the current turmoil in the financial markets have  reduced available funds for home construction, resulting in a larger  proportion of renovations relative to new construction and reduced scope  and amenities at some military family housing privatization projects. Second, more funds now  need to be set aside to help ensure debt repayment. Collectively, a decline in available construction funds caused by higher  interest rates, increased debt repayment reserve requirements, and lower  rates of return on invested funds could have an adverse impact on the  condition and amenities of military housing privatization projects, which  could in turn reduce occupancy, and ultimately threaten the financial  viability of those projects. Further, a House Conference Report directed DOD to include  data on developers’ contributions to the recapitalization accounts of each  ongoing family housing privatization project in each semiannual report on  the privatization program, and the House Appropriations Committee has  directed DOD to provide a semiannual report summarizing the results of  DOD’s military housing privatization initiative monitoring tool and giving  status reports on each privatization project underway. However, information about the impact that  the recent turmoil in the financial markets is having on some projects and  the resulting effects on available funds for new construction as well as on  future recapitalization funds was not included in DOD’s most recent  semiannual status report to the congressional defense committees in  January 2009. By including this information on housing privatization  projects in its semiannual report, DOD could provide Congress with a  more current view of the effects of the current financial market and  enhance congressional defense committees’ ability to monitor the services’  efforts to provide servicemember with quality housing over the life of each  project. Including information about the changed status of retrofitted projects  would assist congressional oversight of the program. To assess the progress of DOD’s housing privatization efforts we obtained  and analyzed performance data on each of DOD’s privatization projects. Service officials  identified some newly awarded projects that were more affected by  market turmoil than others.
Why GAO Did This Study

In response to challenges the Department of Defense (DOD) was facing to repair, renovate, and construct military family housing, Congress enacted the Military Housing Privatization Initiative in 1996. The initiative enables DOD to leverage private sector resources to construct or renovate family housing. As of March 2009, DOD had awarded 94 projects and attracted over $22 billion in private financing. DOD plans to privatize 98 percent of its domestic family housing through 2012. Since GAO's last housing privatization report in 2006, major force structure initiatives have placed new demands on DOD for housing. GAO was asked to assess (1) the progress of DOD's housing privatization program, (2) the occupancy rates of the housing projects, (3) the impact of various force structure initiatives and DOD's efforts to mitigate any challenges, and (4) the effect of financial market turmoil on some projects. To perform this work, GAO visited 13 installations with privatization projects; analyzed project performance data; and interviewed DOD officials, real estate consultants, and private developers.

What GAO Found

DOD has made significant progress since 1996 to remove inadequate family housing from DOD's inventory by transferring these homes to developers, but it will be several more years before all of these inadequate houses are either replaced or renovated. Developers had replaced or renovated about 67 percent of the inadequate privatized housing as of February 2009. While about 70 percent of military housing privatization projects are exceeding DOD's expected occupancy rate of 90 percent, each service has some projects below this rate. Some privatization projects with occupancy rates below 90 percent are challenged to generate enough revenue to fund construction, make debt payments, and set aside funds for recapitalization, which could negatively affect the condition and attractiveness of privatized homes and make it harder to compete with other homes in the community. Base realignment and closure actions, overseas rebasing, Army modularity, and grow-the-force initiatives are challenging DOD's ability to provide family housing at some installations, and the services are taking steps to mitigate the challenge. Among other measures, Army developed an approach where an already awarded project is retrofitted with a new or another already awarded project. Once retrofitted, Army's total investment in the developer carrying out the projects must stay below a certain percentage of the capital costs of both projects combined, not a percentage of each project separately. This practice often results in DOD investing additional funds towards retrofitted projects. The House Appropriations Committee directed DOD to report on the status of each privatization project underway on a semiannual basis. However, DOD's most recent semiannual report did not include information on the retrofitting model it is using for certain projects. Including information on the changed status of privatized projects in DOD's report would assist congressional oversight of the program. Several factors related to turmoil in the financial markets have reduced available funds for project construction, resulting in more renovations relative to new construction and reduced amenities at some newly awarded projects. First, higher interest rates in bond financing have increased the cost of some projects. Second, due to the diminished value of bond insurance, developers are having to set aside project funds to increase assurances the debt is repaid but that reduces available funds for construction. Third, financial turmoil has resulted in lower rates of return on invested funds. Consequently, as more homes are renovated given effects of today's financial markets, more recapitalization funds could be required. In H.R. Conf. Rep. No. 110-424, the conference committee expressed interest in monitoring developers' contributions to recapitalization accounts in DOD's semiannual report. However, information these effects have had on housing privatization projects was not included in DOD's most recent report. By including this information in its semiannual report, DOD could provide defense committees with a more current view of the financial market effects on these privatized projects.