	Background

Section 2667 of Title 10 provides authority to secretaries of the military  departments to lease nonexcess real property under the control of the  respective departments, subject to several provisions. 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; 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. The  services have also used the authority contained in section 2667 to enter  into more complex leases that the services refer to as EULs. 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. 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. 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. 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. According to  the services, the recent economic downturn caused development plans for  several EULs to significantly slow down or to be placed on hold. 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. 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. 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 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. Recommendations for Executive Action

We are making six recommendations to address EUL statutory compliance  issues and EUL program management concerns. 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. 10 U.S.C. 10 U.S.C. §1.
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.