Privatization Alternative - Enhanced-Use Leasing of Non-Excess Federal Property
 
September 27, 2001
 

Base closure, privatization, A-76 procurements and outsourcing have been the federal government’s principal means to reduce infrastructure operating and maintenance costs during the last decade. Now, Congress has provided federal property managers with a new tool to leverage underutilized property by authorizing the Department of Veterans Affairs (VA) and the Department of Defense (DoD) to lease real property and facilities under an innovative program called "enhanced-use leasing." This privatization alternative has produced a string of successful transactions at the VA, and DoD officials are recommending its broad application within the military departments.

The VA maintains an extensive portfolio of properties, including more than 23,000 acres of land and more than 4,600 buildings at approximately 270 locations. A significant number of these properties are underutilized. In fact, the GAO estimated in 1999 that the VA was spending as much as $35 million a year to maintain over five million square feet of vacant space. Acutely aware of the VA’s aging and underutilized capital infrastructure, Congress devised the ground-breaking, enhanced-use leasing authority that allows the VA to leverage its under performing capital assets to generate revenues, achieve operating cost reductions and obtain private investment in VA programs, facilities or services.

Under the enhanced leasing authority, 38 U.S.C. §§ 8161-8169, the VA may lease land or buildings to the private sector for up to 75 years. The leased property may be developed for non-VA uses, consistent with the mission of the VA. The VA is not required to follow federal acquisition rules when selecting the enhanced-use lessee, although it must devise procedures that ensure selection process integrity. Furthermore, to maximize the program’s flexibility, Congress chose to exempt the enhanced leasing authority from an array of restrictive federal statutes, including the Competition in Contracting Act, the Federal Property and Administrative Services Act of 1949, and the Stewart B. McKinney Act. The VA however, must abide by all federal environmental laws, e.g., the National Environmental Policy Act (NEPA) and the National Historic Preservation Act.

Unlike traditional government leasing, which offers little more than a revenue return in proportion to the depletion of the leased asset, the enhanced-use leasing program encourages innovative public/private partnerships. In return for the long-term lease, VA must obtain fair consideration, either monetary or in-kind. However, funds received as consideration do not have to be returned to the Treasury, but may be kept by the VA. By allowing revenues to come back to the agency, the authority provides the incentive necessary to encourage government property managers to be creative and aggressively pursue opportunities to partner with the private sector. At the same time, the long-term lease provides the private developer (lessee) with the property interest necessary to secure financing through the capital markets and amortize any capital investment made in the property or facility.

A key component of the enhanced-use leasing program is close coordination with and reliance on the local government and community as full partners in the development process. For example, the VA must hold a public hearing at the location of any proposed enhanced-use lease to obtain veteran and local community input. It also must provide two notices to its Congressional oversight committees prior to entering into an enhanced lease. Close integration with community leaders and interested stakeholders enables the VA to address concerns early in the planning and development process.

The VA has completed a variety of projects since enactment of the enhanced leasing statute, including several office buildings, parking facilities, child development centers, a community nursing home, homeless shelter, low-cost senior housing and a cogeneration plant. Agency property-management officials estimate that the agency’s enhanced-use leasing authority has produced over $200 million of private investment in VA property and facilities in the past five years.

Department of Defense’s Leasing Statute

Less than a year ago, Congress modified the Department of Defense leasing authority, 10 U.S.C. § 2667. While not identical to the VA’s enhanced-use leasing authority, DoD’s revised leasing statute greatly improves its ability to leverage underutilized (but not excess) properties. The new authority permits construction or acquisition of new facilities with cash proceeds earned from leased DoD property and clarifies that in-kind consideration received from leases can be used for construction of new facilities. The legislation also allows the in-kind consideration to be accepted at any military facility, not just at the site of the leased property.

DoD officials have stated that these enhancements provide the Military Services an exceptional tool to maximize the utility and value of underused real property assets. The ability of its property managers to spend cash on a greatly expanded list of base operating support functions, including construction, and the ability to accept a greater array of in-kind services, creates practically limitless out-leasing opportunities. Examples of these opportunities include: the creation of new or joint-use office space, warehouses, hotel/temporary quarters, vehicle test tracks, wind tunnels, energy generation plants, recreational playgrounds, sports venues, etc.

Without question, in the coming months, there will be considerable interest in and scrutiny of these groundbreaking leasing authorities. And, as other federal agencies evaluate a need for similar authority, the enhanced-use leasing initiative should gain the recognition and publicity needed to showcase its versatility, flexibility and overall effectiveness in converting under-performing federal properties into productive assets.

For a more in-depth discussion of enhanced-use leasing, see the Summer 2001 edition of the Public Contract Law Journal article entitled "A Privatization Alternative: The Department of Veterans Affairs’ Enhanced-Use Leasing Program" by Leigh A. Bradley and David P. Metzger, partners in the Government Contracts Practice Group at Holland & Knight LLP.

For further information, contact Leigh A. Bradley at 1-888-688-8500 or via e-mail at labradle@hklaw.com.