The Department of the Army  currently has 34 MHPI projects at 44 installations in the United States. Since these projects began, the Army has invested $1.97 billion and the  private sector has invested $12.6 billion in the initial development of the  military housing projects. Army MHPI Project- Litigation Costs Involving Pinnacle Were Not Accounted for during MHPI Annual Budget Process

According to Army officials, the only litigation that has caused the  expenditure of funds not accounted for during the MHPI’s annual budget  process for operating costs to-date is litigation involving Clark Realty  Capital (Clark) and Pinnacle Property Management (Pinnacle). The Army Followed a Process to Manage MHPI Litigation Funds Not Accounted for in the Budget That Limits Access to Litigation Information

The Army has a standard process to manage MHPI projects’ funds for the  costs of litigation not accounted for in the MHPI projects’ annual budget  process, but instead used an alternative process designed to limit access  to information about the Pinnacle litigation. The alternative process is  consistent with the relevant MHPI projects’ operating agreements. However, according to  Army officials, the standard process has not yet been used to approve  any major decisions regarding litigation expenses, because the Pinnacle  cases are the only cases that met the major-decision threshold criteria  whose litigation expenses have been approved and would have gone  through this process had decisions not been made to restrict access to  information pertaining to this litigation. This process is consistent with the MHPI projects’ operating  agreements for managing these projects and allows for Clark and only  one Army office to review associated cost information. As a result, the Deputy Assistant Secretary of the Army  (Installations, Housing & Partnerships), acting on behalf of the Army, can  directly approve specific actions proposed by Clark senior leadership on  behalf of the MHPI project, such as approving the litigation and audit  budget and expenses. According to Army officials, throughout the litigation process, Army and  Clark officials have regularly shared litigation documents and met to  discuss the Pinnacle litigation. Army MHPI Project Costs for the Pinnacle Litigation Have Not Prevented Housing Projects from Meeting Normal Operating Requirements

According to Army officials and our analysis of the project-management  accounts for the four locations involved in the Pinnacle litigation, the  expenditure of funds to pay litigation and audit expenses have not  prevented the projects from meeting normal operating requirements, such  as conducting maintenance or paying for utilities, from the time the  litigation began in 2010. According to  Army officials, Pinnacle litigation and audit expenses were also paid from  revenues that flowed into the MHPI projects. Nevertheless, Army  officials said that the Pinnacle litigation and audit costs have had no  effects on the projects’ ability to move forward with construction as  planned because these projects were developed within anticipated  funding levels. The MHPI projects’ property-management agreements provide that the  party that substantially prevails in a legal action may recoup their legal  expenses. Army officials stated that they expect the MHPI projects to  prevail in the litigation and recoup most, or even all, the costs of  conducting the litigation. However, DOD did not provide written  comments and provided technical comments, which we incorporated in  our report as appropriate. We are sending copies of this report to the appropriate congressional  committees; the Secretary of Defense; the Secretary of the Army; and the  Director, Office of Management and Budget.
Why GAO Did This Study

In 1996, Congress enacted the MHPI, which provided the Department of Defense with a variety of authorities that may be used to obtain private-sector financing and management to repair, renovate, construct, and operate military family housing. The Army has invested $1.97 billion and the private sector has invested $12.6 billion in the initial development of MHPI projects at 44 installations.
The Senate report accompanying a proposed version of the National Defense Authorization Act for Fiscal Year 2014 mandated GAO to examine the Army’s litigation costs related to MHPI, specifically any litigation costs not accounted for during the MHPI’s annual budget process. This report examines the extent to which the Army has implemented its process to manage funds for litigation not accounted for in the budget and identifies any effects that the litigation and audit costs have had on managing the MHPI projects.
To conduct its work, GAO examined the Army’s process for managing litigation, interviewed Army officials, and analyzed documents to determine whether litigation and audit costs have had any effects on managing the MHPI projects.
GAO is not making recommendations in this report. DOD provided technical comments on a draft of this report, which were incorporated as appropriate.

What GAO Found

The Army has a standard process to manage litigation costs of its Military Housing Privatization Initiative (MHPI) projects that are not accounted for in the annual budget process. Army officials indicated that there is one case between four Army MHPI projects and Pinnacle Property Management (Pinnacle) that met the dollar threshold criteria and that would have been approved through this process. However, Army officials did not use the standard process because the Army determined that it needed to limit access to Pinnacle litigation information to avoid disclosing any information material to the litigation strategy. As a result, the Army used an alternative process to review and approve litigation costs for Pinnacle that is consistent with MHPI operating agreements. Had the standard process been followed, litigation and litigation cost information would have been shared with the MHPI projects construction company, Clark Realty Capital (Clark), and four different offices within the Army. Army and Clark officials decided to use the alternative process allowed by the MHPI’s operating agreements so that fewer personnel would be aware of ongoing litigation information involving Pinnacle. The alternative process allows the Army and Clark to directly approve specific actions on behalf of the MHPI project, such as approving litigation and audit expenses, and allows sharing information with only Clark and one Army office.
According to Army officials and our analysis of these four MHPI projects’ accounts, Pinnacle litigation expenses have not prevented the projects from meeting their normal operating requirements, such as conducting maintenance or paying for utilities. Rents collected from these four MHPI projects funded the normal operating requirements for these projects as well as the Pinnacle litigation and audit expenses. Rents collected in excess of operating expenses normally are available for other purposes such as construction; capital, repair, and replacement of buildings; and future reinvestment. However, because litigation expenses were also paid from the rents collected at the four MHPI projects involved in the litigation, some funds have not been available for these purposes. Nevertheless, Army officials said that the Pinnacle litigation and audit costs have had no effects on the four projects’ ability to move forward with construction as planned so far or to meet any scheduled capital repair projects because these projects were developed within anticipated funding levels.
The Army property-management agreements provide that the party that substantially prevails in a legal action may recoup their legal expenses. Army officials stated that they expect the MHPI projects to prevail in the litigation and recoup most, or even all, the costs of conducting the litigation.